South-Western College Publishing - Economics  

Manufacturers Migrate to Mexico
Subject Production Possibility Frontiers, Gains From Trade
Topic International Trade
Key Words Exports, Imports, Investment, Costs, Tariffs, NAFTA
News Story Since 1994, $7.7 billion has been invested in new auto and auto-parts factories in Mexico. Exports of vehicles to the U.S. have almost doubled, so that auto imports from Mexico now comprise 15 percent of the U.S. market. Foreign investors include GM, Ford and Chrysler from the U.S.; Daimler-Benz and Volkswagen from Germany; and Nissan from Japan. In turn, they have attracted more parts suppliers from abroad. Work has been transferred from plants in the U.S. and elsewhere.

The causes include lower costs and reduced tariffs. For example, VW reports that Mexican workers work longer hours and are more productive than workers in Germany, and are paid much less than workers in the U.S. The North American Free Trade Agreement has cut the cost of exporting to the U.S. Hence the VW Beetle can be priced more competitively.
(Updated August 12, 1998)

  1. Draw production possibility frontiers for Mexico and the U.S., assuming that the two countries produce autos and "other goods". Show the U.S. with more resources than Mexico and a comparative advantage in other goods, and Mexico with a comparative advantage in autos. Mark points on the frontiers showing where each country might have been before the North American Free Trade Agreement (NAFTA).
  2. Using the concept of opportunity cost, explain how your diagram shows that Mexico has a comparative advantage in autos
  3. On the diagram, draw points representing the positions of the two countries after NAFTA has increased trade. What has happened?
  4.    a.  Are both countries better off? Why?
       b.  Is everyone in each country better off? Explain.
Source J. Millman, "Mexico Is Becoming Auto-Making Hot Spot," The Wall Street Journal, June 23, 1998.

Return to International Trade Index

©1998  South-Western College Publishing.  All Rights Reserved   webmaster  |   DISCLAIMER