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Proceedings of the 2019 Conference on the
United States–Mexico–Canada Agreement
Updated compilation and editing, June 2021

September 26–27, 2019

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Forging a New Path in North American Trade & Immigration

FORCINO
ANEW PATH
in North American Trade & Immigration
Proceedings of the 2019 Conference on the
United States–Mexico–Canada Agreement

Pia M. Orrenius, Executive Editor
Jesus Cañas, Michael Weiss, Editors

•
~

Federal Reserve
Bank of Dallas

PRESENTED BY:
Federal Reserve Bank of Dallas and Mission Foods Texas–Mexico Center at SMU

EXECUTIVE EDITOR:
Pia M. Orrenius

EDITORS:
Jesus Cañas, Michael Weiss

FORGING A NEW PATH IN NORTH AMERICAN TRADE AND IMMIGRATION
is a publication of the Research Department of
The Federal Reserve Bank of Dallas,
P.O. Box 655906, Dallas, TX 75265-5906.

It is available on the web at
www.dallasfed.org/research/pubs

Articles may be reprinted on the condition that the source is credited
and a copy is provided to the Research Department. The proceedings are based on the
audio tran­scripts from the conference. Speakers provided the graphics.

The views expressed in this volume are those of the authors and should not
be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

June 2021

Table of Contents
INTRODUCTION
Pia Orrenius and Jesus Cañas, Federal Reserve Bank of Dallas......................................1
FORGING A NEW PATH: OPENING REMARKS
CHAPTER 1
Robert S. Kaplan, Federal Reserve Bank of Dallas...........................................................3
Audience Questions and Answers................................................................................9
A CONVERSATION: THE PATH TO THE USMCA TRADE AGREEMENT
CHAPTER 2
ldefonso Guajardo Villarreal, Former Secretary of Economy of Mexico and
Mexico’s USMCA representative ....................................................................................15
RULES OF ORIGIN: U.S. CONTENT OF IMPORTS, SUPPLY CHAINS
AND TRADE DIVERSION
CHAPTER 3
Reassessing Value-Added Cross-Border Supply Chains
Alonso de Gortari, Dartmouth College...........................................................................19
CHAPTER 4
Mexico in the Context of Global Trade Tensions
Eddy Bekkers, World Trade Organization.....................................................................26
CHAPTER 5
Mexico’s Higher Costs Under USMCA May Potentially Offset Gains
from China-Related Trade Spurt with U.S.
Daniel Chiquiar, Banco de México.................................................................................33
A PESSIMISTIC OPTIMIST IN ‘INTERESTING TIMES,’ THE ERA OF GLOBALIZATION
CHAPTER 6
Timothy J. Kehoe, University of Minnesota...................................................................40
SERVICES AND DIGITAL TRADE
CHAPTER 7
Liberalizing Trade of Services Offers Potentially Large Economic Gains
Michael Sposi, Southern Methodist University..............................................................50
CHAPTER 8
Digital Economy Finds a Home in USMCA Provisions
Anupam Chander, Georgetown University....................................................................56
CHAPTER 9
Expansion of Digital Service Economy Offers North American Opportunities
Joshua P. Meltzer, Brookings Institution........................................................................61

ENERGY SECTOR: INVESTMENT, REGULATION AND BINATIONAL STRATEGY
CHAPTER 10
Lifting Mexican Red Tape Could Speed Energy Infrastructure Growth
Enrique Marroquin, Hunt Mexico..................................................................................67
CHAPTER 11
Pragmatism May Ultimately Guide Mexico’s USMCA Energy Policy
Pedro Niembro, Monarch Global Strategies..................................................................73
CHAPTER 12
Meeting Mexico’s Demand for U.S. Natural Gas Depends on Adding Pipelines
Curt Anastasio, GasLog Partners LP..............................................................................79
ECONOMIC IMPLICATIONS FOR THE U.S. OF A NORTH AMERICA WITHOUT
NAFTA OR USMCA
CHAPTER 13
USMCA Keeps the Peace, Fails to Improve on NAFTA
Christine McDaniel, George Mason University..............................................................83
CHAPTER 14
Tariffs Only a Fraction of Trade Barrier Costs in Global Supply-Chain Era
Kei-Mu Yi, Federal Reserve Bank of Dallas and University of Houston........................86
REVIVING FREE TRADE OFFERS BEST CHANCE FOR ‘HAPPY’ GLOBAL OUTCOME
CHAPTER 15
Anne Krueger, Johns Hopkins University......................................................................94
KEEPING NORTH AMERICA GLOBALLY COMPETITIVE REQUIRES ITS ECONOMIC
INTEGRATION
CHAPTER 16
Raymond Robertson, Texas A&M University............................................................... 100
MIGRATION, WORKFORCE AND THE INTEGRATION OF LABOR MARKETS
CHAPTER 17
As Mexican Mass Migration to U.S. Ends, New Arrivals Come from
Central America, Asia
Jeffrey S. Passel, Pew Research Center......................................................................... 110
CHAPTER 18
U.S. Wage Growth Provides Greatest ‘Pull’ for Mexican Migration Decision
Madeline Zavodny, University of North Florida.......................................................... 123
CHAPTER 19
Canada Presents More Accommodating Approach to Immigration than U.S.
John B. Sutcliffe, University of Windsor...................................................................... 129
ABOUT THE CONTRIBUTORS.................................................................................... 135

Introduction
Pia Orrenius and Jesus Cañas, Federal Reserve Bank of Dallas
The foundations of the global prosperity that has spread and deepened since
the mid-20th century are being questioned, including the role of free trade. This
backlash against what used to be considered conventional wisdom has had deep
repercussions for our region, bringing down the North American Free Trade
Agreement (NAFTA) and replacing it with the U.S.–Mexico–Canada Agreement
(USMCA) on July 1, 2020.
The global multilateral trading system, embodied in the World Trade
Organization (WTO), was forged in the spirit of a post-World-War-II mindset
that international cooperation and global trade and exchange could lift
living standards and fortify economies around the world. Preferential trade
agreements proliferated, including NAFTA, ratified in 1994, the first such
agreement between a developing nation (Mexico) and advanced industrial
economies (U.S. and Canada).
Although anti-trade rhetoric has intensified in recent years, such concerns are
not new. Opening up to trade was always controversial. Political leaders faced
considerable public opposition as they lobbied for their nations to join the WTO
or signed them on to regional trade agreements. Even as tariff barriers came
down around the world, many countries kept nontariff barriers in place and
implemented new protectionist measures to slow the growth of international
trade and foreign investment.
NAFTA was a success by most standard measures. After its passage and over the
following 25 years, the volume of U.S.–Mexico trade rose fivefold, and foreign
direct investment soared. Cross-border manufacturing linkages deepened, and
Mexico developed a world-class manufacturing platform approaching that of
the U.S. and Canada. In turn, North American consumers enjoyed lower prices
on everything from cars to medical devices as well as greater product quality
and variety. Despite this apparent progress, NAFTA came under increasing fire.
It was in this time of rising anti-trade sentiment and the imminent demise of
NAFTA that the Federal Reserve Bank of Dallas held its two-day conference,
“Forging a New Path in North American Trade and Immigration,” to explore
what the future would bring—principally the USMCA. Conference speakers
reviewed the accomplishments of NAFTA and analyzed the consequences of
its removal and its replacement with the USMCA. They also discussed detailed

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aspects of North American trade and migration including rules of origin, supply
chains, trade creation versus trade diversion, services and digital trade, natural
gas markets and energy sector investment, and the integration of labor markets.
The insights of this broad group of topic experts boiled down to four main
points. One, NAFTA was a success according to standard metrics for evaluating
trade agreements. Hence, a strong and consistent commitment to trade and
openness remains the best option to bolster economic growth, consumer
welfare and the global competitiveness of North American industry. Two,
while trade generates net benefits, it also creates winners and losers. Nations
need better safety nets and training programs to aid workers who have been
displaced by trade. Three, while the USMCA is more restrictive than NAFTA,
particularly with regard to the automotive sector, it will continue to provide
the necessary legal and institutional framework for North American trade
and investment and help expand digital trade. Finally, while North American
labor markets are well-integrated along several dimensions, cross-border labor
migration is still helpful because it can alleviate worker shortages in certain
industries and occupations and support remittance flows, which helped provide
a needed boost to economic development in Mexico.
The gathering of trade and migration scholars in September 2019 was much
like an earlier Dallas Fed conference held on the occasion of NAFTA’s 20th
anniversary in 2014. At that time, the expectation was that NAFTA would be
subsumed in the Trans-Pacific Partnership (TPP), a proposed 12-country trade
agreement that included Mexico, Canada and the U.S. as well as a number of
additional countries around the Pacific Rim. TPP was eventually realized, albeit
under a different name and without the U.S.
Looking forward, it’s clear that the proponents of free trade are under scrutiny,
and the benefits of trade are being questioned, particularly in the U.S. It’s
incumbent on leaders to address the criticisms and allay the fears of workers
as well as better communicate trade’s benefits. It’s also important to strengthen
the world trading system more generally so it can better enforce the conditions
of trade agreements and ensure that countries live up to their obligations. The
road ahead leads back to liberalized world trade; the only question is how many
detours there will be along the way.

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I

OPENING REMARKS

CHAPTER 1

Forging a New Path
Robert S. Kaplan, Federal Reserve Bank of Dallas
Texas is the largest exporting state in the country, and a lot of our work here at
the Dallas Fed is particularly focused on trade, immigration and energy—given
the characteristics of our district—as well as on monetary policy. We spend a
lot of time focusing on cyclical developments—GDP (gross domestic product),
employment, inflation, the monthly PMIs (purchasing managers indexes).
There’s a lot of cyclical data that come out with high frequency. But my own
bent, coming from the business world, is that we also spend a lot of time on the
longer-term, structural drivers that help explain some of those day-to-day and
month-to-month and even year-to-year cyclical results.
Let me explain what I mean by that and why trade and immigration are
so critical.
There are four big drivers that we talk about at the Dallas Fed. Let me start with
the first, demographics. The U.S. population is aging, and U.S. workforce growth
is slowing. We’re not the only country in the world with this issue. Europe
has got a significant demographic issue. Germany is much more challenged
than the United States. Japan is similarly affected. China has got a significant
demographic issue. But why am I talking about this as a key driver? GDP growth
is made up of growth in the workforce plus growth in productivity.
Add those two things together, and you get GDP growth. If the workforce is
aging, and workforce growth is slowing—before you even get to talking about
productivity—that’s a headwind for GDP growth.
There are a few ways to talk about the evidence of this. One is the labor force
participation rate. Much has been made of the fact that in 2007, the U.S. labor
force participation rate was about 66 percent. The participation rate, for those
who don’t know, is the percentage of the population, (age) 16 and older, that is
either working or actively looking for work.
That was 66 percent in 2007; it is around 63 percent today. In our view, the bulk
of that decline is due to aging of the workforce and demographics. And by the
way, we think it’s been a pretty tremendous accomplishment to keep that labor

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force participation at around 63 percent over the last three or four years. It’s
our own view at the Dallas Fed that over the next 10 years, because of aging,
this participation rate is likely to decline further, heading toward a low of 61
percent. For those who watch economic statistics, if that actually occurs, that is a
significant headwind for labor force growth and for GDP growth.
You can imagine there are a number of things that can be done to address
this. Over the years, getting more women to participate in the workforce has
been helpful to labor force participation. That’s why there’s a lot of talk in this
country regarding child care, transportation challenges, skills training and
other policy changes that could bring people into the workforce. But the other
one that is a significant issue is immigration. The only comment I’ll make about
immigration is immigrants and their children, based on our research, have
made up as much as 50 percent or more of workforce growth over the past 20
years in the United States. If you look out over the next 20 years, they are going
to be a much higher percentage of workforce growth. Why is that? Because we
know native workforce growth is going to be negative on net.
Again, I’m a business person. I like to think about distinctive competencies and
strategy. What’s one of the things that has been distinctive about the United
States over all of our lifetimes and before? We have been a magnet for talent
from around the world. We have attracted and assimilated and brought in
people from all over the world who have become leaders of our country and
active, productive citizens. My grandparents were not born here; they came
to the United States. I’m not unusual. Immigration is critical. If we’re going
to improve workforce growth in the United States, this is critical. This is why
Japan has such a substantial temporary worker program. Germany has had its
challenges related to immigration, but this helps explain why Germany has tried
to tackle the subject of immigration—although it’s not gone terribly well. They’re
worried about slowing workforce growth. So, that’s the No. 1 driver.
The second big structural driver is a combination of technology and increased
technology-enabled disruption, which is a global phenomenon. It has
implications in the United States at least for lagging educational achievement—
math, science and reading, as well as lagging skills training. Why do I talk about
this? Productivity is the second part of GDP growth; labor force growth is the
first part. Interestingly, labor force productivity growth in the United States has
been sluggish relative to what it has been historically.
Why is that? It’s particularly confounding because we see investments in
technology and technology-enabled disruption that improve productivity. I’m
a student of corporate results. I was trained to read corporate results, and I
still do in this job. If you look at companies and industries, you’ll see that just
about every industry that you can follow is much more productive today than
it was 10 years ago. So why are we not seeing it show up in aggregate measures
of labor force productivity? Our thesis at the Dallas Fed is that technology and
technology-enabled disruption cut differently by educational attainment. What
I mean by that is if you have a college education, while you may be traumatized

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during periods of your career by technology and technology-enabled disruption,
you probably have the skills and the training and the ability to benefit in terms
of growth in your income and your career prospects.
If, on the other hand, you are one of the 46 million workers in this country who
has a high school education or less, you’re likely seeing your job increasingly
being either disrupted or eliminated. Think of the call center worker who makes
$55,000 a year today plus benefits. Those jobs aren’t going to exist five, six, seven
years from now. And by the way, the workers in those jobs know that. If you’re
doing a middle-skills routine type of job, over the course of your career, unless
you get retrained, you may actually see your income and your career prospects
deteriorate. Which is why in this country there’s so much discussion about, “Is
capitalism working for everyone or is it just working for some?” We think that
heavily cuts by educational attainment.
We’ve looked at a number of studies that have shown that if we could improve
math, science and reading—we rank 25th out of 35 industrialized nations—that
would improve workforce productivity. And we certainly believe strongly
that there’s a big skills gap, if you’ve heard that term. Over half of all small
businesses in this country report they cannot find skilled workers to fill jobs.
We think if we did more to beef up skills training, that would also improve
productivity. And why is it so urgent? It’s so urgent because of the first point:
Workforce growth is slowing. We are not compensating for that by improving
productivity. And if workforce growth is slowing and productivity growth
remain sluggish—not negative but sluggish—we’re going to have low or lagging
GDP growth. We’re talking about this trend all the time.
The third big driver is globalization. Globalization has been a fact of life for most
of our lifetimes. The company I joined in 1983—I joined a primarily domestic
company—had very little business outside of the United States. By the time I left
that company, we had over half of our revenues outside the United States, and we
were unusual. Today, nearly 45 percent of S&P 500 revenues come from outside
the United States. The U.S. economy is much more integrated now with the rest of
the world. The leading companies in the world are much more globally integrated,
and we know that capital flows are much more globally integrated.
If you’re an asset allocator in this world, you think globally. Your asset
allocation is global. And the issue is this: The U.S is less than 5 percent of the
world’s population. Our work at the Dallas Fed suggests that globalization is
an opportunity for the United States. However, the narrative in the last several
years has been that if your job is being disrupted in Wisconsin or Ohio or
anywhere, it’s probably due to globalization. Either an immigrant may have
affected your wages or taken your job, or trade is the reason your job has been
disrupted. Our analysis suggests that may have been true 15, 20 years ago. It
might have been a more credible argument then, but today if your job is being
disrupted or eliminated, it is far more likely happening due to technology and
technology-enabled disruption and, probably, the education system— your
math, science and reading proficiency or the fact that you don’t have skills

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training—those are far more likely the reasons that your job is being disrupted
or eliminated.
The reason we flagged this is that if we get that diagnosis wrong, we’re going to
make poor policy decisions regarding trade and immigration. That means we’re
going to grow more slowly.
So, we spend a lot of time in an apolitical way at the Dallas Fed trying to
understand how, for example, the trade relationship with Mexico and Canada
(operates). It’s our view that the trade relation with Mexico, which is heavily an
intermediate goods relationship, is actually critical to U.S. companies domiciling
here and to them being more globally competitive. Basically, it has contributed
to more jobs in the United States on net. It’s allowed companies and businesses
to stay in this hemisphere and to stay in the United States. There’s a reason the
Ford assembly plant is called assembly, not manufacturing. It’s an assembly
plant. Across industries we very effectively use trade and sophisticated supply
chain and logistical arrangements to improve our competitiveness, and it’s our
own view that we’re taking share— or at least we were taking share— from
Asia. We think that’s critical to GDP growth in the United States.
On immigration, we’ve done a lot of work, which I’m sure we’ll talk about in this
conference, and (Dallas Fed Vice President) Pia (Orrenius) and her team have
done a lot of research that indicates the U.S. would likely be well-served to adopt
a more skills-based and employer-based immigration system, more similar to
Canada. To put it plainly: In Canada, they survey companies around the country,
they figure out where the job gaps are—where the skill gaps are—and they
backward integrate that into their criteria for immigration.
However it’s done, if you think you’re going to actually cut the number of
immigrants and grow GDP, those two things do not quite go together. If you’re
going to grow, you need to grow the workforce, and you can restructure the
immigration criteria.
Some may say we’re actually going to cut the number of immigrants, and that’s
going to be great for the United States. Our comment is, “Not if you want to grow
GDP.” Our research has also indicated that we don’t believe that immigrants
have materially, negatively affected wage growth at the low end and certainly
not at the high end. We find that immigrants have taken jobs at both ends of the
skill distribution where domestic workers are scarce, and we have benefited
as a nation. That is not the narrative you hear today (in public discourse), and
one of the reasons we’re very excited to be doing a conference like this. I think
we need to do more to make clear the various aspects of immigration and the
various aspects of trade.
I think we’ve also said we would do well to segment our trading relationships
and our thinking between those that are intermediate goods and those that are
final goods relationships. The trade relationship with China is primarily a final
goods relationship. I’m sure we’ll talk more about that, but we think that’s an
opportunity for growth.

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Now, the fourth big structural driver. None of this would be that big of a
problem if we weren’t so highly leveraged at the federal government level. And
so, the last big driver is what’s happened with U.S. debt-to-GDP.
Since the Great Recession, the household sector has deleveraged. It’s not that
households have reduced debt so much; they haven’t. But they haven’t increased
their debt, and their incomes are growing. Household debt-to-GDP is in much
better shape than it was 10 or 12 years ago. People may not have realized, if you
go back to 2006 and 2007, which were pretty good years, household debt-to-GDP
was historically high, and the reason we didn’t notice it was because people
were focused on household debt-to-asset values. We know what happened with
housing. It’s been a long, slow grind for households to get their balance sheets in
better shape. A strong job market has helped.
The corporate sector is more leveraged today than 10 years ago. Triple B debt
has tripled. Corporate leverage has increased dramatically, but, critically, the
financial sector has deleveraged. We’ve written a lot about this at the Dallas
Fed and said why corporate debt-to-GDP is something we should be watching
carefully. It’s not a “systemic risk,” but in a downturn, it may well be an
amplifier, meaning if we slow, companies will have to allocate a greater percent
of their cash flow to servicing debt. It means they won’t be spending on capital
expenditures and other things. It’s something to watch, but we think it’s more an
amplifier than a systemic risk.
The third sector we look at—the government sector—is dramatically more
leveraged than it was after the Great Recession. Debt held by the public
now is approximately 76 percent of GDP, and the present value of unfunded
entitlements is now in excess of $55 trillion and heading north. Even before
the recent tax legislation, deficits, we believe and the CBO (Congressional
Budget Office) believes, are going to start exceeding $1 trillion a year. And
normally you would not increase your debt-to-GDP late in the economic
cycle. The point of all of this is we think the path of U.S. debt-to-GDP is likely
not sustainable.
So why aren’t you reading this on the front page of the paper every day?
It seems like years ago, five or 10 years ago (with the) Simpson-Bowles (deficit
reduction plan), you had a lot more conversation about this. The situation is
worse today, but interest rates are low. I think implicit in the calm about this
is the belief that the dollar will remain the world’s reserve currency for the
foreseeable future, which means people have to be overweight to the dollar. Our
concern at the Dallas Fed is that if you’re relying on that as heavily as we are,
that’s a dangerous thing to do, and we would be well-served to moderate our
debt growth.
People ask me, “What’s the ‘black swan’ event, the thing you just can’t imagine
happening that could hit us in the face?” My definition of the black swan event
is an event that stares you right in the face and is so obvious that you willfully
decide to ignore it. This (the dollar no longer being the world’s reserve currency)

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for me is the potential event; it’s so obvious and it’s so clear, and we are willfully
deciding not to pay attention to it.
That’s the fourth issue, and the reason I mention it is to put everything in
context. Now, what do you do about it? One, we can grow faster. Obviously, we
can do entitlement reform, a very sensitive subject. We can find other ways to
moderate our debt growth. But then if you go back to start with immigration
and trade—the subject of this conference—you’d kind of have a little bit
different conversation. About immigration, for example, if you put it in context,
then unless we grow the workforce, we’re creating greater and greater demands
on our children and grandchildren that they’re going to have to pay off the debt.
It might change the context of that debate and the trade-offs you’re making. And
right now, we’re willing to tolerate a little slower workforce growth and maybe
we’ll make up for it in productivity even though we’re not quite making the
investments in education and skills training as aggressively as we need to. But if
you later on acknowledge the fact that we’re historically highly leveraged, you
might change that debate.
So, those are four of the big drivers. Of the other big structural drivers we talk
about, climate change would be the most notable. We think that these once-in-alifetime (weather) tail events are starting to happen every year or two or three,
and they are very expensive. It is a big topic in the state of Texas, which is why
we look at it as it relates to the health of our ports, the city of Houston and the
need for infrastructure along the Gulf (of Mexico), given floods, drought and
other major weather events. And if you believe the National Climate Assessment
is even close to being accurate, these events are going to intensify. But we’ll
leave that for a broader discussion.
I think in the context of those four big drivers, trade and immigration loom
very large. We, at the Dallas Fed, believe that, (these are) opportunities for the
U.S. to grow faster as opposed to threats. We view them more as opportunities
if we make the right policy decisions. You’ll notice a lot of things we’re going to
talk about today might cause somebody to say, “Those are very interesting, but
what the hell does that have to do with monetary policy?” And the answer is, it
doesn’t have that much to do with monetary policy. We see our job at the Dallas
Fed as more than just to make good monetary policy decisions and provide
good analysis of the economy. We also believe that part of our job is to share
our research with elected and appointed officials and to call out that it’s going
to take more than just monetary policy if we’re going to improve growth and
increase the welfare and prosperity of our citizens.
As important as monetary policy is—we’re central bankers, we obviously must
think it’s important, and it is—it’s not the be-all, end-all. We need broader
economic policy. Trade and immigration are part of that broader economic
policy, which will help us grow faster and have a better future for our children
and grandchildren.

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Audience Questions and Answers
Robert S. Kaplan, Federal Reserve Bank of Dallas

Q: With regard to education, how fast do college degrees become
obsolete if you don’t continually retrain yourself?
I was a college professor for 10 years, and so I’m a big believer that we’re going
to have to change the culture or the mindset of our country. There’s no such
thing as you get an education and then say, ‘I’m done. Now, I can go on about
my career.’ I think all a college education or an MBA does—I used to say this
to students, executives and MBAs—is get you ready to continue to learn. But
most of the learning occurs after you finish college and hopefully, you learn
enough basic skills so you’re more equipped to learn. You learn to ask the right
questions, you get some basic skills, particularly how to read and write. Students
of today—and I include probably all of us in this room—are going to have to get
more equipped to update their education, and (it’s going to get) more stressful
getting trained and retrained because the world is changing much more rapidly.
I don’t think we’re sufficiently communicating that.
We’re big fans of looking at the whole education ecosystem. Somebody asked
me, “If you had one extra dollar, where would you spend it?” One extra
dollar, I’d go straight to the zero to five-year old group and expand pre-K and
upgrade teacher quality in pre-K in the United States. This is so the kids start
first grade (and are performing) at least at grade level; currently, too many
are not. Improving secondary education and skills training are also good
alternatives. A high percentage of students—a shockingly high percentage—
are not finishing college even in six years. Some of those students should be
going for skills training, and maybe going onto college after. But we need to
beef that up and increase awareness. And then, yes, of course we need to
improve college readiness.
But after all of that, there’s one other part of the ecosystem, which is in your 20s
and 30s and 40s, that we’re not used to. It’s easy to say, hard to do. If you’re in
your 40s and your job has been restructured or eliminated and you have to tell
your friends that you’re going back for training and starting over, that doesn’t
feel very good.
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The truth is more companies are having to do the retraining. But it has to
be done with junior colleges and high schools (because) there’s a lot of small
companies in this country; they’re not equipped to do sufficient training.
Automotive technicians would be an example where it’s got to be a community
effort, where the community college trains people, and they go off to a lot of
different businesses. But the thought that you’re finished with your education at
age whatever it is, 22, 23, 24, 25, I think maybe was never true, but it certainly is
not true today.
Q: I spent my life in manufacturing. You mentioned Mexico would be
(providing) intermediate goods. They’re basically (making) the highlabel content stuff, and we make high-value stuff here. You talked about
automobile assembly plants. You look at the last 10 years, I think 11 plants
were built in the region—nine were built in Mexico, two were built in
the U.S.
Right, and a lot of purchasing is moving to Mexico also. I get it. Here’s what’s
going on, and this is going on in Asia. It’s going on in Mexico. I think what you
were referring to (is that) they’re moving up the value chain. You’re talking
about that trend, whereas when it first started—this was true of China, it’s true
of Taiwan, Korea—they started off at the low end of the value chain, and then
as they got more expertise, they moved up the value chain. And your point is, as
they move up the value chain, it takes more of that capability from the United
States. The other thing—I spent a lot of time on this when I was at Harvard—if
you lose your manufacturing, you eventually lose your R&D also, and we’re very
concerned about that.
Here’s the challenge, and that’s why these trade agreements are key. There’s no
getting around the fact—and this gets into the adaptability issue—it’s not enough
to have a job in the United States if it’s not going to be globally competitive five
and 10 years from now. It’s going to be gone. The challenge, and what we’d
rather see people focus on in the United States, is how to create a level playing
field, which is obviously what we’re doing. It is true that, increasingly, some of
these other tasks are going to get outsourced. What’s happening in the United
States in today’s job market is a good example of it; we’re going to have to help
the labor force be more adaptable.
By the way, forget Mexico. Technology is increasingly replacing a lot of these
functions. The part that we’re not doing a very good job of is helping those
workers who are getting their job eliminated or restructured. We’re making
it hard to go for retraining, but I think we have got to be sensitive to what you
said. I’d like to see us invest dramatically more in our human capital to improve
the adaptability of our workforce, and to my eye, we are lagging many countries
around the world because we’re not investing enough in our workforce. There
are no easy answers, but that’s the tension.

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Forging a New Path in North American Trade & Immigration

Q: I own a manufacturing company in Mexico and produce for 12 U.S.
companies. I’d like to know or if you could give a little perspective
to the 63 percent (U.S.) workforce participation rate and the
employment report of hundreds of thousands of jobs today that are
currently available.
Here’s what’s really tricky about these jobs numbers. You’ve got a headline
unemployment rate of 3.7 percent. The other thing we look at even more deeply
is something called the U-6, which is unemployed plus discouraged workers
who’ve given up, plus people who work part time, though they prefer to work
full time. Even that measure, it’s higher, but that’s at 7.1 percent, well below its
prerecession low. That tells us that the job market is tight.
The other thing we look at is within this participation rate, namely prime-age
participation of workers ages 25 to 54. And prime-age participation is now
getting back to where it was prerecession.
So, we’ve got a very tight labor market. So, then what’s the problem? One of the
biggest problems I see is the lack of skilled workers, and we’re not educating
enough skilled workers. And I can tell you, there’s probably not a week that goes
by that we don’t talk to people, either in high schools, junior college presidents,
workforce development boards or businesses. You know why? We convene a lot
of groups to try to encourage this (job training), and I’d say the biggest response
I get is a lack of awareness. It’s not like these partnerships aren’t being created.
(There is a) lack of awareness and a little bit of a stigma, social stigma for taking
some of these jobs.
Want an example? Ten years ago, on automotive, if you went and bought a
car at a car dealership, the highest paid person in the car dealership was the
salesperson. And that person who made the most usually negotiated most, not
a pleasant experience some of the time. Roll forward to today, that person is
now called a product specialist. He or she makes half of what they used to make.
There are fewer of them, but there is one person that is the highest paid person
now, and that’s the automotive technician. That person, in some cases, makes
$150,000 or more and you can’t find them. There aren’t enough of them.
That’s a giant change over, maybe, 10 to 12 years, but I don’t think the public
is aware of it. So, we think there’s an awareness issue. There’s a lot more
communication. Our leaders broadly should be flagging us, talking about an
alternate career path. I think the answer is probably not to forgive all college
debt, it’s instead to think through alternative paths to improve this ecosystem.
So, the problem is, to your point, why can’t you just fix this damn thing in the
next six months? The kinds of things I’m talking about, if you start now, (it will
take) years and years. It has to be done locally. Worker mobility is historically
low. You’re going to improve the skills gap; it has to be done in a bunch of cities
and towns all through the United States.

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I was just in Corpus Christi at the end of last week. They have a big skills gap in
Corpus Christi. They got all this infrastructure, the port, petrochemicals, etc., and
they can’t attract workers. The other trend that’s going on, which is concerning,
is there’s a cultural trend of young people moving out of smaller cities to bigger
cities, and a lot of the skilled jobs are in these smaller cities.
It’s a complicated issue. We just try to pound a way out of every element of the
ecosystem and talk about it. The problem is technology and technology-enabled
disruption is going on like this and the improvements in education are kind of
going maybe like this, and the gap is actually widening.
Q: I wanted to pick up your point about climate change. Mark Carney,
governor of the Bank of England, has spoken quite a bit about the
systemic challenges of climate risk for the financial sector, both in
terms of the actual sort of outcomes—more heat waves, events that are
costly to companies, that are not being priced appropriately—and also in
regulatory risk terms. What’s your view of that? How is the Fed thinking
about that (topic)? Do you think the financial sector in the U.S. is sort of
thinking about these risks systemically or where we are we on it?
As you said, the Bank of England, on the one hand, has taken up this topic, but it
focused most specifically on systemic risk, financial stability. I think that’s worth
looking at. If you’re an insurance company or other financial intermediary—
and I talk to a lot of them and to their chief executives—they’re actively taking
this into account and it’s affecting pricing in the catastrophe market and the
reinsurance market and all that.
At the Dallas Fed, we’ve taken up the other aspects of this a little bit more; what’s
the effect on economic performance, even though right now it does not appear
to be as material. Our worry is if the frequency and intensity of these weather
events increase, you may actually start to see it affect where businesses domicile
and migration patterns. It certainly affects investments that have to be made
right now in infrastructure to protect against these (weather events).
The ports? They’re a great example where there’s multibillion-dollar investment
that needs to be made along the Gulf to protect against the next weather event.
We’re sort of broadening the aperture of it. I’m not going to come out on which
part is most important, but we’ll take it up a little bit more before you even get to
financial stability. You would hope stress testing, and a lot of the good regulatory
practices, will take that into account, and we should be able to manage it. I
worry. We need to do things to improve the other parts of the ecosystem and call
out that climate change is more than a nice thing to look at. It’s a business thing.
It’s an economic thing. It’s going to affect growth and peoples’ lives and where
they live and everything else.

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Q: There are some people who believe that your four drivers are lacking
or missing one. There should be a fifth driver: monetary policy. Monetary
policy should have, as one of its objectives, economic growth. And
you see that coming out of the current administration. What do you say
to that?
I want to differentiate between a driver and a policy response to a driver. So
monetary policy is a policy response to a driver, and here’s my take on it.
Obviously, I went from the private sector to come be a central banker. When I
came here, I wanted to believe that monetary policy is very, very important. I
think humility might be the wrong word, but I think these drivers help us put
monetary policy in context. Monetary policy has a key role to play in helping
with the adjustment process, to set the stage for better growth. But my own
view is—and we can talk about it at this conference—monetary policy by itself
can encourage risk taking and debt during down periods and other things. By
itself, it’s not a substitute for labor force growth. Structural reforms improve
productivity, like good policy decisions on globalization. The fundamental
drivers of growth, many of the prescriptions to improve them, are a way for
monetary policy (to aid the economy).
I think it’s very important to flag that. Here’s why: If I look at the ECB (European
Central Bank)—I have great respect for (ECB President) Mario Draghi and what
they’ve done—they haven’t had a lot of fiscal policy (among ECB countries)—
there’s talk maybe Germany might (use fiscal policy)—so it’s been heavily on
them (monetary policy makers). I think the last thing you’re going to hear me
say at the Dallas Fed is, “Don’t worry, monetary policy, we got this,” because
it’s actually not the right message or the right analysis. We think it takes a
broad menu. So back to the ECB, they have done extraordinary things to try to
stimulate the economy and tighten credit spreads. But you can see they need
fiscal policy and other structural reforms if they’re going to grow faster.
Monetary policy by itself can’t do it all, and if monetary policy is the key alone,
my worry is you’re going to make decisions that distort markets, hurt savers,
and I think it shouldn’t be a substitute for broader economic policy. And I think
it’s part of my job to call that out.
Q: Many immigrants in Texas face challenges. What could be leveraged
to provide more access to capital to immigrants and also to let
immigrants open bank accounts? What is your view on that?
There’s a bunch of issues in there. Let me just untangle them. One is a broad
issue of access to financial services, and we (at the Dallas Fed) spend a lot of
time on this. We do a conference every year called RAISE Texas. We think we
have a disproportionate percentage of our population that doesn’t have access
to financial services. A disproportionate percentage of our population doesn’t
have access to Wi-Fi, so we spend a lot of time on that too. And I think that a
disproportionate percentage of these fastest-growing demographic groups are
reading behind grade level.
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Forging a New Path in North American Trade & Immigration

What we’re trying to do here is encourage policies—and by the way, it may not
take the government to fix these. We formed a partnership in McAllen with local
business people and the mayor. They created a public Wi-Fi (network); they now
have Wi-Fi. It didn’t cost that much money, and it cost very little government
money. There’s a whole bunch of parts to this ecosystem, but it starts with
identifying all the gaps.
We have to work to get it done. This is why it’s hard. It can’t be mandated from
D.C. or even from Austin. If the local mayor in McAllen did not say, “I want
to solve this problem,” I actually don’t know how they would have solved
this problem. It took local leaders, local business people and the Community
Reinvestment Act and banks being part of it. But it takes partnerships to address
these issues. I think the banks are ready and willing, but it takes more than just
the banks. It takes local leadership; it takes partnerships being formed.
We work to try to intermediate, and we think one of the great distinctive
competencies we have at the Dallas Fed is we can be a convener. If we call
a meeting of all these groups, people will actually come. We try to use that
convening power, and hope (that when) we talk about these things, other cities
call and say, “You know what? We heard what you did in McAllen, we’re going to
do it in our town.” I know that sounds like nibbling away—and if it does sound
like that, it’s probably because you have got to just work at it, and that’s the way
we go at this.

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I

A CONVERSATION: THE PATH TO THE USMCA
TRADE AGREEMENT

CHAPTER 2

The Path to the USMCA Trade Agreement
Ildefonso Guajardo Villarreal, Former Secretary of Economy of Mexico
and Mexico’s USMCA representative
Back when NAFTA (the North American Free Trade Agreement) was proposed,
the political scene was highly challenged. You have to remember that when
NAFTA (which took effect in January 1994) was first discussed, even President
Clinton was opposed to it.
Finding Political Support NAFTA Lacked
The main element that we have to acknowledge in order to defend USMCA (the
United States–Mexico–Canada Agreement) vis-à-vis NAFTA is the fact that during
20 years, we let it (NAFTA) work by itself without really giving the political
support it required. Even U.S. governments that were very much in favor of
NAFTA didn’t bother to defend NAFTA in the political arena.
I met several times, as Mexico’s secretary of the economy, with President Obama
and his team. During those meetings, they made it very clear that in public
statements from both administrations, we should not use the word “NAFTA.”
They asked instead to call it the North American Competitiveness Agreement
because NAFTA was a bad word in opinion polls.
So, “Is USMCA better than the original NAFTA?” How can you answer that if
NAFTA was already damaged? That is a false debate.
Rules of Origin, the $16 Wage Requirement
USMCA incorporates labor rights formally and not as a side agreement. That
is, under USMCA, any labor rights violation will be subject to trade sanctions.
Mexico passed a labor reform revamping its federal labor law in order to be
closer to the labor standards of its North American partners. Among other
things, union power was transferred to the actual workers, ensuring freedom of
association and bargaining power. Currently, Mexico has a 40-hour workweek,
with hourly wages ranging between $4 (U.S.) and $5.

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Wages are considerably lower in Mexico compared with Canada and the U.S.
partly because there is no labor mobility in North America like there is in the
European Union. Wage differences are addressed indirectly and only in the
automotive sector under the USMCA via new rules of origin. Under the new
agreement, the North American component in automotive production goes up
from 62.5 percent to 75 percent, and it will require that workers making at least
$16 an hour produce 40 percent of such content.
The wage requirement for the auto sector under USMCA is another way to
say that 40 percent of the automobile should be produced in Canada or U.S.,
while 60 percent could be produced in Mexico. That is an indirect way to try
to address the demand by the current U.S. administration (of Donald Trump)
originally requiring 50 percent of the content of an automobile to be produced
only in the U.S. You know, there is no trade agreement in the world that requires
such high domestic content.
The overall wage difference between countries will eventually be solved with
economic growth and obviously labor demand. But that is something that
happens through time and through the process of economic development.
Bringing NAFTA Up to Date
The principal updates to NAFTA under USMCA were the strengthening of
intellectual property rights and the inclusion of new chapters dealing with new
technologies that did not exist 25 years ago, such as cellphones and digital trade.
There is also an update of the dispute-resolutions mechanism. The process was
a hard one since at the beginning of the negotiations, the position of the U.S.
administration was nothing beyond U.S. laws. However, if you say nothing
above U.S. laws, then you are saying that you are going to impose your own
views on any trade or investment dispute.
The challenge was to preserve the essence of NAFTA’s Chapter 11, covering
disputes between investors and the state; Chapter 19, which is trade disputes;
and Chapter 20, which is government-to-government disputes. We did it.
However, we still have to revisit the selection process for the arbitration panel.
The example to follow in that regard should be the panel selection process
currently in the TPP (Trans-Pacific Partnership). I think that we can solve
that problem without the need to open the negotiation process to respond to
the criticism that the new USMCA lacks a modern selection process for the
arbitration panels.
Negotiating Rules of Origin
Another point of discussion had to do with rules of origin. At the beginning of
the renegotiation, the current U.S. administration wanted 100 percent North
American content in order to qualify for USMCA benefits. We were able to
narrow the content to 75 percent already discussed for the auto industry, for

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Forging a New Path in North American Trade & Immigration

example, and limit content requirements to only five industries: autos, steel,
fiberglass, petrochemicals and fiber optics.
Of those five industries, the two that mattered the most to the current
administration were autos and steel, which are essential to their international
trade strategy.
Another issue had to do basically with inclusion of environmental and labor
issues as part of the agreement and not only as side chapters or notes.
Labor Provisions Cemented Bipartisan U.S. Support
The way labor is included in the new agreement is definitely a dream come true
for pro-union Democrats. Even presidents from their own party were not able to
make this happen in the past. The labor provision is thanks to one of the players
within the Trump team who knows the U.S. Congress and knows Democrats.
That’s why today, (U.S. Trade Representative) Robert Lighthizer is saying openly
that he believes that the USMCA is going to get through Congress because
the elements are there for bipartisan support. (Final approval of the USMCA
occurred in January 2020.)
Reshaping Mexico’s Auto Manufacturing
For Mexico, it was a tremendous challenge to address the redesign of the auto
sector. When the U.S. originally made the request, they wanted half of the North
American content be made in the U.S. That was not viable for Canada
and Mexico.
So, we basically looked at what were the ideas behind President Trump’s
positioning vis-à-vis Japan, vis-à-vis Korea, vis-à-vis Europe, and how
manufacturing jobs and the auto industry were the main concerns for him.
What we basically said is: “OK, today, Mexico’s export of sedans to the U.S. is
1.8 million sedans, of which 70 percent are made by the three big American
companies and two other companies that are very close to meeting the new
rules of origin.” For those companies, the production requirement was not very
tough. On the other hand, for the other 30 percent—the Audis, the BMWs—to
adapt to the new rules of origin would be a very big challenge. Remember,
today, when you make an Audi, you are basically outsourcing steel globally.
So, we told the other companies that the new rules would be adopted
gradually—they would get four years to meet the new rules. And, if after four
years they are still not able to meet the 75 percent content requirement, they
would be able to pay the most-favored nation tariff (MFN), which is 2.5 percent,
to enter into the North American market. What they have to face is, “if I cannot
meet the new rules in four years, I have to pay MFN.”
Ongoing Threat of Article 232
There is one potential problem with this scenario. There is still the risk that the
U.S. will insist on using Article 232 (under the Trade Expansion Act of 1962),
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which cites national security concerns, to impose a special tariff on the import
of cars, as they have threatened to do with Germany and other countries. That
means companies would have to pay a special tariff of 25 percent rather than
the MFN tariff of 2.5 percent. This possibility will generate uncertainty, in
addition to the implementation of the USMCA rules of origin.

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I

RULES OF ORIGIN: U.S. CONTENT OF IMPORTS,
SUPPLY CHAINS AND TRADE DIVERSION

CHAPTER 3

Reassessing Value-Added Cross-Border
Supply Chains
Alonso de Gortari, Dartmouth College
Over the last couple of decades, we’ve witnessed an enormous fragmentation
of production both across different countries and across different stages of
the supply chain. Whereas, a couple of decades ago, it was true that countries
mostly traded final goods, nowadays supply chains cross all over the globe
and products cross country borders multiple times before being delivered
to consumers.
This really changes how we think about international trade. Such fragmentation
of production is particularly prevalent in the NAFTA (North American Free
Trade Agreement) region. To illustrate this with one example, let us think about
the production of cars, the archetypical good in the NAFTA region.
A couple of decades ago, Ford, General Motors and Chrysler produced their cars
almost entirely in plants in places like Michigan. Nowadays, things are very
different. When a car is produced in North America, it may still be the case that
the engine is produced in Michigan with steel or aluminum smelted in upstate
New York. The frame of the car is perhaps built in northern Mexico using steel
from Asia, maybe China. The steel frame of the car is shipped to North Texas,
where the chassis is added, and we have a more developed body of the car. Then
the chassis, the steel frame and the engine are shipped to central Mexico, where
huge factories assemble vehicles that can then be sold in the Mexican domestic
market (Chart 1). But they can also be shipped to the United States, Canada and
other places in the world.

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Forging a New Path in North American Trade & Immigration

CHART 1: THE RISE OF GLOBAL VALUE CHAINS: WHAT THEY IMPLY FOR TRADE
Increasingly fragmented supply chain across borders/production states
y Ex. Cars in North America
Alcoa

Engine
Chassis

Steel Frame

Assembly

SOURCE: de Gortari Alonso (2019). “Disentangling Global Value Chains,” NBER Working Paper No. 25868.

International trade is much more complicated because you have goods that
cross borders multiple times. When Mexico sells these cars assembled in Mexico
in the U.S. market, the cars often have a lot of U.S. content even though they are
imported from Mexico. Moreover, they have some Mexican content that was
already imported upstream in the supply chain and was re-exported back to
Mexico and then back into the U.S.
This makes our task as economists very challenging because it means that the
data that we’ve traditionally used to study international trade—that is, bilateral
trade flows that tell you how much a country trades with another country—
become very hard to interpret because the data only tell you the location from
which goods are being shipped. But since goods are crossing borders multiple
times before being delivered to final consumers, it’s very hard to tell what’s the
origin of the value of these goods.
So when making trade policy, policymakers should understand first how trade
policy changes could affect the upstream supply chain.
To show you what the measurement challenge is more specifically, let’s think
about a very simple supply chain in which the U.S. produces car parts, ships
them to Mexico, and Mexico then assembles cars that are sent back to the U.S.
and sold to American consumers. This involves back and forth trade because
American car parts are making their way back to the U.S. through Mexican
car exports.
The reason why we know so little about how much trade actually occurs through
the supply chain is because the data that we have, the data that statistical
agencies collect, tell you information about bilateral trade. So, what’s bilateral
trade? It’s the dollar value of car parts that are shipped to Mexico and used by the
Mexican car industry. And it also tells you the dollar value of Mexican cars that
are shipped to the United States and sold to American consumers.

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Forging a New Path in North American Trade & Immigration

But the data don’t tell you the supply chain linkage indicating how American
car parts are put into the cars that Mexico ships back. The data point that would
tell something about integration in the NAFTA region is exactly what’s missing
in the data. The reason why it’s so hard to impute this or figure it out is because
Mexico also ships cars to other locations, such as Germany.
The current approach is to assume that at the industry level in a given country,
everything is produced in the exact same way. For example, assume that of
all the car parts that Mexico buys, 40 percent come from the U.S. Well, if 40
percent of all car parts in Mexico come from the U.S, and if every single Mexican
car is produced the same way, that means that every time Mexico ships a car
to consumers in the U.S. that car is going to have 40 percent American car
parts. Every time Mexico sells cars to Germany, those cars all have 40 percent
American parts.
What really takes place in North American auto manufacturing production is
that even though Ford and Volkswagen may both be assembling their cars in
Mexico, they have extremely different supply chains.
What may be happening is that Ford is using Mexico to assemble cars that are
then shipped and sold in the U.S.; Volkswagen is also assembling cars in Mexico
but is shipping them to consumers in Germany. Ford has a supply chain such
that all of the car parts come from the U.S. But Volkswagen has a different
supply chain. It makes its car parts in Europe, in China or somewhere else.
When Mexico exports cars to the U.S., those cars embody a huge amount of
American car parts. It is much more than we would get using the previous set
of assumptions in which we presume that the share of American content in
Mexican exports to the U.S. is watered down because we are putting a whole
bunch of them into Mexico’s exports to other locations besides the U.S. (Chart 2).

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CHART 2: MEASURING GLOBAL VALUE CHAINS
NAFTA supply chains involved a lot of back-and-forth trade
US car parts 		

Mexican cars		

US consumers

Measuring supply chain linkages is challenging in practice
y It’s typically assumed all of an industry’s goods use same input mix
40%

US car parts

40%

US car parts
40%

Mexican cars
Ford Fiestas

US consumers

Mexican cars
Ford Fiestas

US consumers

Mexican cars
VW Beetles

German cons.

y But this ignores NAFTA’s supply chain specialization

100%

Mexican cars
Ford Fiestas

US consumers

Mexican cars
VW Beetles

German cons.

US car parts
0%

SOURCE: de Gortari Alonso (2019). “Disentangling Global Value Chains,” NBER Working Paper No. 25868.

It turns out that taking into account this degree of supply chain specialization
in the NAFTA region is going to be very important for studying trade
policy impacts.
Looking at customs-level data allows a better estimation of supply chain
specialization. Customs data record all imports and exports at the shipment
level for any country in the world. It thus allows calculation of the type of
imported components carmakers use in their production processes for exports
to various regions. For example, you can use that data to figure out what car
components Ford uses when producing in Mexico for the U.S. market versus
what import components Volkswagen uses when exporting to the German
market. It is possible then to look across all car manufacturing firms in Mexico
and get a sense of what type of imports are used in different supply chains when
exporting to various markets.
Chart 3 confirms NAFTA supply chain integration. When Mexico exports cars
to the U.S., these cars tend to have an enormous amount of American car parts.
If the assumption that economists typically make to measure supply chains
were accurate, we would expect to see the exact same type of input share when
Mexico sells cars to other locations. However, customs data show that when
Mexico exports cars to Germany, it uses very different car parts suppliers. The
companies that are exporting cars from Mexico to Germany have very different
supply chains. Therefore, when Mexico exports cars to Germany, these cars have
much fewer American car parts. Instead of having 74 percent of foreign inputs
coming from the U.S., it’s only 18 percent—the remainder are from Japanese,
German and Polish companies.

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CHART 3: NAFTA SUPPLY CHAINS: EVIDENCE FROM MEXICAN CUSTOMS DATA
Source of foreign inputs used in Mexican vehicle imports to U.S, Germany

••
••
•

CAN

USA

JPN

•••
••

DEU

DEU

JPN

Germany

USA
Other

POL
USA
Other

Use of inputs depends on destination country/industry
SOURCE: de Gortari Alonso (2019). “Disentangling Global Value Chains,” NBER Working Paper No. 25868.

Customs-level data also allow us to look at the value added. Even if Mexican
cars have a lot of American car parts, it doesn’t mean that those car parts are
actually American value added because the U.S. itself also imports inputs from
other locations. It could be the case that the U.S. is buying inputs for some car
parts from some country, building them up a little bit and then exporting them
to Mexico.
The U.S. value-added content of Mexican exports to the U.S. is higher when
looking at customs data than when using the conventional method previously
discussed. Chart 4 shows the share of U.S. value added in Mexican imports. U.S.
value-added content in Mexican imports is larger in the majority of the sectors
shown when using specific customs data instead of assuming heterogeneity in
the use of inputs.

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CHART 4: NAFTA SUPPLY CHAINS ARE DEEPLY INTEGRATED
Share of U.S. value-added in imports from Mexico
■

Conventional Estimates
100%

-

Share That Is U.S. Value-Added

Bounds

♦

Estimates with Integrated NAFTA Supply Chains

$118 $35 $31 $9.9 $9.5 $9.2 $8.6 $6.8 $2.0 $1.8 $1.5 $1.4 $0.9 $0.2 $0.1 $10

80%

60%

t t t t t t t t t t t t tItI

40%

20%

0%

Total

Motor Vehicles

Computers, Electronics

Electrical

Wood, Paper

Machinery

Food, Tobacco

Textiles

Other Transport

Chemicals

Metal Products

Rubber, Plastics

Coke, Ref. Oil Prod.

Pharmaceuticals

Non-Metallic Min.

Basic Metals

SOURCE: de Gortari Alonso (2019). “Disentangling Global Value Chains,” NBER Working Paper No. 25868.

In 2014, Mexico exported to the U.S. about $120 billion in goods. According to
the conventional estimate, only about 17 percent, or 17 cents of every dollar
imported, were produced upstream in the U.S. For cars, it was close to 18
percent. However, according to customs data that take into consideration the
specialization of supply chains, U.S. value added is considerably larger.
It’s more sensible to think that when Mexico exports manufactured goods to the
U.S., it’s not 17 cents of every dollar that are produced in the U.S., but it’s closer
to 30 cents. When you look at cars, the difference is even bigger. Instead of being
close to 18 percent of every dollar exported to the U.S., the American content
is closer to 40 percent. These numbers are much closer to all the anecdotal
evidence we have on NAFTA telling us that Mexican–American supply chains
are very deeply integrated and that a lot of the value of the Mexican exports
shipped to the U.S. is actually American content that was produced upstream in
the supply chain.
Once you measure things more accurately using more and better data than we
were using before, it turns out that NAFTA economies are much more integrated
than we thought. In particular, there is an enormous amount of American
content in Mexican exports going to the U.S.

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Forging a New Path in North American Trade & Immigration

What are the policy implications? The fact that there is very deep integration
means that if the U.S. were to put high tariffs on Mexican final good exports,
it’s probably going to hurt Mexican exports. But if American suppliers are
producing a lot of the value that’s put into these exports, that sort of change
in trade policy is going to ripple up the supply chain, and it’s going to hurt the
suppliers located in the U.S. When trying to design trade policy with some given
objective, you really should think about how supply chains are allocated in
reality in order to try to gauge the implications of those changes in trade policy.

25

Forging a New Path in North American Trade & Immigration

CHAPTER 4

Mexico in the Context of Global Trade Tensions
Eddy Bekkers, World Trade Organization
There has been a variety of developments in trade policies in recent years. The
U.S. decided not to participate in TPP (the Trans-Pacific Partnership); there
was renegotiation of NAFTA (North American Free Trade Agreement); U.S.
implementation of Section 332 measures (fact finding related to tariffs and
trade); 301 measures (tariffs in response to improper transfer of technology and
intellectual property) on China and, of course, responses to all these initiatives.
There is uncertainty about the future of the appellate body of the WTO (World
Trade Organization). There is, of course, Brexit and skepticism in other
European countries about the European Union. Therefore, the question that
could be raised is how trade under the USMCA (United States–Mexico–Canada
Agreement, the successor to NAFTA) could be affected by these trade policy
events (Chart 1).
CHART 1: INTRODUCTION
y Trade policy events last two years suggest that trade relations will be changing:
ƒ Withdrawal United States (US) from Transpacific Partnership (TPP), uncertainty
about NAFTA and conclusion of new agreement, USMCA
ƒ US tariff increase on steel and aluminum (232 measures) plus response and possible
tariffs on car imports into the United States
ƒ US tariff increases on imports from China (301 measures), response, and broader
implications for relations between two biggest economics in the world
ƒ Uncertainty About Appellate Body, World Trade Organization (WTO)
ƒ Brexit and scepticism about the European Union
y Central question presentation: how would USMCA trade be affected by different trade
policy scenarios?
ƒ Construct three scenarios, and determine impact on trade, output, intra-USMCA
trade, and foreign value added in intra-USMCA trade
y Disclaimer in general: The opinions expressed in this presentation should be attributed
only to its author(s). They are not meant to represent the positions or opinions of the
WTO and its Members and are without prejudice to Members’ rights and obligations
under the WTO.
SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

26

Forging a New Path in North American Trade & Immigration

The following three stylized scenarios show the possible effects of recent trade
policy changes within the USMCA region.
The first scenario is a realistic scenario that is currently happening: tariffs
on steel and aluminum, which are in place since last year, the different 301
measures (tariffs on Chinese goods), plus the responses of China and other
trading partners.
In scenario two, we add an increase of tariffs on cars by 25 percent, with USMCA
trade exempted. This is not the case so far, but we don’t know yet whether this is
going to take place.
The third scenario shows the value added in the USMCA region and what would
happen to global trade if USMCA would break up (Chart 2).
CHART 2: THREE SCENARIOS
y Generate baseline of global economy until 2030, taking into account the projected
impact of digital technologies on trade costs
y Construct three scenarios
1. Tariff increases trade tensions 2018-2019. 232 measures (tariffs steel and aluminum)
and 301 measures (tariffs China) plus responses
2. As Scenario (1) and increase of tariffs on cars 25% (USMCA exempted)
3. As Scenario (1) and (2) and break-up of USMCA
» Serves to illustrate importance of USMCA agreement for trade within the region
SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

The economic model is a recursive, dynamic CGE model, a “computable general
equilibrium” model. The model features intermediate linkages, straight linkages
between countries’ capital accumulation and investment. The model uses the
conventional way to model intermediate linkages. It does not take into account
what Alonso de Gortari just presented on auto supply chain ties across North
America. Cars exported from Mexico to the U.S. have much more U.S. content
than the average exports from Mexico to other countries. Unfortunately, at the
global level, we simply don’t have such detailed data.
The baseline for the model includes data aggregated to 24 regions and 25
sectors. We project data out to 2030, imposing macroeconomic projections
on our economic model. The macroeconomic projections are from the IMF
(International Monetary Fund), including employment, population and GDP
(gross domestic product) per capita growth until 2022 or 2023. Then we use
United Nations projections and Organization for Economic Cooperation and
Development (OECD) projections through 2030. We also use OECD projections
for climate change implications.
We have some additional features in the model. In particular, we have
differential productivity growth. What does that come down to? Mainly that
productivity growth, on average, is larger in agriculture and manufacturing
27

Forging a New Path in North American Trade & Immigration

than in services, which is going to lead to a shift in the economy toward services
sectors. Then we also account for a change of preferences. We also impose
change in savings rates as a function of an empirically specified equation
where savings respond through demographics. And finally, we include foreign
trade costs.
We also include three types of reactions in trade costs—the interaction of the
Trade Facilitation Agreement (expediting movement of goods under the WTO),
foreign trade cost because of the extension of e-commerce and the growth of
digital technologies.
Returning to the three stylized scenarios previously outlined, the first scenario
is the realistic scenario, the 232 measures (involving national security and
imposition of tariffs) and the 301 measures (involving safeguarding intellectual
property and imposition of tariffs) have brought tariffs on imports from China.
These tariff packages were announced last year (25 percent) and may possibly
grow to 30 percent. There is a new package of tariffs—a 15 percent tariff
mainly on final goods. Then, of course, there’s also a response by China. Here
I summarize by saying that tariffs on American imports to China are raised to
more than 20 percent; but they are about 20 percent currently.
In scenario two, we add tariffs on imports of cars. We exempt Mexico and
Canada because that seems to be the realistic scenario. And we include a
response. We assume that the response is proportional to the amount of trade,
to the amount of cars that countries are exporting to U.S.
The third scenario implies a breakup of USMCA. We assume that tariffs would
go to the most-favored nation level under the WTO after the breakup. Then
we include an increase in non-tariff measures (NTMs). We use estimates of
the average impact of NTMs on free trade agreements in the past and then we
convert those estimates into a trade-cost equivalent. In addition, we assumed
that the car tariffs would then also be imposed, plus there would be a response
(Chart 3).

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Forging a New Path in North American Trade & Immigration

CHART 3: METHODOLOGY: CONSTRUCTION OF THREE SCENARIOS
1. Trade tensions: 232 and 301 measures plus response
ƒ Section 232 measures: US tariff increase on imports of aluminum and steel (Mexico,
Canada, Australia, Argentina) and responses by the EU, Russia, Turkey, and China
ƒ Section 301 measures: US tariff increase on Chinese imports plus response
» 230 billion (mainly intermediates): 30%
» 280 billion (mainly final goods): 15%
» Response China: Tariffs on American imports raised to more than 20%
2. As scenario (1) and increase of tariffs on cars to 25% plus response
ƒ Mexico and Canada exempted
ƒ Response: tariff increases proportional to trade affected by car tariffs
3. As scenarios (1) and (2) and collapse of USMCA
ƒ Tariffs increase from preferential level to most favored nation (MFN) level
ƒ Increase (Iceberg) trade costs related to non-tariff measures
» Top-down approach from gravity literature: use estimates of ad valorem equivalent
trade cost increases associated with break-up deep FTAs at sectoral level (Egger et
al., 2015, EP)
ƒ Mexico and Canada not exempted from car tariffs anymore (plus response)
SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas,
Dallas, TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

Emerging countries like China and India are projected to have a much higher
GDP per capita growth than countries such as the U.S. or the European Union.
In addition, we assume population and labor force aging have actually kicked
in (Chart 4). For example, when you look at China, the growth of the labor force
between 2018 and 2030 is projected to be negative.

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Forging a New Path in North American Trade & Immigration

CHART 4: BASELINE: MACROECONOMIC PROJECTIONS
Macroeconomic Projections: Annual Projected Growth 2018-2030
GDP Per Capita

Population

Labor Force

Argentina

Country

1.53

0.78

0.70

Asia LDC

4.98

0.86

1.19

Brazil

1.31

0.60

0.40

Canada

0.93

0.94

0.55

China

5.14

0.16

-0.21

European Union 28

1.59

0.19

0.16

Indonesia

4.41

0.84

0.95

India

5.20

1.09

1.08

Japan

1.27

-0.34

-0.11

Korea

2.51

0.19

-0.38

Latin America

1.91

0.81

0.81

Mexico

2.03

0.85

1.05

Other Asian Countries

1.78

1.42

1.31

Russia

2.26

-0.12

-0.49

Southeast Asia

3.47

0.94

1.04

Sub-Saharan Africa LDC

2.98

2.28

3.02

Turkey

2.29

0.97

1.26

United States

1.30

0.69

0.56

SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX
https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

Chart 5 shows the policy experiments from scenarios 1 and 2. Tariffs the U.S.
faces will jump from 3.1 percent to more than 7.7 percent once you take into
account 232 and 301 measures plus a 25 percent tariff on car imports from
the rest of the world outside North America, along with the corresponding
retaliation from trading partners. Chart 6 shows tariffs faced by the U.S. if
scenarios 1 and 2 are realized, plus the breakdown of the USMCA and the 25
percent tariff on car imports from Mexico and Canada. Tariffs faced by the U.S.
will jump to almost 12 percent.
CHART 5: TARIFFS BETWEEN US AND CHINA IN BASELINE AND SCENARIOS 1 AND 2
Country

Partner

Average tariffs

Bil. tariffs USA-CHN

Scenario 1: Trade Tensions
Initial

Scenario

Initial

Scenario

USA

Imposed

1.36

5.82

2.62

20.63

USA

Faced

3.07

5.55

5.92

19.05

China

Imposed

3.68

4.72

5.92

19.05

China

Faced

4.39

7.62

2.62

20.63

Scenario 2: Trade Tensions and Cars
USA

Imposed

1.36

7.11

2.62

20.63

USA

Faced

3.07

7.72

5.92

19.05

China

Imposed

3.68

4.72

5.92

19.05

China

Faced

4.39

7.62

2.62

20.63

SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

30

Forging a New Path in North American Trade & Immigration

The simulations provide the impact on real exports, real GDP and the change
in shares of global trade. According to the simulations, trade will fall by more
than 6 percent. If tariffs are imposed on autos, trade will fall 9 percent and even
further, 15 percent, if there is a breakup in USMCA. Canada and Mexico will
both benefit if trade tensions persist and if auto tariffs are imposed.
CHART 6: POLICY EXPERIMENTS: TARIFF CHANGES
Tariffs USMCA Partners in Baseline and Scenario 3
Country

Partner

Average tariffs

On USMCA Partners

Initial

Scenario

Initial

Scenario

USA

Faced

3.07

10.75

0.01

11.65

USA

Imposed

1.36

8.76

0.03

7.28

Canada

Faced

1.14

5.91

0.05

6.94

Canada

Imposed

1.04

5.63

0.01

8.81

Mexico

Faced

0.76

5.99

0.00

7.07

Mexico

Imposed

1.30

7.59

0.00

13.03

SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

Globally, trade is projected to fall by around 1 percent in the first two scenarios
and by about 2 percent with the breakup of USMCA (Chart 7A). In terms of GDP
effects, both China and the U.S. will experience a contraction in GDP growth
in the three scenarios (Chart 7B). Canada and Mexico will only be negatively
affected by the USMCA breakup scenario. As you can see, there are negative
implications of continued trade restrictions globally.
It is worth mentioning that these simulations do not take into account effects
through investment or policy uncertainty, which could magnify the negative
impacts even more.
The results in terms of market share show U.S. market share of world trade will
fall from 16 percent to about 14 percent, while China’s will go up to 18 percent.
The reason is that trade diversion plays a big role in our models. That means
that if China can export less to the U.S., it will start exporting quite a bit more to
other markets.
Looking specifically at the U.S., Chart 8 shows that trade between the U.S. and
China is projected to fall very substantially, diverting trade to other trading
partners, such as Canada and Mexico. The negative effects are magnified if
USMCA is not in effect. Additionally, the share of intra-USMCA trade would fall
with the breakup of USMCA.

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Forging a New Path in North American Trade & Immigration

CHART 7A: TRADE EFFECTS: SELECTED COUNTRIES AND GLOBAL AVERAGE
Percentage Change Real Exports by 2030 (cumulative scenarios)
Country

Trade Tensions

Autos

Canada

1.17%

4.05%

-9.39%

China

-3.30%

-3.21%

-3.20%

EU

0.06%

-0.20%

0.21%

Japan

0.12%

-0.73%

-0.52%

Mexico

Break-up USMCA

1.74%

3.11%

-7.35%

USA

-6.27%

-9.14%

-14.76%

Global

-0.88%

-1.13%

-1.87%

y US exports are projected to fall significantly in the different scenarios both because of
responses trading partners and reallocation to import competing sectors
y Canada and Mexico are projected to expand trade in the first two scenarios because of trade
diversions
y Globally trade is projected to fall by around 1% in the first two scenarios and close to 2% with a
break-up of USMCA
SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

CHART 7B: GDP EFFECTS: SELECTED COUNTRIES AND GLOBAL AVERAGE
Percentage change real GDP by 2030 (cumulative scenarios)
Country

Trade Tensions

Autos

Canada

0.40%

0.71%

-1.83%

China

-0.74%

-0.61%

-0.38%

EU

0.25%

0.26%

0.53%

Japan

0.21%

0.05%

0.28%
-3.14%

Mexico

Break-up USMCA

1.38%

2.30%

USA

-0.44%

-0.72%

-1.10%

Global

-0.14%

-0.09%

-0.05%

y China and the US projected to lose because of trade tensions and Mexico and Canada to gain
because of trade diversion and redirection of investment flows
y Global effects are limited: no investment and trade policy uncertainty effects modelled
CHART 8: TRADE EFFECTS: USA
Percentage change trade USA by 2030 (cumulative scenarios)
Trade Tensions

Autos

Total Exports

-6%

-9%

Break-up USMCA
-15%

Total Imports

-5%

-9%

-14%

Imports from China

-56%

-57%

-58%

Exports to China

-38%

-35%

-31%

Imports from Mexico

7%

10%

-11%

Exports to Mexico

3%

9%

-46%

Imports from Canada

6%

11%

-18%

Exports to Canada

2%

8%

-34%

y Bilateral trade between the US and China is projected to fall very substantially, diverting trade
to other trading partners such as a Canada and Mexico
SOURCE: Bekkers Eddy (2019). “Trade Tensions and USMCA Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas,
TX https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-bekkers.pdf

32

Forging a New Path in North American Trade & Immigration

CHAPTER 5

Mexico’s Higher Costs Under USMCA May
Potentially Offset Gains from China-Related
Trade Spurt with U.S.
Daniel Chiquiar, Jesus Cañas, Armando Aguirre and Alfonso Cebreros

Daniel Chiquiar, director of research at Banco de México, appeared as part of
Panel 1, “Rules of Origin: U.S. Content of Imports, Supply Chains and Trade
Diversion.” He discussed Mexico in the context of global trade tensions. Chiquiar
subsequently co-authored an article for the Federal Reserve Bank of Dallas’
Southwest Economy first quarter 2020 issue. He asked that the article, which
follows and expands on earlier remarks, appear instead in this volume.
A recent easing of global trade tensions has not come without critical change
involving two of the U.S.’ largest trade partners: Mexico and China.
Talks aimed at easing underlying trade policy differences between the U.S. and
Mexico and the U.S. and China concluded earlier this year with two agreements.
The United States–Mexico–Canada Agreement (USMCA) replaces the North
American Free Trade Agreement (NAFTA), which had been in place since 1994.
It sets a new framework for North American regional integration among the
three nations.
The U.S.–China Phase One deal included Chinese pledges for the purchase of U.S.
farm products, safeguards for intellectual property and the promise of further
talks to reduce trade frictions between the two nations. The trade dispute has
included successive rounds of tariffs since early 2018.
Taken together, the two agreements present challenges and opportunities for
Mexico, both in the short term and long term, with regard to how it will do
business—including with Texas that counts its neighbor as its largest trading
partner and as a key link in the production of intermediate and finished goods.
USMCA, while opening the possibility of further regional integration in areas
such as digital commerce, is more restrictive than NAFTA in other sectors,
such as the automotive sector, where lower Mexican output could adversely
affect its gross domestic product (GDP). On the other hand, even with the latest
agreement between the U.S. and China, ongoing policy differences between
33

Forging a New Path in North American Trade & Immigration

the two have prompted trade diversion toward Mexico, which has acquired an
increasing share of the U.S. import market.
However, these positive effects of trade diversion may be short lived and come
with the cost of higher prices to consumers.
Uncertainty of Projections
Projections of the economic effects of new trade agreements, particularly
of their short-term impact, are tentative given the high level of uncertainty
that persists regarding trade policy and global growth. In this sense, rising
protectionism across the world and within the North American region is one of
the main risks confronting the global economy.
In particular, there is uncertainty regarding the extent of the distortions that
measures such as tariffs and non-tariff barriers may pose for global trade,
supply chains and the international organization of productive processes.
There is also uncertainty about the effects that tariffs and the deterioration
in international trade conditions could have on the global economy and
investment in the short and medium terms.
Finally, over a longer horizon, greater barriers to trade could lead to a
reconfiguration of global value chains to the detriment of aggregate productivity
as manufacturing moves away from the efficient allocation of the production of
goods and services.
USMCA Auto Sector Effect
USMCA is more restrictive in some respects than NAFTA, particularly in the
automotive sector. Under USMCA, the value of regionally sourced content has
increased significantly. Additionally, there are new restrictions regarding the
origin of steel, aluminum and vehicle parts used in the production process and
new requirements governing labor value content and the wages paid.
Specifically, USMCA stipulates several notable changes in vehicle production.
The North American share of the value of automobiles and light trucks
produced increases from 62.5 percent under NAFTA to 75 percent under USMCA
and from 60 percent to 70 percent for heavy trucks.
Rather than applying NAFTA’s uniform content standard for vehicle parts,
USMCA sets separate content requirements (the percentage that must be
produced in North America) for three groups: core parts, such as engines
and transmissions, 75 percent; principal parts, like electrical and electronic
parts, 70 percent; and complementary parts, which include brake systems and
miscellaneous parts, 65 percent.
At least 70 percent of the steel and aluminum used in the manufacture of
automobiles and light trucks must originate in the U.S., Canada or Mexico.
Notably, requirements for labor value content were introduced in the updated
agreement: 40 percent of the materials for automobiles and 45 percent of the
34

Forging a New Path in North American Trade & Immigration

content for light trucks must be produced by regional enterprises that pay
workers at least $16 per hour. Since Mexican autoworkers currently earn about
$7.30 per hour for auto assembly and $3.40 while making automotive parts, this
new provision most directly affects Mexico.[1]
The USMCA requirements could make automotive production less efficient
and decrease the competitiveness of the automotive industry across the North
American region relative to the rest of the world, our estimates show.[2]
Using a quantitative general equilibrium trade model—typically used to study
the effects of trade reforms on industry—we estimate the effects of the new
requirements, comparing USMCA with NAFTA.[3]
In the baseline scenario, more restrictive rules-of-origin requirements will
increase production costs that, in turn, will imply higher prices, reduced output
and a decrease in consumer surplus in the region (Chart 1, blue bars).[4]
Furthermore, at the regional level, spending on the transport equipment sector
will shift away from local producers and toward foreign suppliers of these goods.
CHART 1: LONG-TERM EFFECTS OF TRANSITION TO USMCA TRIM AUTOMOTIVE
SECTOR OUTPUT

■

USMCA - regional value content + labor value content rules

■

WTO - most-favored-nation tariff

A. Effect on light-vehicle production
Thousands of units
0
-50
-100
-150
-200
-250
-300

Mexico

Canada

United States

Mexico

Canada

United States

B. Effect on GDP
Percent
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
-0.60
-0.70
-0.80

NOTES: effect on light-vehicle production is calculated by applying the percent losses estimated for transport equipment sector output in the counterfactual exercises to
each country’s light-vehicle production for 2018. Effect on gross deomestic product (GDP) is calculated by running the percent losses estimated for transport equipment
sector output in the counterfactual exercises through each country’s input-output table as available from the Organization for Economic Cooperation and Development
(OECD). Regional value content refers to production in North America. USMCA is United States-Mexico-Canada Agreement. WTO is the World Trade Organization.
SOURCES: Banco de Mexico: Automotive News: Canada’s National Statistical Agency: Bureau of Economic Analysis: OECD. Federal Reserve Bank of Dallas

35

Forging a New Path in North American Trade & Immigration

There are considerable losses of real output in the transportation manufacturing
sector, as the whole region will reduce its output in the sector. While all
countries in the region are negatively affected, Mexico stands to sustain the
biggest loss both in terms of the absolute number of vehicles produced and GDP.
The competitiveness of some assembly operations in Texas could be affected
since facilities such as Toyota’s truck plant in San Antonio and the General
Motors SUV unit in Arlington rely on Mexican parts.
Opting Out of USMCA Trade
It is also possible that the new auto provisions increase the burden of
compliance to the point that firms opt out of using the benefits of the USMCA
and prefer, instead, to source their inputs from the least-cost country (not
necessarily from North America) and pay the most-favored-nation (MFN) tariff
when exporting. Such a move would hurt regional suppliers. Thus, even in
a mildly disruptive scenario, the increase in the rules of origin may increase
regional content at the cost of lower North American competitiveness in the
automotive industry. In a heavily disruptive scenario, the tougher rules could
actually lead to a reduction in the overall regional content in the sector.
Using our model, we estimate the effects that opting out of USMCA could have
on the auto sector by considering an MFN opt-in scenario in which all regional
trade in the sector faces MFN tariffs. Our estimates imply that this scenario is
harsher than our benchmark USMCA scenario, although not drastically so (Chart
1, orange bars). This suggests the possibility that any further tightening of the
rules of origin requirements in the auto sector could create the incentives for
firms to opt out of the USMCA as a means of conducting trade within the region.
Trade Diversion to Mexico
Trade conflicts between the U.S. and China have also been a factor behind
Mexico’s recent export performance. Electrical and optical equipment,
machinery, footwear and textiles are among the sectors where the U.S. has
imposed high tariffs on China and where Mexico competes with China for
market share.
Thus, it is natural to believe that trade diversion could boost Mexican exports
in some industries. Since the U.S.– China dispute began, China has lost market
share in the U.S., and Mexico has recorded gains (Chart 2). Most of the market
share that China lost in the U.S. involved goods subject to higher tariffs—the
same set of goods in which Mexico achieved its largest gains of market share in
U.S. imports (Chart 3).

36

Forging a New Path in North American Trade & Immigration

CHART 2: MEXICO GAINS SHARE OF TOTAL U.S. IMPORTS AS CHINA SLIPS
Percent*

		

■

China

■

Mexico

2.5.
23.5
21.5
19.5
17.5
15.5
13.5
11.5
2015

2016

2017

2019

2018

*Seasonally adjusted. NOTE: Dashed lines indicate the month when various tariffs on China became effective - July, August and September 2018.
SOURCES: Banco de Mexico; U.S. Department of Commerce. Federal Reserve Bank of Dallas

Most of the market share that China lost in the U.S. involved goods subject to
higher tariffs—the same set of goods in which Mexico achieved its largest gains
of market share in U.S. imports (Chart 3).
CHART 3: MEXICO GAINS SHARE OF U.S. IMPORTS AFTER TARIFFS ON CHINA GOODS
Percent*
1.50
Russia
U.K.

1.00

Taiwan
S. Korea

Switzerland
Singapore
Netherlands

0.50

Mexico

Ireland
Vietnam

0.00

Mexico

-0.50

Rest
Without additional tariffs

-1.00
-1.50
-2.00

Without additional tariffs

China

Goods with additional tariffs

Goods without additional tariffs

NOTE: Approximately 80 percent of the value of total U.S. imports of light vehicles is excluded from the analysis because China had no share of the products making up
this item in 2017. SOURCES: Banco de Mexico; U.S. Department of Commerce. Federal Reserve Bank of Dallas

It is important to note that some of Mexico’s gains were in sectors in which
China did not export to the U.S. Thus, it appears that Mexican exports have
benefited from trade diversion, though perhaps not as much as some might
have initially expected.

37

Forging a New Path in North American Trade & Immigration

Notice that the declining share of Chinese imports in the U.S. has outpaced
Mexico’s gains. In fact, the increases that Mexico has achieved due to trade
diversion amount to only one-third of what China lost. Thus, trade diversion has
benefited other countries too, as the rest of the world acquired market share in
the U.S. In particular, South Korea and Taiwan have also gained considerable
presence in the U.S. import market.
Mexico has gained not only in terms of market share of U.S. imports. China’s
market share losses positively affected Mexico’s manufacturing production in
sectors in which China lost the most.
However, even though Mexico has been able to gain some output from trade
diversion, this improvement has come at someone else’s expense since trade
diversion entails an efficiency loss.
In this case, it seems that U.S. consumers have borne the loss through higher
prices of imports. Mexico has realized higher prices for the type of exported
goods that would have faced tariffs had they come from China. Prices for those
Mexican exports to the U.S. increased relatively more than the export prices of
goods unaffected by the tariffs.
While there is evidence suggesting that Mexico has, at the margin, benefited
from trade diversion, these “gains” may be short lived if trade tensions lead to
a further slowdown of global economic activity, larger trade distortions and a
breakup of global value chains.
Estimates of a counterfactual scenario in which the U.S.–China trade dispute
was persistent suggest that both the U.S. and China would sustain real output
losses, while Mexico and Canada would increase production, albeit only
marginally. However, prices would be much higher, particularly across North
America. These higher prices would reduce the gains from globalization for
consumers in the region.
Changing Trade Patterns
The adverse impact on economic activity, trade and investment flows of an
evolving and uncertain global trade environment is not surprising. However,
calculating the magnitude of this effect is difficult. Mexico as a key U.S. trade
partner is, not surprisingly, subject to the crosscurrents of trade tensions
between the U.S. and China. These impacts are especially important for Texas,
which counts Mexico as its largest trade partner.
Approval of the USMCA, an update to the almost quarter-century-old NAFTA,
could by itself change trade. Indeed, costs—especially in the key automotive
sector—will rise and tend to make North American products potentially less
competitive than they might have been over the longer term, depressing
Mexico’s GDP.
However, Mexico stands to gain, albeit in the short term, from trade tensions
between the U.S. and China and the imposition of retaliatory tariffs that began

38

Forging a New Path in North American Trade & Immigration

in 2018. Mexico has been a beneficiary of trade diversion, accounting for a
portion of what China previously supplied to the U.S.
The U.S.–China Phase One agreement that called a ceasefire to the dispute and
a pledge for further trade talks makes calculating the future benefit to Mexico
difficult. The impact of disrupting the production of goods and services and the
global value chains that they represent could exacerbate any broader economic
slowdown, further trimming Mexico’s short-term gains and negatively affecting
its trading partners.
Notes
1. F
 or more information, see “NAFTA Briefing: Review of Current NAFTA
Proposals and Potential Impacts on the North American Automotive Industry,”
by Kristin Dziczek, Michael Schultz, Bernard Swiecki and Yen Chen, Center for
Automotive Research, April 2018.
2. E
 stimates are derived from a model that can be used to analyze different
counterfactual scenarios regarding changes in tariffs and trade costs among
different countries and sectors based on two main data requirements: sectorlevel trade elasticities and expenditure shares between countries and sectors.
For more information, see “Trade Theory with Numbers: Quantifying the
Consequences of Globalization,” by Arnaud Costinot and Andrés RodríguezClare, Handbook of International Economics, Gita Gopinath, Elhanan Helpman,
and Kenneth Rogoff editors, 2014, vol. 4, pp. 197–261.
3. T
 o properly interpret the results of this exercise, it is important to keep
in mind that it only contemplates the general equilibrium implications
of changes to the barriers that shape automotive trade in the region. The
shift from NAFTA to USMCA contemplates changes in other sectors that are
not considered for the purposes of this exercise but can have important
macroeconomic consequences (i.e., reducing uncertainty). In addition,
important assumptions were made in order to map regional value content
and labor value content requirements into the model. For more information
about the modeling results, contact Alfonso Cebreros or Armando Aguirre.
4. S
 ee note 2 for details of the methodology used to produce the estimates
depicted in Chart 1.

39

Forging a New Path in North American Trade & Immigration

ASSESSING TRADE AND GLOBALIZATION

CHAPTER 6

A Pessimistic Optimist in ‘Interesting Times,’
the Era of Globalization
Timothy Kehoe, University of Minnesota, Federal Reserve Bank of
Minneapolis (Consultant)
I am an advisor at the Federal Reserve Bank of Minneapolis. I always have to
remind myself to say that nothing I say represents the views of the Minneapolis
Fed or the Federal Reserve System.
We also heard two Mexican economists whom I respect a lot—Secretary
Guajardo (Ildefonso Guajardo Villarreal, former Secretary of the Economy and
Mexico’s USMCA representative) and Dr. Daniel Chiquiar, the Research Director
at the Banco de México—giving us views that were very compatible in some
ways, but with very different tones.
Secretary Guajardo is something of an optimist, and my friend, Daniel, is a
bit of a pessimist. Whom do I agree with? Well, I cannot tell you. That is the
problem. I am not restricted from telling you my views on trade policy, as I am
about monetary policy. No, I just cannot tell you because I do not know, and
I am nervous about that. There is an English saying that says, “May you live
in interesting times.” The history of that saying seems go back to the late 19th
century, to Joseph Chamberlain, the prominent British politician and statesman
who was the father of Neville Chamberlain, the “peace in our time” prime
minister.
Chamberlain claimed that the saying was some sort of Chinese proverb, but no
one has ever found any evidence for that. It seems he made it up. Even so, it has
become known as the Chinese curse, and we are suffering from it. These are
interesting times. Let me see if I have this right. I could have titled this talk “A
Defense of Globalization.” Or maybe, “Why I’m a Globalist, not a Patriot.” That
was meant to be a joke. My father was in the U.S. Navy for 37 years. He was a
globalist and a patriot. I do not see the contradiction.
I feel a little bit guilty about not talking more about rules of origin. But we had
such a good discussion this morning, I can just step back and take a big picture.

40

Forging a New Path in North American Trade & Immigration

I

The Industrial Revolution—this is talking about economic history—started over
200 years ago. The really brutal but heartening fact is that for most of the world,
the Industrial Revolution has occurred in the past 50 or 60 years. The Industrial
Revolution has improved living standards and reduced inequality throughout
the world like nothing else has done in the last 200 or 300 years. I’m just going to
show you one specific piece of data: Go to the World Bank’s count of how many
people in the world live in extreme poverty. It’s at all-time lows in world history.
That’s not to say that what we call globalization has not increased inequality
within countries and even across countries in some cases. But if you just take
into account that something like one-third of the population of China is middle
class by world standards and one-third of the population of India is middle class
by world standards, then inequality has plummeted since about 1990.
The United States was part of a movement after the Second World War to really
push to cure the problems that had caused the war. That’s why we created
the three big Bretton Woods institutions—the World Bank to lend money to
developing countries; the International Monetary Fund to try to control the
world monetary system and slow down the process of competitive devaluation,
which had hurt us so much in the 1930s; and, of course, the International Trade
Organization (ITO) to regulate international trade to prevent trade wars. Or you
haven’t heard of that?
The ITO didn’t get off the ground. Instead, there was an initial agreement called
the General Agreement on Tariffs and Trade (GATT). In 1994 and ’95, GATT
was transformed into the World Trade Organization. But for various reasons—
disagreements on agricultural trade being one of the biggest ones—it has run
out of gas, and now we’re relying on unilateral liberalization and regional
liberalization as the drivers of globalization. When I say globalization, I mean all
the good things that have happened since the industrial revolutions.
I am nervous about global warming. We have to do something about the climate
change, but we also want to keep growing.
I want to talk about the United States a bit. Come on, I have to talk about my
own research. I’m a professor. I mean, that’s what I do, research, and I try to
convince people of the importance of it. In a recent project, we look at the losses
of jobs in manufacturing due to all of the trade deficits we’ve had with countries
in East Asia—at the very beginning Japan and Korea started in 1992. And later,
after 2000, with China. They lent us a lot of money that we could use to buy
their goods cheaply, and that was a tremendous boon for the United States, but
it cost jobs in manufacturing. But nowhere near as many jobs as have been lost
because of improved technology.
What I will touch upon is to remind you of the big tension we have. The biggest
trade war the world has experienced since the 1930s is the current one we
have with China, and I think the Trans-Pacific Partnership (TPP) would have
avoided it or at least we would have had allies on our side, and we threw away
that opportunity.

41

Forging a New Path in North American Trade & Immigration

I do not think we are going the right way now. Here is my economic history
lesson, and I only want you to see two things here (Chart 1). This is the real
GDP (gross domestic product) of people working in the United States. Sometime
about 1880, we started growing at 2 percent per capita or per working-age
person per year. That is what made us the richest country in the world because,
of course, before the Industrial Revolution had started, we were only growing at
1 percent per year.
CHART 1: REAL GDP PER WORKING-AGE PERSON IN THE UNITED STATES
1600

Index (1875=100)

800

400

Data

200

100

50
2 percent annual growth trend

25

1800

1830

1860

1890

1920

1950

1980

2010

SOURCE: Kehoe Timothy J. (2019). “May You Live in Interesting Times,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas,
Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-KEHOE.pdf

So, here is kind of a theory of economic history that I developed working with
Ed Prescott (Arizona State University) when we were studying depressions, but I
am still working on it. This compares the United States, growing at 2 percent per
person, with Japan (Chart 2). I would get the same picture if I put in Germany,
the Netherlands or the U.K. They were poorer than the United States but also
growing at roughly 2 percent in the early 20th century.

42

Forging a New Path in North American Trade & Immigration

CHART 2: REAL GDP PER WORKING-AGE PERSON IN THE UNITED STATES AND JAPAN
1990 U.S. Dollars

64,000

32,000

United States

16,000

8,000

4,000

2,000

-·
.. 1·•··--'"' ~·.··

......

.,,.

...•

Japan

1,000
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

SOURCE: Kehoe Timothy J. (2019). “May You Live in Interesting Times,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas,
Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-KEHOE.pdf

How much poorer? They (Japan) had 30 percent of the income of the United
States. Then we, of course, had our Great Depression and World War II. Japan
had the World War II destruction. After the war, of course, Japan was going
to grow rapidly. Europe also had its capital stocks destroyed. But they, too, did
more than go back to where they were before.
You remember back in the 1980s, we thought Japan was going to overtake
us. No, they did not, but they are doing fine. Please do not let yourselves get
confused by the journalists and politicians who do not understand economics.
When you look at GDP growth, take out population growth. Japan only grows
1 percent per year now, but its population is shrinking by 1 percent. I find it
heartening that this Asian country can still keep moving along at 2 percent per
capita. We grow 3 percent, but our population is expanding by 1 percent. It is
the same 2 percent per capita.
Chart 3 reports on work that I have done with some former students of mine.
I was very inspired by Walt Rostow’s work, The Stages of Economic Growth.
Rostow was a bit of what we call a Keynesian. He did not really understand
growth theory. But he had a clear vision that countries go through distinct stages
of growth. You have countries that are stuck in the preindustrial revolution. The
economist who analyzed this was Thomas Malthus in 1810, right at the time that
his analysis was starting to stop being useful. There were always technological
and economic advances, but expansion of the population ate it all up.

43

Forging a New Path in North American Trade & Immigration

CHART 3: STAGES OF ECONOMIC GROWTH REVISITED

Stage 0: Malthusian trap
Stage 1: Growth like that of U.K. in the Industrial Revolution
Stage 2: Real GDP per working-age person at least 35 percent of industrial leader (U.K. in
19th century, U.S. in 20th, 21st centuries)
Stage 3: Real GDP per working-age person at least 65 percent of industrial leader
SOURCE: “The Stages of Economic Growth Revisited, Part 1: A General Framework and Taking off Into Growth,” by Daniela Costa, Timothy J. Kehoe and Gajendran
Raveendranathan, Federal Reserve Bank of Minneapolis, Economic Policy Paper 16-5, March 2016.

Then, we have what Rostow called the “Take-Off into Sustained Growth,” looking
like the U.K. at the beginning of the Industrial Revolution. Rostow thought about
this back in 1960, and he was right that achieving sustained growth seemed very
difficult. Now, it seems trivial; you do anything right in a country, and you are
going to grow.
But then, you want to start catching up to the industrial leader, the U.K. in
the 19th century, the U.S. in the 20th century, and get to where real GDP per
working-age person is 35 percent of the industrial leader. Mexico has been
there. But lots of countries are not there. In fact, that is a fear in countries
like China. They call it “The Middle Income Trap.” You start growing and then
something is lost. The Chinese are right to be nervous about it.
Then, finally, you do what we call joining the industrial leader where you have
at least 65 percent of their GDP—the countries in this group include a lot of
countries in Western Europe. In fact, some of those countries in Western Europe
do not particularly have lower productivity than the United States. They—just as
societies or maybe through their tax systems, whatever—have decided they do
not want to work as much as Americans do.
But in Chart 3, I am just looking at countries in 1960 by the classifications I have
just given you and you see something that is shocking: In 1960, the majority of
the of the world’s population—52 percent—lived in countries that had never
experienced any kind of industrial revolution. Now, that number is about 3
percent, and that is what I am saying. The majority of the world’s population
lives in countries that have gone through the industrial revolution since 1960.
I have to talk about Mexico because I love Mexico so much. But talking about
the growth experience of Mexico makes me sad. Between about 1950 and 1980,
Mexico was one of the fastest-growing countries in the world. When you take
out the rapid population growth, the growth rate was lower, but it was still 4
percent per year. Mexico was catching up with the United States. Unfortunately,
Mexico has stagnated since then (Chart 4).

44

Forging a New Path in North American Trade & Immigration

CHART 4: REAL GDP PER WORKING-AGE PERSON IN THE UNITED STATES AND MEXICO
64,000

2011 U.S. Dollars

United States

32,000

16,000

8,000

Mexico

4,000

2,000
1890

1910

1930

1950

1970

1990

2010

SOURCE: Kehoe Timothy J. (2019). “May You Live in Interesting Times,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas,
Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-KEHOE.pdf

My friend, Kim Ruhl, and I were asked to write a paper in the Journal of
Economic Literature some years ago, talking about why Mexico had not
benefited from all the reforms that it had implemented. Well, first, we say, “Why
did Mexico grow so rapidly?” The answer was three reasons: Urbanization—
people moved out of the countryside into the cities; industrialization—a huge
expansion of the manufacturing sector; and basic education. Those are the same
reasons that China has grown so rapidly in the past 30 years.
Why has Mexico stagnated? You know, I love Mexico. But we have to face the
facts. There is a lack of rule of law, financial markets are a mess, labor market
regulations are a bit of a mess, and those are the things that we think have held
Mexico back. China has similar problems; certainly, in financial markets, China
is far worse than Mexico. In terms of rule of law, I would argue that China is also
worse (Chart 5).

45

Forging a New Path in North American Trade & Immigration

CHART 5: MEXICO VERSUS CHINA
Why did Mexico grow so rapidly in 1950-1980?
y Urbanization
y Industrialization
y Basic education
Same reasons China has grown rapidly 1990-present
Why has Mexico stagnated since 1980?
y Problems in financial markets
y Problems in labor markets
y Lack of rule of law
China has similar problems
Significant difference between Mexico and China: Mexico was closed to trade and foreign
investment during its rapid growth period, while China was open.
SOURCE: “Why Have Economic Reforms in Mexico Not Generated Growth?” by Timothy J. Kehoe and Kim J. Ruhl, Federal Reserve Bank of Minneapolis, Staff Report 453,
November 2010.

China is doing well. It is not clear, however, that China has reached the level of
Mexico yet. That is something to keep in mind. A significant difference between
Mexico and China is that Mexico, when it was in its boom, was closed. We
remember from our Mexican economic history that the boom was the period of
Mexicanization, when the country was closed to foreign trade and investment. I
am optimistic about the future for Mexico. I am optimistic about Mexico. There
are just the problems to be overcome.
What about world trade? I did not mention one of the essential things in this
picture that we always have to keep in mind. Looking again at Chart 1, we see
that, except for the Great Depression and the World War II boom, the blue
line is almost the red line except at the very end, following the 2007-to-2009
so-called Great Recession. There was nothing great about it. It was just global,
and it affected all the countries in the world. What we see in Chart 1 after 2009
is shocking. We have never really recovered from the 2007–2009 recession. The
U.S. economy is doing about the best of any major economy in the world right
now, and for the last year or so, the labor market has tightened. But in general,
we are not back. We are on a growth path about 10 percent below where we
should be. And trade has stagnated in the United States because it collapsed
during the global recession. It is the same picture for the whole world. Whom do
we (the U.S.) depend on for trade? I tell you: It is Canada and Mexico and China.
They are currently one, two and three as our trade partners. I do not think we
can afford a trade war with China. We certainly cannot afford a war with all
three of them (Chart 6).

46

Forging a New Path in North American Trade & Immigration

CHART 6: INCREASING IMPORTANCE OF REGIONAL TRADE BLOCKS
U.S. International Merchandise trade (exports plus imports)
percent GDP
10

8

,

.. ....
.

....

..... ..'
.
.... ....
. .

Rest of World

,

,

\

'

..
.'

:··
6

.
..

4

'

NAFTA

European Union
2

..··· China

····················............···············································/

0
1970

1980

1990

2000

2010

SOURCE: Kehoe Timothy J. (2019). “May You Live in Interesting Times,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas,
Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-KEHOE.pdf

What about the impact of deficits? These are simple facts. I published a paper
with my friends, Kim Ruhl and Joe Steinberg, in the Journal of Political Economy
last year (2018), and we were looking at what we called, “global imbalances,”
and that meant the huge deficit the United States had with Japan, Korea and
China. Here are just facts about labor productivity (Chart 7). Productivity in
producing goods has grown at about 4 percent per year. Some people will call
that “automation.”

47

Forging a New Path in North American Trade & Immigration

CHART 7: GLOBAL IMBALANCES AND STRUCTURAL CHANGE IN THE UNITED STATES
Labor productivity by sector (with Kim Ruhl and Joseph Steinberg 2018)
real value added per worker (1960=100)
800

400
Goods

200

Services
100

,,# ...... ____ _

~------# ·------.. -##·-----•#

Construction

--- ......
..... #

50
1960

1970

1980

1990

2000

2010

SOURCE: Kehoe Timothy J., Ruhl Kim J., and Steinberg Joseph B. (2018). “Global Imbalances and Structural Change in the United States.” Journal of Political Economy
126(2): 761-796.

Suppose we stick that into a model of trade. We make the assumption in the
model that, for some reason, the Chinese, when they get our dollars for their
manufactured goods, do not want to buy our goods but rather they want to buy
our government bonds. That is something we have to remember about China.
We Americans seem to want to have government deficits. Somebody has to buy
our bonds. Thank God for the Chinese.
Our model does a very good job with hardly any other driving forces besides
foreign savings, mostly Chinese savings, in the United States in it. The model
has constant productivity growth, no recessions, nothing but foreign savings
in the United States. What happens to employment? What has happened in
employment is what would have been there even without what former Fed
Chairman Ben Bernanke called, “The Global Savings Glut.” For some reason, the
Chinese want to save in our country, which in principle is good for us, not bad.
The loss of jobs in manufacturing is from our productivity increases.
What about trade and services? In measured trade in services, the U.S. is by far
the world’s largest exporter of services. Everybody has a story. They call their
bank credit card company, and they talk to some guy who identifies himself as
John but might slip up, and you hear his Indian accent and his is name is Sanjay
and so forth. India as a country has more than a billion people, and the educated
people speak English. We get them to work at call centers. That is good for us
and is good for India’s economy.

48

Forging a New Path in North American Trade & Immigration

India exports services, but we export a lot more. We export business services.
The world’s giant multinationals are headquartered in the United States. We
do managerial services, design services, research services, and we also get
all the income associated with copyrights and trademarks in entertainment,
pharmaceuticals and so on.
Let me just give you an example that is simplified. General Motors U.S. sells
design services to GM in Mexico. That is export of services. You do not find the
exports from the United States to Mexico in the data. Actually, you can find it,
but you have to know where to look. Whom does GM Mexico pay? They pay GM
Bermuda. Why? There’s no corporate income tax in Bermuda. How do they do
that? It is really simple. All GM U.S. sells its patents to GM Bermuda. They sell
the patents cheap, and some of them end of being worth nothing because they
never get used. This is something you can do. GM U.S. sells all its patents to a
wholly owned subsidiary in Bermuda, and that is whom Mexico pays. Corporate
income taxes are high in Mexico, and before the tax reform, of course, in the
United States. So, it is just a way of GM saving its money tax-free, like a 401(k)
plan for big corporations.
The money is going to somewhere where the corporation does not have to
pay taxes, and sometimes it involves three different entities. Kim Ruhl was
explaining a lot of this to me in detail, and I did not quite understand all of
it. But that is part of the point. And it is all legal. That is the way many U.S.
corporations are minimizing their tax burdens, but it means the published
numbers on bilateral trade deficits mean much less than some people in the
current administration acknowledge.
Final point: The Trump administration is very right—but it is a complaint that
goes back before them—regarding problems that countries like the United States
have with China. U.S. firms want to get into China. China has the biggest and one
of the fastest-growing consumer markets in the world. The Chinese had a formal
system back in the 1990s. If you were a foreign company and you wanted to set
up operations in China, you had to have a Chinese partner, and you had to share
your trade and technological secrets with that partner. China then joined the
WTO, and people pointed out, “Chinese government, your policy is in violation
of WTO.” The Chinese government said, “Fine.” They erased the policy, but they
still enforce it.
We have got to do something about China coercing foreign companies operating
there to give up trade and technological secrets. My own view, perhaps the
globalist view, is that we should have been doing this with our allies rather than
resorting to a trade war, working through the WTO.
In conclusion, I want to be optimistic about the future like Secretary Guajardo,
but sometimes I end up being a pessimist like Dr. Chiquiar.

49

Forging a New Path in North American Trade & Immigration

SERVICES AND DIGITAL TRADE

CHAPTER 7

Liberalizing Trade of Services Offers Potentially
Large Economic Gains
Michael Sposi, Southern Methodist University
Traditionally, when someone mentions international trade, the first thing that
comes to mind is movements of goods—goods like agriculture; commodities like
oil and steel; and maybe manufactured goods.
We’re moving stuff across borders, and that is how we think about international
trade and underpins the way that we developed trade models. International
trade is kind of really based on the physical nature of goods.
Governments have a long history of using trade policy in the form of tariffs and
quotas to possibly protect certain industries in the goods sector or subsidies
to promote manufacturing in the form of industrial policy, for example. To
produce the good in one location and consume it in another, you need to
move the stuff. There is a cost to doing it, and the further you want to move
it, generally, the more costly it is. This is how we traditionally think about
international trade.
We typically ignore services, assuming services are not tradable. An example
would be a haircut. It’s produced where it’s consumed, and that’s true for a lot
of types of services but not all. For example, transportation services. If you’re
flying out on an international airline, you are consuming something that’s
produced by residents in another location. Another example is international
banking, such as consulting services via a multinational corporation, as well as
consulting services for research and engineering.
The output for such services could be stored digitally and then moved across
borders. You write some software code to do some calculations, and you could
send the results to someone in another location. You’re still moving stuff, but it’s
very different than physically moving goods. So, we need to think about services
trade a little bit differently than goods trade.
Chart 1 shows a breakdown of trade in goods versus services from the
perspective of the U.S. with each of its main trading partners. Clearly, the
majority of trade is still dominated by trade in goods, but services trade is non50

Forging a New Path in North American Trade & Immigration

CHART 1: RE-EXAMINING OUR VIEW ON INTERNATIONAL TRADE
Services account of sizable share of U.S. Trade

■

Services

■

Goods

120

Composition of U.S. bilateral trade, percent

I

trivial, particularly when you look at U.S. trade with the EU and trade with the
rest of the world.

100

80

60

40

20

0
Canada

China

Eur. Union

Japan

Mexico

Rest-of-world

SOURCE: World input-output database: authors’ calculations.

Services actually account for about one-third of U.S. exports. It’s not something
we want to ignore when thinking about trade. Trading goods between the U.S.
and Australia is very costly because you have to physically move stuff, but this
is less true for digital information or a lot of services production. When sending
something by email, it doesn’t matter if you are here in the same room with me
or if you’re all the way in Australia.
Chart 2 shows the average effect of distance on trade flows. When you’re
looking at goods trade, as the distance becomes greater, the amount of trade
between those two locations declines very quickly. When you look at the same
effect of distance on services trade, there is really not much of a difference
whether we’re 6,000 miles apart or only 350 miles apart.

51

Forging a New Path in North American Trade & Immigration

CHART 2: RE-EXAMINING OUR VIEW ON INTERNATIONAL TRADE
Distance is less of a barrier for services

■

Traded Services

■

Goods

Distance in miles
(350,750)

(750,1500)

(1500,3000)

(3000,6000)

(6000+)

0.00
-0.50

Log change in trade

-1.00
-1.50
-2.00
-2.50
-3.00
-3.50
-4.00
-4.50

SOURCE: Authors’ calculations

I want to shift now and put things into a more broad macroeconomic
perspective. Trade has grown remarkably as a share of world GDP (gross
domestic product). The share of trade over global GDP rose from 20 percent in
1970 to 50 percent today.
There have been several trends that have been very prominent features of
the global economy. Trend No. 1: a massive increase in globalization. Trend
No. 2 is something that economists refer to as structural transformation. The
middle figure in Chart 3 demonstrates this process; there’s a very sharp shift
in resources from goods to services. Services are occupying a greater share
of expenditures globally, and the goods share has been declining. However,
openness is much higher for goods compared to services and has been
increasing much more rapidly over time.

52

Forging a New Path in North American Trade & Immigration

CHART 3: GLOBAL ECONOMY TRENDS

■

Services

■

Goods

EXPENDITURE SHARES

OPENNESS
0.6

1.0

0.5

0.8

0.4

0.6

0.3

0.4

0.2

0.2

SECTORAL OPENNESS
2.0
1.5
1.0
0.5

0

0.1
1970

1980

1990

2000

2010

0
1970

1980

1990

2000

2010

....................................
1970

1980

1990

2000

2010

SOURCE: Lewis, L., Monarch, R., Sposi, M., and Zhang, J. “Structural Change and Global Trade.” Federal Reserve Bank of Dallas Working Paper No. 333.

Here, I have shares measured in terms of final expenditures. What I am
measuring is final expenditures by households—the stuff that you purchase
and consume day to day; fixed capital formation, spending on construction
and other forms of investment like equipment and machinery; and
government spending.
Goods are just the more open sector; a lot of stuff is being traded. What are
the key drivers of openness? The impacts of declining trade barriers have
come in many forms, including reductions in tariffs, making trade policy more
transparent and declining physical transportation costs.
Standardized shipping containers and more efficient modes of moving goods
from Point A to Point B have all resulted in more trade taking place. In addition,
the industrialization of emerging economies has contributed to the increase
in trade, as they have joined the global trading system. Globalization has
lifted huge portions of the world’s population out of poverty, improved quality
of goods, promoted competition, increased product selection and generally
lowered consumer prices of goods. The gains aren’t shared equally by everyone,
but this is, I think, a fairly uncontroversial statement to make: The aggregate
benefits from trade have been positive.
Higher incomes and industrialization globally have resulted in greater income
per capita. This additional income is being disproportionately spent on services
relative to goods. As you get richer, you’re going to spend a greater share of
your income on luxury goods as opposed to necessities but also consume more
education, spend more on health care, go out dining, to entertainment—all
service sector activity.
However, there is a differential in productivity growth between goods and
services. Productivity growth has been much faster in goods-producing
industries than in service-producing industries.
What does this mean? In the macroeconomic sense, this is going to result
in a reallocation of resources from goods to services. Goods become more
53

Forging a New Path in North American Trade & Immigration

productive—you need to allocate fewer workers and fewer resources to the
production of goods and reallocate them toward services. These resources
are going to come with a cost—you pay a higher price for services over time
compared with goods. This change in relative prices is also going to mean
households’ budgets are going to be spent increasingly on services because
they’re becoming more expensive.
Those are the drivers of structural change. The consequences are important in
the context of thinking about openness. The economy is shifting from goods to
services, but the service sector is not as open/tradable as the goods sector. It’s
going to—all else equal—reduce openness or make the world look less open
because we’re just consuming more and more of stuff that’s not traded as much,
limiting the potential benefits you could realize from trade liberalization in goods.
We’ve already exhausted a lot of the scope that we have for reducing trade
barriers on goods. Tariffs and quotas are extremely low. Even in spite of the
recent protectionist policies, by historical standards, tariffs are still extremely
low. There is some scope for liberalization, but it’s limited. In addition, policy
could do very little about changing the cost of moving goods—the physical
transportation cost part of it.
What can be done to increase openness and realize more benefits from trade?
I did some projections based on a recent working paper with some co-authors
of mine, Logan Lewis and Ryan Monarch from the Federal Reserve Board of
Governors and Jing Zhang from the Chicago Fed.
The first thing I want to point out in Chart 4 is to ignore the colored lines;
look at the black line—that is the trade to GDP ratio; the solid part of it is
what we observed already since 1970. The dashed line is based on a simulation
or projection going another 45 years into the future. The assumptions that
I’m building into this calculation are that, suppose there are no changes to
trade barriers, either in goods or services, either up or down. Trade barriers
are constant.
CHART 4: WHAT DOES THE FUTURE HOLD?
Structural change will restrict growth in openness
Baseline

Productivity Projection

With goods liberalization

With services liberalization

1.0

Openness

0.8
0.6

-------- -----

'~

0.4
0.2
0

1980

2000

2020

2040

2060

SOURCE: Lewis, L., Monarch, R., Sposi, M., and Zhang, J. “Structural Change and Global Trade.” Federal Reserve Bank of Dallas Working Paper No. 333.

54

Forging a New Path in North American Trade & Immigration

We also assume a differential in productivity growth between goods and
services. The economy is gravitating continually away from goods toward
services, and there’s no increase in trade. Trade as a share of GDP is going to fall
because we’re going to just be consuming more stuff that’s less traded. What you
see with the dashed line is a decline in world trade as a share of GDP.
We’re kind of limited to what we can do with trade policy on goods, but we
should be thinking about what we can do with services trade. Services is 80
percent of the global economy; we should be seriously thinking about how we
can benefit from trading these services. There are six chapters of the USMCA
(United States–Mexico–Canada Agreement) that are either directly or somehow
closely related to trading services. I want to give just a quick picture of how we
think about the potential benefits from liberalizing trade in services.
Look at the colored lines in Chart 4. Let’s start with the blue one. This is the
same projection exercise. We’re going to assume productivity growth is
continuing at the same rate as it has in the past. And we’re going to assume that
goods trade barriers somehow decline at the same rate that they have in the
past, about 1.5 percent per year. The blue line shows openness is going to just
continue increasing at pretty much the same trend rate that it has in the past.
Alternatively, suppose there are no reductions in trade barriers for goods, but all
of the attention is focused on liberalizing trade in services (red dashed line).
We’re going to reduce barriers for trade in services by 1.5 percent per year, just
to make the calculations comparable. What you can see is that openness would
increase productivity exponentially.
Why is that? There is a complementary effect of liberalizing services. We’re
consuming them in greater proportions, and if we could reduce prices in
services, improve the quality of services—and that’s the stuff that you’re
consuming a majority of—then the benefits are disproportionately large from
doing that rather than focusing on goods. Policy toward the liberalization of
trade in services is something that we should really think about.

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Forging a New Path in North American Trade & Immigration

CHAPTER 8

Digital Economy Finds a Home in USMCA
Provisions
Anupam Chander, Georgetown University
The USMCA (United States–Mexico–Canada Agreement) can help create a North
American digital free-trade zone. Even as we build border walls, people can
jump them by using electronic means to participate in commerce across
North America.
Services were left out of international trade agreements until the 1990s. It’s not
surprising then that, during the last century, trade in services across borders
did not grow as fast as trade in goods. No one thought to add services to the
international trade regime because people thought that services could not, for
the most part, be traded across borders. The only way you could consume a
service was to actually travel to that place—go get your hair cut in that place—
to engage in trade in services. But of course, the electronic medium allows us
to now deliver services across borders, often in real time without the buyer
or seller leaving home or work. The electronic medium has made many
services tradeable.
NAFTA (North American Free Trade Agreement) was one of the pioneering
interventions in the space, creating a liberalized trading center for services
across the U.S., Mexico and Canada. It offered national treatment; for example,
Canada promised that it would treat an American or Mexican services provider
operating in Canada at least equal to a Canadian service provider.
There were exceptions and grandfather clauses, but overall, that was the big
picture in regard to NAFTA’s innovation. The WTO (World Trade Organization)
created a year later (1995) picked up on this. It globalized this desire to liberalize
trade in services, but it did so in a much more limited form than NAFTA. The
USMCA now takes that NAFTA intervention from 1994 and reinvents it for the
digital age.
Tariffs and taxes can interfere with cross-border e-commerce. The USMCA
raises the de minimis thresholds at which imports into a country are exempt
from taxes and duty fees. Such de minimis thresholds are designed to make
relatively low-value cross-border transactions cheaper, faster, easier and more
56

Forging a New Path in North American Trade & Immigration

predictable. This directly impacts the ability to engage in e-commerce across
borders especially for consumer products.
Another critical thing that USMCA does with respect to duties and customs is
the prohibition of duties on stuff sent electronically. If you buy a music CD in
the U.S., and you bring it to one of the NAFTA countries, you would have to pay
duties. However, if you buy it via iTunes, you will not pay duties.
We first saw this approach in the WTO, with the Declaration on Global
Electronic Commerce adopted by the WTO’s Second Ministerial Conference
in May 1998. This has now been adopted in the USMCA—prohibiting customs
duties on digital products. This means essentially that you can now sell these
digital products, music videos, e-books, and software across these three
countries—that is, across the continent, without having to pay customs duties.
It’s possible that you might have paid sales taxes, which are different than
customs duties, but the taxes have to be applied equally to domestic sellers and
foreign sellers.
USMCA also prohibits data localization measures. Data localization is the idea
that data is only safe if it’s kept in this country. That is, data becomes unsafe,
insecure or is unavailable for government purposes if it leaves the country. It’s
associated with the idea that data is the new oil, which is the term that you’ve
heard many times. It is a metaphor that serves only to cloud the way that data is
actually utilized by multiple parties.
It’s worth pausing to reflect on that claim. There was a recent New York Times
op-ed arguing that data is the new oil and we should regulate it as such. The
reality is that you’re producing a ton of data all the time, but most of it is not
very valuable. Data only becomes valuable after it’s analyzed. You might have
tons and tons of files in your file drawer, but they are not valuable until they
are analyzed. Data isn’t inherently useful—a computer could spin out as much
data as you want. It’s very different than oil, which can be readily processed into
something that society values.
Data localization is motivated by a number of different possible concerns. One,
if the data leaves our country, it will be subject to foreign surveillance. That’s a
common concern you’ll hear from governments: “We’ve got to keep this local, so
that we don’t have to worry about foreign governments accessing it.” This was a
concern raised against the U.S. especially in the wake of the (Edward) Snowden
revelations (regarding National Security Agency practices), which suggested that
the U.S. was widely surveilling electronic information.
Of course, the Snowden revelations also revealed that the U.S. was surveilling
activities outside the U.S. Foreign surveillance doesn’t only happen when
on the shores of the government that is doing the surveilling. In fact, a lot of
surveillance happens in other countries, and so, with the electronic medium,
exfiltration of data, hacking, etc., as we saw in the 2016 elections, this
surveillance did not have to take place in the U.S. itself. American data did not
have to be abroad to be hacked from Russia. This idea that by keeping it here,
you rid yourself of foreign surveillance is, I think, misbegotten.
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Forging a New Path in North American Trade & Immigration

A second motivation for data localization is the idea that keeping data here is
the only way to protect our privacy. When the data moves abroad, it becomes
public in some way. The same notion arises in the context of any kind of activity
that you might think. You can imagine a kind of food version of this. We can
only eat food that’s grown in the U.S. because only food grown in the U.S. is
safe. In reality, it turns out that food grown elsewhere is safe, and also that food
grown in the U.S. can be unsafe.
A privacy breach can occur domestically, so data might not be particularly safer
if we keep it here. In fact, requiring data localization often increases privacy
risks because you have to create huge data infrastructures across the world and
replicate them in every country where you need to localize to provide services.
An argument is made that by keeping the data here, you generate local
employment, and you’re supporting a local digital economy. The problem with
that argument is that much of the digital economy actually works by relying
upon services provided by others. If you’re opening a new startup, you don’t
buy your own server, you don’t buy your own financial management systems.
You don’t manage all that yourself. You outsource everything. By not allowing
outsourcing to other countries, where your data can be processed, you actually
hamper your local startup economy. You now have to rely on local, pricier
options that are often not as good as the global versions of that service.
Chart 1 shows images of server centers or server farms. The left one is a Google
farm on the West Coast, in Oregon, and the right one is AWS, the Amazon
servers, in Herndon, Virginia. One thing you’ll notice about these facilities
is that, despite their enormous footprint, there’s almost no parking. It’s just
machines talking to machines. There isn’t much in the way of employment in
these places that are stuffed with electronic equipment. Unless your country is
the one producing that electronic equipment, all that is being imported from
somewhere else. Finally, these centers are enormous energy consumers. Thus, it
makes sense to sell/export data services to other countries with high energy cost
and a lack of infrastructure.

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Forging a New Path in North American Trade & Immigration

CHART 1

SOURCE: Chander Anupam (made using Google Maps), (2019). “Creating a North American Digital Free Trade,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-CHANDER.pdf

USCMA says data localization is not generally permitted unless it is both
necessary and proportionate. In the USMCA, there’s actually a sophisticated
provision for data localization in financial services (Chart 2). Basically, what it
says is: If you can’t ensure that local regulators, like the Federal Reserve, can
access this information when they need it in a timely fashion, then we might
insist that you keep it locally. But if you can make arrangements to have this
information made available wherever it is back to the regulators on an asneeded basis, then it can travel abroad, and it can be held abroad. USMCA has, I
think, a better view of this than earlier exclusions of financial services entirely
from the realm of data localization liberalization obligations.
CHART 2: SUMMARY OF DIGITAL TRADE IN THE USMCA
Data Localization
ƒ Financial Information: Data localization with respect to
financial services is subject to somewhat different rules.
ƒ Article 17.18 allows regulators to require data localization if
a business is unable to provide them with access to data.
The goal is to balance the need for free flow of data with the
demands of regulators.
ƒ Financial regulatory authorities must be given “immediate,
direct, complete, and ongoing access to information processed
or stored on computing facilities that the covered person uses
or locates outside the Party’s territory.” If an institution fails to
provide such access, authorities shall provide “a reasonable
opportunity to remediate” before imposing a data localization
restriction on that institution.
SOURCE: Chander Anupam (made using Google Maps), (2019). “Creating a North American Digital Free Trade,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-CHANDER.pdf

59

Forging a New Path in North American Trade & Immigration

Chart 3 summarizes a few more points about digital trade in the USMCA. There’s
information about authentication, electronic signatures, enforceable consumer
protections and anti-spam rules. There are limits on a disclosure of source codes
and algorithms. The motivation there is that companies don’t want to disclose
how their algorithms work to governments because they are worried about
industrial espionage.
CHART 3: USMCA

Ensure that suppliers
are not restricted in
their use of electronic
authentication or
electronic signatures,
thereby faciliating
digital transactions.

Require enforceable
consumer
protections and
anti-SPAM rules.

Limit governments’
ability to require
disclosure of
proprietary computer
source code and
algorithms.
Introduction of “algorithms” is
new. Protecting AI from industrial
espionage. But concerns about
legitimate needs for algorithmic
transparency.

Limit the civil liability
of Internet platforms
for third-party
content that such
platforms host or
process, outside
of the realm of
intellectual property
enforcement, thereby
enhancing the
economic viability
of these engines of
growth that depend
on user interaction
and user content.
Largely modeled on CDA Section 230,
which is seen as critical to the rise of
US Internet enterprise

SOURCE: Chander Anupam (2019). “Creating a North American Digital Free Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank
of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-CHANDER.pdf

A critical move on this front is limiting the civil liability of internet platforms
for third-party content. This borrows from the Communications Decency Act
Section 230 that many of you may have heard about in the U.S. This is a key
pillar of U.S. internet law, one of the reasons for our unique success in creating
the internet platforms that we have today. Section 230 is the 1996 congressional
statute that provides legal immunity to digital service providers for the thirdparty information they disseminate.
Companies across Canada, Mexico and the U.S. will benefit from these
provisions under the USMCA digital chapter, allowing them to enjoy the benefits
of economies of scale by having access to digital service suppliers from all three
countries. Consumers now have greater access to a broader range of suppliers,
and businesses also benefit from having their business inputs from a broader
range of suppliers.

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Forging a New Path in North American Trade & Immigration

CHAPTER 9

Expansion of Digital Service Economy Offers
North American Opportunities
Joshua P. Meltzer, Brookings Institution
If we think about this agenda more broadly, within the Americas, just improving
internet access remains key. When we think about digital in the trade space,
we tend to gravitate to our experience with Amazon or Google or Facebook.
In fact, the commercial and economic opportunities are very much on the
business-to-business end. It’s not only about these large internet companies, but
it’s really about how the broad economy utilizes these digital technologies more
effectively to improve productivity.
This is very much about manufacturing, it’s very much about services, it’s very
much about agriculture, chemicals, energy, you name it. Different industries are
adopting these technologies at different rates and becoming digitally intensive
in different ways. From a policy perspective, that’s really the opportunity and
the challenge. It’s not about how we use Facebook or whether or not Amazon
delivers our puzzles quickly enough.
One of my points is about the enormity of the potential. A McKinsey study a few
years ago estimated that the value of global data flows in 2014 was more than
the value of trade in goods. Global data flows raised world GDP (gross domestic
product) by 3.5 percent, or $2.8 trillion in 2014, and the contribution will rise to
$11 trillion by 2025 (McKinsey, 2016). That’s a trend, which certainly seems to
be going upward and helps explain a bit of why we’re seeing stagnation on the
goods side. It is because we’re seeing a lot of transformation and transition to
value being traded across borders using data flows rather than traditional trade
in goods.
E-commerce sales were over $27 trillion in 2017 (United Nations Conference on
Trade and Development, 2019); that is, $27 trillion was essentially transacted
over the internet worldwide. About 88 percent of that was business to business.
This is also a global phenomenon. What I think is important when one thinks
about Mexico—but also more broadly—is the opportunity for developing
countries to participate in international trade in ways that were previously a lot
of more challenging.
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Forging a New Path in North American Trade & Immigration

In terms of the digital opportunities for the U.S., I think the International Trade
Commission (ITC) has done the best work on trying to calculate the benefits of
the use of the internet and data. According to the ITC, U.S. internet and data
use has increased U.S. GDP by 3.4–4.8 percent and supported up to 2.4 million
jobs (ITC, 2014). The internet economy has grown significantly faster than
the broader economy. Chart 1 shows cross-border data flows underpinning
international trade. From 2005 to 2014, there was a 45 times increase in global
data flows. That trend has essentially continued and actually grown.
CHART 1: CROSS-BORDER DATA FLOWS UNDERPIN INTERNATIONAL TRADE
Growth of global cross-border data flows 2005 vs. 2014
2005
100% = 4.7 Terabits per second (Tbps)

---....... .
EU

NA

···-....
..
·......

AF

•

AS
ME
AF

OC

LA

EU

NA

AS

ME

2014
100% = 211.3 Tbps

OC

LA

)

)

Regions:

NA-United States and Canada EU-Europe AS-Asia LA-Latin America ME-Middle East AF-Africa OC-Oceania

Bandwidth:
<0.05

-0.05-0.1

-0.1-0.5

-0.5-1.0

-1.0-5.0

-5.0-20.0

->20.0

SOURCE: TeleGeography, Global Internet Geography; McKinsey Global Institute analysis.

I want to talk about the ways that I see the use of data and digital commerce
as transforming international trade and what it means. I’ll focus in on services
a bit more and map that onto what’s happening with USMCA (United States–
Mexico–Canada Agreement).
Regarding the platforms context, I simply mean here (it’s) a typical e-commerce
transaction. You may be on eBay, Alibaba, Etsy; I’m essentially transacting
goods online.
Now, from a trade perspective, that essentially means that you could be a
small business and where your customer base used to be—whoever walks past
your store in a town and maybe the next town over—now you have access to
consumers globally. eBay has some good data that essentially show that this
(involves) small- and medium-sized enterprises. You can see that I’ve got data
for the U.S. and Canada, but this plays out for Mexico, too. It’s remarkably
similar across the world. Essentially, you are almost entirely always exporting if
you are on eBay as a small business, compared with offline peers. Importantly,
there’s a whole sort of ecosystem that comes with an e-commerce platform. You
62

Forging a New Path in North American Trade & Immigration

have access to financial payment services. It’s often tied in with express delivery
services; so you have access to postal services.
There are various mechanisms for creating trust on the platform. This actually
brings in other services to make the actual eBay or the broad e-commerce
experience work effectively. In terms of the USMCA, there’s a whole range
of commitments to underpin growth in e-commerce, certainly within North
America.
As Anupam [Chandler] mentioned, there’s also a lowering in USMCA of the
de minimis level. When you are importing a good, if it falls below a particular
value, tariff rates and other duties don’t apply. Often for the small businesses
on e-commerce platforms, they’re selling essentially low-value one good or
two goods. If you can avoid the tariffs and duties and all the paperwork that
goes with exporting, that can be the difference between that transaction being
commercial or not. So, raising the de minimis level in USMCA for Mexico
was important.
Investment commitments are very important because a lot of e-commerce
happens under different business models. For instance, Walmart is trying to
develop what it calls an omni-channel e-commerce strategy, which means that
they’ve got the big-box stores, but also increasingly, you can go online. You can
purchase or you can pick it up at the store or you can pick up at a designated
post office box.
These fulfillment centers may be located in Mexico rather than the goods having
to cross the border every time an e-commerce transaction is made. A lot of
investment comes in behind the e-commerce strategy; the protections that are in
USMCA are important there.
The USITC (United States International Trade Commission) looked at the benefits
of this agreement for North America. It concluded that we would see increases
in exports from the U.S. over e-commerce to both Mexico and Canada (Chart 2).
CHART 2: USMCA SHOULD INCREASE E-COMMERCE

y Cross-border flows of information, including financial information
y Improved market access for services industries
ƒ Express delivery
ƒ Logistics
ƒ Financial
y Raised de minimis levels
ƒ $117 tariff-free threshold
y Investment-e.g. Walmart omnichannel ecommerce strategy
y USITC estimates increase of US ecommerce exports of:
ƒ $332 million to Canada
ƒ $91 million to Mexico
SOURCE: Meltzer Joshua P. (2019). “Services and Digital Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX.
https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-MELTZER.pdf

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Forging a New Path in North American Trade & Immigration

When it comes to trade and services, it’s worth noting services are about 80
percent of U.S. GDP, and while there’s been a sort of growing trade deficit in
goods, there’s basically been an ongoing trade surplus in services. In fact, this
slightly picks up on the cross-border services trade between the U.S. and Canada
and Mexico and the rest of the world (Chart 3A).
CHART 3A: U.S. CROSS-BORDER SERVICES TRADE, 2017 ($BILLIONS)
Imports

Exports

Canada

Mexico

Rest of World

Canada

Mexico

Rest of World

Travel services

8.6

17.1

109.3

17.4

17.9

175.4

Professional services

8.5

2.9

93.0

11.1

3.1

140.1

Professional and management
consulting services

3.1

0.7

39.6

7.8

1.5

69.6

Legal services

0.2

0.0

3.0

0.8

0.2

9.0

Accounting services

0.3

0.1

2.4

0.2

0.2

1.4

Technical, trade-related, and
other business services

3.1

1.6

21.0

3.0

1.4

28.9

Architectural and engineering
services

­—

­—

­—

1.0

0.4

8.9

Research and development
services

2.3

0.5

32.5

0.4

0.2

41.6
116.4

Charges for the use of IP

1.7

0.7

48.9

8.4

3.6

Audiovisual and broadcasting
services

0.7

0.6

11.9

1.9

0.7

19.0

Other charges for IP

1.0

0.1

37.0

6.5

2.9

97.4

Transportation services

5.4

3.1

93.2

7.0

4.0

77.6

Financial services

2.2

0.4

26.3

7.0

1.4

101.2

Computer services

3.9

0.6

27.5

2.8

0.9

19.2

Insurance services

0.6

0.0

50.1

1.8

0.4

15.8

Telecommunication services

0.3

0.4

4.8

0.6

0.3

10.0

All other services

1.8

0.3

30.9

2.3

1.3

50.6

33.0

25.5

484.0

58.4

32.9

706.4

Total

SOURCE: Meltzer Joshua P. (2019). “Services and Digital Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX.
https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-MELTZER.pdf

The U.S. exports not only travel services but also professional services. There
are a lot of management consulting services, business services, R&D (research
and development) and financial services. A lot of these services are actually
increasingly delivered cross-border online. In addition, the U.S. also sells
services via foreign affiliates in Mexico and Canada and has a surplus
(Chart 3B).

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Forging a New Path in North American Trade & Immigration

CHART 3B: U.S. AFFILIATE SALES AND PURCHASES, 2016 ($BILLIONS)
Canada

Mexico

Sales of services
abroad by U.S.owned foreign
affiliates

Purchases of
services from
foreign-owned
U.S. affiliates

Sales of services
abroad by U.S.owned foreign
affiliates

Purchase of
services from
foreign-owned
U.S. affiliates

Retail services

23.2

12.0

9.1

—

Wholesale services

18.1

11.3

4.4

0.8

Professional, technical, and
scientific services

15.8

9.4

3.8

Legal

0.0

—

0.0

0.0

Accounting

0.6

0.0

0.1

—

Other professional

15.2

9.4

3.7

Finance and insurance services

10.6

34.5

10.6

0.1

Information services

9.3

8.7

2.8

—

Data processing services

3.1

—

—

Telecommunication services

1.2

—

—

—

Audiovisual and broadcasting
services

1.2

0.4

0.3

0.0

3.8

8.3

2.5

—

All other services

Other information serivces

43.4

24.1

8.9

8.2

Total

111.1

100.0

39.6

9.1

SOURCE: Meltzer Joshua P. (2019). “Services and Digital Trade,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX.
https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-MELTZER.pdf

We’ve got approximately $150 billion of services delivered through affiliates
in Canada or Mexico. The U.S. purchases through affiliates located in the U.S.,
about $110 billion, so there’s about a $40 billion surplus in there. You have some
similar services there, but you see a lot more retail and wholesale services as
well through these affiliates.
The USITC estimated how much of these services are digital. They believe
that 61 percent of total U.S. services exports and 53 percent of U.S. services
imports are digital. Why an estimate? This is because we don’t actually have
statistics on how services are delivered. We don’t know if a service is delivered
in person. We don’t know if it’s delivered over the telephone. We don’t know
if it’s delivered online. So, you have to make an exercise where you assess
what services could potentially be delivered online, and this is what is digitally
deliverable. It’s probably an upper bound of what actually occurs, but it also
shows where opportunities for growth lie.
Canada is the second-largest market for digital services, and it’s also one of
the largest sources for the U.S. Mexico is a rapidly growing area of computer
service exports as well. Certainly one would expect that there would be some
growth in those areas within the North American context under USMCA. These
are some of the kind of market access gains under USMCA from where we
were under NAFTA. You do see that for instance, Canada has removed a lot of
its provincial-level barriers to services—the citizenship test and commercial
presence requirements.

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Essentially, Canada is not saying anymore that if you want to deliver, you’ve
got to be physically present in Canada. You can do that from the U.S., and an
increase in digital technologies makes that possible. You’ve got some other
services gains in Mexico—professional services gains, computer, environmental,
transport and financial. Overall, we will see barriers to services trade coming
down under USMCA.
In the context of an environment where you can increasingly trade services
online, certainly reducing services trade barriers in USCMA expands the
opportunity for more digital services trade between the U.S. and Canada
and Mexico.

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I

ENERGY SECTOR: INVESTMENT, REGULATION
AND BINATIONAL STRATEGY

CHAPTER 10

Lifting Mexican Red Tape Could Speed Energy
Infrastructure Growth
Enrique Marroquin, Hunt Mexico
Those of you that know me, see me as very bullish on Mexico energy and on
cross-border energy. I work in a company that focuses, among other things, on
building electricity interconnections between the United States and Mexico. That
has exposed us to a lot of interesting situations and opportunities in Mexico,
particularly on the electricity side.
The growth of electricity in developing countries—not developed countries—
closely tracks gross domestic product (GDP) growth. If you look at the growth that
you’re seeing in Chart 1—China, India, Egypt, Brazil—Mexico is no exception. GDP
is directly tied to electricity consumption, or electricity consumption is directly
tied to GDP growth. There are many explanations for that.
One, they (countries) grow their demographics, and as they become “richer,”
they consume more [goods and services]. Now, they can go more often to the
theaters. They can go more to the malls. They can buy more electronics.
CHART 1: GDP AND THE ELECTRIC INDUSTRY
Gross domestic product and electricity use growth rates (2011-2015)

Percent per year (five-year average)

Direct correlation observed more in developing economies than in developed ones

■ Gross Domestic Product

10

■ Electricity Use

8
6
4
2
0
-2
United
Kingdom

United
States

Japan

China

India

Egypt

SOURCE: EIA Nov, 20 2017

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Forging a New Path in North American Trade & Immigration

Brazil

Then the population starts aging. It becomes thriftier in how it consumes energy.
There’s more energy efficiency. So, in some countries, the GDP growth continues
to be positive even as electricity demand decreases.
That’s basically what’s going on; Mexico is no exception. In the past 10 years,
the consumption of electricity in Mexico or demand for electricity has closely
tracked the GDP, as you can see from the graph and, in fact, it has outpaced the
GDP in Mexico. Consumption has been growing on a gross basis around 2.7
percent, and the GDP growth in an average per year has been 2.2 percent. As
you can see, Mexico is still developing (Chart 2).
CHART 2: GDP VS ELECTRICITY DEMAND IN MEXICO
In the last 10 years, the demand for electricity in Mexico has grown at an annual rate of 2.7%
while GDP has grown at 2.2%
8.0

Crecimiento anual (%)

6.0
4.0
2.0
0.0
-2.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
PIB real Nacional > tmca 2.2%
Consumo Bruto SEN > tmca 2.7%
Demanda Mexima Integrada SIN > tmca 3.0%

-4.0
-6.0

SOURCE: Prodesen, 2019-2033, Secretaría de Energía, http://www.gob.mx

That means that the more electricity consumed in theory, the greater the
investments that one needs or the country needs [to make] in generation
and in transmission and distribution. And whether the investments are done
in the country or done outside the country and the electricity is brought in
via transmission, that demand and that increase in demand is important to
anchor investments. These kind of investments are long term; they’re very
capital intensive.
These projections actually are encouraging for those who are looking at the
electricity market. At least for the next three decades, the annual projected
growth is 2.7 percent. So, it’s still probably higher than GDP growth.
Another interesting fact is that Mexico is a large country; I think it’s the 14thlargest in the world, geography wise. The top panel of Chart 3 shows projects
that have either been approved or are in the midst of being approved through
the various processes in Mexico, whether regulatory or with interconnection to
the grid. The chart also shows the amount of megawatts in the queue or that are
being built is in the thousands (Chart 3, blue).

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The bottom panel is the solar potential. The sun always shines down there,
and in some places, it shines too much. There’s a lot of solar potential in the
country. Mexico has a unique opportunity. However, it requires investment to
capitalize on its renewable energy potential. Hopefully, they won’t squander it
[renewable potential].
CHART 3: RENEWABLE POTENTIAL OF MEXICO
y Mexico has a vast and yet untapped renewable potential
y Industry estimates show that the impact to GDP could be $30bn and create 200 thousand
new jobs in 15 years1
y Investments could trigger economic development in remote areas

1 “Estudio de Energias Limpias en Mexico 2018=2032” Sect. 2018 CESPEDES
Source: Prodesen, 2019-2033, Secretaría de Energía, http://www.gob.mx

As I’ll mention later in the presentation, we’ll see that though some of the
current thoughts prevailing in the government circles in Mexico indicate
otherwise, [but] the potential is there. The investments that could be attractive
just on the renewable side are massive. Most importantly, the jobs and the
economic development that they can create are to be reckoned with. For
instance, some of you are aware that one of the policies of the AMLO (Andrés
Manuel López Obrador) administration is to foster development in the southeast
region of Mexico, which encompasses the states of Oaxaca, Chiapas, Tabasco,
Campeche and Yucatan.
Oaxaca is one of the premiere wind-generation regions in the world—not in
Latin America or in Mexico, (but) in the world. It has as high a potential [equal
to] some of the regions that are famous here in Texas, in the (Texas) Panhandle
and in North Dakota. Oaxaca is one of the most-impoverished regions in
Mexico. If you match the large wind potential and the need for electricity
that Mexico has, investments down there could generate a lot of change and
economic development.
However, things are not going exactly how we want on the regulatory side.
Chart 4 shows how attractive Mexico is for renewable energy projects. It is No.
19, falling six places from last year. Some factors affecting Mexico’s ranking are
changes in government policy, cancellation of electricity auctions and threats to
modify existing contracts.

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CHART 4: RENEWABLE ENERGY COUNTRY ATTRACTIVENESS INDEX
Some factors affecting Mexico’s ranking:
ƒ Change in government policy towards SOE
ƒ Cancellation of electricity auctions
ƒ Threats to modify existing contracts
Country

2019 Rank

China (Mainland)

1

2018 Rank
1

US

2

2

France

3

5

India

4

3

Australia

5

6

Germany

6

4

Japan

7

7

UK

8

8
10

Argentina

9

Netherlands

10

9

Mexico

19

13

SOURCE: EY May 2019.

In 2016, Mexico estimated that it would need about $125 billion to keep up with
the country’s needs. That money has to come from somewhere, and that’s where
investors outside Mexico and even within Mexico could have a role. That’s
where the USMCA (United States–Mexico–Canada Agreement) can help and
NAFTA (North American Free Trade Agreement) has helped.
There are two chapters that talk about energy in the USMCA. The first one is
Chapter 8.1, basically a Mexico-chapter only. It talks about the sovereignty that
Mexico retains of the ownership of hydrocarbons. Basically, the U.S. and Canada
are recognizing formally that Mexico can and will own the hydrocarbons in its
territory. The other is Chapter 14, which talks about investor protections and the
famous investor-state dispute settlement mechanism (ISDS). Some experts argue
that the USMCA is a little more limiting than NAFTA regarding ISDS protections.
But when it comes to energy in Mexico, the majority of the projects and the
majority of the contracts are going to be anchored by the government, whether
it’s Pemex or whether it’s CFE (Mexico’s Federal Electricity Commission). The
ISDS will offer protection and [also] offer very clear guidelines on how investors
could take advantage of arbitration protections, if needed. That brings a lot of
certainty to the investments side on the energy sector because it protects against
expropriation risk. That’s encouraging about USMCA.
Chart 5 shows how NAFTA has helped the trade of energy commodities. The size
of the arrows depicts how much trade is going on. The yellow one is crude oil.
There’s a lot of crude coming from Canada and Mexico into the U.S. However,
the U.S. is sending more refined products, like gasoline, to Mexico. In addition,
the majority of the natural gas that’s being imported into Mexico comes from
the U.S. There are some liquefied natural gas (LNG) imports through the LNG
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Forging a New Path in North American Trade & Immigration

terminals on the Gulf and in the Pacific. Mexico rarely, if ever, exports any gas to
the U.S.
CHART 5

3,256
Mbbl/d

301
Mbbl/d

542
Mbbl/d

564
Mbbl/d

8
Bcf/d

2.1
Bcf/d
187.4*
GWh/d

582
Mbbl/d

879
Mbbl/d
87
Mbbl/d

3.8
Bcf/d

23.9*
GWh/d

4.5*
GWh/d

t Ill]
.002
Bcf/d

4.7*
GWh/d

■
■
■
■

Crude Oil
Refined Product
Natural Gas
Electricity Power (2015 data)

SOURCE: Reproduced courtesy of the American Petroleum Institute. North American Energy, 2017.

Canada has a larger trade balance in electricity. Canada’s electricity exports to
the U.S. are mostly hydroelectricity and mostly to the northeast states. The tiny
arrow that you probably can’t see is the amount of electricity that gets imported
and exported between Mexico and the U.S., and that’s mostly due to lack of
infrastructure. There are very few electrical interconnections between the
two countries. But hopefully, the USMCA will enable the increase of electricity
interconnections between Mexico and the U.S.
Unfortunately, Mexico’s current administration is not aligning public policy
and investment objectives. Other countries, like Peru, have investor-friendly
regulation that actually attracts a lot of investment in the mining sector and in
the energy sector.
In Mexico, we have a misalignment. To be blunt, there’s a misalignment
between what the government wants to do and what the investor community
wants to do. There’s also an inefficient regulatory framework. You know, we
have countries (the U.S. and Canada) again that have—I wouldn’t say probusiness—but more streamlined regulatory environments. You can see how the
investment flows easily.
Mexico has as an inefficient regulatory framework, and it has had a lot
of turnover in the ranks of the staff in the regulatory bodies. But also, the
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Forging a New Path in North American Trade & Immigration

regulations are incomplete. There are some things that are allowed in the
constitution that haven’t been yet put in writing in the form of regulations.
There’s a semi-transparent tariff-setting mechanism. One can argue that the
tariff is set based on what the government wants to do as a monopoly, and that
disrupts the market and makes it an uneven playing field.
Last, but not least, there’s currently an unpredictable government, and I don’t
need to tell you how much pain and suffering there is among people who are
developing energy projects right now in Mexico and how long it’s taking for
them to get a permit and how volatile the situation is. You know, it all depends
on the president’s [López Obrador] daily morning press conference.
Well, anyway, that’s what’s going on in Mexico right now. The government has
had basic priorities in the energy sector: to strengthen Pemex and the Comisión
Federal de Electricidad (the Federal Electricity Commission), which sort of fly in
face of the private sector. The private sector wants to be independent, wants
to have open markets and wants to invest and get the returns. The current
government said that it wants to reduce energy imports and wants to build a
new refinery. Nobody sees the logic in that investment.
So, anything that does not fit in the government strategy is sort of put in
secondary or tertiary priority by the government. That is generating angst in
the investor community. In addition, they [government officials] are basically
dismantling the industry’s regulators. The regulatory bodies are understaffed.
They were understaffed before, and now they’re in an even worse position.
The most recent high-profile case was the resignation of the director of the
environmental regulatory agency for hydrocarbons. He clashed with the
secretary of energy, Secretary (Rocio) Nahle, because she wanted to break
ground on the refinery project, and they had not finished the environmental
permitting. That’s just a taste of what’s going on right now, why perhaps the
country is not looking that good. This year, it has stagnated basically, and maybe
energy is just a sample of what’s going on.
So, to wrap up, Mexico seems like a country that is like someone who has a
Formula 1 (racing) car stuck in the garage ready to go. They want to move fast,
they have this world-class driver sitting there, who’s just waiting to go. And then
suddenly, we find out that the tires are flat and there are no front tires, and they
have asked the driver to push the car to get to the finish line.
We have a car, but it’s incomplete. “So, let’s push it compadre, because we’re
going to get there sometime.” Hopefully, they’ll get the car fully furnished, and
we can really compete.
I would just say this. There is a saying: “You can’t have something for nothing.”
Mexico and the president and the government of Mexico don’t realize that they
have to yield. They have to yield somewhat to what the international investment
community wants in order to get investment flowing. I hope they realize that
because on this side of the border, we want to write checks and we want to
invest in Mexico, and sometimes it feels like they don’t want it down there.
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Forging a New Path in North American Trade & Immigration

CHAPTER 11

Pragmatism May Ultimately Guide Mexico’s
USMCA Energy Policy
Pedro Niembro, Monarch Global Strategies
I’ll try to offer an alternative perspective to what you may have been reading
and watching on news outlets regarding what’s happening in Mexico’s
energy sector. This perspective is based on over 30 years of a close personal
relationship that my boss, Ambassador Jim Jones (Monarch Global Strategies
chairman), has had. He was ambassador in Mexico when NAFTA (the North
American Free Trade Agreement) passed, and he developed a great friendship
with (Mexican President Andrés Manuel) López Obrador and key sub-officers
who are back in the administration.
Let me start by saying that all parties were able to claim a victory from the
USMCA (the United States–Mexico–Canada Agreement) when it comes to
energy (Chart 1). For the United States, the oil and gas industry can celebrate
what did not change. Mexico and Canada were able to introduce provisions
important to their interests. Despite initial threats to remove it, the investors’
state-dispute settlement mechanism between the United States and Mexico
was preserved for a handful of industries, including oil and gas and (electrical)
power. As a result, investments are provided with much needed certainty over
their ventures in Mexico.

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Forging a New Path in North American Trade & Immigration

CHART 1: ENERGY & USMCA: EVERYONE WINS
United States
y Investor-state dispute settlement mechanism remains in place
y Maintains NAFTA’s tariff-free trade of raw and refined oil and gas
products
y Grants equal opportunities to participate in Pemex and CFE tenders
Mexico
y Includes a statement-important to the nationalistic portion of the
country that declares Mexico has “direct and inalienable ownership”
of its hydrocarbons
y Keeps the capacity to introduce constitutional changes to the energy
sector, but these cannot be contrary to the spirit of the USMCA
Canada
y The largely symbolic “proportionality clause” is wiped out
y Tariffs on diluent used to transport heavy oil are eliminated

l♦I

SOURCE: Niembro Pedro (2019). “The Challenges to Mexico’s Energy Sector: USMCA and the AMLO Administration,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-niembro.pdf

The agreement also maintains NAFTA’s allowance for tariff-free trade of raw
and refined oil and gas products between the United States and Mexico. And it
granted equal opportunities to participate in Pemex and CFE (Comisión Federal
de Electricidad, the Federal Electricity Commission) tenders, which is very
important given President López Obrador’s ambitious plans for the sector. For
Mexico, the USMCA—as Enrique (Marroquin of Hunt Mexico) has mentioned—
included a statement that was very important for López Obrador that declared
that Mexico has direct ownership of its hydrocarbons. Meanwhile, Canada was
able to wipe out the largely symbolic proportionality clause and to eliminate
truck tariffs on diluents used to transport heavy oil. The USMCA should support
continued integration of energy interests within North America.
The bigger determinant of future investments, I think, rests within the Mexican
administration. Despite (its) initially slowing down the energy reforms, I believe
that foreign expertise and investments will be needed to achieve AMLO’s
(President López Obrador’s) social and economic goals. And the USMCA energy
provisions should give investors the confidence to make this happen. It may
be hard for outsiders to understand that a very significant portion of Mexicans
view those natural resources as a source of national pride, almost as a divine
right. AMLO’s opposition to the energy reform played a major role in getting
him elected. However, AMLO is a very pragmatic politician, and he understands
that private investment is needed in order to achieve his goal of 6 percent
growth by the end of his administration. One other key issue—and it has been
discussed previously—is that he wants to bridge the gap between the north of
Mexico and the impoverished southeastern part of the country.
AMLO’s ambivalence on energy reform is revealed in his choices for the cabinet.
The secretary of energy, the director of Pemex and the director of CFE are all
nationalists who strongly oppose the energy reform. The office of the president
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Forging a New Path in North American Trade & Immigration

(which is in charge of the strategic relationship with international investors),
the all-important finance ministry and the Mexican ambassador to the U.S. are
all big proponents of open markets and an open energy arena. There can be
little doubt that the energy team initially shaped the strategies and rhetoric for
the energy sector. Oil and gas routes and electricity auctions were canceled.
Regulatory agencies like Comisión Nacional de Hidrocarburos (CNH) (National
Hydrocarbons Commission) and Comisión Reguladora de Energía (CRE) (Energy
Regulatory Commission) came under attack right after AMLO’s rise to power.
But as the administration came to terms with the realities of governing, these
strategies have been evolving at a modest pace.
The pragmatists in AMLO’s team know that the energy sector is key for the
successful implementation of their social policy. As proof of this evolution, the
CNH has resumed the approval of oil development plans for privately held oil
fields. And Secretary of Energy (Rocío) Nahle just announced this past week that
auctions may come back shortly with some changes in the way that they will be
implemented—but it’s a welcome change. Exploration and production service
contracts are under review to make them more appealing for companies. They
are being linked to public–private partnership agreements.
Chart 2 shows how much needs to be done on the Mexican side of the Gulf.
There is a big opportunity for business. Since peaking at 3.4 million barrels
per day in 2004, Mexico’s oil production has been falling. We estimated that
in order to return to 2004 levels of production, Mexico will require anywhere
from $30 billion to $40 billion of investment per year. Even to reach AMLO’s
own goal of increasing production to 2.6 million barrels per day, he’ll need at
least $25 billion in investment. I mean, as Enrique (Marroquin) was saying in
the case of CFE, Pemex does not have that kind of money—and I don’t think
they will ever have it—especially since the new refinery is being given a great
deal of importance, and a big part of the budget for Pemex is being allocated to
construction of that refinery.

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Forging a New Path in North American Trade & Immigration

CHART 2: EXPLORATION WELLS DRILLED IN THE GULF OF MEXICO (2018)

Gulf of

Mt>XICO

SOURCE: Offshore magazine. https://www.offshore-mag.com/

Pemex is the most indebted oil company in the world, and so money needs to
come from a different alternative, and that alternative is private investors.
The administration is beginning to understand the importance of continuing
with the energy auctions, but it will still take them some time. The fact that
service contracts are being sold as public or private partnerships on Pemex’s
20 priority fields is a good sign. While these contracts might not be interesting
enough for operators and oil giants given the lack of exploration upside—and
are too risky for Mexican services companies—we’re witnessing a nascent
understanding of what the industry needs to be attractive. This understanding
was not there when the president was elected. They are finally catching up
with the reality of governing.
This new understanding also provides an opportunity to review and enhance
the auction processes and take away what didn’t work. Companies of all sizes
operating on the U.S. side of the Gulf of Mexico will have a clear advantage given
that they have the most experience and the technology they have developed
over decades of exploration and production in shared geological columns.
As you will see in Chart 3, the infrastructure is already in place, and that should
set American and Canadian companies apart from competition from other parts
of the world. So, there is a pipeline infrastructure across the Gulf of Mexico. It
shouldn’t be hard to begin connecting that infrastructure to the Mexican side of
the Gulf once investments get back on track.

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Forging a New Path in North American Trade & Immigration

CHART 3: PIPELINE INFRASTRUCTURE ACROSS THE GULF OF MEXICO (2018)

SOURCE: Offshore magazine. https://www.offshore-mag.com/

I won’t describe much about midstream, but I think that one example of the
evolution that I am talking about in AMLO’s understanding of having partners
in the energy arena is the recent pipeline renegotiation issue. To provide a
quick recap, CFE Director (Manuel) Bartlett wanted to get rid of some pipeline
development projects. Bartlett threatened to take the pipeline developers to
international arbitration. However, President López Obrador immediately took
matters into his own hands, appointing a representative from his office to lead
talks. Although it was not made public, he made Bartlett take a side door and
he did not participate in those talks. Of course, when the issue was resolved,
Bartlett received the applause.
What I mean is that in the end, all parties were able to claim victory, and I think
that companies were very happy with renegotiation. At least that’s what my
friends tell me; they celebrated. So, this self-inflicted wound was a key learning
experience for the Mexican government, which brought uncertainty into an
already distrustful investment ecosystem and unnecessarily endangered the
support for the USMCA in the U.S. and Canada.
In the downstream sector—I won’t talk much about it—but the refinery in
Dos Bocas is perhaps AMLO’s most controversial flagship project. However,
there will be opportunities for investments in modernizing Mexico’s existing
refineries. One of them was built 70 years ago, and they really haven’t kept
up with new technologies because of a lack of funds. The administration is
allocating a ridiculously small budget to revamp these refineries—about 30
times less than what conservative estimates suggest is needed. I mean, we’re
talking a need of about $15 billion to $20 billion. And this year, they were
allocated $250 million for modernization.

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Forging a New Path in North American Trade & Immigration

So, we will keep importing fuel for the time being. But another opportunity lies
in the petrochemical industry, which is practically nonexistent in Mexico.
We think that if you want to do business in Mexico, you should first understand
what the goals of AMLO’s administration are and try to align your investment
projects with his goals. In our meetings with him since his election, we have
been very successful by putting things in perspective in a way that resonates
with him. How does your project offer development to the people? Does it create
technology transfer and/or knowledge transfer? All those things are important
to him.
He’s not a numbers guy, so if you begin talking about dollars and cents and the
bottom line, you will lose him—you immediately lose him. When you bring
up benefits for a community, for a region and how this project can help him
achieve his goals, you get his attention back. Over the past 30 years, López
Obrador has built a political persona he has to keep up with, and his public
discourse is often inflammatory. Behind closed doors in his office, he allows his
pragmatic side to surface.

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Forging a New Path in North American Trade & Immigration

CHAPTER 12

Meeting Mexico’s Demand for U.S. Natural Gas
Depends on Adding Pipelines
Curt Anastasio, GasLog Partners LP
I thought I would begin with a brief overview of the macro picture for LNG,
or liquefied natural gas, and then dive into the United States–Mexico relationship
as it relates to natural gas and LNG. The macro outlook looks very bullish for global
LNG. The demand for gas is growing much faster than for any other hydrocarbon.
Natural gas is cleaner burning certainly than oil or coal. There’s ample supply,
it’s cheap, it has a high energy content, it’s relatively easy to move and to
store. There are many environmental and economic benefits that are feeding
the demand growth. When you see a continuing trend of natural gas and
renewables displacing coal and oil for power generation, in particular, that’s
bullish for those involved in the supply chain—including my company, GasLog—
in LNG transportation and storage.
We hear a lot about the growth of China, and rightly so. But it’s interesting to
note in Chart 1 that the forecast for demand is actually quite diverse globally.
Over 80 percent of forecasted demand growth is from outside of China through
2025. You can see some of those regions in Chart 1—including Europe and
Southeast Asia; quite big demand is there. It’s not all about China.

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CHART 1: FORECASTED DEMAND GROWTH IS GLOBALLY DIVERSE
LNG Demand Growth 2018-2025 (MT)

■ Demand Growth by Region/Country ■ Cumulative Demand Growth (RHS)
32%

40

33%

125

19%

10%

20
6%

2%

3%

75

6%

0

(20)

175

25

NE Asia
(ex . China)

Africa

ME

LATAM

India

China

Europe

SE Asia
(ex . India
& China)

Cumulative LNG Demand Growth (MT)

LNG Demand Grwoth by Region (MT)

60

(25)

NOTE: Over 80% of Forecasted Demand Growth is Outside of China During 2018-25
SOURCE: Wood Mackenzie

Looking at the supply side, the biggest growth has come recently from Australia
and the U.S., and about 60 percent of that new capacity is [attributable to] the
U.S. In fact, the U.S. production capacity just about doubles over the next year or
so. The other top exporters are Malaysia, parts of Africa and Russia.
LNG prices are generally seasonal. They peak in the summer and winter
months, and they’re softer in the shoulder months, such as in the fall. But
there’s considerable regional variation even within countries. At the moment,
a global economic slowdown and the U.S.–China Trade War are among the
factors depressing LNG prices in the face of this new supply coming from the
U.S., Australia and Russia. Currently, LNG prices are low, below $5 per MMBtu
(million British thermal units). Those low prices may further delay the next
wave of supply development projects.
Turning to Mexico, the rising U.S. production has enabled the U.S. to become a
net exporter. At the same time, you have rising demand in Mexico, mainly to
natural-gas-fired power plants, together with shrinking Mexican supply, which
make Mexico an importer. U.S. LNG exports to the world will be increasing
very significantly over the next several years, as I’ve said, but the exports to
Mexico are and will continue to be mainly by pipeline, so the three LNG import
terminals in Mexico—Costa Azul, Altamira and Manzanillo—are really shrinking
in terms of import volume. The gas import story in Mexico is not going to be
LNG; it’s going to be piped gas. This takes us back to the point Pedro (Niembro of
Monarch Global Strategies) made about the infrastructure challenges of getting
those pipes across the border to feed a potential plant in that location.
Chart 2 shows the increasing U.S. pipeline export capacity to Mexico. While gas
exports by pipe started out mainly from the Eagle Ford (in south central Texas)
and South Texas, producers now in the Permian Basin (in West Texas) have
a huge incentive to export to Mexico. Pipeline capacity has been and is being
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built to satisfy Mexican demand by companies like Enbridge, Kinder Morgan,
Energy Transfer and Howard Energy, among others. Kinder just started the Gulf
Coast express pipeline, and U.S. production is at an all-time high partly for that
reason. Also, natural gas exports to Mexico are at an all-time high and rising.
CHART 2: U.S. NATURAL GAS PIPELINE EXPORTS INCREASE WITH COMMISSIONING OF NEW
PIPELINES IN MEXICO
Monthly U.S. natural gas exports to Mexico by pipeline (Jan 2011-May 2018)
Billion cubic feet per day

12

Total cross-border
pipeline capacity

10
8
6
4

South Texas

2

West Texas
Arizona
California

0
2011

2013

2015

2017

SOURCE: Energy Information Administration

The capacity of the projects that are already in service and those that are in
progress will exceed by far the actual exports to Mexico. So, that’s going to allow
future supply growth to Mexico by pipe. But U.S. exports to Mexico will depend
not only on cross-border pipelines but also on Mexican pipeline expansion and
construction. However, there have been significant delays on the Mexican side
that have resulted in low utilization of cross-border pipelines from West Texas.
This had been happening before (Mexican President) Andrés Manuel López
Obrador and (U.S. President) Donald Trump. Unfortunately, the lack of pipeline
infrastructure rendered Mexico unable to capitalize on the lower gas prices that
we’re seeing with gas in the U.S. So instead, the country was forced on numerous
occasions to cut gas supplies, especially to industry more than residential.
That said about the problems in Mexico, some of the pipelines have been placed
in service within the past year, such as the La Laguna–Aguascalientes. So, there
is good news and progress on that front. But I want to make clear that the U.S.
also has some challenging dynamics.
Liquefaction capacity for one thing has lagged the supply increases. The delays
on those projects are not just all commercial or financial, but also regulatory.
We have our own opposition among citizens’ groups to pipelines. Often, it’s
environmentalists who are opposed to all forms of fossil fuels. In addition,
landowners even in the state of Texas are opposed to these pipelines. Kinder
Morgan encountered such opposition to its $2 billion Permian highway natural
gas pipeline, trying to move gas from West Texas to the Gulf Coast.
In conclusion, I want to leave you with three takeaways. First of all, the global
LNG supply demand outlook is robust, and that trend looks powerful and in

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place. Second, increasing U.S. natural gas production and declining Mexican
production have resulted in exports of pipeline gas to Mexico. Finally, there
have been logistic challenges on both sides of the border—in Mexico and in the
U.S.— that have impeded progress. The good news is they are being resolved.

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I

ECONOMIC IMPLICATIONS FOR THE U.S. OF A
NORTH AMERICA WITHOUT NAFTA OR USMCA

CHAPTER 13

USMCA Keeps the Peace, Fails to Improve
on NAFTA
Christine McDaniel, George Mason University
On Jan. 19, 2017, we had the Trans-Pacific Partnership, the TPP. The TPP was set
to open up new markets for U.S. farmers and U.S. businesses, small, medium
and large. It was designed to do everything NAFTA (the North American Free
Trade Agreement) did and more across the Asia Pacific region. Four days later,
the U.S. quit the deal.
Today, we have a revised NAFTA in front of us. The revised deal does nothing for
our U.S. farmers or businesses across the Asia Pacific region. So, today, I’m going
to talk about the economic implications of a situation where the USMCA (United
States–Mexico–Canada Agreement) does not pass and the U.S. does withdraw
from NAFTA. The key takeaways are going to be the following.
First of all, the U.S. would lose preferential access in our two largest markets, as
speakers today spoke about at length. It would be devastating, especially for the
small- and medium-sized businesses that rely so much on recent developments
in trade preferences. It would also be a strain on every culture for sure.
Ironically, we could actually have free trade in autos—that could be a bright
spot—but greater uncertainty overall.
Without USMCA or NAFTA, U.S. exports lose preferential access to markets in
Mexico and Canada, as you all know. Nearly 30 percent of U.S. exports go to
these two markets, and we would be facing not only their MFN (most-favored
nation) tariffs, but also bound tariffs (an additional tariff on specific goods
that is above MFN rates), which could go as high as 45 percent for agricultural
products in Mexico and up to 15 percent in Canada. Other goods could go up to
35 percent in Mexico and 5 percent in Canada (Chart 1).

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CHART 1: U.S. EXPORTS LOSE PREFERENTIAL ACCESS (WITHOUT USMCA OR NAFTA)
27% of US exports go to Canada and Mexico
y

With no USMCA or NAFTA:
ƒ US agriculture would face up to 45% tariffs in Mexico and 15% in Canada

27%

ƒ US goods would face up to 35% tariffs in Mexico and 5% in Canada
ƒ Behind-the-border barriers

SOURCE: McDaniel Christine (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American
Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-mcdaniel.pdf

Currently, about $740 million worth of U.S. beef exports, or 20 percent, go to
Mexico duty free. Without NAFTA, without USMCA—so, with no deal at all—it
would revert to a 20 percent tariff. Not only do we revert to a 20 percent tariff,
but our competitors in Australia and Canada would continue to get zero tariffs.
U.S. exports of beef would face those tariffs, plus all of those other messy, hairy
things behind the borders that customs and retailers can do to foreign sellers.
We have Canada, where Canada has been opening its dairy market little by
little over the past few years. It was not costless for them politically. Without a
deal from the U.S., we would lose out on all those benefits. Right now, 7 percent
of our dairy exports go to Canada, duty free. Without a deal, it would revert
to not only an 11 percent tariff, but an additional $2 per liter of milk, and that
translates into a pretty large ad valorem equivalent, plus there would be all of
those non-tariff, behind-the-border retail and shelf issues.
Lastly, beer: Last year, about 21 percent of our beer went to Mexico duty free
and the competitors, they face a 20 percent tariff. We’re talking about Belgium,
Germany, Netherlands and the U.K. Without a deal, we would be facing that
same 20 percent. Those are just three examples, but there are many more.
Now, let’s look at the bright spot. If there is no deal, there could actually be
freer trade in autos by only paying the 2.5 percent MFN tariff. However, when
you’re talking about the $20,000 to $80,000 automobile coming in, it still adds
up pretty quickly. But there would be cost savings without rules of origin, so it
could actually happen in the longer run. It could mean freer trade in autos. It
might mean most production in autos stays in the U.S. It could also mean lower
consumer prices for autos in the U.S.
I was just up in Traverse City, Michigan, last month and it was amazing. It was
all those suppliers—the OEMs (original equipment manufacturers), the auto
part suppliers. Detroit sees itself as the future of mobility for America and the
world. But it doesn’t see a future in OEMS anymore. To them, it’s all digital, it is
figuring out how to get people from A to B, and that does not always involve an
automobile. It certainly doesn’t always involve manufacturing an automobile in
the U.S.
So, I got this feeling that Detroit and the state of Michigan are so far ahead of
where Washington is in thinking about the auto industry and the future of
mobility. With USMCA, we see stricter rules of origin, higher wage requirements,
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which would hit Mexico, and strong and enforceable labor rules (Chart 2). With
just NAFTA, we have those existing rules of origin—not as strict, but they’re still
there—no wage floor and we’ve got weak enforcement of the labor rules. And
with no deal at all: no rules of origin, no wage requirements, and we go back to
a 2.5 percent tariff assuming that the U.S. respects the WTO bound levels.
CHART 2: POSSIBLY FREER TRADE IN AUTOS
USMCA

NAFTA

NO DEAL

y Stricter rules of origin

y Existing rules of origin

y No rules of origin

y Higher wage requirements
on Mexico

y No wage floor

y No wage requirements

y Weak enforcement of labor
rules

y MFN tariffs imposed

y Enforceable labor rules

SOURCE: McDaniel Christine (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American
Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-mcdaniel.pdf

When the current administration (of Donald Trump) is asked about the potential
economic effects of USMCA, their report says very clearly that their baseline
estimate is a small but negative effect to the U.S. economy. Small, but negative.
This is the first time we’ve ever seen a small but negative effect on the U.S.
economy of a potential trade agreement. It was only when the ITC (International
Trade Commission) included the assumption that we would reduce policy
uncertainty that the needle moves to the other side of zero.
If you assume USMCA will reduce policy uncertainty, then you get to a small,
but positive, effect. I see USMCA as if it is NAFTA 0.8, but no deal at all is really
0.0, because really, losing all those preferential tariffs will be devastating for so
many of our businesses and our farmers. When people say, “The USMCA is great,
let’s pass it,” and you dig deeper, it’s usually because the alternative is Trump’s
threat to withdraw. If it’s withdrawing from NAFTA or USMCA, of course, it’s
going to be USMCA. That’s how I see this.
If you look at the deals that the U.S. has been doing or talking about doing, they
are much more about damage control than they are about real market opening.
If (only) the FTAs (free trade agreements) we are doing were really all about real
market opening! But today, it’s really more about risk management, damage
control and quelling uncertainty.
You look at the U.S.–Japan deal. What is Japan really getting from this deal?
Why would they even do it? They’re doing it hopefully to get out of a [Section]
232 (national security tariff) on autos. Maybe they’re doing it just to keep the
peace. But they’re really not getting anything out of it, if you look at the text.
USMCA is not necessarily better than NAFTA. There is really no great market
opening in there.

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CHAPTER 14

Tariffs Only a Fraction of Trade Barrier Costs in
Global Supply-Chain Era
Kei-Mu Yi, Federal Reserve Bank of Dallas; University of Houston
What I’m going to talk about really touches on themes that a lot of the earlier
speakers already talked about in a lot of detail. I’m just going to go a little bit more
high level. One thing I should say is that, as a member of the Dallas Fed, these
views are my own and not those of the Dallas Fed or the Federal Reserve System.
I’m going to talk about the implications for the U.S. as well as for Mexico and
for Canada of North America without NAFTA (the North American Free Trade
Agreement). Just as a background and looking at Mexico’s trade, I wanted to
point out a couple of changes in Mexico’s trade following NAFTA. The year
before NAFTA, Mexico’s trade with the U.S. was a little under 10 percent of
Mexico’s GDP (gross domestic product), and 25 years later, it’s double that
as a share of GDP. It’s pretty clear that Mexico and the U.S. are more tightly
integrated than before.
In addition, something you can’t tell just from reading that headline number
is that a key feature of this increased integration is the increased global value
chain (global supply chains)—the idea that production processes are linked
sequentially across countries. The way that I think about it is, imported inputs
are basically used in production to make goods that are subsequently exported.
Some part of the supply chain involves parts and components that are crossing
multiple borders while the good is in process. This is an important feature of
global supply chains, and I’ll come back to that later.
We have a lot of granular evidence out there, but sometimes you want a
national or industry-level number. This is one metric of the extent of global
supply chains: It’s the foreign value added from the perspective of a particular
country. The foreign value added in, say, a dollar’s worth of exports (Chart 1).

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CHART 1: GSC METRIC: FOREIGN VALUE-ADDED EXPORTS
Foreign value-added share of exports (%)

■

Mexico

■

U.S.

40
35
30
25
20
15
10
5
0
1995

2000

2005

2010

2015

Mexico’s foreign value-added share of exports has increased significantly since NAFTA.
World-wide, foreign VAX rose about 5 pp between 1995 and 2009 (Johnson and Noguera, 2017)
SOURCE: OECD, author’s calculations

The green line is Mexico, and the time span runs from 1995 to 2016. Right
around the time of NAFTA (which began in 1994), roughly 27 cents of every
dollar’s worth of Mexican exports represented foreign value added largely
from the United States. Since then, it has increased so that, as of 2016, the
latest year of these data, it was 36 to 37 cents in every dollar—an increase of
10 percentage points.
We don’t have a definitive cause or reason, but clearly, some of this is due to
NAFTA. The United States is in blue (in Chart 1). You wouldn’t expect as much
foreign value added embodied in U.S. exports because the U.S. is such a large
economy. It has a lot of suppliers within the country. But even in the U.S., that
number has increased over time from roughly 11 percent to 15 percent. This
is going on globally as well. The bottom line is, firms and entire industries in
countries around the world are relying more on imported inputs to make the
stuff that they then export.
Now, I’m going to get more specifically back to what Alonso de Gortari (of
Dartmouth College) talked about. The data that I just showed you comes from
particular sources, but that data is too coarse, and is not granular enough to
deal with the fact that many global supply chains involve specialized inputs
and input specialized for the production process of a particular good. That data
is too coarse to capture the examples that Alonzo talked about this morning
(during a presentation on cross-border supply chains).
The foreign inputs that Mexico uses to make cars that they then export to the
U.S. are very different from the foreign imports that Mexico uses to make cars
that are exported to Germany. If you build in that extra granularity, you’ll
actually get measures that show an even greater increase in global supply
chains, especially for a country like Mexico. It would be useful going forward
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Forging a New Path in North American Trade & Immigration

if we can implement these measures not just for particular goods, but at the
national level as well as for industries (Chart 2).
CHART 2: KEY FEATURE OF GLOBAL SUPPLY CHAINS IS SPECIALIZED INPUTS

y Specialized inputs - using inputs specialized for the production process of particular
good - are important
ƒ For example, as Alonso de Gortari showed earlier:
» 74% of foreign inputs that Mexico uses to make motor vehicles for export to the U.S.
come from the U.S., but ...
» only 18% of foreign inputs that Mexico uses to make motor vehicles for export to
Germany come from the U.S. (and only 38% come from Germany)
SOURCE: Yi Kei-Mu (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-yi.pdf

This is the backdrop following the greater trade integration that we all know
about—a key part of that greater integration is more global supply chains. Now,
we want to get to the question at hand, which is assessing the gains and losses
from adding or removing a free-trade agreement and in particular, assessing the
effects of, say, canceling NAFTA or the U.S. leaving NAFTA.
I want to just talk about the challenges that economists face in addressing and
making these calculations. There are two kinds of calculations or exercises
that you would do. One is an after-the-fact calculation: NAFTA happened in
1994; what have been the effects of NAFTA since then on the U.S., Mexico,
Canada, etc.?
The key challenge is sorting out the effects of NAFTA from the effects of other
events happening at the same time. Recall NAFTA happened in 1994; that was
also the year that Mexico had a major financial crisis. Actually, their (Mexico’s)
output fell even more then than it did in the Great Recession 10 years ago.
During the 1994 financial crisis, the peso depreciated a tremendous amount,
which affected their trade flows. It makes it very hard to sort out the specific
effect of NAFTA from other things going on. That’s a challenge in doing
ex-post analysis.
As I said, there are roughly two kinds of calculations, and I’m going to focus
on the kind that virtually all the economists who have talked here today have
referred to. I’m going to call it a quantitative theoretical model. In the literature,
the jargon is a “computable general equilibrium model.” This is the standard
framework that is used to assess the gains or losses from, say, going into a
future trade agreement or pulling out of a trade agreement. Now, I should
say, parenthetically, they (computable general equilibrium models) haven’t
performed well in the past, and that’s why it’s a challenge. In particular, they
didn’t perform well in the predictions of NAFTA, especially at the industry and
the sector levels. But they are getting better over time. These models are black
boxes, and I just want to spend a couple minutes filling back one layer of that
black box and just try to explain how they work (Chart 3).
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Forging a New Path in North American Trade & Immigration

CHART 3: ASSESSING GAINS AND LOSSES FROM ADDING OR REMOVING A FREE TRADE
AGREEMENT (E.G. NAFTA)
y After the fact, key challenge: Sorting out the effect of NAFTA from the effects of other
events happening at same time
y Before the fact, key challenge: Need to use a quantitative theoretical model - have not
performed well in past (but getting better). Typical framework and methodology:
ƒ Multi-country, multi-sector model of international trade
» International trade is based on “comparative advantage”
» Barriers to international trade: tariffs, non-tariff policy barriers (NTBs), all other costs
of trade. If tariffs and other barriers are lowered, cost of imports fall - more trade,
more specialization: good, overall
» Quantify model with data from input-output tables, national income and product
accounts, and other sources
» Examine effects of increasing tariffs to typical U.S. tariff rate with its trading
partners (MFN)
SOURCE: Yi Kei-Mu (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-yi.pdf

Typically, these frameworks have to have many countries and they have a lot
of sectors, and then you have to have a motive for trade in the first place. A
lot of these frameworks are based on this famous idea that goes back to David
Ricardo, called comparative advantage. The key idea there is that it’s the relative
differences in productivity that drive trade, not the absolute differences in
productivity, so the fact that the U.S. might be more productive than Mexico in
every single good doesn’t mean that the U.S. won’t gain from a trade deal with
Mexico. It’s really about relative comparisons.
In these frameworks, since you’re evaluating the effects of trade agreements
or the effects of pulling out of a trade agreement, you need to have barriers.
Typically, these models have barriers like tariffs and non-tariff policy barriers,
which are becoming more important over time because, globally, tariffs in
the last 50 years have come down. And then there are other costs of trade,
which Christine McDaniel (of George Mason University) alluded to— behind
the barriers, behind the border barriers. The basic way these models work is
pretty straightforward: If these barriers come down, the costs of imports are just
lower. If it’s a broad, across-the-board reduction in barriers, then for everyone,
for every country, every firm, every household, the costs of importing are lower,
so everybody is importing more. If everybody is importing more, then the other
side, of course, is that everybody is exporting more.
What’s happening within a country when you’re importing more and also
exporting more? You’re specializing more. You’re getting out of activities that
you’re relatively less good at and you’re buying them from abroad, and then
you’re focusing more on those activities at which you are relatively good. Those
are the activities that you’re exporting.
This actually goes to the idea that specialization is the source of the gains. This
idea goes all the way back to Adam Smith; he had the pin factory example of
specialization (where workers can produce more pins if the manufacturing is
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Forging a New Path in North American Trade & Immigration

broken down into discrete, specialized tasks). It’s just that idea writ large, but at
the national level, that’s the main source of gains from trade.
The next step with these frameworks is, you have to put numbers to them.
It’s almost like an engineering exercise. You want to give them numbers or
you have to put numbers into the parameters, and then you get data from
input/output tables, national product accounts and other sources. Then,
you’re basically ready to do a simulation like an analysis of the effects of, say,
increasing tariffs in the event that the U.S. pulls out of NAFTA.
I should just say, parenthetically, right now officially, all the tariffs within NAFTA
trade are zero. If the U.S pulls out of NAFTA, the standard presumption is tariffs
would go up to the typical U.S. tariff rate with its trading partners, which are
known as MFN tariffs—most-favored nation tariffs—but as Christine and others
have alluded to, there’s no necessary reason why the U.S. would raise them to
that level; they could potentially raise them to higher levels.
That’s the way these analytical frameworks worked as was talked about in (Banco
de México’s) Daniel Chiquiar’s presentation (on Mexico and global trade tensions)
and in the presentation on trade dispute costs by Eddy Bekkers (of the World
Trade Organization). Tim Kehoe (of the University of Minnesota), the keynote
speaker, also referred to research on that. They all belong to this framework.
So now, I’m going to briefly review the findings from one of these quantitative
theoretical models, and it draws from a paper (“The Economics of Revoking
NAFTA”) by Raphael Auer, Barthélémy Bonadio and Andrei Levchenko that
they did for the IMF (International Monetary Fund). It was specifically about
the economic effects of removing NAFTA. These are just a couple of the results.
This is the change in real income in each of these three countries from raising
tariffs, which are currently zero between the three countries, to MFN levels and
reporting two sets of results.
Now, MFN levels are actually not that high—they’re on the order of about 5
percent. There’s a lot of variation across goods. They also have another exercise
where they try to implement some of these “behind the border” barriers. NTB
stands for non-tariff barrier. There’s another exercise they do— raise a tariff to
MFN levels, but then a lot of non-tariff barriers also get imposed between the
NAFTA countries. These are the numbers that come out of it (Chart 4).
CHART 4: BRIEF REVIEW OF FINDINGS FROM QUANTITATIVE MODEL
Economic Effects of Removing NAFTA
ƒ Change in real income from raising tariffs to:
Country
USA
MEX
CAN

I

MFN
-0.00%
-0.25%
-0.06%

I

MFN plus higher NTBs
-0.22%
-1.81%
-2.15%

ƒ Wide disparity in losses across sectors and U.S. states (with some even gaining)
SOURCE: Auer Raphael A., Bonadio Barthélémy, and Levchenko Andrei A. (2020). “The Economics and Politics of Revoking NAFTA,” . IMF Economic Review, Palgrave
Macmillan; International Monetary Fund, vol. 68(1), pages 230-267, March.

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One takeaway is the U.S., as I mentioned earlier and as we all know, has a very
large economy, so even though Mexico and Canada are two of the top three trading partners, it’s still a relatively small fraction of U.S. GDP. That’s why the losses
to the U.S. are smaller than the losses to Mexico and Canada. I should say, one
reason why I chose this study is they also included all 50 states in this—they had
about 40 sectors and I’m not reporting all the numbers—but they find a very
wide disparity in losses across sectors and across U.S. states.
These overall numbers actually hide the fact that there’s a tremendous disparity.
You see, all the numbers here are negative. But, if we looked at the sector level,
we would see that pulling out of NAFTA for some sectors would actually be
beneficial. To summarize, this study—this quantitative model, which is pretty
close to the state of the art—generates interesting and useful findings. That said,
it misses on a couple of key things that people have talked about today.
The first, of course, goes back to the global supply chains. The framework that
was used for the study I just mentioned doesn’t allow for global supply chains
with specialized inputs. Some of the work that I did a long time ago and, more
recently, that Alonzo and his co-author have really generalized and extended
in a beautiful way, suggested the losses from higher trade barriers could be
magnified. I just heard from him that the number 10 times higher is probably
an exaggeration so, I’m going to say 1.5 to two times higher once global supply
chains are taken into account. I just want to spend one minute on why that is.
Why are the effects from higher trade barriers magnified? The basic idea is just
that, once you have tariffs on both sides of the U.S.–Mexico border, if you’re still
going to do a supply-chain thing, then those like parts, like motor vehicle parts
that the U.S. sends to Mexico, they’re going to be hit by a tariff once they go into
Mexico. Then they get put in a car. When the car comes back to the U.S., the car
will be hit by a (another) tariff.
In effect, all of those parts that went to Mexico and came back are hit by a tariff
twice. That’s the basic reasoning why the higher tariffs affect global supply
chains more negatively than standard conventional trade. The flip side is
true, too, in a world where due to technological advances, global supply-chain
possibilities are greater than the gains from even a small tariff reduction. That’s
the main intuition as to why, once you are in a world of global supply chains,
then the effects of higher tariffs can be larger than, say, what you might think if
they just go from 0 percent to 5 percent in a standard setting.
Then there’s one other point that the framework in the study that I alluded
to two slides ago doesn’t account for, which is the long-run effects on capital
investment. We saw in our energy panel today a lot of discussion about
capital investment. If you get rid of a trade agreement, that could affect
capital investment, and that’s going to have follow-on effects, negative
effects on real income. Some other research by Michael Sposi (of Southern
Methodist University) and a co-author say that also could double the
magnitude of the effects.

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Putting the original numbers from the table that I showed a couple slides ago
together with global supply chains and then capital investment, I’m just going to
get a rough number (Chart 5).
CHART 5: ALSO, FRAMEWORK DOES NOT ALLOW FOR EFFECTS ON LONG-RUN CAPITAL
INVESTMENT

y Research by Ravikuman, Santacreu, and Sposi (2018) suggests including for long-run
capital investment doubles the effects of changes in barriers to trade
Putting all the numbers (conservatively) together suggests losses in real income of about 4
to 8 percent for Mexico and about 0.5 to 1 percent for U.S. in a world without NAFTA.
SOURCE: Yi Kei-Mu (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-yi.pdf

The reason is we still don’t have a good framework that embodies all of these
forces that suggest that the losses in real income to Mexico would be on the
order of 4 percent to 8 percent and for Canada a similar-type number, and maybe
0.5 percent to 1 percent for the U.S. if we went to a world without NAFTA.
I want to put those numbers in context. I’m going to put them in the context of
the Great Recession. In the Great Recession, U.S. real, or inflation-adjusted, GDP
fell 4 percent. This was the worst economic crisis since the Great Depression; so,
the worst event in 80-plus years. Another metric, the employment-to-population
ratio fell 4 percentage points. In that context, then, pulling out of NAFTA could
be like a quarter of the Great Recession.
So, it’s not small potatoes and for Mexico, of course, it would be worse than the
Great Recession there (when) inflation-adjusted GDP fell 7.5 percent in the peakto-trough fall. Pulling out of NAFTA could be the equivalent of a Great Recession
event for Mexico.
All of my discussions so far have completely excluded what’s going on in real
time. (By that) I mean, this NAFTA pulling-out thing at least for now still appears
hypothetical. But what’s going on in real time, of course, is the U.S. trade war
with China. If that’s going on and we pull out of NAFTA, then obviously, the
losses to the U.S. would be greater, and it would become closer to a Great
Recession-type event.
So, that’s it. A world without NAFTA or the USMCA (the United States–Mexico–
Canada Agreement) wouldn’t be the end, but owing to increased linkages
between the countries, the cost to ending NAFTA now could be significant (Chart
6). I’ve mentioned these analytical frameworks that economists use to study
these agreements, and we still need to improve them.

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Briefly, the last two bullets (in Chart 6), the non-tariff barriers—for example,
labor market regulations or environmental regulations—they may have good
consequences, but you do have to factor in the restrictions that they would
impose on free-market activity. Research by Tim Kehoe—he didn’t talk about it
at lunchtime—shows that a lot of activity tends to happen in what are known as
the least-traded products. I think our models need to capture that as well.
CHART 4: CONCLUSION

y A world without NAFTA or USMCA would not be the end, but owing to increased linkages
between the countries, especially global supply chain linkages, the costs to ending
NAFTA now could be significant
y Analytical frameworks used to study trade agreements need to be refined more to better
capture:
ƒ Global supply chains with specialized inputs
ƒ Long-run capital investment
ƒ Non-tariff barriers
ƒ Least-traded products

SOURCE: Yi Kei-Mu (2019). “Economic Implications for the United States of North America without NAFTA or USMCA,” Forging a New Path in North American Trade and
Immigration, Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-yi.pdf

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EXAMINING THE IMPACTS AND STATUS
OF FREE TRADE

CHAPTER 15

Reviving Free Trade Offers Best Chance for
‘Happy’ Global Outcome
Anne Krueger, Johns Hopkins University
You usually start by saying, “It is a pleasure to be here and thank you for inviting
me.” That’s at least half true. It’s half true because the dinner talk is supposed
to be a happy talk. It’s supposed to be a pep rally. I should try to tell you that
everything is all right. You wouldn’t believe me, anyway, because it isn’t. So,
I will not say I’m entirely happy to be here. I tried hard to think about how to
make this a happy talk, and I did not succeed.
There is an anecdotal story, or there was at one time, when Mrs. Thatcher
(former British Prime Minister Margaret Thatcher) visited Russia at the time
of the May Day Parade. She was notably impressed with the tanks, and then
shining missiles and smartly uniformed men went marching by. And then came
a straggly series of columns, men, almost all scruffy, mostly with patches on the
sleeves, trousers that were too long. As the story of that time went, she asked
Khrushchev who those men were, and he answered, “They are the economists.
You will be surprised how much damage they can do.”
I decided that tonight, that’s the appropriate story, except it’s not the
economists who are doing the damage—it’s the politicians and the
policymakers. That said, I’m going to try and spend a few minutes and see
if I can put things a little bit in context. I want to start with the prospects for
global trade mostly. I cannot even begin to think through how the USMCA
(United States–Mexico–Canada Agreement) should go until it is put in context
of the entire global trading system.
I want to start by saying that the WTO (World Trade Organization) is very much
under threat. It is incredibly important, and I did not hear a word about it today.
I think that’s a mistake on all of our parts.
Two countries with high tariffs that get together to trade aren’t going to gain as
much as two countries with low tariffs, all else equal. This was true for Canada
and pretty true, or is becoming true, for Mexico. That’s enabled them to get
the benefits of the preferential trade agreement without the trade diversion

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I

that might otherwise have happened. And let’s recall the principles of the
international system because they are important.
We have to have a rule of law, commercial law, if you like—the commercial code
covering international trade and other international economic transactions.
If you enter into a contract with your fellow countrymen and something goes
wrong, one of you could take it to court and get it sorted out. To do business
internationally, we need something of the same sort, and that’s what the WTO
provides the basis for.
The WTO is our rule of law for international trade issues, and it is crucially
important. You cannot function bilaterally with over 200 countries. There are
now 164 members of the WTO. Those other 30 will soon be there or they are in
the waiting line. Basically, we need a multilateral system. WTO principles say we
are going to have only tariffs, and the reason we’re going to have only tariffs is
because they are transparent, and your trading partner can know what you’ve
been doing and businessmen can know what to expect. Everybody can set their
own tariffs, but they have to be transparent and they have to be public.
Secondly, there must be nondiscrimination between trading partners except
when there’s a preferential trading arrangement. If you have a preferential
trading arrangement, all tariffs must go to zero within a specified time.
Nondiscrimination is terribly important as a principle of international trade,
and it makes sense for the most part. If you’re going to buy a home, certainly
you’d like to buy from the cheapest source at least 95 percent of the time. The
preferential trading arrangement brings you basically into an area in which the
partners join a nondiscrimination area, and discrimination in the form of tariffs
applies to the rest of the world.
Third is national treatment—and this is crucial—yet we forget it all the time.
The WTO gives us all assurance if we run afoul while dealing with another
country or a business in another country. National treatment means that I have
the same right to go to court in Mexico as a Mexican has, and a Mexican has the
same right in U.S. courts as a U.S. resident has.
The final important WTO principle is that there must be a safety belt.
Unfortunately, that has come to be used too much for the U.S. That’s the (Section)
301 (provisions allowing the U.S. to impose trade sanctions on countries
determined to violate trade agreements) that you hear so much about, and they
are misused by the United States. It certainly would be desirable to have those
rules stricken, or at least amended to make them correspond to cases where
there might be an economic rationale for the measures. But at least there are
some rules in the WTO that prevent things from getting even worse.
Additionally, the WTO has sponsored multilateral trade negotiations. There have
been some big disputes that didn’t make headlines because they got settled. You
may recall there were at least two chicken wars between the U.S. and Europe.
We’ve had disputes over and over again—the GMO arguments (over genetically
modified agricultural programs) with the Europeans; Canadians and lumber.
There are many of these. There has to be a mechanism internationally to sort
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them out. Although the president of the United States (Donald Trump) seems to
think that he should be judge, jury and executioner, most of us would agree that
you need a third party to adjudicate cases and serve as an impartial judge.
The WTO dispute-settlement mechanism is far from perfect. The WTO
dispute-settlement mechanism basically goes through an appeals process and
negotiation. The court of appeals has seven judges and, for any given case, it has
to be decided by a majority of at least three (they normally have five (judges)
per case). Right now, the appeals court has only three judges left. No. 1, that
means that if anyone is sick, there can be no decision. It also means as one of
them leaves—his term ends in December (2019)—there will be no more disputesettlement mechanism process within the WTO, which is disastrous.
This is serious. The reason we don’t have any more (judges) is because
there have been some nominees, and the U.S. administration has refused to
approve any of them. I do not hear as much pressure as I would like from
other countries, including Mexico, on that score, and yet it is at least as
important for Mexico’s future and for NAFTA’s (the North American Free
Trade Agreement’s) future.
There are proposals out there for new judges. A number of countries got
together and put forward proposed changes in an attempt to satisfy the U.S.
However, the Trump administration has turned down the proposals so far
for any amendment or any way to change things in such a way that they (U.S.
officials) say they would be satisfied. So, we have a World Trade Organization
that is under threat, and a serious threat, and what happens to it is going to
matter for NAFTA—which I will keep on calling it even though, of course, I
should say USMCA.
During the first 25 years after World War II, we had the fastest rate of economic
growth for the world economy that we know of in recorded history. Developing
countries think they didn’t do so well, but they actually grew just about as
fast as the developed (countries)—partly because there was a healthy growth
of international trade because of the WTO, which enabled prosperity in all
kinds of ways, and because commodity prices held up pretty well. Tariffs for
manufactured goods among the advanced countries were about 47 percent
on average in 1947—and in 2003 or 2004, they were 3 percent. There have
been a few peaks; it’s not all good, but it’s much, much better than it was. The
remaining problems that need to be resolved involve cultural trade, services
trade, intellectual property, digital commerce and other new issues. It’s not
perfect; there’s more to be done. But on the other hand, we have had some
tremendous successes.
One thing that happened—I’m getting closer to NAFTA, as you’ll see in a
minute—was, of course, that the European Union, or the European common
market, started after the Second World War. Europeans had very high tariffs.
The U.S. Marshall Plan came in, but as a condition, the Europeans had to stop
their bilateral trade and clearing arrangements, go to multilateral clearing and
begin lowering their tariffs.
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The Europeans had an average tariff rate of about 70 percent to 75 percent. The
international economy was getting rid of its restrictions, and so for Europeans,
their internal tariffs went to zero. For the rest of us, it (tariffs) went to 3 percent.
And yet people saw the European Union and thought the preferential trading
arrangement was a success. Now, I would assert that the European Union
was a success, no doubt about it, but it was a success, in part, because of the
external tariff lowering at the same time as it was lowering tariffs to zero among
themselves in general. European integration on top of that enabled them to do
even more.
Most countries stayed with the multilateral system—except for the European
Union—until the 1980s. There were few preferential trading arrangements.
There was one in Latin America, where all of the import substitution finance
ministers or trade ministers got together and (in essence proposed), “Would you
please take my high-priced washing machines while I take your high-priced
refrigerators?” There was one in East Africa, same kind of thing. India has
one now. As far as I know, there may be 10,000 items that they don’t allow in
duty-free out of some 12,000, or something like that. It’s not really a preferential
trading arrangement in any sense of the word.
Until the 1980s, nothing big changed. In the 1980s, Canada approached the U.S.
and said, “We want a free-trade agreement.” That seemed fairly easy. They were
a neighboring country. The U.S. had tried twice before to get Canada to do it,
and they said, “No.” Finally, in the late 1980s, Canada negotiated with the U.S.,
and the CUSFTA (Canada–United States Free Trade Agreement) was formed. And
then, of course, Mexico wanted to join, so in 1994 it became NAFTA.
When the Berlin Wall fell (in November 1989), all of the newly independent
countries—if that’s the word I should use—had to establish some kind of trade
agreement. You don’t get into the WTO fast, so in the meantime, many of them
wanted preferential trading arrangements, usually free-trade areas with the
European Union. All of a sudden, within a year, you went from a world in
which there were maybe five (preferential trade agreements)—I don’t know
the number—but it was very small, to 90. We now have something like 250.
Free-trade areas are all over the place. Some of them are more meaningful
than others.
Unfortunately, recent events have reversed the trend toward greater integration
both multilaterally and through free-trade agreements. We had, of course, the
renegotiation of trade agreements. Korea finally decided that they’d rather
take a quantitative restriction on steel exports to the U.S. They agreed that they
would cut back to 70 percent of the average level of steel exports in the past
three years. Only later, the U.S. informed them that was true for each kind
of steel that they exported to the United States. They found out that the U.S.
delineated 59 types of steel. Not only that, any time you want to import it, you
had to specify all kinds of things. I think there are seven different dimensions
that have to come in on each application. I’ve forgotten them all, but they
include tensile strength, chemical composition, whatever the finish is, shape,
thickness and a couple more.
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In any event, all of this has led to a large bureaucracy in the U.S. It is busy trying
to administer the Korean quotas, waivers and everything going with that. The
Trump administration thought there would be about 20,000 applications for
waivers in cases where it (manufacturing) couldn’t be done in the U.S. I know
of one company alone that filed 10,000 applications for waivers—one small
company. Every waiver is good only for a year for one specific product for one
purpose, and those things must come in quarterly. If you wanted, for example,
to have steel to build snowplows for next winter, you kept bringing it in during
the summer because you can’t get it all in during the winter.
They have now, I think, up to 60 people in the Department of Commerce who
are looking through those applications. The last I heard, they are six months
behind in deciding what to do with them. The United States has gotten itself in
one glorious mess already on that issue.
And of course, the Koreans were big exporters to China, so that creates
complications there. Then there’s the Japanese situation and, of course, they
don’t like things the way they are. Meanwhile, the Koreans are now mad at the
Japanese, so we’ve triggered some really bad stuff there. The Japanese are trying
to renegotiate with the U.S. As of yesterday, the Japanese would not sign the
deal. They would not sign the deal because they said, “OK, we’ll give you a lot of
the stuff you want. But if you put auto tariffs on us, we’ll take it back.” “No,” the
Trump administration said. That was not satisfactory.
We have the China trade war; we have all kinds of things going on that aren’t
making a lot of sense. Vietnam’s exports to the United States have gone up
something like 50 percent in the past year. Nobody thinks they’re all from
Vietnam, including the Trump administration. The Trump administration is
now mad at Vietnam, of course, because they’re allowing the (Chinese) goods to
come in that way.
Trade in the world is in a mess. So, what do poor people in Canada and Mexico do
and people like me who think the international trading system is worth saving? I
think the first thing is, we have to think in terms of what can happen to the world
economy, and this is where I started. I think there are really three outcomes.
The first is the optimistic one, and that is basically simple. The damage is
being done and there’s a lot that becomes sufficiently evident, sufficiently fast.
Either a new administration in Washington reverses it quickly, or the Trump
administration does what it has once or twice before: declare victory and walk
away and let things go back to normal. I can hope for that; I don’t think we
should bet on it.
The second one: Things continue to deteriorate and countries form trading blocs
or smaller groups. That’s very negative for world economic growth, and it is a
very poor outcome for the trading nations.
I think, however, there is a third possibility, which I want to address. There are
enough countries in the rest of the world that want to keep open and don’t like
this. So, they could form some kind of mini WTO, almost like the TPP (the Trans98

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Pacific Partnership) did, and then implement basic WTO-type rules and anybody
who wants to join can, according to those rules.
That one I think is an optimistic scenario, not because I want it to happen.
Because if it does happen, the countries who’d do that will get ahead, relative
to the countries that try and put up protective barriers. And, over time,
people (will) begin to see that the free-trading countries in this new group are
actually thriving and prospering more than the United States, which is now the
Argentina of the 21st century. It could turn things around, and I think it would
eventually. How long would it take? I don’t know.
I happen to have spent a lot of time in Australia over the years, and the
Australians and New Zealanders were very cocky earlier on because, of course,
they would go to Europe and say that they were much richer than Europe. But
then the Europeans kept growing, and they (Australia and New Zealand) didn’t
grow as rapidly. Finally, Australia and New Zealand changed trade policies
because they saw that, indeed, they were losing out.
I think the same has happened to some other countries. They see that, indeed,
the ones that are open to trade are doing better.
I don’t know what will happen. I don’t know which of these scenarios will
happen. Maybe there’s some fourth alternative I haven’t thought of. But what I
do know is that right now we have to worry about NAFTA or USMCA, whichever
you want to call it.
We also have to worry about the world trading system. No matter how good the
outcome is right now for NAFTA—even with the effect of this NAFTA 1.0, the old
one, which we agree is better than the new one, which in turn certainly is better
than none—it will not be as good as it once was unless we get the WTO sorted
out as well.

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EVIDENCE OF AN INTEGRATED NORTH AMERICAN
LABOR MARKET

CHAPTER 16

Keeping North America Globally Competitive
Requires Its Economic Integration
Raymond Robertson, Texas A&M University
I realize that most people in this audience probably already are convinced and
believe in North American (economic) integration. Nevertheless, I would like to
present some points of view that maybe you haven’t heard and, hopefully, they
won’t be too redundant.
One of the things I teach to my public policy master’s degree students is that
we really want to try to train technocrats. People who are going to be basing
decisions about policy should do so not on ideology but on evidence and
especially on what economists know about how markets work.
I think it is important that we start thinking about our grand strategy for both
the United States and the region. While it’s not clear what our grand strategy
is, what our role in the world is going to be or what it should be, I think it starts
with North America, and I think that’s really important.
I would like to argue—and I think most of you will probably agree with me—
that we need to base this vision on the reality of integration that we already
have. I know that a lot of the talk yesterday highlighted this: Alonso de Gortari
(of Dartmouth College, speaking about supply chains) was one of them, and
there were several others, including Christine McDaniel (of George Mason
University, discussing the United States–Mexico–Canada Agreement).
I’m going to be making the case that integration within North America is not
just important because we believe that having good neighbors is important, but
also because that integration is important for us vis-à-vis the rest of the world.
I’ll explain that as we go along. That’s going to be based on the realization that
better neighbors—which are Canada and Mexico, in our case—make us stronger
domestically, but also more competitive with the rest of the world. That’s really
important in an increasingly integrated global economy. This is a project that
I worked on with some folks from the World Bank, Samuel Pienknagura, Chad
Bown and Daniel Lederman (Chart 1).

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I

CHART 1: THE BENEFITS OF INTEGRATION

y Regional integration makes the region stronger relative to the
rest of the world
ƒ Exporters gain experience and knowledge
ƒ Optimal regional input sourcing minimizes the costs
ƒ Allowing finance to flow where needed
ƒ Facilitating worker movement to optimized skill allocation
across borders
y Promoting regional integration acknowledges the power of
gravity
y Other regions are increasingly integrated
ƒ Europe
ƒ China with East, South East Asia

SOURCE: Robertson Raymond (2019). “US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve
Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf

Basically, the argument here is that regional integration makes the region
stronger relative to the rest of the world. One of the main reasons is that when
you are regionally integrated, your new exporters—people who are trying to
enter the export market—can export locally (within the region), and this is how
most exporters get started. You start exporting to your neighbors first, and that
allows the accumulation of knowledge and expertise that then makes you more
prepared to export to the rest of the world. Having a very tight integration in
your region facilitates new exporters entering into the global market.
Another reason is that optimal regional input sourcing minimizes costs. I think
this is something that we’re all aware of. The option to have different producers
within the region allows for cost minimization, and that’s another reason why
you become much more competitive with the rest of the world.
Another reason that’s really important is that it allows finance to flow where
it’s needed. Our report talks a lot about the integration of capital markets
and how having well-integrated capital markets can make up for some of the
deficiencies in your own country. One of the big problems that we see with
entrepreneurship and getting people started in the export market is lack of
finance; this happens in a lot of countries. Having regionally integrated financial
markets helps solve some of those problems and allows flexibility and diversity
for new exporters.
We also would argue in this report that facilitating worker movement allows us
to optimize skill allocation across borders. There’s been a lot of work this year
and last year on something called “the place premium.” I published a paper
on this as well. Those very large differences in wages across countries create
opportunities for migrants that generate efficiency gains. Moving workers from
low-wage countries to high-wage countries generates efficiency gains that end
up contributing to the economy.
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Yet another reason is that promoting regional integration acknowledges
the power of gravity. The idea here is that most trade is occurring between
countries that are geographically close because transportation costs matter, and
there’s a number of other factors that feed into that. The very fact that you have
strong regional integration basically acknowledges this power of gravity and
proximity—the benefits of proximity—and allows you to take advantage to build
up your supply chain or even your own production. The power of gravity is
obviously very important, and having regional integration promotes that.
We worry a lot about China, and we worry a lot about competition from other
parts of the world. What we don’t always acknowledge is that these other regions
are increasingly integrated. Obviously, Europe pursued very deep integration.
They formed a market that now rivals the size of North America, rivals the
size of the United States. That kind of integration has obviously made them
much stronger in many ways. China is increasingly integrated with East Asia—
Southeast Asia in particular—and moving a little bit into South Asia. There’s the
recent agreement between China and Pakistan. There are other examples of
China taking advantage of the differences across countries to integrate, and that
makes them stronger. Our lack of initiative puts us behind. Without a clear vision
of what we want to do as a region, we’re going to be falling behind.
Let’s talk now about integrated labor markets. Some of the work I did on my
dissertation showed that U.S. and Mexican labor are closely integrated and
migration, which is one force of that, has changed dramatically. We now know
that net flows into the United States from Mexico are negative—more Mexicans
are returning to Mexico than coming to the U.S. And there’s also been a very
significant change to the demographics of migrants. The main message from
this—from my point of view, based on my research—it’s really a mistake to
think about the Mexican labor market as a separate labor market from the
United States. The Mexican labor market is deeply, deeply integrated into North
America. Thinking about the Mexican labor market as a separate market is just
simply not factually accurate. It’s one continuous North American labor market.
There are benefits of this either way. Probably a lot of you saw the Dallas
Morning News article a while ago, so you’re aware that almost a third of
businesses in Dallas are owned by immigrants who only make up 24 percent
of the population. Immigrants come in and they start businesses, and this
contributes to the regional economy.
Fostering this labor market integration increases economic efficiency. As a
result, putting up barriers between us only ends up hurting ourselves, right?
Because it reduces the benefits of that integration.
Falling manufacturing employment is very costly for workers, and I think we
don’t fully appreciate that. There’s been a lot of recent research in international
economics—and I had one paper estimating this cost for Mexico—for the United
States and for other countries that shows that when people lose their jobs or
are displaced, these events often incur permanent and lasting effects. And these
adjustment costs include moving between jobs or between regions and are
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estimated to be as high as eight times annual income. People don’t like to move,
and if they are forced to move involuntarily because they lose their jobs, that’s
an extremely large real cost for people.
So, the fact that we haven’t fully appreciated the costs partially explains why a
lot of us are mystified by why we’ve seen elections go the way they’ve gone.
Of course, it’s unclear whether the main force behind these changes is trade
or technology. If you look at some of the more recent research from Peter
Schott, Justin Pierce and Teresa Fort (“New Perspectives on the Decline of U.S.
Manufacturing Employment”), they argue that it’s difficult to tell the difference
between trade and technology. It’s not like trade is the only culprit or technology
is the only culprit; there might be some mix, and the contributors might not
be separable. But there have been (other) people—and here’s another paper
(“Looking for Local Labor Market Effects of NAFTA”) that points a finger at
Mexico—blaming it (Chart 2).
CHART 2: THE CURRENT CLIMATE
y Falling manufacturing
employment is very costly for
workers (adjustment costs: 8x
income?)

20,000
U.S. Manufacturing EMP (K)

y Teresa C. Fort & Justin R.
Pierce & Peter K. Schott, 2018.
“new Perspectives on the
Decline of US Manufacturing
Employment,” Journal of
Economic Perspectives, vol
32(2), pages 47-72 show a mix of
trade and technology that may
not be separable contribute
to falling manufacturing
employment

U.S. MANUFACTURING EMPLOYMENT

15,000

10,000

y Several point the finger at Mexico (Shushanik Hakobyan and
1940m1
1960m1
John Mclaren, 2016. “Looking for
Local Labor Market Effects of
NAFTA,” The Review of Economics
and Statistics, MIT Press, vol. 98(4), pages 728-741, October)

1980m1

2000m1

2020m1

Time

y Others point to rising trade deficit with Mexico as evidence to U.S. losses
SOURCE: Robertson Raymond (2019). “US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve
Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf; Bureau of Labor Statistics.

When I was meeting with a congressional representative from Pennsylvania
yesterday, he pointed a finger at Mexico and said, “This plant, in my district,
left and moved to Mexico. We lost 1,600 jobs, and it was very costly.” We
(economists) need to acknowledge that and try to figure out what to do about
it. It’s not clear that trade policy is the best way to solve that. It might make
more sense to directly address the concerns of these workers than change trade
policy. Nevertheless, many others have pointed to the rising trade deficit with
Mexico as evidence of U.S. losses, which if you studied international economics,
you’d know that that’s not right. That’s not the right way to think about it, but
people are very fixated on this trade deficit.
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I’d argue that without a coherent vision about trade policy, uncertainty raises
costs for businesses and actually contributes to the trade deficit (Chart 3). The
trade deficit between the United States and Mexico has gotten worse. But if you
look at a very simple introduction to an international economics model, it shows
that a lot of that is driven by changes in the real exchange rate. The Mexican
real exchange rate has been depreciating. Every time there’s some threat
against Mexico, the exchange rate gets worse, or depreciates against the dollar,
and that makes the trade deficit worse. Hence, beating up Mexico is actually
counterproductive (if you believe the trade deficit is bad) because it depreciates
their currency and worsens the deficit.
CHART 3: WITHOUT COHERENT VISION, UNCERTAINTY RAISES COSTS
y USMCA: Already discussed by
some of the very best in the
field (Christine McDaniel, Kei-Mu Yi)
y 11.30.2018: USMCA signed.
Mexico ratified the treaty in
June 19, 2019.
y USMCA scheduled to be
reviewed in 6 years (most
business investment has a
longer timeframe)
y 6.7.2019: Trump’s threat of
putting tariff on Mexico goods
y 7.3.2019: Trump demanded that
Mexico deploy its troops to
half migrants.
y Economist (8/17/2019), Baker,
Bloom, and Davis: Rising
uncertainty has real effects
(lower investment, employment)

U.S. MANUFACTURING EMPLOYMENT
■

e

e

■

nx

nx

20

0

15

-2000

10

-4000

5

-6000

0

1990m1

2000m1

2010m1

2020m1

-8000

Time

Source: Robertson Raymond (2019). “US-Mexico-Canada:
All for One and One for All?,” Forging a New Path in North
American Trade and Immigration, Federal Reserve Bank of
Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf; Bureau
of Labor Statistics.
Peso plunges vs. the U.S. dollar after Trump announces Mexican import tariffs,” CNBC, May 31, 2019. www.cnbc.com/2019/05/31/peso-plunges-vs-the-us-dollar-aftertrump-announces-mexican-import-tariffs.html

The next thing, of course, is whether or not U.S. and Mexican workers
are competing with each other. That’s the big concern when you talk to
representatives from Pennsylvania, for example. They believe that Mexicans are
taking U.S. jobs. I have a paper (“Are Mexican and U.S. Workers Complements
or Substitutes?”) with the (Mission Foods) Texas–Mexico Center (at Southern
Methodist University), where I use labor demand models and econometrics to
see how much U.S. and Mexican workers actually compete. My paper shows
that before NAFTA (the North American Free Trade Agreement), U.S. and
Mexican production workers were actually substitutes.
So, this was a reality before NAFTA happened, but as I’m sure a lot of you heard
probably yesterday, the current estimates (after NAFTA) would suggest that U.S.
and Mexican workers are now complements due to a restructuring of the North
American value chain or global value chains. So, now Mexican workers and U.S.
workers are working together to produce different parts of the same output, and
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Forging a New Path in North American Trade & Immigration

I’m going to show you some graphs that represent this. The policy implications
here— whether you’re talking about the labor market side or the production
side—[is that] North America is best thought of as a common market. It’s a single
production unit where we’re working together across the three countries to
produce different things.
I’ll give you a real good example of this. After 9/11, we had to shut down our
borders for obvious reasons. As a result, several automobile plants in the United
States had to close because they couldn’t get the parts they needed from Mexico.
The Mexican parts are complementary to U.S. employment. Putting barriers or
tariffs or reducing Mexican production reduces the demand for U.S. workers.
We can show that econometrically, and it’s also intuitive. This labor demand
approach, I argue, works very well to represent the economic restructuring
that followed NAFTA and shows that now, particularly in autos but in other
industries as well, we’re working together.
We are also “natural complements.” Chart 4 shows the educational distribution
back in 1992 of the United States and Mexico. Mexico is in green; the United
States is in red. You can see that we complete each other in the educational
distribution in the sense that there’s going to be parts of the educational
distribution in Mexico that fill the gaps in the U.S., and then optimal allocation
of tasks across these borders increases the demand for workers on both sides.
CHART 4: NATURAL COMPLEMENTS
■ Mexico ■ USA

4

Density

3

2

1

0

1

Education Level

12

“US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve Bank of Dallas, Dallas, TX.
https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf

If you look at the graph of U.S. production workers and Mexican production
workers over time, they don’t move in an opposite direction, which is what
you would expect if we were competing with Mexican workers for jobs
(Chart 5). They actually are very closely integrated; they move together. When

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Forging a New Path in North American Trade & Immigration

our employment falls, their employment falls. When our employment rises,
their employment rises. You can see from the graph that this happens in the
short term and the long term.
CHART 5: MEXICAN AND U.S. PRODUCTION WORKERS

14.7

14.1

14.6

14

14.5

13.9

14.4

U.S. Obrero Hours

Mexican Obrero Hours

■ Mexico Obrero Hours ■ U.S. Obrero Hours

13.8
2006m1

2008m1

2010m1

2012m1

2014m1

2016m1

2018ma

Time
SOURCE: Robertson Raymond (2019). “US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve
Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf

The correlation is stronger in some industries than others. It’s not so much true
in chemicals because you don’t have much of a value chain in chemicals, and
(it’s) a little bit less in food products. It’s very strong in the things you’d expect,
which should be industries like apparel and automobiles. If you look at the
automobile industry, in particular, North America produced 17 million vehicles
in 2018. Mexico produced a very small share of that total. They exported 2.5
million to the United States. While U.S. content in vehicles produced in Mexico
pre-NAFTA was less than 5 percent, now it’s more than 40 percent.
The USMCA (United States–Mexico–Canada Agreement) increases administrative
costs and domestic content requirements for autos. But having some sort of
agreement in place that’s going to facilitate that (trade) movement is really
important. The labor demand estimates, like I said, show that (U.S. and Mexican)
automobile workers strongly complement one another, and they’re not
substitutes. That’s just something most people don’t realize because most people
haven’t done the econometrics.
On the flip side, this integration with the United States actually has big
implications for Mexico. Mexican employment really depends on the U.S.
market. Chart 6 shows Mexican exports to the United States in textiles and
employment in textiles. Mexican employment is directly linked to U.S. apparel
imports from Mexico.

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Forging a New Path in North American Trade & Immigration

CHART 6: MEXICAN EMPLOYMENT DEPENDS ON U.S.
y Falling Mexican employment directly linked to U.S. apparel imports from Mexico
y Use a local-labor market approach to estimate the effects on employment
y Apparel is especially important because it is a gateway for women to enter the formal labor force
■ Textiles/App Imports MX

■ Employment Textiles/App

Imports (in billions of USD)

1.8
2.0
1.6

1.5

1.4

Employment Shares (PP)

2.0

2.5

1.0

1.0
2005

2007

2009

2011

2013

2015

Year
SOURCE: Robertson Raymond (2019). “US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve
Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf

If you look at U.S. apparel imports in 2000, we imported more from Mexico
than from China. But if you look at 2016, the Mexican share almost disappears
and the Chinese have greatly taken over the U.S. apparel market. If you look at
just the time series graph, as the imports from China have gone up, the imports
from Mexico have gone down. When Mexico wins, China loses, and when China
wins, Mexico loses. If we’re thinking of a unified North America, and we’re very
concerned about China as a competitor, we need to think about how this is also
affecting Mexico. Here I’m building on the work of Daniel Chiquiar (of Banco de
México), who’s done awesome work on this.
When Chinese apparel exports to the U.S. increase, apparel employment in
Mexico goes down. But then these workers leave apparel, and they go into food
and they go into leather, and they’re also incurring those adjustment costs. The
cost on workers of switching industries is really high, and it’s painful. When I
estimated the adjustment costs of changing employment in Mexico, it was an
order of magnitude larger than in the United States. Mexicans by these data do
not like to change jobs; it’s very costly.
Last week, I was in McAllen (Texas), and I was meeting with the economic
development corporation there. They were extremely enthusiastic about the
U.S.–China trade war because they believed that it was going to bring in lots
of investment to McAllen, and I thought, “That would be great if that would
happen.” They actually noted several advantages relative to China: lower
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Forging a New Path in North American Trade & Immigration

shipping costs, Mexican companies maintaining independent operational
control, and a lower minimum wage even relative to China. It’s very possible
that the maquiladora program might bring competitive advantages. They
were very optimistic about the possibility that the trade war would bring
investment. We have some supporting anecdotes. For example, Apple is
going to be producing its new computer in Texas now, bringing it back from
China. There are some (other) anecdotes, and that’s going to be an interesting
part for research.
So, what are our next steps along this new path? I think it really needs to be
recognized that North America is a single production unit and (we should)
support trade agreements and policies that are going to facilitate that kind
of integration (Chart 7). I think that’s really important, not just for Texas, but
also for the rest of the country—and (we should) recognize that this integrated
production makes us stronger relative to the rest of the world.
CHART 7: NEXT STEPS ALONG THE NEW PATH

y Articulate a vision of a unified and integrated North America
y Recognize North America as a single production unit and support trade agreements and
policies that facilitate integration
y Recognize that integrated production makes us stronger relative to the rest of the world
y Implementing meaningful migration reforms based on a changed reality and medium-term needs
y Implement effective compensation mechanisms to help those adversely affected by trade
ƒ Review of what has worked and failed with current programs
ƒ Supporting people linked to occupations rather than industries
y Attracting investments
ƒ HR support programs that help foreign capital succeed
ƒ Identifying skill gaps in Texas and elsewhere based on a vision of integrated production

SOURCE: Robertson Raymond (2019). “US-Mexico-Canada: All for One and One for All?,” Forging a New Path in North American Trade and Immigration, Federal Reserve
Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-robertson.pdf

I think the migration is a critical part of that unified vision, but it’s irresponsible
for us not to acknowledge that there are people who are adversely affected by
trade, and we need to be better at designing effective compensation mechanisms.
We have not done a good job. I mean, that’s been probably the most significant
failure in that area, whether it’s in the United States, Canada or Mexico.
We need to review what has worked and what has failed with our current
programs and support people, linking them to occupations rather than
industries. One of the concerns we had about the trade adjustment assistance
that happened with NAFTA was that it was directly linked to industries as they
lost jobs, and it wasn’t recognizing the Stolper–Samuelson effects that show that
these changes in demand don’t just affect workers in a particular sector. When
workers in a particular sector are affected, that ripples out and affects the same
kind of workers in other sectors.
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Forging a New Path in North American Trade & Immigration

Here is another anecdote. It occurred when people were campaigning in Iowa,
and they went to the John Deere plant, and John Deere was exporting machinery
and lawn mower tractors all over the world. They went to the workers, and
they said, “How do you feel about this free trade?” And they were like, “This is a
disaster for us.”
But you’re in a company that’s exporting all over the world. “Yeah, but we’re
workers, we’re production workers,” and trade can push down and affect
production workers generally, not just in particular industries.
We need to understand how the economy works and design assistance
programs appropriately to give compensation, because if we don’t, people
are going to continue to vote against trade, and they’re going to vote for
protectionists, and it doesn’t matter if they’re on the right or the left. I mean,
both political sides have protectionist parts of the parties, and we need to try to
address that by better helping people who have lost from trade.
And the other final thing, and these are really specific policy proposals, but they
did come out in the discussion I was having down in McAllen about attracting
this investment. Apple is going to be producing in Texas again, but if we’re
going to be bringing in investment from other countries, there are two things
that we really do need to focus on. No. 1 is that we really need human resources
support programs. I think one of the big concerns that’s holding up Democrat
support of the USMCA in Congress is working conditions in Mexico. I have done
a huge amount of work on working conditions in the past 10 years. I argue that
working conditions are a function of human resource policies.
Human resource policies are a form of technology, just like any other kind
of production technology. It’s a technology that can be shared, like helping
companies in Mexico, whether they’re U.S. companies, Chinese companies
or whatever, adopt what we would consider to be modern human resource
policies. We need to facilitate understanding from foreign capital coming in of
our human resource policies and why they’re so successful.
The other key point of focus, of course, is identifying the skill gaps in Texas, in
particular, and elsewhere based on this vision of integrated production.
What we really mean by that is what the folks down in McAllen were saying:
“We can attract this high-tech investment, but we don’t have the skills that we
need to work on the high-tech production.” We need to identify what those skills
exactly are and then try and help the local universities, University of TexasEl Paso and a whole bunch of others in the (Rio Grande) Valley to train the
people to really take advantage of this kind of production.

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Forging a New Path in North American Trade & Immigration

MIGRATION, WORKFORCE AND THE
INTEGRATION OF LABOR MARKETS

CHAPTER 17

As Mexican Mass Migration to U.S. Ends, New
Arrivals Come from Central America, Asia
Jeffrey S. Passel, Pew Research Center
I’m at the Pew Research Center. This is our disclaimer. We call ourselves a fact
tank. The main thing is that we don’t take policy positions. If I happen to say
something policy-related, please don’t quote me. I’m a demographer. I’m not an
economist. There are going to be a lot of numbers, but the main thing is not the
numbers per se but the trends and the patterns.
The focus is on immigration today, and I have to say I think there’s a mismatch
between what the data show about immigration and immigrants and the politics and
the rhetoric of it. In particular, unauthorized immigrant numbers have been going
down for about a decade now. The total number is the lowest it’s been since 2004.
We had rapid growth in the unauthorized immigrant population until 2007,
dramatic declines right after that and the numbers have been drifting down
ever since. This is especially true of Mexico. Mexican mass migration to the
U.S. has essentially stopped. The huge drop in the number of unauthorized
immigrants living in the United States is due to more Mexican people moving
from the U.S. to Mexico than from Mexico to the U.S., and that’s been true for a
while, and it has sort of slipped under the radar (Chart 1).
CHART 1: MEXICANS DECLINE TO LESS THAN HALF U.S. UNAUTHORIZED
IMMIGRANT POPULATION
U.S. unauthorized immigrants by origin, in millions
6.9
6.2

6.3

5.6

Mexico

5.3

4.5
4.8
2.9
2.0
1.4

1990

4.1

5.2

5.4

5.5
4.9

Other countries

2.8

1995

2000

2007

2010

2017

SOURCE: Pew Research Center

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Forging a New Path in North American Trade & Immigration

I

To the extent we are getting new unauthorized immigrants—and the numbers
are going down—mostly, they are visa overstayers. Apprehensions of Mexicans at the southern border are at a 50-year low. I would say deterrence seems
to be working. It’s a question of enforcement, deterrence and we’ve heard a
lot about things that are happening in Mexico, as well. The low flow and the
shifts in the origins of unauthorized immigration have consequences both for
the migrants themselves and for the country. The fact that the unauthorized
population here today has been living in the United States for a long time
means that they (the immigrants) put down roots and have families. Lawful
immigration numbers have essentially remained unchanged. Immigrants play
an important part in our labor force and in labor force growth over the next
several decades (Chart 2).
CHART 2: IMMIGRATION TODAY
y Mismatch between data and political rhetoric
y Unauthorized immigrant #s lowest since ‘04
ƒ Unauthorized immigrant numbers grew rapidly, 1990 to 2007
ƒ Dramatic declines for 2 years then slow drop
y Mexican mass migration has essentially stopped
ƒ Drop in unauthorized since ‘07 due entirely to Mexican reversal
y “New” unauthorized are mostly visa overstayers
ƒ Apprehensions of Mexicans are at a 50-year low
ƒ Deterrence seems to be working on Mexicans
y Low flow and origin shifts have consequences
ƒ Longer duration of residence & more families
ƒ Lawful immigration nubmers remain unchanged
ƒ Key labor force role of immigrants today & in the future

This is a graph of the number of Mexican immigrants (solid dark line) living
in the U.S. For just a little history, the numbers weren’t very big in 1970. There
were only three-quarters of a million Mexicans immigrants living in the U.S.
(Chart 3).
CHART 3: MEXICAN POPULATION IN US GREW SLOWLY BEFORE ‘90; BY 1970, “ONLY” ABOUT
3/4 MILLION MEXICANS IN US
Mexican-Born Population in the U.S. (000s)
Percent Mexican of Foreign-Born Population

-...... -

-

6

15%

Mexican migrants in US (millions)

4
2
0

...

.
.013 .024 .042 .068 .078 .103

1840

1880
Beginnings
(1840-1910+)

.. -··

_

.641
.576
.377 .454
.222 .486

1920

-

1960

Flood tide Deportations
(1910-1930) (1930-1940+)

10%

8%
760,000

(1970 Census)

5%

Percent Mexican of foreign born

0%

2000
Bracero
(1942-1965)

SOURCE: Pew Research Center estimates based censuses and augmented CPS (1995-2004) and ACS (2005-2017)

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Forging a New Path in North American Trade & Immigration

Then something happened, the numbers went straight up (Chart 4).
By 2007, there were about 17 times as many, almost 13 million Mexicans living
in the U.S. They accounted for about one-third of all the immigrants in the U.S.
and represented about 10 percent of all the Mexicans in the world. And then,
again, the growth all of a sudden stopped. The recession had a lot to do with it,
but enforcement made a difference, too. We had a kind of steady downward
drift. Now, there’s under 12 million—about 11.6 million Mexicans in the U.S.—
about one-quarter of all the immigrants in the U.S., instead of one-third.
So, there were very dramatic changes from 1970 to 2007, and since then, a
complete reversal.
CHART 4: GROWTH CEASES & DRAMATICALLY REVERSES, 2007-2017; STEADY DOWNWARD
DRIFT AS RETURNS TO MEXICO CONTINUE
Mexican-Born Population in the U.S. (000s)
Percent Mexican of Foreign-Born Population
Mexican migrants in US (millions)

12.8

12

11,6000,000

10

(2017 ACS--Adjusted)

9.4

15%

16%

6

4.5

4

0

25%
20%

8

2

30%

8%

·---- ... -·· --- ___ ...... .-,_, ........

.013 .024 .042 .068 .078 .103

1840

880

.222 .486 .641

1920

.377 .454 .576

.760

1960

10%
5%

2.2

0%
2000

SOURCE: Pew Research Center estimates based censuses and augmented CPS (1995-2004) and ACS (2005-2017)

This is unauthorized immigrants in total—not just Mexico—and here you can
see the numbers were going straight up. This is net growth of about 500,000
a year for about 17 years (Chart 5). And for the numbers to grow by 500,000,
it means that we were probably getting 700,000 to 800,000 new unauthorized
immigrants every year for this long period of time.
Then again, sudden reversal. For the numbers to drop, it means people have
to leave the country. And we saw a drop of about 500,000 a year for two years.
And again, we were continuing to get new ones, so it meant something on the
order of 700,000 to 800,000 left the country each year for two years. Since then,
the numbers have kind of leveled off and [are] drifting down. Our estimate is
there are about 10.5 million unauthorized immigrants in the country, and that’s
roughly what it was in 2004.

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Forging a New Path in North American Trade & Immigration

CHART 5: STABLE FOR ‘09-’14, THEN REAL DECLINES IN ‘15-’17 UNAUTHORIZED IMMIGRANT
#S DROP TO ‘04 LEVEL
13

12.2

Unauthorized immigrants
(millions)

11.3

11

11.1

11.0

10.7

10.5

8.6

9

7

Shaded area represents 90% confidence interval

5.7

5

3

3.5

1990

1994

1998

2002

2006

2010

2014

2018

SOURCE: Pew Research Center estimates based on residual methodology

So, there were several big changes here along the way. This is Mexico (Chart 6).
The number of unauthorized Mexicans in the U.S. peaked in 2007. It’s just under
7 million and again, dropped by about 500,000 over the next two years.
CHART 6: UNAUTHORIZED MEXICANS PEAK IN ‘07, TOO; DROPPED BY 500,000 OVER
NEXT 2 YEARS
6.9
7 Unauthorized immigrants
6.4
(millions)

Mexico

6
5

4.5

4
2.9

3
2.0

Shaded/dotted area represents 90% confidence interval

2
1
1990

1994

1998

2002

2006

2010

2014

2018

SOURCE: Pew Research Center estimates based on residual methodology

Since then, overall, the numbers have continued to go down for Mexicans—the
last year showed a particularly big drop. We’re under 5 million, according to our
estimates, which showed a drop of about 2 million unauthorized immigrants
from Mexico living in the U.S. in a 10-year period (Chart 7).

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Forging a New Path in North American Trade & Immigration

CHART 7: UNLIKE TOTAL, MEXICAN DECLINES CONTINUE - DOWN BY 2 MILLION
FROM PEAK
6.9
7

Mexico

Unauthorized immigrants
(millions)

6.4
5.9

6

5.6

5

5.8
5.4

4.9

4.5

4
2.9

3
2.0

Shaded/dotted area represents 90% confidence interval

2
1
1990

1994

1998

2002

2006

2010

2014

2018

SOURCE: Pew Research Center estimates based on residual methodology

From other countries, the pattern is a bit different. The numbers went up (Chart
8). Since 2007, we’ve seen small increases. Central America plays a role here.
And Asia, interestingly, played a role. But what has happened, if you overlay the
Mexico line is that there are more unauthorized immigrants from places other
than Mexico living in the U.S. now than unauthorized immigrants from Mexico.
Mexico is still by far the largest, but it’s not a majority. And this is, from what we
can tell, the first time this has ever happened. It just happened in 2017.
CHART 8: MEXICANS DECLINE TO LESS THAN HALF OF UNAUTHORIZED IMMIGRANTS FOR
THE 1ST TIME EVER
6.9
7 Unauthorized immigrants
Mexico
6.4
(millions)

5.9

6

5.6

5

5.4

4.1
2.9

3
2.0

..··

2

5.3

5.3

4.5

4

5.8

5.3

5.0
_

.. -·········

5.5

5.2 4.9

Other countries

... ·······················

2.8
Shaded/dotted area represents 90% confidence interval

1

1.5

1990

1994

1998

2002

2006

2010

2014

SOURCE: Pew Research Center estimates based on residual methodology

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Forging a New Path in North American Trade & Immigration

2018

We haven’t made estimates for 2018, but the numbers that came out yesterday
from the American Community Survey show a very small drop in the total
number of Mexicans living in the U.S. So, I don’t expect to see any big shift in
these trends over the next year or so. So, Mexico is down 2 million. Central
America is up from about 1.5 million to almost 2 million. Asia is up a little bit, at
1.3–1.5 million. The number of unauthorized immigrants from South America
and Europe has dropped a little bit, and other places have basically been stable.
And this is a 10-year pattern we’re talking about (Chart 9).

1.900

CHART 9: MEXICANS DOWN 2 MILLION SINCE ‘07; CENTRAL AMERICA, ASIA - UP; SOUTH
AMERICA, EUROPE-CANADA - DOWN; OTHERS STABLE

Unauthorized immigrants
(thousands)

South
Amer.

Caribbean

Asia

EuropeCanada

Middle
East

250

250

140
Central
Amer.

130

650

500

1,450

475

475

900

775

1,300

1,500

■ 2007 ■ 2017

Africa

SOURCE: Pew Research Center estimates based on residual methodology

The next four largest countries are the Northern Triangle countries—El
Salvador, Guatemala and Honduras—and India. All of these have shown
increases since 2007. It’s worth pointing out—we’re talking Mexico is at 4.9
million. So, Mexico has many more, even with the large drops. These others’
increases in terms of numbers are much smaller, but these four are trending
up. The next-largest country is China. It, along with the Dominican Republic,
Brazil and the Philippines, basically stayed about the same for 10 years. Since
we continue to get new unauthorized immigrants, the stable numbers mean the
ones already here are either leaving or, in some cases, becoming legal.
Unauthorized immigrants account for 10.4 million of the almost 46 million
immigrants living in the country (Chart 10), or slightly less than one-quarter.
It’s been as high as one-third, but it’s been going down as legal immigration
continues. The total immigrant population grows, and the unauthorized
(population) is falling.

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Forging a New Path in North American Trade & Immigration

CHART 10: ABOUT ONE-IN-FOUR U.S. IMMIGRANTS ARE UNAUTHORIZED
Total U.S. foreign-born population: 45.6 million

Unauthorized
immigrants
10.4 million (23%)

Lawful
immigrants
35.2 million (77%)

Temporary
lawful
residents
2.2 million (5%)

Naturalized citizens
20.7 million (45%)

Lawful permanent
residents
12.3 million (27%)

SOURCE: Pew Research Center estimates based on residual methodology

The largest group of immigrants in the country is naturalized citizens. These
are people who came here as legal immigrants and have become U.S. citizens.
This group, which is just shy of 21 million, is the only one of these that’s been
growing. What happens is we get new immigrants who aren’t citizens, but a lot
of these people who are non-citizens become citizens. This is the growing part
of the immigrant population. Lawful permanent residents, these are green-card
holders who have not become U.S. citizens, are a little over a quarter (of the
immigrant total). This number, about 12 million, is about the same as it was 25
years ago. In addition, there are about 2 million people who were here legally
on temporary visas that allow them to live and work in the U.S. The biggest
groups here are foreign students and guest workers—H1B and other types of
guest workers.
This next chart shows the same data I showed a little while ago. It’s just a
different look. Mexico and Latin America are 75 percent to 80 percent of the
total. Asia and other regions are much smaller shares of the unauthorized
immigrant population (Chart 11).

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Forging a New Path in North American Trade & Immigration

CHART 11: UNAUTHORIZED IMMIGRANT POPULATION DOMINATED BY MEXICO, LATIN AMERICA
Unauthorized immigrant population (thousands)
Other regions
900
Asia
1,450

Caribbean

475

TOTAL
10.5 MILLION

4,950

Mexico

775

South America

1,900

Central America
SOURCE: Pew Research Center based on augmented 2017 ACS.

Mexico is our largest source of legal immigrants in terms of both the number
coming to the U.S. and the number living here. There are about 6.5 million
legal immigrants from Mexico, representing about one-fifth of all the legal
immigrants living in the United States. The rest of Latin America is about a
quarter. Asia is almost a third. It’s a group that’s been growing, with significant
numbers from other parts of the world as well.
This is legal immigration–green cards (Chart 12). The numbers have not gone
down. They have remained unchanged since about 2001, when new laws kicked
in. 2003 was a bit of an aberration. We didn’t reduce the inflows; we increased
the security background checks. And so, it was a queuing problem more than
anything else; the numbers were made up in the next couple of years.

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CHART 12: LEGAL ADMISSIONS UNCHANGED SINCE ‘01 (EXC. ‘03) “GREEN CARDS” EXCEED
1 MILLION/YR ROUTINELY
Lawful permanent immigrants admitted by fiscal year (thousands)
■ Mexico

■ All Other

Average Admissions, ‘01-’08

1250

1,059,000

1000

750

500

250

0

1995 ‘97

99

2001

‘03

‘05

‘07

‘09

‘11

‘13

‘15

‘17

SOURCE: DHS YEARBOOK OF IMMIGRATION STATISTICS AND SUPPORT DATA.

We’re averaging a little over a million new legal immigrants (green-card holders) a year and have been for basically 20 years. The numbers at the bottom are
Mexico. Mexico is usually the largest source of green cards.
So, the overall pattern—growth and then decline, as you can see, is driven
by Mexicans, and the drop in new arrivals—that is, new unauthorized
immigrants coming to the country—is also driven by Mexicans. Most
unauthorized immigrants from places other than Mexico and Central America
are visa overstayers. Most from Mexico and Central America are what the
border patrol calls EWIs—Entries Without Inspection—people sneaking across
the southern border.
My sense is the southern border is generally secure. The apprehensions of
Mexicans are at a 50-year low (Chart 13). In addition, there are some statistics
that are put out by DHS (Department of Homeland Security) that suggest they’re
doing a much better job of catching people trying to sneak in.

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CHART 13: NON-MEXICAN APPREHENSIONS EXCEED MEXICANS, BUT STILL LOW
1,800

Deportable aliens located (000s)

1,600

1,636

1,637

1,400
1,200

Mexicans

1,000
800
600
400
200

219

113

Non-Mexicans
130

0

249
155

1960 1966 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
SOURCE: Department of Homeland Security and INS, CBP apprehension statistics

The big increases in the last several years are Central Americans, in particular
families. Again, my sense is they’re not trying to evade capture, they’re coming
to the border and actually turning themselves in. The historic notion that for
every one immigrant we catch, some larger number get away—in the case of
Central Americans—is probably not correct.
Our enforcement strategy seems to have worked. We have fences in the places
where it’s easy to cross, which has forced people to try to cross in deserts and
mountains and rugged terrain. We’ve greatly increased the size of the border
patrol over the last 20 years. They have much more technology available in
terms of sensors and drones and the ability to spot people trying to sneak in.
And in Mexico itself, it’s hard to get to the border.

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CHART 14: NEW UNAUTHORIZED IMMIGRANTS IN 2017 ARE NOT ILLEGAL ENTRANTS (#) BUT
LIKELY OVERSTAYS (*)
Share of unauthorized immigrants arriving 2012-17
Approximate Overstays (*) 62% 260,00/year

Other Regions*

(Europe,
MENA, Africa)

Asia*

18%

23%

Mexico #

20%

ANNUAL
AVERAGE
425,000

8%

18%

Central
America #

13%

South
America*

Caribbean*
SOURCE: Pew Research Center based on augmented 2017 ACS

The current increase in illegal immigration is mainly due to visa overstayers
(Chart 14). We’re getting, according to our estimates, about 260,000 overstays
a year added to the U.S. population. The majority of them are from Asia, South
America and other parts of the world. With this change in the pattern and the
drop in new arrivals, the unauthorized immigrant population is increasingly
rooted here in the U.S. About two-thirds of all unauthorized immigrant adults
have been here for 10 years or more. Ten years ago, it was about one-third.
In the case of Mexico, the numbers are ever more extreme. Five out of six (83
percent) unauthorized Mexican immigrants have been here 10 years or more
and only about 8 percent have been here less than five years.
These families—immigrants, especially unauthorized—are more likely to be
couples with children (Chart 15). About 43 percent of households headed by
unauthorized immigrants are couples with children.
CHART 15: IMMIGRANTS, ESPECIALLY UNAUTHORIZED, MORE LIKELY TO BE COUPLES
WITH CHILDREN
U.S. Native
Households

18%

Legal Immigrant
Households

32%

Unauthorized
Immigrant
Households

43%

Percent of group’s households that are couples with children. 2016.
Source: Pew Research Center based on augmented 2016 ACS

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The share among U.S. native households is only 18 percent and, a lot of those
native households are old. About 91 percent of unauthorized male immigrants
are in the workforce. That compares with 79 percent of U.S. natives in the same
age span. Legal immigrants fall in between. In the case of women, the pattern
is reversed. About three-quarters of native women of working age are in the
workforce and only 60 percent of unauthorized immigrant women. The main
difference between these populations is the presence of children under (age)
five in a household. A lot more of the unauthorized immigrant women appear to
be staying home with young children than native women.
This next chart goes back to something (Federal Reserve Bank of Dallas
President) Robert Kaplan said yesterday: What does this look like going into
the future? For the next 20 years, all growth in the labor force will come from
new immigrants and U.S.-born children of current immigrants (Chart 16). The
labor force numbers among the third-plus generation—U.S. born with U.S.-born
parents—will go down. This is the baby boomers aging out of the workforce.
CHART 16: NEXT 20 YEARS, ALL GROWTH COMES FROM NEW IMMIGRANTS AND US-BORN
CHILDREN OF CURRENT IMMIGRANTS

180

Working-age population,
ages 25-64 (millions)

Actual

Projected

183

173
US born with
immigrant parents
(2nd generation)

140

138

Immigrants
(1st generation)

118
100

US born with
US-born parents
(3rd+ generations

86

60
1965

1975

1985

1995

2005

2015

2025

2035

SOURCE: Pew Research Center (2016) “historic” projections.

But what would happen if we didn’t have immigrants coming in? The workingage population would decrease by 2035 (Chart 17). Basically, any growth in the
labor force that we’re likely to see over the next 20 years is going to come from
immigrants who are not yet in the country. Thank you.

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CHART 17: WITHOUT FUTURE IMMIGRANTS, WORKING-AGE POPULATION WOULD DECREASE
BY 2035
Projected

Working-age population, ages 25-64 (millions)

183

173

180

Projected
without
2015-2035
immigration

138

140

18 million
difference due
to 2015-2035
immigration

166

118

100
86
60

1965

1975

1985

1995

2005

2015

2025

2035

SOURCE: Pew Research Center (2015) “historic” projections.

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CHAPTER 18

U.S. Wage Growth Provides Greatest ‘Pull’ for
Mexican Migration Decision
Madeline Zavodny, University of North Florida
A lot of what I’m going to talk about draws on my research with Pia Orrenius (of
the Federal Reserve Bank of Dallas). We wrote a paper for the Center for Global
Development that looked at unauthorized inflows of Mexican workers for the
past 20 years or so.
I think you all agree, certainly living in Texas, that Mexican worker migration
matters. It matters a lot to us in Florida as well. But on a grand scale, it’s
important to the U.S. economy that about one-sixth of our workers are foreign
born and Mexicans alone are about 5 percent of workers in the United States.
They’re an incredibly important source of workers. They’re also our neighbors.
They’re students. They’re colleagues. They are very important as consumers,
workers and friends.
They’re also important to the Mexican economy. When the Mexican economy
experiences a downturn like the Tequila Crisis, for example, the U.S. has
historically served as an outlet for those workers to leave. That helps stabilize
the Mexican economy as well as potentially benefiting the U.S. economy. In the
same way, 50 years ago when Mexican women were having six kids instead of
two, the United States once again served as an outlet for that excess labor force.
Another important thing to Mexico that perhaps we haven’t talked about as
much over the last day and a half is remittances that Mexican workers in the
United States send back to Mexico, on the order of $25 billion annually. And that
really helps stabilize the Mexican economy. It’s an incredibly important source
of funds to a lot of communities and families. And perhaps those funds going
there affect the number of people who are coming to the United States as well.
Looking ahead, changes in demographics in the U.S. and in Mexico make these
flows and what’s going to happen to them very important. I think perhaps
the most jaw-dropping thing that Jeff Passel (of the Pew Research Center) just
showed us was what the future of the U.S. labor force would look like without
immigrants. It is hard to understate the importance of immigrants to the future

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of the U.S. workforce. Historically, many of those immigrants have been from
Mexico, but that has been changing.
As economists, the way that we think about immigration is typically push
versus pull factors (Chart 1). What’s pushing them to leave their country, and
then what’s pulling them into another country as well. Thinking about the
push factors from Mexico, one important set of factors is economics. What’s
happening with Mexican wages? When they’re going up, we would expect fewer
people to be pushed out.
CHART 1: PUSH VERSUS PULL FACTORS

PUSH
y Economic factors

>>

<<

PULL
y Economic factors

ƒ Mexican wages

ƒ U.S. wages

ƒ Mexican job growth

ƒ U.S. job growth

ƒ Trade with U.S., Canada
y Demographic factors
ƒ Labor force entrants

ƒ U.S. construction activity
y Demographic factors
ƒ Labor force entrants
y Border enforcement

SOURCE: Orrenius, Pia and Madeline Zavodny (2016). “Unauthorized Mexican Workers in the United States: Recent Inflows and Possible Future Scenarios” Center for
Global Development Working Paper 436 (September). https://www.cgdev.org/sites/default/files/unauthorized-mexican-workers-united-states-inflows.pdf

When jobs are growing in Mexico, when you have rising employment
particularly in the formal sector, you would also expect a weaker push factor.
Trade with the United States and Canada, the creation of NAFTA (North
American Free Trade Agreement) and then what’s happened after NAFTA could,
of course, be an important factor in whether or not Mexican workers are feeling
pushed out into the United States.
Although it pains me as an economist to say, economics is not all that matters.
Demographics matter as well. In particular, this is where the age structure and
that drop in the number of children born to the average woman in Mexico
matters a whole lot. If you’re part of a baby boom, when you enter the labor
market, you’re facing a lot of competition. There’s a big increase in labor supply
at the same time as you’re joining the workforce. For a lot of people in Mexico,
that baby boom, when it was happening 40 to 50 years ago, eventually acted as a
push factor. That has, of course, diminished a lot as birthrates have fallen.
Switching over to the United States—thinking about Texas, California and
the whole rest of the country—we act as a magnet that is potentially strong,
potentially weak, in attracting workers from Mexico and elsewhere. Again,
here economics is important. What we would expect is, as U.S. wages are rising,
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either overall or for the type of people who might enter, we would have a
stronger magnet when U.S. jobs are more plentiful and the unemployment rate
is low. We’d expect again a stronger magnet. When we think about Mexico, one
important economic factor is what’s happening with U.S. construction activity.
When you think back to the early 2000s, when we had a housing boom in the
United States, it was potentially a very strong magnet attracting lots of workers.
Then, we have the housing bust starting in about 2006, and suddenly that
magnet just really disappeared. As we’ve been going back through another
housing boom—weaker, but still a boom in the last few years—potentially that
magnetic pull is back.
Again, economics isn’t all that matters. There’s also U.S. demographics—what’s
happening with the aging of the U.S. population, how many potentially
competing workers there might be for Mexicans who might consider coming to
the U.S.
Finally, one potential block on that pull factor is border enforcement,
particularly during the period that Pia Orrenius and I looked at—the 1990s and
early 2000s. Whereas now, we would also be very concerned about rethinking
interior enforcement as well.
In this paper, we estimated the inflow of unauthorized Mexican workers. We took
a whole bunch of U.S. government data that’s publicly available, and we tried to
count the number of people in the U.S. labor force who were born in Mexico and
who appeared to have not been in the country in the last year (Chart 2).
CHART 2: NITTY-GRITTY DETAILS
y Current Population Survey 1996-2004, American Community Survey 2005-2014
y Mexican-born workers who entered U.S. within last year
y 3 methods to estimate # unauthorized:
ƒ Imputation: Predict legal status based on characteristics, 2007 Survey of Income and
Program Participation
ƒ Residual: Weighted count minus temp worker visa issuances
ƒ Proxy: Based on education or other logic-based proxies
ƒ 20% adjustment for undercount
SOURCE: Orrenius, Pia and Madeline Zavodny (2016). “Unauthorized Mexican Workers in the United States: Recent Inflows and Possible Future Scenarios” Center for
Global Development Working Paper 436 (September). https://www.cgdev.org/sites/default/files/unauthorized-mexican-workers-united-states-inflows.pdf

We think about this inflow as new entrants; that is, the gross inflow of Mexican
workers. What we were particularly interested in in this paper was how much
of that gross inflow of Mexican-born workers appeared to be unauthorized.
Here we adjust for an undercount. The government does not ask people if
they are unauthorized because who would answer that accurately? People are
kind of reluctant to cooperate with government surveys. They’re long. They’re
intrusive, and if you’re an unauthorized immigrant, you’re particularly reluctant
to cooperate with these surveys. So, the surveys undercount the number of
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immigrants in the U.S., in particular the number of unauthorized immigrants.
We are interested in the gross inflow—the number of workers newly coming
over the border—and also in the stock. At any point in time, how many
unauthorized Mexican workers appear to be in the United States? This is what
one estimate of our numbers looked like (blue line in Chart 3). We think it’s a
pretty good number because it follows closely estimates from the Pew Research
Center (red line) and estimates coming from the Department of Homeland
Security (green line).
CHART 3: COMPARISON TO ESTIMATES OF TOTAL UNAUTHORIZED MEXICAN
IMMIGRANT POPULATION
■ Our estimate of workers

■ Gonzalez-Barrera (2015)

■ Baker & Rytina (2013)

8,000,000

6,000,000

4,000,000

2,000,000

0
1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

SOURCE: Orrenius, Pia and Madeline Zavodny (2016). “Unauthorized Mexican Workers in the United States: Recent Inflows and Possible Future Scenarios” Center for
Global Development Working Paper 436 (September). https://www.cgdev.org/sites/default/files/unauthorized-mexican-workers-united-states-inflows.pdf

What you tend to see here is that the stock of unauthorized Mexican workers
or the immigrant population as a whole, as Jeff Passel was saying, was going up
through the Great Recession, until about 2007, and then it started to fall.
What does the widening gap (between the blue and red lines) mean? If we’re
right in our estimates, it is the fraction of unauthorized Mexicans who are (not
working) here in the United States. You still have a decline in the unauthorized
Mexican immigrant population in the U.S., but you have an even bigger drop in
the number of those who are working. Why is that occurring? Why are fewer
unauthorized Mexican immigrants working? Probably because we’ve made it
harder for them to work through interior enforcement, through E-Verify (the
federal worker eligibility verification program), through Secure Communities,
through the U.S. Immigration and Customs Enforcement Program 287g
(cooperation between federal, state and local law enforcement), through a lot
of these programs that are discouraging work within a population that has no
safety net to fall back upon.
What we’re interested in is, of course, the why. What was going on? What were
the drivers of this inflow with regard to push versus pull factors? We ran these
regressions, and we have a whole bunch of regression results. What are the
takeaways from all of these numbers?
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Forging a New Path in North American Trade & Immigration

One is that U.S. wages are a very important magnet. If U.S. wages are growing 1
percent faster, inflows of unauthorized immigrants from Mexico are about 8–14
percent higher (Chart 4). The better the U.S. economy, the more people try to
come. Mexican wages act as a push factor when they fall (more people leave);
with a 1 percent drop, about 3 percent more leave. But they (Mexican wages)
don’t matter as much as U.S. wages do. The pull factor is more important than
the push factor. Border enforcement matters. Construction activity does not
matter a whole lot. But the size of those birth cohorts matters as well.
CHART 4: DETERMINANTS OF UNAUTHORIZED IMMIGRANT INFLOWS FROM MEXICO:
REGRESSION RESULTS
(1)

(2)

(3)

(4)

U.S. Average Wage

14.18***

14.22***

--

8.47**

Mexican Average Wage

-3.14**

-3.32*

--

-3.99

U.S. Construction Permits

--

-0.05

--

-0.52

U.S. Total Employment

--

--

9.60**

6.96

Mexican Total Employment

--

--

-6.17

-5.95

Border Enforcement

-1.11***

-1.17**

-1.45**

-2.25**

U.S. Births 15-19 Yrs Ago

-17.42**

-20.47

11.50

-28.32

Mexican Births 15-19 Yrs Ago

21.32***

22.40***

-3.63

18.71**

*** p <0.01, ** p<0.05, * p<0.1
SOURCE: Orrenius, Pia and Madeline Zavodny (2016). “Unauthorized Mexican Workers in the United States: Recent Inflows and Possible Future Scenarios” Center for
Global Development Working Paper 436 (September). https://www.cgdev.org/sites/default/files/unauthorized-mexican-workers-united-states-inflows.pdf

What might happen in the future? What might we expect? Well, if things
continue like they’ve been for about the last five years, these gross flows will
be about 100,000 per year. Is that high or low? Well, that’s a very normative
question, but what is important is that this is very low in a historical context.
When we go back to before the Great Recession, those numbers were about
220,000, gross, coming over per year, and more of them were staying. So, we
predict much lower flows. But if U.S. economic growth were to strengthen, those
flows would increase considerably. If the Mexican economy were to weaken,
those flows would also strengthen, but not by as much. Remember, the pull is
bigger than the push, and of course, you know there are lots of caveats—they’re
hard to predict.
So, what does this mean for policy? This is all talking about unauthorized
immigrants. I think most of us would agree that we would prefer that
immigrants come to the United States legally, but the problem is U.S. legal
immigration programs are a mess, both on the permanent side and on the
temporary side. And it is so much easier for an employer to hire someone who’s
already taken the risk of crossing and is here illegally than to try to bring in a
worker legally. The paperwork and the wait time for a visa and the uncertainty
associated with trying to do that is tremendous.

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If we want to reduce unauthorized immigration into the United States, we need
to stop the pull magnet, and we need to provide employers with better legal
ways to get the workers that they want. We need visa portability and automatic
adjustment of visa numbers over business cycles (Chart 5). The other thing is,
we do have this shrinking stock of unauthorized immigrants who are already
here. Many of them are working, and so one thing we might strongly want to
consider is legalizing this population, enabling them to move more easily across
jobs, to have better futures for themselves and their U.S.-born children.
CHART 5: POLICY IMPLICATIONS

y Need more, better work visa programs and want employers to use them
ƒ Spot market is key to employers
ƒ Visa portability
ƒ Automatic adjustment over business cycle
ƒ Allocate visas to employers who want them the most
ƒ Couple with stricter worksite enforcement
y Legalization program for those already here

SOURCE: Orrenius, Pia and Madeline Zavodny (2016). “Unauthorized Mexican Workers in the United States: Recent Inflows and Possible Future Scenarios” Center for
Global Development Working Paper 436 (September). https://www.cgdev.org/sites/default/files/unauthorized-mexican-workers-united-states-inflows.pdf

Our immigration trends in the United States really are shifting away from
Mexicans to Central Americans and Asians. Their patterns of work tend to be
very different from those of Mexican immigrants. The Central American inflows
that we’ve focused on so much in the United States over the last couple of years
have very low labor force participation rates. The flows are mostly women and
children, and they come seeking asylum. They’re much less likely to work than
the types of migrants that the U.S. used to attract, and that has large economic
and demographic implications for the U.S.

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CHAPTER 19

Canada Presents More Accommodating
Approach to Immigration than U.S.
John B. Sutcliffe, University of Windsor
There are similarities between the Canadian and American immigration
systems, but there are also important differences. We can look at several ways
in which the Trump presidency has had an impact on the Canadian immigration
system as well as, of course, on the American immigration system and on the
USMCA (United States–Mexico–Canada Agreement). I’m going to argue it (the
impact of the USMCA) is not major and won’t be the major cause of change,
assuming it is ratified (Chart 1).
CHART 1: OVERVIEW
y There are similarities between the Canadian and American immigration systems.
y As the same time, there are important differences.
y The Trump Presidency has had an impact on Canadian immigration and the movement
of people between Canada and the United States.
y The USMCA is not - or will not be - the major cause of change.
y The biggest impact comes from US immigration decisions already taken and the general
prevalance of uncertainty.
SOURCE: Sutcliffe John B. (2019). “Forging a New Path in North American Trade and Immigration,” Forging a New Path in North American Trade and Immigration,
Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-sutcliffe.pdf

The biggest impact in immigration has come from decisions already taken and,
typically, American decisions already taken and the uncertainty that’s evident in
this process. In Canada, as in the United States, regulating the movement of people
into and out of the country is a very complicated process. Part of this is because of
the sheer number of people we’re talking about. The other part of the complexity
is because of the different types of people we’re talking about. People coming for
short-term visits, such as tourists or students; people arriving for short-term work,
short-term positions; people coming permanently, moving for a job offer to look
for work and family reunification; people coming to join family members already
present in the country; or people coming to escape problems in their home
country, who on humanitarian grounds can apply for refugee status.
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I think for both Canada and the U.S. and indeed for all countries that are net
recipients of immigrants, there are a number of core questions. How many
people are to be admitted? Where should they come from? Where do they go?
What are they being admitted to do? And what are the conditions attached to
their entry?
Typically, most of the entry is on short-term visas or sometimes with no visa
at all, but a significant percentage of foreign arrivals (are) on different types
of permanent visas. Both Canada and the U.S. already have sizable immigrant
populations or people born outside of the country (Chart 2).
CHART 2: U.S. AND CANADA: SIMILARITIES
y Both countries have sizeable immigrant populations. And these populations will increase.
y Both countries have different visa types and different policies dealing with different
categories of migrant.
y Both have three main categories of permanent immigrant - family class; economic class;
refugee/asylum seekers.
y Both also deal with the movement of people who do not intend to reside permanently.
y Some of the movement of people between Canada and the US for temporary work is
covered by NAFTA.

SOURCE: Sutcliffe John B. (2019). “Forging a New Path in North American Trade and Immigration,” Forging a New Path in North American Trade and Immigration,
Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-sutcliffe.pdf

As we’ve seen, these numbers are set to increase over time. In the U.S., the
foreign-born population stands at around 45 million, approximately 13–14
percent of the total population. The absolute number in Canada is a lot
smaller, 7.5 million, but it constitutes a much higher percentage of the existing
population and it’s somewhere in the range of 22 percent. And that’s again set to
increase, as we heard yesterday. On a couple of occasions, immigration growth
is going to be critical to overall population growth. It already is particularly in
Canada and that, in turn, is going to be central to growth of the labor force.
As for similarities, both countries have a vast number of different visa types
and different policies dealing with different categories of migrants. Simplifying,
there are three main categories of permanent immigrant: those entering as a
family class, family reunification; those entering under an economic class visa of
different types; and those arriving as refugees or seeking asylum in the country.
Both countries also have to deal with some movement of people who don’t
intend to reside permanently, and some of this category of people is covered
by or is connected to the NAFTA (North American Free Trade Agreement).
There are various migration categories within NAFTA, and they include the
TN visa (for Canadian and Mexican professionals working in the U.S.), NAFTA
professionals, intra-company transfers, traders and investors. Some of the key
differences between the U.S. and Canada acknowledge that Canada places much
more emphasis on the economic class of immigrant compared with the U.S.,
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Forging a New Path in North American Trade & Immigration

which has placed the main emphasis on family reunification. This situation
has been broadly the case since the 1960s. In the U.S., over 60 percent fall
under the family class of immigration, whereas in Canada, it’s almost the direct
opposite over the last 30 years—family class is a much smaller category, and the
economic class of immigrant is much higher.
Another difference is that Canada uses a point system to select immigrants
under the economic class. Applicants receive up to 100 points. Applicants
receive points for level of education; their age; their linguistic skills, whether
they speak French or English; and whether they have a letter or a job offer
already in place in Canada. This kind of merit-based system to some extent is
what Donald Trump has been advocating for the U.S. He is certainly, and in
much more vehement terms, very critical of the family class and the emphasis
of family class of immigration in the U.S.
I think it’s important to note though, that the difference isn’t perhaps as great as
it appears on paper. This is because the economic class of immigrants entering
Canada also includes their immediate dependents. So, that absolute number is
not just the principal applicants but also the family members coming with them.
When you start to look at those numbers, the difference isn’t as big.
In 2016, for example, about 44 percent of the applicants coming in under the
economic class were the principal applicant. The remaining 56 percent were
family members coming with the principal applicant.
I think in the modern (era)—talking about the time period we’re in now
particularly—the Canadian government and Canadians are more accepting of
immigration and immigrants generally.
Multiculturalism is embedded in the Canadian national identity—and again, this
has been for many years now and it crosses the political spectrum—and there’s
a continuing openness to the idea of immigration. For example, on the day in
January 2017 when Trump signed the first of his attempted immigration bans,
(the) travel bans on citizens from mainly Muslim-majority countries, (Canadian
Prime Minister) Justin Trudeau tweeted out: “To those fleeing persecution,
terror and war, Canadians will welcome you regardless of your faith, diversity is
our strength and #WelcomeToCanada.”
Again, just earlier this summer, when Trump was tweeting to four Democratic
congresswomen saying they should return to where they came from, Justin
Trudeau responded saying, “That’s not how we do things in Canada.” Some of it
is moral high ground, but it still reflects Canada’s commitment to openness.
It is significant to know that the Canadian government, the liberal government,
currently is planning to increase the amount of immigration and the number
of immigrants coming to Canada. You could see the increase, the projected
increases across the different categories (Chart 3).

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CHART 3: CANADIAN GOVERNMENT AND CANADIAN DIFFERENCES
Immigration Category

2018

2019

2020

2021

Economic

177,500

191,600

195,800

202,300

Family

86,000

88,500

91,000

91,000

Refugee and Protected Persons

43,000

46,500

49,700

51,700

3,500

4,250

4,500

5,000

310,000

330,800

341,000

350,000

Humanitarian
Total

SOURCE: Sutcliffe John B. (2019). “Forging a New Path in North American Trade and Immigration,” Forging a New Path in North American Trade and Immigration,
Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-sutcliffe.pdf; Statistics Canada.

Just yesterday, Trump again suggested that they (U.S. government officials) are
going to lower the number of refugees admitted to the U.S. in the next year to
12,000 or 18,000. To put that in context, the Canadian government is suggesting
they’re taking 46,500 next year.
Just quickly to note, that while there are differences, I don’t want to overstate
these. Public opinion polls in both countries show sort of similar things.
Canadians tend to support immigration in principle, but you do see all kinds
of different positions when asking about specific types of immigration
and practice.
Recent polling suggests a growing number of Canadians are cautious about
or argue for a reduction in immigration. We now have the People’s Party
of Canada, a populist party created by a former Conservative government
minister. When he failed to win the Conservative leadership, he went off in
a huff and formed his own political party, the People’s Party, and one of the
central planks of this party is to stop, as they call it, mass immigration. However,
they only have about 2–3 percent of the public opinion or potential voters.
Probably more serious is Quebec, the French-speaking province. There have
been various examples of ambivalence or concern about immigration in
that context, the threat that (immigration) might pose to Quebec’s linguistic
and political culture and its very existence. (The province of Quebec’s) Bill 9,
recently passed, introduced a values test for potential immigrants to Quebec.
(The province’s) Bill 21, again a fairly recent legal measure, introduces a ban on
religious head scarfs or religious symbols for public servants, police officers and
teachers. It actually highlights another key difference between Canada and the
U.S., which is the provinces have a much bigger role in the immigration process
than I think the states do in the U.S.
Regarding NAFTA, the original idea was to allow highly skilled workers to
travel across the border to support the increased trade in goods and services
that NAFTA was designed to create. Within that, one of the pieces of the NAFTA
agreement, Chapter 16, was to list the professions that were covered. That
allowed TN visas (for professionals) to be issued. One of the problems has
been, of course, that the list was created in the 1990s and has not really been

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updated. So, it creates a great deal of ambiguity. Unfortunately, USMCA doesn’t
fundamentally change that ambiguity. The wording is slightly changed, but
in essence it (terms for TN visas) remains the same. They didn’t revise the
professions covered. What that means is that there is a greater role on the part
of border guards to assess to what extent applicants meet the requirements to
get TN visas at the border checkpoints.
I would argue that the most significant change is not USMCA, but it’s the
uncertainty introduced to the movement of people and services across the
U.S. border (Chart 4). In the context of the Trump presidency, I think there’s
even more license for CBP (U.S. Customs and Border Protection) officers to
increase scrutiny of cross-border movement, and my talking with immigration
lawyers and business leaders provides some degree of evidence that this is
impacting decisions.
CHART 4: THE TRUMP EFFECT
y The most significant change is not the USMCA. It is the uncertainty that the Trump presidency introduces to the movement of people and goods across US borders.
y In the context of the Trump Presidency, there is perhaps greater license for Customs and
Border Protection officers to increase scrutiny of this form of cross border movement.
y Immigration lawyers and business leaders provide anecdotal evidence of increased
border delays and the impact that this is having on business decisions.

SOURCE: Sutcliffe John B. (2019). “Forging a New Path in North American Trade and Immigration,” Forging a New Path in North American Trade and Immigration,
Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-sutcliffe.pdf

There has been an impact in Canada already. This reduction on the annual
cap on refugees (admitted into the U.S.) and other measures like the attempt
to remove temporary protected status for individuals from selected countries,
have been responsible for an increase in asylum claims in Canada. Looking at
the year before Trump entered office, (there were) 23,000 to 23,500 such claims,
increasing to over 50,000 in 2018.
The safe third country is the kind of agreement that Trump is now trying to
impose or to get applied in Central America. There is already a safe thirdcountry agreement in place for Canada and the U.S. Asylum seekers who
arrived at the border with the U.S. from Canada are denied that asylum or
the right to make that claim; they should have made the claim in Canada as a
safe country. Similarly, asylum seekers arriving at the Canadian border from
the U.S. are denied entry with the expectation that they should have claimed
asylum in the U.S.
There is one loophole in this agreement. The Canada–U.S. agreement in this
context only applies to the official ports of entry. Immigrants who arrive
between those official points of entry have their asylum claims heard. What
we’ve seen in the context of the Trump presidency is an increase in the number
of asylum seekers arriving in Canada between official ports of entry. (In the)

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first year of Trump (being) in office, 20,000-plus such asylum seekers arrived on
the Canadian border, compared with 2,000 the year before. This has put huge
pressure on the Canadian asylum processing system.
Some positive effects for Canada were mentioned yesterday. More Americans
are now seeking to move to Canada, and there are more international students.
In 2017, Trump’s first year, the number of international students coming to
Canadian universities went up 16 percent. In 2018, it was up 20 percent. In the
U.S., the number is down 6 percent.
Immigration is a politically charged issue in the U.S. and in Canada (Chart
5). However, the debate about immigration (in Canada) has not reached the
intensity observed in the U.S. Finally, as I said before, the biggest change
with USMCA is the uncertainty introduced to the decision-making processes
regarding immigration policy.
CHART 5: CONCLUSIONS
y Immigration is a politically-charged issue in the United States.
y It is possible to identify some of the same debates, issues and tensions surrounding
immigration in Canada.
y But immigration (and opposition to immigration) has not reached the same intensity in
Canada as it has in the US.
y With respect to immigration and migration, the biggest change of the Trump presidency
is not the negotiation of the USMCA but increased uncertainty and changes made as a
result of other immigration decisions.
SOURCE: Sutcliffe John B. (2019). “Forging a New Path in North American Trade and Immigration,” Forging a New Path in North American Trade and Immigration,
Federal Reserve Bank of Dallas, Dallas, TX. https://www.dallasfed.org/-/media/Documents/research/events/2019/19usmca-sutcliffe.pdf

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I

ABOUT THE CONTRIBUTORS

Curtis V. Anastasio
Chairman, GasLog Partners LP

Anastasio is the chairman of GasLog Partners LP, a subsidiary of GasLog Ltd. He
was appointed executive chairman in February 2014 and led the initial public
offering of the company in May 2014.
Anastasio serves on the board of Par Pacific Holdings Inc., where he serves as
chairman of the Audit Committee. He also serves on the board of The Chemours
Company, which spun off from DuPont in 2015, and as a director of the Federal
Reserve Bank of Dallas.
He previously served as president and chief executive officer of NuStar Energy
LP. Under his leadership, NuStar grew from a small business to a Fortune 500
company. Anastasio was also president and CEO of NuStar GP Holdings LLC.
Anastasio has held various positions in the upstream and downstream oil
and gas industry, which have included responsibility for supply, trading,
transportation, marketing, development and legal. He worked in the energy
industry in Canada for several years.
He received a BA from Cornell University and a JD from Harvard Law School.
After graduation, he practiced corporate law in New York City.

Eddy Bekkers
Research Economist, World Trade Organization

Bekkers is a research economist at the World Trade Organization, focusing on
quantitative trade modeling. Before that, he was a postdoctoral researcher at the
University of Bern and assistant professor at the University of Linz.
He conducts research on a wide range of topics in international trade such as
firm heterogeneity, gravity modeling, traded goods prices, trade wars, food price
pass-through, foreign affiliate sales and trade in services.
He has published in peer-reviewed journals such as the Economic Journal,
European Economic Review, Canadian Journal of Economics, Review of
International Economics, Economics Letters and World Economy.
Bekkers holds a PhD from Erasmus University Rotterdam.

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Jesus Cañas
Senior Business Economist, Federal Reserve Bank of Dallas

Cañas is a senior business economist at the Federal Reserve Bank of Dallas
analyzing regional economic growth. His research also focuses on issues
pertaining to the Mexican economy, the U.S.–Mexico border economy and crossborder manufacturing.
He has written articles for academic journals such as Annals of Regional Science
and Growth and Change and co-edited Ten Gallon Economy: Sizing up Economic
Growth in Texas. His publication “Texas Border Cities Illustrate Benefits and
Challenges of Trade” has been mentioned in the Wall Street Journal as well as in
all major Texas newspapers.
Cañas is a member of the Mission Foods Texas–Mexico Center Faculty Advisory
Board at Southern Methodist University, charged with the task of improving the
Texas–Mexico relationship in its economic, political, social and cultural aspects.
He is also an adjunct professor at Texas Christian University.
He holds a BA in economics and finance and an MS in economics from the
University of Texas at El Paso.

Anupam Chander
Professor of Law, Georgetown University

The author of the book, The Electronic Silk Road, Chander is an expert on the
global regulation of new technologies. He practiced law in New York and Hong
Kong.
He has been a visiting law professor at Yale, the University of Chicago, Stanford,
Cornell and Tsinghua. He previously served as director of the California
International Law Center and as Martin Luther King Jr. Professor of Law at the
University of California, Davis. A member of the American Law Institute, he has
also served on the Executive Council of the American Society of International
Law, where he co-founded the International Law and Technology Interest
Group. A recipient of Google Research Awards and an Andrew Mellon grant on
the topic of surveillance, he has served on International Center for Trade and
Sustainable Development/World Economic Forum expert groups on the digital
economy.
He also serves as an adjunct senior research scholar at Columbia University’s
School of International and Public Policy, a faculty advisor to Georgetown’s
Institute for Technology Law and Policy, and a faculty affiliate of Yale’s
Information Society Project.
Chander is a graduate of Harvard University and Yale Law School.

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Daniel Chiquiar
Director of Economic Research, Banco de México

Chiquiar is currently the director of economic research at Banco de México.
As chief economist of the central bank, he is the chief economic adviser to the
Board of Governors. Among other responsibilities, he directs the Economic
Research Division of the central bank, providing intellectual leadership and
direction to the efforts aimed at contributing to the understanding of policy
recommendations on current economic events and diverse issues. Much of the
research is used as the basis for advice to the Board of Governors and published
in top academic journals.
During his career, he has held professional appointments in both the private
and public sectors. At Grupo BIMSA, he was appointed vice president of
research, and later, director of economic policy in the Finance Ministry of
Mexico. In 2003, he joined Banco de México as an economic researcher,
advancing to his current position. He has also been an adjunct professor at
Instituto Tecnológico Autónomo de México (ITAM) and Centro de Investigación y
Docencia Económicas.
He graduated from ITAM and earned a PhD in economics from the University of
California San Diego.

Roberto Coronado
Senior Vice President in Charge and Senior Economist, Federal Reserve Bank
of Dallas, El Paso Branch

Coronado oversees the law enforcement functions and economic education
programs across all offices of the Eleventh Federal Reserve District.
He also has oversight for the El Paso Branch and the Bank’s economic research
and outreach functions in West Texas and southern New Mexico and recruits
branch board members. Coronado is also a senior economist and member of the
regional group of the Bank’s Research Department. In that capacity, he provides
regional input into the Dallas Fed’s monetary policy process and is responsible
for monitoring and tracking economic and business activity in West Texas and
southern New Mexico.
Coronado is a clinical assistant professor at the University of Texas at El Paso
where he teaches in the Executive MBA program.
He holds a BBA in accounting and economics and an MS in economics from the
University of Texas at El Paso and a PhD in economics from the University of
Houston.

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Alonso de Gortari
Assistant Professor, Dartmouth College

De Gortari recently joined Dartmouth College as an assistant professor of
economics following a one-year postdoctoral research fellowship at Princeton
University.
His research has been presented in the world’s foremost research universities
and policy institutions and has been quoted in media outlets such as The
Economist and The New York Times.
De Gortari holds a BA in economics from Instituto Tecnológico Autónomo de
México (ITAM), an MA in economics from Harvard University and an MA in
economic theory from ITAM. Alonso earned his PhD in economics from Harvard
University. His dissertation, titled “Essays on Globalization,” won the 2018 World
Trade Organization’s Best Essay Award.

Luisa del Rosal
Executive Director, Tower Center for Political Studies, Founding Executive
Director, Mission Foods Texas–Mexico Center, Southern Methodist University

Del Rosal serves as the executive director of the Tower Center for Political
Studies and founding executive director of the Mission Foods Texas–Mexico
Center at SMU.
She has strategic and operational responsibility over both centers, staff
oversight and board relations. Her leadership role ensures that all
programming, research and fundraising align with the mission of each center.
Previously at the SMU Cox School of Business, she oversaw strategy and
development of new global partners to engage in networking, leadership and
business development for the Latino Leadership Initiative.
Prior to SMU, she was the community relations manager for Education
is Freedom, a college access program. Previously, she was a manager of
international business development for the Dallas Regional Chamber and held
various positions with public relations firms. Through these positions, Luisa
developed expertise in a host of areas including developing strategic initiatives,
marketing, client services, fundraising and program administration.
She holds dual bachelor’s degrees in political science and sociology, as well as a
master’s in higher education policy and leadership from SMU.

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Marc Giannoni
Senior Vice President and Director of Research, Federal Reserve Bank of
Dallas

Giannoni is senior vice president and director of research at the Dallas Fed. He
joined the Bank in 2017.
Giannoni previously was a research economist and assistant vice president in
the macroeconomic and monetary studies function of the Federal Reserve Bank
of New York. He is a native of Switzerland and began his career as an economist
with the Swiss National Bank in Zurich in 1992.
He joined the New York Fed as an economist in 2000 before leaving to begin
an academic career at the Columbia University Graduate School of Business.
Giannoni rejoined the New York Fed in 2011 while continuing as an adjunct
professor of finance and economics at Columbia.
He holds BA and MA degrees in economics from the University of Geneva in
Switzerland and MA and PhD degrees in economics from Princeton University.

Ildefonso Guajardo Villarreal
Former Secretary of Economy of Mexico, Mexico’s USMCA Representative

For more than three decades, Guajardo has served in various public positions,
specializing in international trade, trade negotiations, economic competition,
industrial policy and regulatory reform.
He began his career as chief economist of the Brazil Section and associate
economist in the Fiscal Affairs Department at the International Monetary Fund.
Subsequently, he was appointed director of the North American Free Trade
Agreement office at the Mexico Embassy in Washington, D.C.
Throughout his career, he has held several senior management positions at
the federal and public levels including Secretary of Tourism, chief clerk of the
Ministry of Foreign Affairs and head of the Office of the Governor of Nuevo
León.
Guajardo served as Secretary of Economy of Mexico from 2012 to 2018, where
he coordinated the design and implementation of industrial policy, foreign
trade, support for small and medium enterprises, business regulations, mining,
regulatory reform, industrial property and consumer protection.
He earned a BA in economics from the Autonomous University of Nuevo León,
a master’s in economics from Arizona State University and pursued doctoral
studies in public finance and economics at the University of Pennsylvania.

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James F. Hollifield
Professor and Director, Tower Center at Southern Methodist University

Hollifield is Ora Nixon Arnold Chair in International Political Economy,
professor in the Department of Political Science, and director of the Tower
Center at Southern Methodist University.
Hollifield has served as an adviser to various governments in North and South
America, Europe, East Asia and the Middle East and Africa, as well as the
United Nations, the World Bank, the Inter-American Development Bank, the
Organization for Economic Cooperation and Development, the International
Labor Organization, the International Organization for Migration, the European
Union and other international organizations.
He is a member of the New York Council on Foreign Relations and a global
fellow at the Woodrow Wilson International Center in Washington, D.C.
He is a fellow at the Center for U.S.–Mexican Studies at the University
of California San Diego, the Institute for the Study of Labor (IZA) at the
University of Bonn and the Global Migration Centre at the Graduate Institute of
International and Development Studies in Geneva.
Hollifield earned a BA in politics and economics from Wake Forest College, a
DEA in applied economics from Sciences Po Grenoble and Paris and an MA and
a PhD in political science from Duke University.

Robert S. Kaplan
President and CEO, Federal Reserve Bank of Dallas

Kaplan has served as president and CEO of the Federal Reserve Bank of Dallas
since September 2015. He represents the Eleventh Federal Reserve District on
the Federal Open Market Committee in the formulation of U.S. monetary policy
and oversees the 1,200 employees of the Dallas Fed.
He was previously the Martin Marshall Professor of Management Practice and
a senior associate dean at Harvard Business School. Prior to joining Harvard in
2006, Kaplan was vice chairman of Goldman Sachs Group Inc. He is the author
of several books on leadership and management.
Kaplan serves as co-chairman of Project A.L.S. and co-chairman of the Draper
Richards Kaplan Foundation, a global venture philanthropy firm that invests in
developing nonprofit enterprises dedicated to addressing social issues. He is also
a board member of Harvard Medical School.
Kaplan holds a bachelor’s degree in business administration from the University
of Kansas and an MBA from Harvard Business School.

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Timothy J. Kehoe
Professor, University of Minnesota

Kehoe is the Distinguished McKnight University Professor in the Department of
Economics at the University of Minnesota, where he has been a professor since
1987. He is also an adviser at the Federal Reserve Bank of Minneapolis.
His career has included numerous visiting professorships at universities across
the globe, authoring more than 100 book chapters and academic articles and
supervising 50 PhD theses in economics. He has received numerous research
grants and awards and has been a fellow of the Econometric Society since 1991.
In 2008, he was made Doctor Honoris Causa by the Universidad de Vigo in Spain.
Kehoe has taught at Wesleyan University, the Massachusetts Institute of
Technology and the University of Cambridge in England. His research and
teaching focus on the theory and application of general equilibrium models.
He received his BA in economics and mathematics from Providence College and
his PhD from Yale University.

Anne Krueger
Senior Research Professor, Johns Hopkins University

Krueger is the senior research professor of international economics at the
School for Advanced International Studies, Johns Hopkins University. She is
also a senior fellow of the Center for International Development (of which
she was the founding director) and the Herald L. and Caroline Ritch Emeritus
Professor of Sciences and Humanities in the Economics Department at Stanford
University.
She was first deputy managing director of the International Monetary Fund
from 2001 to 2006. Prior to that, she taught at Stanford and Duke universities.
From 1982 to 1986, she was vice president of economics and research at the
World Bank. She had earlier been professor of economics at the University of
Minnesota.
She is a distinguished fellow and past president of the American Economic
Association, a senior research fellow of the National Bureau of Economic
Research, and a member of the National Academy of Sciences, the American
Academy of Arts and Sciences, the Econometric Society and the American
Philosophical Society.
She has published extensively on economic development, international trade
and finance and economic policy reform.
She holds a BA from Oberlin College and a PhD from the University of
Wisconsin.

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Enrique Marroquin
President, Hunt Mexico

Marroquin is president of Hunt Mexico. In this role, he is responsible for
expanding Hunt’s presence in Mexico by seeking development and investment
opportunities in the energy sector, and he currently oversees Hunt’s operations
in Mexico. He also leads all of Hunt’s development activities in the desert
Southwest region of the U.S.
Previously, Marroquin served as chief financial officer for Grupo Vanguardia in
northern Mexico. Before that, he served in different business and infrastructure
development roles at Grupo Cydsa in Monterrey, Mexico.
He is currently a member of the U.S. Section of the U.S.–Mexico Energy Business
Council, a member of the Wilson Center Mexico Institute Advisory Board and
a board member at the Southern Methodist University John Goodwin Tower
Center for Political Studies. He also works closely with the Mission Foods Texas–
Mexico Center at SMU.
Marroquin is a graduate of the Monterrey Institute of Technology with a BSc
in chemical and systems engineering. He also earned an MASc in chemical
engineering from the University of Waterloo and an MBA from the Edwin L. Cox
School of Business at SMU in Dallas.

Christine McDaniel
Senior Research Fellow, Mercatus Center, George Mason University

McDaniel is a senior research fellow at the Mercatus Center at George Mason
University. Her research focuses on international trade, globalization and
intellectual property rights.
McDaniel previously worked at Sidley Austin, LLP, a global law firm, where she
was a senior economist. She has held several positions in the U.S. government,
including deputy assistant secretary at the Treasury Department and senior
trade economist in the White House Council of Economic Advisers. She has
worked in the economic offices of the U.S. Department of Commerce, U.S. Trade
Representative and U.S. International Trade Commission.
McDaniel spent three years in Australia as deputy chief economist in Australia’s
patent office. She has published in the areas of international trade, intellectual
property and empirical trade analysis and modeling.
She earned a BA in economics and Japanese studies from the University of
Illinois at Urbana–Champaign and holds a PhD in economics from the University
of Colorado.

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Joshua Meltzer
Senior Fellow, Brookings Institution

Meltzer is a senior fellow in the Global Economy and Development program at
the Brookings Institution. At Brookings, he works on international trade law and
policy issues with a focus on the World Trade Organization and large free trade
agreements such as the Trans-Pacific Partnership Agreement.
Meltzer has testified on trade issues before the U.S. Congress, the U.S.
International Trade Commission and the European Parliament. He teaches
digital trade law at Melbourne University Law School and has taught
international trade law as an adjunct professor at Georgetown University Law
School and Johns Hopkins School for Advanced International Studies.
Prior to joining Brookings, he was posted as a diplomat at the Australian
Embassy in Washington, D.C., where he was responsible for trade, climate and
energy issues; prior to that, he was a trade negotiator in Australia’s Department
of Foreign Affairs and Trade.
Meltzer holds law and commerce degrees from Monash University in
Melbourne, Australia, and an SJD and LLM from the University of Michigan Law
School in Ann Arbor.

Pedro Niembro
Senior Director, Monarch Global Strategies

Niembro leads the energy practice at Monarch Global Strategies (formerly
ManattJones Global Strategies). Based in Mexico City, he has extensive public
and private sector experience across a range of industries, including energy,
infrastructure, tourism and agribusiness. Through Monarch’s “business
diplomacy” approach, he helps his clients capitalize on the opportunities created
by Mexico’s liberalization of the energy sector.
Before joining Monarch, he served in leadership roles at the ministries of
tourism (SECTUR) and energy (SENER), where, at the latter, he served as a
liaison with the Office of the President of Mexico, the state-owned companies
Pemex and CFE, and the legislative branch and state governments, lobbying
for passage of the 2008 energy reform and in support of the National Energy
Strategy. Niembro has also served as country manager in Mexico for a
renewable energy company where he built a +1 GW portfolio in solar- and windpower projects.
Niembro earned a bachelor’s degree in business administration and
management and an MBA from the Universidad Anáhuac del Sur, A.C.

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Pia Orrenius
Vice President and Senior Economist, Federal Reserve Bank of Dallas

Orrenius is a labor economist working on regional economic growth and
demographic change. She manages the regional and microeconomics group
in the Research Department at the Dallas Fed and is executive editor of the
quarterly publication Southwest Economy. She co-edited Ten-Gallon Economy:
Sizing Up Economic Growth in Texas.
Her academic research focuses on the labor market impacts of immigration,
unauthorized immigration and U.S. immigration policy. She is co-author of the
book Beside the Golden Door: U.S. Immigration Reform in a New Era
of Globalization. In 2004–05, Orrenius was senior economist on the Council of
Economic Advisers in Washington, advising the Bush administration on labor,
health and immigration issues.
Orrenius is a research fellow at Southern Methodist University’s Tower Center
for Political Studies and Mission Foods Texas–Mexico Center, as well as at
the Institute of Labor Economics (IZA). She is also an adjunct scholar at the
American Enterprise Institute and adjunct professor at Baylor University.
Orrenius holds bachelor’s degrees in economics and Spanish from the
University of Illinois at Urbana–Champaign and a PhD in economics from the
University of California, Los Angeles.

Jeffrey S. Passel
Senior Demographer, Pew Research Center

Passel is a senior demographer at the Pew Research Center in Washington,
D.C., an organization he joined in January 2005. His research interests include
the demography of Hispanics and immigrants, integration of immigrants
into American society and worldwide immigration trends. He has developed
measures of immigration flows, especially estimates of the unauthorized
immigrant population and components of change that are widely cited by all
sides in debates over immigration and its effects. He also works on generational
dynamics, population projections, defining racial/ethnic groups and measuring
census undercount. Previous positions include principal research associate at
the Urban Institute and various positions at the U.S. Census Bureau.
He has served on committees for the Population Association of America and
panels for the National Academy of Sciences and the Social Security Advisory
Board. He is a fellow of the American Association for the Advancement
of Science and the American Statistical Association. In 2004, American
Demographics magazine selected him as a “demographic diamond,” one of the
five demographers/social scientists most representative of influential work in
the last 25 years.

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Passel holds a BS from the Massachusetts Institute of Technology, an MA from
the University of Texas and a PhD from Johns Hopkins University.

Raymond Robertson
Professor and Director, Mosbacher Institute for Trade, Economics and Public
Service, Texas A&M University

Robertson is director of the Mosbacher Institute for Trade, Economics and
Public Policy at Texas A&M University. He is also a professor and holder of the
Helen and Roy Ryu Chair in Economics and Government in the Department of
International Affairs at the Bush School of Government and Public Service. He
is a research fellow at the Institute for the Study of Labor in Bonn, Germany,
and a senior research fellow at the Mission Foods Texas–Mexico Center. He was
named a 2018 Presidential Impact Fellow by Texas A&M University.
Widely published in the field of labor economics and international economics,
Robertson previously chaired the U.S. Department of Labor’s National Advisory
Committee for Labor Provisions of the U.S. Free Trade Agreements and served
on both the State Department’s Advisory Committee on International Economic
Policy and the Center for Global Development’s advisory board.
Robertson earned a BA in political science and economics from Trinity
University in San Antonio, Texas, and an MS and a PhD in economics from the
University of Texas.

Matthew Rooney
Managing Director, Bush Institute–Southern Methodist University Economic
Growth Initiative, George W. Bush Institute

Rooney joined the Bush Center in June 2015 following a career as a foreign
service officer with the U.S. Department of State. At postings in Washington and
abroad, he focused on advocating market-driven solutions to economic policy
challenges in both industrialized and developing countries, and on protecting
the interests of U.S. companies abroad.
In Washington, Rooney was on loan to the U.S. Chamber of Commerce to create
a high-level private sector advisory body for the Summits of the Americas,
working closely with the U.S. private sector and with companies and business
associations from throughout the Americas to negotiate an agenda to promote
economic integration in the region. Previously, he was Deputy Assistant
Secretary responsible for relations with Canada and Mexico and for regional
economic policy.
Abroad, Rooney was Consul General in Munich, a consulate providing a full
range of consular and export promotion services. As Counselor for Economic
and Commercial Affairs at the U.S. Embassy in San Salvador, El Salvador, he
laid the groundwork for free trade negotiations between the United States and
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the five countries of Central America and promoted market-based reforms for
electrical power.
Rooney studied economics, German and French at the University of Texas and
received his master’s in international management at the University of Texas at
Dallas.

Michael Sposi
Assistant Professor, Southern Methodist University

Sposi is an assistant professor of economics at Southern Methodist University.
His research explores the role of international trade in explaining real exchange
rates and relative prices, the links between international trade and the process
of economic development, the global effects of demographic change, the
dynamics of external imbalances, and the structure of production through
input–output linkages. His work has been published in peer-reviewed academic
journals and Federal Reserve System publications.
Prior to joining SMU, Sposi was an economist at the Federal Reserve Bank
of Dallas and provided economic analysis and policy briefings to the Bank’s
president in preparation for Federal Open Market Committee meetings.
Sposi earned a BA in economics and operations research from Central
Connecticut State University, an MS in economics from the University of North
Carolina at Charlotte and a PhD in economics from the University of Iowa.

John B. Sutcliffe
Associate Professor and Department Head, Political Science, University of
Windsor

Sutcliffe is head of the Department of Political Science at the University of
Windsor in Ontario, Canada. He has worked at the university since 2000.
Sutcliffe’s current research focuses on the Canada–U.S. border. One element of
this research is the reform of the Detroit River crossing. This ongoing reform of
the border crossing draws attention to the reality that the Canada–U.S. border
is influenced by a diversity of actors, policy sectors and functions. This was the
subject of his book, authored with William Anderson, The Canada-US Border in
the 21st Century: Trade, Immigration and Security in the Age of Trump.
Sutcliffe’s earlier research focused on the place and importance of local
government within the European Union and in Canada, both as single case
studies and in comparative perspective.
Sutcliffe earned a PhD from the University of Cambridge.

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Kei-Mu Yi
Senior Vice President, Federal Reserve Bank of Dallas

Yi is senior vice president in the Research Department at the Federal Reserve
Bank of Dallas. He is on leave from the University of Houston, where he is
the M.D. Anderson Professor of Economics. He is also a research associate
for the National Bureau of Economic Research in its International Trade and
Investment, and International Finance and Macroeconomics programs.
His current research involves the linkages between international trade and
structural change, long-run growth, and global value chains.
Prior to coming to Houston, Yi held positions with the Federal Reserve Banks of
New York, Philadelphia and Minneapolis. In Philadelphia, he was the head of
the macroeconomics section, and in Minneapolis, he was director of research
and, subsequently, special policy adviser to the president.
He has also held positions with Rice University, the University of Iowa, the
University of Virginia and the Wharton School at the University of Pennsylvania,
as well as adjunct positions at Columbia University and New York University.
He received a PhD in economics from the University of Chicago.

Mine K. Yücel
Senior Vice President and Senior Research Advisor, Federal Reserve Bank of
Dallas

Yücel is senior vice president and senior research advisor at the Dallas Fed.
She joined the Bank in 1989 and has served as director of research, head of the
micro/regional/energy group and director of publications. She is an expert on
regional and energy issues and has published numerous articles on energy and
regional growth.
She is president of the National Association for Business Economics and
serves on the University of Texas at Dallas’ Energy Advisory Council and the
Global Interdependence Center Advisory Council. She was president of the
International Association of Energy Economics in 2011 and the United States
Association of Energy Economics in 2005.
Yücel has BS and MS degrees in mathematics from Bogazici University in
Istanbul, Turkey, and a PhD in economics from Rice University in Houston.

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Carlos E. Zarazaga
Senior Research Economist and Advisor, Federal Reserve Bank of Dallas

Zarazaga is a senior research economist and advisor at the Federal Reserve
Bank of Dallas.
In this position, Zarazaga regularly briefs the Dallas Fed president and board
of directors about economic conditions in the U.S. and abroad. In addition to
his policy-oriented responsibilities, Zarazaga carries out scholarly research on
topics such as business cycles and economic crises, inflation outcomes under
alternative monetary and fiscal policy regimes, fiscal policy and sovereign debt
defaults, and growth and economic development.
He participates in academic and policymaking forums throughout the world
and publishes his research in books, Dallas Fed publications and peer-reviewed
journals.
Zarazaga worked at the Central Bank of Argentina as an economist in the Public
Finance Department and, while on leave from that institution, as an economic
advisor for the Fiscal Affairs Commission of Argentina’s Senate. He joined the
Federal Reserve System in 1992 at the Federal Reserve Bank of Philadelphia
before moving to the Dallas Fed in 1994.
He holds a licenciatura in economics from Universidad Nacional de Buenos
Aires, Argentina, and a PhD in economics from the University of Minnesota.

Madeline Zavodny
Professor, University of North Florida

Zavodny, a professor of economics at the University of North Florida, is also a
research fellow at the Institute of Labor Economics (IZA), a fellow at the Global
Labor Organization and an adjunct scholar at the American Enterprise Institute.
Much of her research focuses on economic issues related to immigration. She
is co-author of Beside the Golden Door: U.S. Immigration Reform in a New Era of
Globalization and The Economics of Immigration. Her research on immigration
has also been published in the Journal of Labor Economics, Industrial and Labor
Relations Review, Journal of Policy Analysis and Management and Demography,
among others.
Before joining UNF, she was a professor of economics at Agnes Scott College and
Occidental College and an economist with the Federal Reserve Banks of Atlanta
and Dallas.
She holds a BA in economics from Claremont McKenna College and a PhD in
economics from the Massachusetts Institute of Technology.

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Notes

The U.S., Mexico and Canada have benefited from over two decades
of openness to trade, migration and investment through the North
American Free Trade Agreement (NAFTA). Businesses in these nations
utilize North America’s world-class manufacturing platform to be
more efficient and increase their competitiveness worldwide. In turn,
consumers have enjoyed lower prices and greater product variety. This
conference explored what the future may bring to this deep economic
relationship and the challenges and opportunities presented by the
proposed United States–Mexico–Canada Agreement (USMCA).

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