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FEDERAL RESERVE BANK OF DALLAS
January 1990
•
•
cononnc eVlew
conOffilC
,
u.s. Trade Protection:
Effects
the Industrial
E./Jects on tbe
and Regional Composition
ofEmployment
ojBmplo
yment
Linda C Hunter
Linda
Mexican
Maquiladora
Maquiladora
Growth:
Growtb:
Does It Cost U.S.
u.s. Jobs?
jobs?
William C
C. Gruben
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Economic Review
_n
Federal Reserve Bank
of Dallas
Rob, lt H. Boykin
Ot..t~0IIUt
WiIli.1n H. W,II.e.
_.--
'"' l'all.- rNJ
o-tQoor...,OII.-
H.my RO$.nbh,m
s-..vnh..-n
Geraldvn""'",
P. O'Driscoll.
__ Jr.
~O":""'d......."
W. Michltl
\In""...
COl
1IlII
Sleptltn P. A. Srown
As, .. ,,,,, Vul'r.,..", filii
SMO'((_"
EcanDmi...
Na/iOflaI iPld International
John K Hill
Roben T Clal,
Evan F Koemg
Cari! S town
Kennetl'! M EfI'\efV
JMeJtI H Haslag
Lnda C Hunter
Mark A Wynne
RegIMaI ar.1 Energy
Robefl W GillTlef
Wilham C Gruben
M.ne K Yucel
Kerth R PtlJllips
Lori l Taylor
Fiona 0 Sigalia
Edilol'1
Rhonda Hams
Ciana W Palmer
Virgima M Rogers
Janis P Simmons
The fwnomIC l/fvI~w " Pl/tlI,sI'Ied Il¥ thI!I
Feder.' Reserw BanII 0/ Dallas The __ , !x_
Pftised Ill! those 01 thI!I ilUtI\i)'s rd do rool
necessarIly refltcllM positIons O/!hI ~I
~ Sri. of OaUu or !he Feoer .. Re_
S.~
Sull$tl'lplOOlll are _" . . free 01 d'\II'gI
Please wnd f'!qUtS1i tor
s.~ IItw;l II'Ul'pIt<opy iUbKs'P\tO"IS. !:rid< _
• ...:I .c!C/'I¥Ige$IO thll'\lbhc: All,,,. ~
fD'lliIeseM! 8n; 01 ilIIltn. StallOfl K. (W.
1M. T_75222.12141651.o21B
"",ells ......, Dt repr,1'I\td en thI!I an:!,I00n
Nllhe S(U(;t "trtd,ted fftd the fIese¥tfI 0..
PIInma'IIll ~odecI ...,\II. COIl\' olIN jIllbI.u
liOn eon\MI'flII thI rep'.."ed /III1eN!
It,"
I
Contents
Page 1
us. 7'rade Protection: Effects
on the Industrial and
Regional Composition of
Employment
linda C. Hunter
ProfX>nents of trade protection argue that trade restraints
bolster ovcr.all employment. In an economy near full employmenl, such as lhal in the Unil(.'(i States, trade protection will
have linll.: o r no effect on the level of employment in the long
run. Trade protection has a sign ificant imp'let. however, on
the compositioll of employment. Hunter measures the effects
of trade rcstrJ.ints on the distribution of employment across
industries and regions of the United States. She examines
three cases of U.S. mack protection: lextiles and apparel , .~teel.
and automobiles.
Hunter find.. th:1l these ''''de restr.lims hcnef'it only a
few industries while harming many others. The gains in
employment accrue to the protcctcd sector and its primary
suppliers, and the losses an.: spread across all other industries.
The regional distribution of the g.1ins and losses from trade
protection has a similar pattern Few states gain employment,
bur many states lose employment Funhennore, all the win·
ning states are loe.ned in the East, while the Io.'iing states are
concemrated in the West and ~Iid~'esl.
Page ]5
Mexican
Maquiladora
Growth:
Does It Cost Us. jobs?
William C. Gruben
The ""lexican maqu.iladora sector constitutes a large and
growing group of forei gn-owned pl::tnts that manufacture
products pri marily for export 10 the United States. The
emergence of maqu iladorJ,s coincided with liberalized eus·
toms laws in bOlh Mexico and the Un ited States.
The rise of the Mcxic>lll maquilador.l, or in·lxmd plant,
seClor has heen as conlroversb l as it has been phenomenal.
U.S. labor groups complain that the maquilador..ls take johs
from their memlx:rs. Proponents of the maquiladoras argue
that Ihose jobs would go 10 olher low-wage countries if they
did not go to Mexico. Gruhen shows thai the maquilador.l
sector's ri~ was part o f .. process of globalization of
manufacturing activity that began in Asia in the 1960s. He
also presents Ihe resuhs of indirect stalistic.lliests of the
anli·maquiladora and pro-maquiladora groups' principal
arguments. The tests suggest that variables representing e'.leh
of the two arguments have about equal explanatory power.
This suggests that both arguments arc about (''qually correct.
linda C. Hunter
Economist
Federal Reserve Bank ot Dallas
US. Trade Protection: Effects on the Industrial
and Regional Composition of Employment
he dr:l111alit: innl':t.'~ in Ihl' U.S. tl~lde deficit
in !"IX't'Il! y ....:lr... h:t., tu .... l.:d prolectioni~t sentilllL'nt , I'rOl)()lk'mS ~)f tl~ld .... pn)l ....l·tion claim Ihat
A111L'ricltb :11'.... ]o.',ing m:l!lubnuring jobs to fordgn cOllntri ...... and th:!1 t1'adL' fL·~tr:.lints are nL'e{\t:d
to hobl .... r .... mplo}'11lL·n1. Ahhmlgh t!:lde protel'tiOll
gener:.llly inLTt':be~ .... l11p!o}'IllL·nt in thc prolcl'wd
indu .~lrr. it tl'nd.'> to 1'l·,II.I('\: \,:mp]ormt'nt in other
Indu'lrit''>. Ili}lhl'r pril'L':'> I()!' impol1:'> :lnd their
dOll1l'~tic '>uh'>tituh_:.' :l(h·I..'1':-.dr :lffL'<:t indll:-'lrit·.~
Ih:11 1I......' thl''>l' )-:ood:-. :lS :l1l IllpUI in Iht:ir pnxll1l..'tlon In the long nm. \\ ,Lgl''> will riM' or f:1I1 in fl"
'>por1 ....... to :In incn':t:-L' O f dcnl':t~l' 111 labor dl'111:Lnd clU~d hy Ir:.ldl' h;Lrrtl'r:-. . ThLi chang\:' in
\\:l/-tt:'~ \\ III Cn.'>llrl' Ihal lall()f <.!t'm:lnd i.~ in lint:'
with lalx)r ~llppl)'. Con:-L'<ll1enily, the nt:'t dfl'cl of
Ir:.ltk, re,tr:linh on o\'l..'r:tll l'll1ployrnt:'1lI is und ....ar
and b likely tn h .... -:m:1II.
Ti..lde I'L·'1r:1il1". hO\\·L·\·er. h:1\'l' a signilk:l11t
dfl'ct on Ih .... indu'lri:t 1 l(JIlI/XI.,·i/iOIl of cmployIllL'l1t FU11herlllOrL·. ht..T:1U:,>1..' indiddllal indllstri .... s
hire 1110re \\·01'1.:1;.'1' . . . i n .'>Olll\.: .'>Iatc. . . Ih:1n in others.
trade h:u'!'It'I':,> ;Ilso 11;I\l':1 . . . ignil'icanl dlt::cl on th ....
rl;.'gional Ul1111){)sill(U1 ()! ClI1pl(lymt'1l1 This :l1'Iid ....
11le:1MlrL'S till;.' clrl;.'{'\' or Ir:ldt:' prolection on the
dhlril)ulion of l·lllp!()y111 .... nl :lnoss indll .~lrit.:.'> :lnd
rq.(ion:-. in thl;.' LlnilL'd :-'1:llL·.'>. I l..'x:lminc thrcc t·;I.~L·S
of lr:ldt:: protcctlon . I(::-:till;.',-: and :lpp:trcL :'>tL'CI. and
:llllornohilt'~ ThL'Y :lrL' :ullon).,: Ihl;.' bf.!~c .. t industnt':'> in tht' l lnitl'd St:Ltl" to I'L'(.·\:.'i,·1;.' prot(.'(.'ll0n.
The rL·,ult'> or Ihl'> '>lLldy indic;lI(.· Ih:1I l ' S
Ir:.Lde prottX'lion bcnl'fit, only a rt'\\' industril':'>
whik' hannin1-! many other'> Tlrc !:pin~ m L'mpl(l~'
lllt'nt :tCl'nre 10 the pro(L'l'll'd .'>t'(·lor and iL-. primary .'>upplit'r:'> The lo....'e'>. on the Olht::r hand. arL'
-:pread :ICro'i:-' man} indl"trics. l\I;muf:lctl1rin).,:
T
Econ o mic R('V iC">o' -J a nu ary 1990
industries are hoth wil)nl;.'rS and losers Thlls. trJde
h:HTio.:rs ha\'e not ht'en Ml('('e.~sful in alleviating the
lOiS of manufacturing johs in lhc Uni!l'd States,
The rq:ioll:l] dLitrihlllion of lhe gains :1I1(]
lo:.:-.cs fr0111 ti..K!t: protection has :.l similar pal1l'rn.
Few :.ta1C:. g:lin employment. \\ hi Ie many SI:lt\.:S
10:'l' cmp]oymcn1. FUl'thermorc, the winning states
ar<.· only in the E'1SI The WI;.':uest winners af(;
olllt't:ntr:.l\ed in Ihe soulh ....:t.'>tt::f1l portion of the
United Sl3les. The lo..........·s in employment. on the
oll1L'r hand. :lrc widl..':,>pre:ld All " tates Wt'M of the
tllis.'iis.~ ippi Ri\'l'r. 111 addition to ..ome easlt'm
statt'.~. JO'>C emploYl11cnt
Th e model
Tradc reMr..tinis inae'1SC cmptoymenl in Ihe
protectL>(1 indu:-'lry hy r:lising the price or limiting
thc :,>upply of COlllpcting irn l){med good.~ Industries th:1I :.upply to 11ll' protccted ., ector also gain
elllplo)'1l1t'nt Indust rics Ih;lt purchase the prot ....cted product ai an input f:II.:c higher costs.
T hcsc higher cO.'>ts arc Ihcn passed on to the consumcr and reduct' S:tiCi. Thus. cmployment
declines in tht'.~t' relaled indU... trics.
Because tr:lde rcstr.linl." callse both fXl.~ilive
and nt::gativc clllploymL'nt I;.'fft:l't:-. on 1he t::conomy. Ihe net efft:'ct of protcction 011 aggrcgalL'
labor demand is unl'lear Tr..tde protection may
I would iIIIe /0 /hanI( SlcD/lCt> P A Brown. JoM K HiI. and
LOfl L Taylot lot he/pMcommcnrsWlIhouI tmphc8111lf} them
If1 my conc.\lslQ'lS / am also gralclti /0 OAnn M Ozment
ancJ Paut 5 DaIt>et1h lot t/'IeII research aSS'$l8fl(:'e
lead to t.·ither an excess demand for or :In excess
supply of laiXlr. In :m economy with Oexible
wages and a functioning J:.hor market, wages will
adju.st to ensure that the t!conomy remains full~'
employed. In the long mn, trade protection
simply alters the composition of employment
I estimate tht! gains and losses in employment for dHTt!rent industries by u:.ing an inpuloutpul mood of Ihe United States. A study by
Hun);llIer. Berliner. ;md Ellion (986) prm'ides
estirn;l\es of the initial increase in domestic production :Ind price of the protected commodity
caused by tr.Jdt! reStraints thai were in placc in
1984. 1 I ;lpply the increase in domestic production
estim:lIes to the input-olllPllt model to examine
the gains in employment in industric::s su pplying
to the protccted sector. J also apply Ihe increase
in domestic price estimates to the input-output
model. in a d ifferent manner, to estimate the
losses in employment in industries usi ng the protectcd product. Thc Append ix describes this
procwurt! in dctai!.
Most input-output modds Ihat are used to
examine the cmploymt!nt effects of lrade proteclion as.... ume a ~rft."Ctly elastic labor supply.~ In
othcr word.. , if prolrt:live rTlC'.Jsures calise the
qu:mtity of bho r dt!manded 10 increase or decrease. the quantity of boor supplied will meet
the new dcmand for labor. This is a reasonable
a:.sumpt ion for ;J country that participates in a
hroad lahor market or suffers from a chronic surplus of lalxlr. 'J1tis is not a reasonable assumption,
, AilllOugl1 COSt and benefit eStlmales of /fade prDlecl1()(l
vary. the Hulbaucr·Berlmel·Elliott study provides one sel of
CDflslstent eSlimales lor all thr66cases m rile sludyh6£e For
Dinar cost ana bene/I' eSllmates oillaoo prolftCl/Ofl. see
CoHynsandOJrntway( 1987). Cr8fldaN( 1987). H oel<ok( 1985).
and Talf and Morl<re (1984)
.' '·:Of e"a~s 01 such studieS.
see
Detuau (1987) and
Mende.l (1986)
3 S/riclly speakmg. wage IIcXJOl~ty 6flSures lull employment.
ncx cons/ant emp.Io)om6nt
Labof supply IlOWevcr lends /0
De UflfestJ(JnSrVe /0 wage changes. espec.ally BITIOfIQ adult
men (Perleaval '986) Thus. /he COt?StBnt-employment as·
W'IlPtJOn nos (}Illy 1$ a clear wnprovemont over r/la assumption 01 perf«/Iy BlaSllc labOr supply but also IS relatively
IJCCUfllte
z
however, fOT:L country like the Unitl..'(! Slates.
Lahor is scarce and in limited supply in the United
States becau:.e Ihe country does not pennit a free
flow of labor across its borders and wages arc
sufficit!ntly flexible to :Ichicve vinu:llly full employment. Accordingly, it is more appropriate to
view the nalion:ll Iaoor supply as fuw/.
ikcause I assume the national labor supply
is fixed, aggregate employment is not affected by
tr.lde rcstr:.lims. To e nsure thai aggregate employmt!nI remains constant. any net gains (losses)
gener.:l\ed by the input-output modd are subtr.lcted from (added to) the individua l industries
in proportion to their shares of tOtal employmenl.
This procedure is intended to approxim:llt.' thc
employme nt effects of equilibr.lti ng wage adjustments, assuming thaI industries respond in a
simila r m:Lnner to changing wages.'
Protection in textiles and apparel
The history of protection in the lextile and
apparel indust!), is long and complic;lIed. Chart 1
lists the tr.Jde agreements negotiated O\'eT the past
32 years and illustrates how the level of protection
has risen. In a 1957 agreement. Japan VOluntari ly
:lgreed to restrict ilS exports of fabri{:s to the
United States. Accord ingly, imports from ()(her
countries-including Hong Kong, Portugal, Egypt.
and India-<Iuickly replaced the Japanese goods.
In 1%1, lhe United States reached a one-year
agreement with other textilc cxponers, generally
called the Short-Term Arrangement on Colton
Textiles. Il.s SlIccessor, the Long-Tt!nn Arr.Jngement on Cotton Textiles, broadened product cover.lge a nd extended from 1962 through 1973.
Increased prod uction of man-m:lde fibers
induced the United States to seck cv<.:n wider
product covcmg<.: In 1974, the United Sta tes
reached an expanded agreement w ith its tr.Jdi ng
partners, known as the Multiflher Arrangement ,
that provided a n international fr.Jmework fo r negoti;lIing bilater.J 1 agreements. The Multifiber Arrangement has since been renewed three times,
each time covering a wider scope
products and
countries. The current agreement. which will extend through 1991 , includes 54 developed and
developing countries.
nle tariff or tariff equivalent ('".lte for imports
of textiles and apparel rose from 20 percent in
or
Fakral RCM:rYC Bank of Dallas
CharI '
Text iles and Apparel :
History of U_S _Trade Protection
Tanll or t3n" IIqUlVaient rate
Peftenl
35,---------------------------,
"r---------=,.-;=
MfA
III
Mf A
IV
I
I
I
I
STA
" I-----j---------f--fVA A
LTA
" fr'-"--rr---=-"---t-+" H---H----------f--f-
,._.___
-
"
;
-
NOTE If a quo:a ,s ,mposed the t3,,11 lIqu,valent rate 's the tanll rate
that \oY(Iuid have led 10 the $lime leyel of Imports as Ihe quota
VRA _ Voluntary AKlra,nt Agreement
STA _ Short-Term Al'fangement
LTA" long-Teo-m A)'fa'lQemefll
M FA. MuM'DeI" Amiltlgemef11 Phase 1 II. III. 01 IV
SOURCE OF PA IMARY OATA Hulbauer, Berhnel. and Eloott (t9661.
19;; to _~ pc:rCent hy 19H2 ' th th~ level of prott."Ctiun iOI..1"e':I"'-.'d _ the' ("():.ts and th~ I>c"ndlt:. of
thl.'~t: tradl.' :lgrcl.'lllcnl:. incrcasl.-'{l ;t'i wtll. 111l'
tr:ldl;' rcslraims 111 cffl-"Ct 10 198-, Il;'d 10 a 2-ipt:r(l-nt riSt.' in thl;' dOll1l;'stic priel- of tcxtll~~ and
appard :lho\'1.' il.~ frel;'-Ir:ldc Il;'vd.
Ilighl.'r import pricl.'s for textiles and arrx1rc1
I:nabll:d AmeriC;ln rrodllcl:r:. to in(Tl::lst: tht:ir
d01111.'.'itic markd .~harc . U.S production of tt:xtill;'s
im:n::t:'l.'d 24 pern:1lI a~ a result of proll-ction in
place in 19H4. whik apparel produ<:lion rose 3H
percent. Consequl::ntly. l'11lploymem in the tl;:xtik
:llld :lppard industl)' I.'xpamkd. Industril;s Ihal
supply to the tl'xtiit.: and appan.:1 indu.·"ry abo
in<:r(;:ast:d thl.'ir production :10<1 l,tllploY!11t'nt. On
thc other hand, thc ri ...c in dotllc.. tic Il;'xlik priccs
r.li"'cd (.·OS!.~ fOf fiftll'i tll:.t 1l~1.' Il'xtiks a'i an input.
i\'i thesl- htg,ht:f costs \\·I.'fl' passed on to tht:
con"Ull1er, :.:tlcs cll.'l..'lincd and firm~ rl.'ducl.'d
pnxluction
T:thl~ 1 IiStci thc pcrt·cntage l·h:1O/-.tl.'s in cmployment of 30 u.s_indllstrie .. e.tlt."'-.,<I by tr:1de
R':.tr:lint~ in textiles and apparel. 1111:sc changc:.
are from the input-output :m:lly'ib d~s('rihcd in
F.cono mic: Ro:vicw-J a nuary 1990
the previou'i scl.:tion 1\:. t:xpcl.:tcd. the dear winner from tr:lCit.: rcstr:linl'i in tcxtilcs and apparel is
the pro!l..'I.."tl'd indllst!)' itself. Employmcnt in the
tl.'xtile :1Od :tpr:lfel indl1.~try int:n::l."'-.'d I; percent
a'i a fl.'''UIt of thl.' proll;'cti\'(.' mc:tSllrl'~ that wcrc in
place in 19H<1. i:x x-:luSI;' textiles arc an input in
appard production. tr:ldc barrier:. in texlilt:$
dampen thc I.'ll1ployment gain~ from prolt."Ction in
thc :Ipp:trd indu."try :llonl;'.
111e nl'xt largest winncr i'i the cht:mical and
allil.'d produt'I'i indus!!)'. 111h tndustry increascd
ib l'lllploymeni mon: than 2 percent. Becausc
chcmkals an: uSt-d 10 pnxiuce .~y nthcti c fabrics,
they ;tI"l.' an irnrort:lm in I'll! for the tl.'xtill: and
:lppard industry, AI.~() included in thi:o. catcgory
al'l.' the dyes used to color fabrics. TIll.' other four
induslrks gaining employment as a I"e$uit of trade
rcs(r:.ints in tcxtilcs :111(1 appard gained a very
sm;tll pcrct:mage of their 10t:.1 employment.
Many indu . . tril;' ... lost employment as a result
of tht: ri..e 111 dome~tk {cxlill.' price.~ _ Because
fahrics arc u...cd in Ihl' production of fumi lurl;'_ Ihe
furniturl' :md fhaun.:s imht ..lry 10....1 almost 2 percl:nl of it~ employment Both thl' motor \'ehidcs
:tnd l'quirme!1t industry and Ihl.' Il!atller and
le:Hhl'r product:. indll:.lry lo.'it :llx)tl\ 1 percenl of
their l'mplo}'ll1t:nt. Indudt.:O in kalher ~no le~ther
pnxll1U" arc lu~age and fOtx\\('ar. both of which
u:.c f:thric:. Tilt: Iu.s.'i In ioh~ in mOlar vehicles and
t:quip1lll:nt OO.:UfS 1X:l"au.'>C tcxtiit.'~ an: u~d to
GlrfX't :l1ld l1phobter :nllor1)ohilcs
M:my of thl- industril;':' sufft:ring small employment lossc.~ d id so :IS :1 fl;'Sttit of wage adjustments. As [ mentioned (.'artier. thi ... :tnalysis
assumes that tOlal U_S. l'mployment remains constant. I3CGIU....C !cxtik's and apparci are inputs in
rcbtivciy fl.'w industril's. protection in this industry initially C1U.'iI;'S atl l,:Xl'ess dem:tncl for lahor. As
wagl'.'i rise in re .... ponse to the eXl"CSS demand for
blxJr. many industrit:s not rdated to textiles and
appard de<Tl;';tse Iheir employment.
AI'oj) listed in Table I are the absolutl;'
changcs in I.'mployment G1u'ied hy trade restr.lints
• 7hfI UN' "
Of
tIV'" ~ f liJle f ClIYS to e.tft9r the actual
la,," ralOOf rf aqvora was lfnlJ05ed. tfIB equwalent tari'f rale
/hal would have led to
'''''''
/flO
same level allffl/)OflS as me
,
Table 1
Employment Effects of U.S. Trade Protection
in Textiles and Apparel in 1984
Change In employment
Percent
Absolute
Industry
TextIle mill products and apparel
ChemIcals and allied products
Electric, gas, and sanitary services
MIning
Rubber and mIscellaneous plastIcs products
Paper and allied products
Agnculture, forestry , and hshmg
Petroleum and coal products
Transportation
Wholesale and retail 1rade
CommunicatIon
MachInery, except electncal
Finance, insurance, and real estate
Stone, clay. and glass products
Govemment
Tobacco manufactures
Food and kindred products
Services
Prin!mg and publishing
Electnc and electronIC equipment
Lumber and wood products
Primary meta1mdustnes
Fabncaled metal products
Construction
Instruments and related products
Transportation equipment except
motor vehicles and equipment
Miscellaneous manufacturing mdustries
Leather and leather products
Motor vehicles and equipment
Furniture and f,xtures
t495
2.07
0.1 4
0.10
0.10
0.05
-0.02
-0.10
-0.13
-0.22
-0.26
-0.27
-0.28
-0.32
-0.36
-0.37
-O.3Il
-0.39
-0 43
-0.48
-0.48
-048
-0.51
-0.55
-0.57
-059
-0.68
-096
- 1.05
- 1.88
288,764
21 ,753
1,289
997
787
333
-271
-193
- 3,732
- 37.430
-3,488
-6,722
-16,134
- 1.899
- 55.620
-240
-6,128
-95,433
-5.877
--8,982
-3,369
-4,123
- 7,437
- 24.015
-4 .011
-6.093
- 2.680
-1,832
-9,047
-9,162
SOURCES OF PRIMARY DATA ' US Bureau of Economoc AnalySIS
US Bureau of LabQr Stal1stocs
U S Bureau ot the Census
4
l'ooen l R,",,", n 'c Rank o f Da llas
in textiles and apparel. The textile and apparel
industry and the chemicJls and allied products
industry arc again the dear winners. The three
industries losing the largest numher of jobs are
services, government, and wholesale and retail
l"lde. Although these industries lost less than I
percent of thdr employment, they are large
emptoyo.:rs in the United Stales.
Chart 2
Steel: History of U.S. Trade Protection
Tanl! Of tanl! eqtJlYa!en1rail
Pe'C9Ilt
Pro tectio n in s teel
In 1969, in an effort 10 forestall a hill limiting
U.S. imports of steel, Japan :1Od members of the
European Economic Community voluntarily
agreed to restrict their exports to the United
States. This agreement expir<:d in 1974 and was
nOI renew(.'d. In 1978, Ihe Unih:.:d 5t:lI<:s imposed
the Trigger Price r...k ch:lnism, \vhich established
import reference prices (for severJl grdocs of
steel) based on estima!(.:s of J;lp;lnese costs of
production. profit margins, and tr.lnsponation
costs. Countries exporting swd bdow the refer·
ence prices were subject<:d to expc:.-'-dited ant idumping invcstigmions Countries found dumping
steel on the international muketplact!-sdling
steel abroad at a price helow their estimated costs
of produoion-fac(.'<i increaSt.'<i trade harriers.
By January 1982, AmeriCln steel companies
had filed I iO antidumping petitions against II
countries. In lin effort to sdtle these petitions. the
United States negotiat<..'<i a volunta!), restrai nt
agreement with Japan lind imposed ;\ quota
against the European Economic Community. In
19B4 and 1985. other steel exporters also negotiated volunt:lry rcSIf:linl agreements with the
United States that were sch("duled to expire in
September 1989. PrC!sident Bush recently announced that these agreements will be extended
inlO 1992. Chart 2 shows the v:lrious stages of
prOlectio n of steel and their protective levels.
The level of protection for U.S steel, like
clolhing :;Ind textiles, increased with every new
agreement. In 1974. the t:triff o r equivalent mte
was about 13 percent. It reach(.'<i 30 percent by
1984. The trade restr.lints of 1984 led to a 12·
percent increase in domestic steel price....
As a result of the higher import price of steel
in 1984. domestic steel production increased 5
pcrcem Again, industries th:tt supply inputs to
steel production increas(.-d (heir output as well.
f.conOIDk: Review - J a nuary 1990
NOTE , II II queta IS Imposed . the tarlti equIvalent rate IS the tanH rate
thai would have led 10 the same level ol lmporls as the quola
VAA _ VoIo.l ntary Restra,nt AgreemenT
TPM. Tngger Pno. Mecharusm.
SOURCE OF PRIMARY DATA Hufbauer. Serbnet', and EllIOtt (1986)
The ri~ in domestic st<:ei prices, on the other
hand, led to reduced production for industries
that usc steel. These estimates of the rise in pr<r
duction and price of domestic stt.'"C1 have been
applicd to input-outPlll an::liysis. Table 2 lists the
percentage changes in t.·mployment of U.S indus·
tries tauS<.-'-d hy tr.lde protection in steel in 1984.
Like thc case of textiles and apparel, the
gains in employment arc concentrated in the protected industry. The primary metal industries,
which indllde steel, increased their employment
hy 4 percent. The mining industry is the next
largest winm:r, but the gain there is on ly one-third
of I pef(:ent. The largest loser is the motor vehicles :md equipment indust!)'. It losl more than I
percem of its employment becolUse of incr(.·ased
steel prices. Four other industries lost more than
one-half of I percent of their employment-furniture and fixtures; machine!)', except electrical;
trdnsportation equipment. except motor vehicles
and equipment; and fabric-ned metal products.
These industries are all l:trge users of steel.
Unlike textiles and apparel, steel is an input
in the produoion of many goods. Consequently,
trade protection in steel initially ClUseS an excess
supply of labor. Wages then fall in response to
,
Table 2
Employment Effects of U,S, Trade Protection
in Steel in 1984
Industry
Pnmary metal industries
Mining
Eleclric. gas, and sanitary servICes
Tobacco manufactures
Finance, Insurance, and real estate
Printing and publishing
Wholesale and rela il Irade
Communicallon
Transportation
Services
Leather and leather products
Petroleum and coal products
Government
ChemICals and allied products
Te~lIle mill products and apparel
Agricu lture. lorestry, and fishing
Paper and allied products
Food and kindred products
Instruments and related products
Miscellaneous manufacturillQ induSlnes
Stone, clay, and glass products
Rubber and miscellaneous plas\Jcs products
Lumber and wood products
Construction
ElectrIC and electronic equipment
Fabricated metal products
TransportaTIon equipmenl, e~cept
motor vehicles and equipment
Machinery. e~cept electrical
Furniture and fixtures
Motor vehicles and equipment
Change In employment
Percent
Absolute
3.61
0 .34
0.14
0.12
0.11
009
0,08
0.07
0.07
0.07
0.06
006
001
0 .01
0.01
-0.02
-0.02
-0.03
-0.11
-0.19
3 t. 003
3.280
1,244
78
6,108
1.234
12.720
'65
2,055
16,177
120
117
2,015
125
204
-276
-ISS
-480
- 756
-036
-0.41)
-059
- 746
-1.248
- 1.882
- 1.929
-15,763
-7.464
-8.602
-0.63
-0.67
-0.70
-1.31
-6,497
- 16,91 4
-3, 41 7
- 11,311
-021
-0.24
-0.27
SOURCES Of PRIMARY DATA: US Bureau 01 Economic Ana"'$I$
U,S, Bureau 01 Lebor Stallstlcs.
US Boreau 01 the Census,
thl' L'Xl"l'~~ lahor "upplr A~ \\;Igc!'> <in'll nt', :-<>1111.'
ullrl'f;!lcd indll."triL'" h in:: mort' \\ ork(,:r ... T hu!'>.
nuny mdu",'rit'!'> had n:ry "mall p..:reo.:nl;l).:l· in crl';I"l'" in tht'li Cll1p lo~'IllCnl ;I ... :1 r~" u h of thl'
II)X I 1r.1{J,., rt'!'>II:lim!'> in "tcd
T;lhJ,.· 2 ;11-.0 I"'h t h t, ahsolutt, d l:tngl,:" in
l'rnploYllll'nt h ~ mUu.,lr)" "jot:li n. thl' l 'k :l r \\ in nl'r
6
I... 11ll' prun ,lIT nll'tal indu:-otrit:", \\'Il h a 31.0fX)-job
iI1l"fCI"l" :">L'"kl'" and \\'holt:"al(;' ;md n::t:.u l tr.l dl'
;tfl' thl' onl~' o th..:r in<ill.... tfl t':o:. in \\ hich l'm ploylllt'nt IIlcr"::I ....:d mort' th:tn 10.000 jOl b Thl' four
gr..:ah.,',,' lob dl·<: IIIlt'" ot."l"urTt'd in nonL"ll'(.·tnc;l ]
lll:td lint'I"}·. nm ... tnlctllm. motor \chldc" and
L'Q\l1pllll'nt. :111<1 f:lflnc;lIl'd m~t al product!'>.
Fcdcra t Resc,,'c 8ank or Dallas
Table 3
Employment Effects of U,S, Trade Protection
in Automobiles in 1984
Industry
Motor vehicles and equipment
Pnmary metal Industries
Fabricated metal products
Rubber and miscellaneous plastics products
Electric and electroniC equipment
Machinery, except electrical
Slone. clay. and glass products
Chemicals and allied products
Textile mill producls and apparel
Mining
Electric . gas. and sanitary services
Transportation
Paper and allied products
Lumber and wood products
InSlrumenls and related products
Petroleum and coal products
Wholesale and relall trade
Furnilure and fi~lures
Finance. Insurance. and real eSlate
ServICes
CommunICation
Leather and leather products
Agnculture. forestry. and fishing
Miscellaneous manufactunng industtles
Pnntmg and PUblishing
Tobacco manulactures
Food and kindred products
Government
Construction
Transportation equipment. excepl
molor vehicles and equipment
Change in employment
Absolute
Percent
6.83
1.22
1.03
0.58
0 .42
0,20
0.18
0,1 1
0.09
0.08
0.03
-0.04
-0.04
-0.06
-0,08
-0.09
-0.10
-0.11
-<)13
---0.14
-0.14
-0.1 5
-0.1 5
---0.15
---0. t 5
---0 .17
-0.17
-0.17
58.842
to,438
15,089
4.490
7,897
5,11 1
1.089
1.194
1,822
774
227
- 1,110
-278
-387
-558
-165
- 15.989
-522
-7.451
-33.657
- 1,867
- 287
-2,386
-600
-2,095
-'06
-0 .19
- 2,750
- 26.067
-8,297
---0.23
-2. 400
SOURCES OF PRI MARY OATA: US Bureau of Economic Ana lySIS
US Bureau of Labor Statistics.
U S Bureau ottha Ce nsus
Protectio n in a utomobiles
Allhough ...Ied IInpon rt'~tr.:l lIl t ... in till" mid19l-«b hlll1 the ;HlIO mdlhHY. car pnw.tu("!iorl \\.;t-;
hUOYl'd hy II'- o\\n prol l'(·lion. In April 19H 1. thl'
l ntll'd ... t.Hl· ... tlt'j(OU.Hl·d : ~ \ olL1nt:lI~ r(· ... tr.lin t
:lgrl.."t,·lIIo,·nt \\ll h J:l p:m 10 limit it ... l'''pOn:-o 10 f ill>
l;con Ol1l k Re"jcw - J anuary 1990
l nil ..:ti "1.1I l'''' T IlL' rl''''Ir.:l im:-o o n .1 ap :l nl·...e car import ... ).:I,,,·:uly inn,,·;l'-l'1..1 thl' prod lKtion of dOllll':-otJ(
l':1I'loo. a... \\l'lI ..... pril·..·... and imll .... lly p rofit::.. A ...
eh:1I1 .~ dl'IIl0Ibl r.:lIl· .... from 19>-10 to 1l)85. the
\ 'alul' of l S l':.Ir prtKlul.:tion IIll·I\.·:h l'd ;.Ilmo... t l OU
pcrn:nl. l"(ltllparl'd \\ IIh:~ d-],x: rl''''nt increa.'il' in
I he prl'\ iou ... thl..· ~l·ar:-. W'hen 11ll' \'OIUIlI:lTY rl'-
,
:.tr.lint agrccl11(:m cxplft:'d in April 198;. tht,'
unitcd St;l1c:. d id not ask Japan to eXh::nd. it Sino:
then, howcvcr, Jap:1n \,olllnt:lrily co nt inues 10
limit car cxports to the United Slates, ltlthough :.It
a less restrktive level.
Thc awcl:lllent between Jap:1n lI n d the
Unilcd SlaleS Gilised the price of im p0rlt::d C:.Ir:. 10
incrca ..e II pt;:rn:nt The higher imporl price of
cars !t..·d 10;1 4.t-perct.·nt incn:a~e in tht: price of
dome,"11<: auto mohiles in the United State~ :lnd :1
9-pt.'Kenl innl::lx' in Ibeir production ,
T;lble 3 li ..IS the results or in put-Olilput
analy:-is :tpplietl to eX:lIn inl..· the dft."Ct... of Iht:
Imdc prole(:tion in automobiles t hat was in pian'
in 1984. The mol or vchicles and equ ipment ind ustl)' il1(;rcased il.~ l:1llployment :llmost 7 percent as
a 1'I!suit of tilt., volu ntary restraint :lgret:ment with
):IP:IIl, lndu:.lril:s th:1( supply the aUf 0 indu,~try
suc h as prim:l!)' metals. fabricated metals. rubbcr
:tntl miM:dJaneou" piastl<:S, and clcclric and c1t:ctro nic t.'<jll ipment-abo had increases in their
t.·mploYlllcnt In temlS of the at.111al number of
johs gained . the motor \'ehides and t.·qllipment
indu:-I"), inne:lst.'{1 it:- employment hy 59.000 tub:.
FahriC:ltt.'{1 lllet:Li:.. primary mewb, clcct riG l 1
eqllipnlent. :Ind !l(m~le<.:tri<.:;tl machinery also
gaint:d :l lar/-:l: number of lobs,
Chart 3
Automobiles: U,S. Production and Imports
'00f-------------------------------~~:::::j
,..,-/ :
50
0
"
:/
30
/
Imports
0
10
:
'SO
'85
'----1__ - .
liRA with Japan
NOTE: liRA . Voluntary Restraln l Agreement.
SOURCES Hutballel' Be rliner, and Elliott (1986),
US Deparrmem 01 Commerce
•
Furniture and fixtures
Transportation equipment'
ConstrUC\lon
Leather and leather products
_
Miscellaneous manufacturing
_
Lumber and wood products
_
Instruments and related products
_
Machinery, except electrical
_
Food and kindred products
•
Government
•
Printing and publishing
•
Services
•
Electric and electronIC equipment
•
Tobacco manufactures
•
Stone, clay, and glass products
•
Communication
•
Finance, insurance, and rea l estate
•
Wholesale and reta il trade
•
Fabricated metal products
I
I
I
I
Paper and allied products
I
Petroleum and coal products
,50r----------------=---c----c-o-----,
DomestiC production
'65
Relallve employment losses
Agriculture, forestry , and fiShing
StnlOns at doUars
"
Chart 4
Industries Losing Employment from U.S,
Trade Protection in 1984 in Textiles
and Apparel, Steel, and Automobiles
Transportallon
, E~cepl motor vehicles and I.lqUipmenl
SOURCES Of PRIMARY DATA US Bureau at Economic AnalYSIS
U S Bureau of LallOr StatlsllCS
US Bureau 01 the Cel'lws
Ikc ause C:lrs Clre mrdy inputs in th~ rrexluclion of other goods , few lObs werc l o~1 ;1:; a d i r~<.:t
result of Ibe vollintary restrdinl ;Iw~cmcnt with
Japan Dt."('lines in employment, ho wt:vt:r, 0(,'clIfI'cd in r~:-ponse to labor market adju:-.tment"
Tr.lde re,..tminl:; in the auto jndu ,~t!)' kad to an
in it i;L1 ex(),:,~s demand for labor. \X' :.I}.:es then riSt:,
Wit h wagt.'S ris ing. industries not rei:nt!d 10 ;LUIO
productio n ('ut back Iheir employnlt.'nt !tJightl}"
Fede... 1 Rescn oc Ba n k of Oall.u
Chart 5
Industries Gaining Employment from U.S. Trade Protection
in 1984 in Textiles and Apparel, Sleel, and Automobiles
Relative employment gains
Textile mill products
and apparel
Molor veh icles and equipment
Primary metal industries
Chemicals and allied products
•
Mining
•
Rubber and miscellaneous plasUcs products
•
Electric, gas. and sanitary services
SOURCES OF PRIMARY DATA: U.S. Bureau 01 Econom.c Analysis.
U S Bureau of labor Statjs~cs .
U.S Bureau of the Census
The gains in employment in the auto industry may he temporary. The single protective phase
improved the industry'S profitability temporarily.
Product ion of cars increased substantially while
the voluntary restraint agreement was in plan;:.
In 19&\. the tlm_'e largest u.s. auto companies
ma rked their highest profits ever. Recently, however, sales of Japanese cars have been soa ring
once :.Jgain, and domestic auto sales have be<;n
dropping. ~
Industrial effects of p rotectio n
Charts 4 and 5 summarize the industrial
effects of protection in textiles and apparel. steel.
and automobi les listed in the tables. Chart 4 lists
the industries that lose employment as a result of
tr.lde protection. wh ile Chart 5 lists the industries
that gain employment. These industries are
ranked by the percentage changes in their employment. As Chart 5 shows, very few industries
actually gain fro m lr:.Jde protection. The gai ns arc
virtually limited to the protected industries themselves. Individual industries lose very little, on
av(;rage, relative to the gains of the winning ind ustrl(;s. The reason is that the losses in employment are spread across many industries.
In some c;lses. protection in v,nious indusEconomic Review -January 1990
tries reinforces the effects on employment. For
example, the furniture and ftxtures industry is hurt
by protection in both steel and textiles and apparel. Consequently, it lost the greatest proportion
o f jobs. An e XlIInpk on the winning side is chemicals and allied products. The chemicals a nd allied
products industry is a big winner, over-,jll, because
it g:lined employment from protection in both
<.Iutomobiles and textiles and a pparel.
On the other hand. the employment effects
of trade restraints in o ne commodity may dampen
the dfects of protection in another. An example is
fab ricated metal products, which had a very small
loss in net employment. The explanation is that,
although the industry is a big loser from steel
protection, it is a winner from the voluntary
restraint agreement in automobiles.
The largest gains and losses in em ployment
arc concentrated in the manufacturing industries.
Five of the seven industries that gain e mployment
from trade barriers in textiles a nd apparel, sted,
and automobiles arc manufacturing industries.
Eight of the top ten greatest employment losses
are in manufacturing industri(;s as well. Th(;refore,
, see WlliIe (989)
,
Textiles and Apparel, Steel , and Automobiles :
Reg ional Employment Effects of U.S, Trade Protection
-...
Percent cl'langes IfI slate employment
•
less than ... 25
o
o
- 2" 100
(J
0210 " 9
Mo •• than
50
Buleau 01 Economl(: AnalySIS
Bureau of Labor SlallsllcS
U S Bu.eau 01 Ihe Census
SOURCES OF PRIMARY OATA US
US
un lik..: lIit;' ~l rg lll1l\:n l "t'l fort h hr proponents of
11:ld\:, p rotl.'('l ion, tl~lde h;lrru.: r.~ in Ihe p ro tlXl..:d
i n d u.~!nl:: .... hal. I:: not ;1 11<.'"i;III.:'( \ Iht;' lo~~ of manuf:Klurin~ joh:- in the liniIL'd :-'I;tll.·:111.... nOllm;tnufal.'l uring indu!'>l rics. in g.1.·nl.'ral.
art: nol Ihl.' bift w innl.'r'" or lo.~l.'~ from tradt: prole<.lio n in tl·xtik· ... and appan.'1. :-tl::d. and automoh il\:' ~ TllI.':-l· indu!'>lnl'~ lend to h;I\'c small 0\'t:r.11l
(.·h;lrlgc... in their em ployment. w ilh one exct:p lion-......<.:o n:-tnlt1it /ll lAllht ntl.'llOn suffered I:trge
cmploymcnl 10 ......(;' ... Irom 1I~ l dl' protc<'lion in hoth
.0
and automobiles. Thus. it suffered the third
).In.:a''.:. . [ Ix:rcl 'ntagt: 10........ in em ploynll;: nt
:-1(;'(;'1
Regional effects of pro tection
EVl'n if nationa l employment n:mains (;'on ... tant, tr.ld\:' protection Gill GillS(;' !'>I).lnifk:tnl re~ional :-hifls in employment. Tr.tde prott.'Ctio n
ie:ld:- to incn.:;tses :tnd dccrc;l:-Cs to tht: production
of ).l()(xb and. therefore. labor :-hort;IJ.\l!s and surplu:-c.... in ;lffe<1ed indu!'>tries Ik:t::.t ll:-t' labo r is
Federal Reserve Ha nk o f Dallas
rda[i\I..'ly mohi le :Kro"''' ';;[atl'S. workers will mo\"e
frolll \\ here there i... :1Il exces~ ~llpply of blx)f to
w l1l..'re thl.:R· is an l'xn:~" dcm:md for blx)r.
I e... l il11al l.: I ho..: dl:lnges in ~t:.IL· cmploymt:nt
Glll~l..--d hy l ' S tl~I(Il' prolection hy allocating Ihl..·
t(){al nCI (·hant-:o..: in an indu~tr)"~ I::mployment (as
~in.."n in Ihl..· tahles) amonH the ~t:I[t!~ in ;ll'<.·ord:IIKe with Ih~.:ir Sh;IR':' of \1a\lonal prcxlu<."1ion in
the IJ1dll~l ry In I~ .." Thc aCl"ompanyin).: 1ll;IP
shows whkh ~ta te~ ar...· the \yinners and tl1I..' losers
from C.S I!~lde barriers in lenll ... of pcrn:llt:I).:C
chan1-\e~ in Ihl'ir employmenl
The ~t :ltl..·" thaI ar...· the ).:r...·;lle:.1 wi nners from
tr:lde p roll.'l"tiol) :1l1.~ in tile "olll hea:.tl.'fIl part of Ih...·
Unitnl SIatl.'s. SOllt h C:lfOlina. !'\ortll Carolina .
G...·or).:i:1. and Ablxllll:1 l~tnk highest in tllci r perl"l.'n lagl.' illl"n:a ... e~ in ...·lllpIOyllll'nt bC(';HI.~1..' they
arL' brgc l ...·xtik and apparel producers. O l her
cll';lr \\·inn ...·rs from \I~ l de p rol ...·(·l ion arc T ...·nnes.~n·. '\Ikh ig:m. I{hock: Island. :l l\d Mississippi. AIthou,gll r-.lidligan is a hig winrll'r fmlll proll.'clion
If) :llIlol1lollill·:.. it~ !-p i n ... :11'1.' d;unpen...'"(1 IlL'C;1US<:
of protc(·tion in ...Iet:! ,.enne ....~ ...·...·. RhodL' bland.
;md r.l i:-:'I~~ippl ).:ain I1lO"'[ of thdr I!lllploym....m in
IhL' Il.:xlik and appard indu ...lry In to:rm:- of :Ibso..
lute ...·han1-:o.."~ in elllploym...·nt. IllI.' fin' W...·:u ...':-t
winners :lfI..· '\Jonh C:u'OIJfl:l (r.OOo joh~). Georgi:!
(l-l.(X)() joh:-J. South C:troJina In.DOO johs). ,\ l icl1lt-:;Hl (11.000 jol~). :lOd Abh:um ( 10.000 johs).
Th .... 1-:fI..·ato..:~t IOSl,.·r.... from I nlde pro[I..'<.·tion.
h;l.~o.."d on pcr<.'C..·nta1-:e dl.lngl·... in st:llo.." o.."mployIIlL·f)t. arc: Ihe District of Columhia. Ab~k;l. Nc\·;Ida. amI 11;1\\":lii. Th<.: foUl' st:lles losl t'mployn ll..'nt I~Gnl ,"'l' the prol<.: .... ICd i ndu~trics and Iheir
.sup pl il.;'r:- :K<.'Clll nt for :l ."l11all p",·rl·o.."nl :!).:I..· of Ihl'ir
1-:I"0:-.S st:l[e pl'OduCI Although th<.:~o.." :.t:LI ...·.~ lost thl;'
hi~ht.'.~t pelTl.'m:lgl.' of employment. tllL'Y WI.;'1"o.."
.... Il·ady not thl' wo..";lIe... t losl..·r~ in terms of Ihl.;' nU11lIll'!" of Johs los\. C .lifornia 10....1 thl.: W....a! ...·s[ numIx'" of johs (.-W.OOO johs). Florida ( 13.000 jobs).
iII inob ( l l.OOO joh:-). and Texa... (1 1.000 jobs)
\\ L're Ihe next biggo..".s\ lo:.l.;'r:. in ",·mp!oyml·nt.
A:- Ih...· 111:1)) dhplays. the gain:, from trade
prolt.'.... tion arc ....oncentrat....d :1I11ong ;1 few ~tates.
whik IIle I():-........ ~ an:: sprc:ld :Kro... ~ many statl."S
Furtht'nnon.:. tht' gain ... and IO.......I..·s :lrt" s...:p:IT:lted
gl..·ogr.lphi....ally hy rql;ion. The 1..·:ISh::rn portion of
thl..· United SI:lle... lend ... to gain .... mployml..·nt. whi!c
till..' \\e:-Io.."rn JX)rtion of the country tend~ 10 lOS<.'
l..·llIploYllll..'n[ frolll I he tr.lde re ...l r.linb
Econo mic ReYie w - J a nuarr 1990
Conclusion
In :10 I.:(unomy th:1I b \'irtu:t1ly ::11 full em ..
ployment. 1f:.l(k· h:lrrier.. principally affL'Cl Ihl..'
compo.... ition of l'mploymenl in the long nm :md
nOI the aggrt·gall..· Il'\ d of employmt:'111 This : I f(iell.' ba:, eX:lmin ...'<.I the employmcnl erfeth of U.S.
IrJ.de prOlet·tion in Ihrel' IIldu:.lril·.... tl!xtilt.:s and
apfXlrcl. SI(·(:'1. and :lUtolllohilt:':- I as.... ulllo.." Ih:n
trJ.dl.' prol l'clion doe:. nol chant-:e (he total num ber
or ~)h... in Ihe I!conomy. In... tt:'ad. [ concentr.n ...' on
ho\\ Ir.ltle P1"01o..·t·tion ;111"ecls Ih ...• l,.:ompos;f;ulI of
....m pl()ym.... nl .
The re~ lI h .~ bert:' indicale thaI fl.'w i nd uslries
gain Cll1plO}"lllt'l1t hecaus.... of 1I~ldL' protect ion Thc
prol...·t'lcd industries tliclll . . el\'cs-tl.'xtile:- :Intl :lp"
pard. sll;(: l. and autoll\()hilcs-havo.." o.."xperienct.'d
SUlb[;ll1li:11 in<.'l"",·a.~es in L·llIploYllll ·nl. The on ly
ot llL'r indll .~try to gain " ~ignifica n t proportion of
.... mployment is d lcm ic;l l-. and all il.'d produt'ls;
chl.'mic;l ls arc u:-t:'d L'xten:-ivdy in pT<xlut"in1-:
synth""lic filx: .....
;\10:.1 indus(rie'; losl..' I!mploymenl :i!> :1 result
of Ir:lde re:-I1:lir1b. The ~rl..·:lIe ... t IOM:!r:. arc furnimre
"nd fiXllrT('S: \I~ln~pOrta l i(l1\ ...-quipment. CX(· ....p l
motor \·ehidt.:s and .::tllIiplllent: ('on ... trlltlion: ;lIld
leather and Icath<:r pr(xlut·t ... Thc~e industril':-; uSt:
prodUll .. from prolCc....'<.1 im.lu!>lrie ... :IS inptlt.~ for
their o\\'n pro<.iuoion ;\ 1:I1lY indll ... [rit·~ n(){ relal ed
10 Ihl..· prol(."('I ..."'<.1 :-l'Clor... I..'xpcrienc...• !>ll1all dedines
in l!Jl1p!oyml·nt heC;lll~c tr::ldl! pro[cclion raises the
cost of lalx)r to all firrll.~ in Ih ...• <.:l·onomy
For Ihe l't.',gional implication ... of tr.lde pro\(;'cl ion. ;I simibr palleffl e.xbl s: rcw ~Ia l cs ~p i n ClllploYlilenl. w h ill..' many .. t:lIes lose ...·mployllll.'nt
TilL' ~I;lles 11l:lt gain ""lllplorme!1t arc limilL'd to [he
c;l.... lern portion of tbe lInil cd Statl..'s. The soulh ..
e:l . . lcrn .~I:lles :11'1.: tile gri:'a[est \\'inr1er.~ frorll trade
pro[CClion bec;luse tIll'}" :I rl..· brgL' lextile and appard produ....er.s. All state.' we:.t o f tho.." i'I\ississippi
Itivcr. as wel l a~ :,ome otller:.. lo~e em plo}'t11l..'n[ as
a ......Slilt of tr..l(lt: p rotection III textiles and apparel.
swd. :md :I lt\omobilc~.
The shares are based on Q10ss SUIte {Xodvcl dala by
U S &Jreau 01 ECOOOfTII(";
00CW$.Ily IfS pubIisI!ed by the
AnalySIS SHRefl$ll<Jw TrOll and Ffledellbefg(1988) for a
deSCflpl/()fl 01 100 gross SlalD produc r dala
n
Appendix
Calculation of Employment Changes
This Appendix describes the methods
used to estimate the positive and negative
employment effects of trade protection. I
begin with estimates from Hufbauer, Berliner, and Elliott (1986) on the initial production and price effects of trade restraints on
the protected industry. The input-output table
is provided by the Interindustry Economics
Division (1989) 01 the U.S. Bureau of EconomicAnalysis.lt contains 1983 input-output
accounts for the United States, broken down
at the two-digit level of the Standard Industrial Classification system (85 industries).
To estimate the positive employment
effects of trade restraints, the increase in production of the protected industry is placed in
a vector, with the number of elements equal
to the number of industries in the input-output
table. Every element in this vector is zero,
except the element pertaining to the increase
in production of the protected industry. Call
this vector L\O. Using matrix notation, the
positive output effects of trade restraints are
calculated as follows:
where I is the identity matrix and A is the
input-output matrix. Thesechanges in output,
L1X, are then translated into the positive employment changes.
Calculating the negative employment
effects of the price increase caused by trade
protection involves several steps. The initial
percentage change in price in the protected
industry is used to calculate changes in prices
in other industries in the following manner:
(A.2)
d P ; (1- A')-'d N,
where L1N is the vector containing all zeros,
except the percentage price change in the
"
element pertaining to the protected industry.
The vector L\P measures the increase in the
prices of goods that use the protected commodity as an input . These price changes are
then used to estimate a vector 01 demand
changes, L\O, where the ith element of this
vector is defined as
(A.3)
M.; -dP.r f.a,x,
.. J'
X• -
/
where Xi is total output 01 commodity i and 8"
is one element of the A matrix pertaining to
the ith row andjth column. The term in parentheses defines final demand for commodity
i-total output of commodity i less intermediate demands for commodity i. The L10 vector
is the change in demand lor goods as a result
of higher prices.
To summarize , equation A.2 defines the
effect that an increase in the price of the protected product would have on the price of
commodities that use the protected product
as an input. Equation A.3 then defines the
change in demand for these goods resulting
from their increased price. Note that I have
assumed unit elasticity of demand with respect to price . The L10 vector can now be
applied to equation A.l to generate the decline in output in industries that use the protected product as an input.
The positive and negative employment
effects are added together to generate net
changes in employment caused by trade
restraints in a particular commodity. These
calculations will lead to a net gain or a net loss
in aggregate employment. To ensure that aggregate employment remains constant, the
calculated gain (loss) in total employment is
subtracted from (added to) each industry's
employment in proportion to the industry's
share of total employment.
FOOC; r:l1
R ~ n· e
lI.:Ink of l)aUas
References
vol. I . l·(l. Orley ,\ ., hl'nf...,lter and ~ i dl :,Jr(1
Lavan! (AIl):-.ll'rdam· i\'or1h-J1oll:l ntl ), 5-102,
B~lkhdn,
Ruben E, and Annt: 0 I\ruq..:c:r. cds
( 1I)S·ll. '11)(' .\Imcllllt' IIlId 1:'1 VIIIII/fllI 'if /(('c('J/1
I ~ 1i'(/de Polity (Chic:'l1(o t ·lIhw:-.iIY of ChiCI).:O P~~:-. lor \;.lIion:l1 B Un.":1l 1 of Economil'
Ik ......"rch)
Chi;IIl).:. Alpha C. ( 11)- I). FIIIIlIIIIIIC'lIwl ,lIelbocls (if
.1/(/lhl'II/l/li(.'llll:i..'f!I/()/IIic..... 2d .... d. (:\t'\\. York:
'\!l'(,J:lw-Hlll Book C(lm pan~'l
CoIlYIl". Cha1'1t::-.. and SIl·v..:n Du na",;.), ( 198- ),
"Th..: COSI of TI~ldl' Ht:.. fl~lInh: TIll' C:I.,t.. of
Ja p~ IIl t"1,;'
AUlol11ohile Export, 10 Ih .... Unit..:d
:-it:lte.... - IIl1l'1'lIl1lilllud .1I00Ie/my F/II/d SIf4!'
I'fl/l('I'S 5-1( ;\ I:II'l'Il I: 1')0- 7;
Cr;lntiall. Robc:rt \XI (Il)S7). "Thl' Encn.~ of U.S.
Tl~l(.I..: I'rot c:ction for Autos and St ........ I. .. 8"00/"1illgs I)(f/J(:rs 01/ /:'C(!lwmic /1<'/lI'i/,l'. Iwe, no I
r I-X.'l
D ..:nl;!u. Ar1hur T (19H"'l). Noll' IIJ1/Jort Resimillis
R('dllc:t' F.mploYII/('III. C')A B Formal PuhlicHion
no. SO (St I.ouis: \,(Ia:-.hinwon llnl\·t"rsity, Cl'Ilt.... r fo r l ilt.· .s\lJ d~ 01 AIllt"riCIIl Bu., int",.... Jum")
H id,oJ.;. Su:..an I 1%"1), ~The Con:-.wllt... r Cost or I I.S.
T ratl..: Rt:'>trainh, - Fl'dl'r:ll Iks...'I'\'l' Ibnk or
Nl'\\' York QlIlII1('/~)' Ret'iell'. SlIIl\llll'r. 1- 12.
Il ulhau.... r. G:l ry Clydl'. Di:lIlc T. B",'rlint..'r, and
F..: im herh' Ann El lio ll (19H6 ), Tmt/e Pmleclion
ill Ibe { 'lIil('d S/(Iles .~ I Case STlldies (Washil1).:ton. D.C. : institut t' for Inl ern;uion:l l
I :nm{)mk'~).
IIlI l'rmdu stry EnlllOlll1l'S Di\'ision (1l)X9). "Annual
In pu t-Output i\ct'()Ul1t . . ()f 11K' l ' S. EC()!l()my.
IIJX:'l." Sllln~l' (!I'(,'/lrnll/ll3l1silless 69 (Ft'hru;Iry): 11 -36
.\ J.::·ndl·z . .10.-.(: A (1I)B(). "The Short·Run Tmdt"
and Employment EI1'I;."<:t . . o f Stl'd Il11pon
Ik~tra i nt.'>, .. jillmlll/ of Ir'odd 1i'(ldC' Lall' 20
(~I;.·ph:.·lllbe r-Ol'loh..:r):
;;4-66.
1)l'llcl\·l'1. Joh n (19SM. "bllor Su pply or Mt'n: A
Sun't'Y," in Hal/dIxit)/..! oj La/xII' f:Co/Wlllies,
Econo m ic RevIew-J a nuary 1990
Rl'o"h:I\\. \ 'l'rnon. Edward A Trotl..I r . and
lit )\\ ;.r([ L Fril'uenhl'r).: (19M), -G ros.' Statl::
Pllxiul', hy Indu,I1)" 1%3-R6: SllIn:I'uJ
Cllrtt'lIllJlIsilles.,· 6H (i\l:..iy): 3Q--.t6.
Stal/dard Illduslrial G1a,'.s!fkafioll .lIwlI/(I1 1972.
prep:II'l'd hy U.S O ffice o f i\ lanagl.'lllt:n! and
Bud).:l't. St:u i . . ticL! Poll('Y D i\'ision ( \X' a.. hmgIo n , J) C: Governm c:1lI Printing o nkt").
T:lrr. D,I\'id G .. and .\Iorr;"" E. '\ Io rkrl: (1I)S·I). Agg lt',t!,ale <"'o~'IS 10 I/)e 1'lI ifed Slates (!!'TlI rt/Ts {/l uI
QIIOltlS 0I1 1I1I/XJ/1S Cel/eml Tart/!'e/lIS (/I1l1
R('II/11/'(/1 u/QI/()/as Oil AI/lulllo/Hles. Steel.
SII,!.!,(fI: (fIul Texliles. a 13ur.... au of Econom ics
Stall' HqX)1'1 [0 till' rL·d .... ral Trad..: COl11missio n
( \X'a,hington. 0
GO\'t:rnment Prin ting
0111<'...·. I kccmher)
c.:
U.s.
I3ll rL'au of I.alxlr St:II;""l ic.. ( 19H8). "Ti me Sl'ri es
]):.11:1 for Input-OutPll1 Industries: O Ul PUl.
Prie...·. and Empl()}'Ill..:nt ~ (Wa ....h ington. D ,C.
rmlll'nl Printing Office, St:pll'mher)
G()\ ....
U,S BUrl'au of the O... OS\I:-. ( 198;). SllIfislica/ Abslmc:1 (!llbe Uml('ll SIllies. 1986. J()()lh c:d.
(Wa.~h i n~ton. D Co: Government Prin ti ng
Ollk...·)
L.5 DL'[XII11llt"ot of Ollllllll'rt't" (19H(}). 1986 C.S.
IlIdllslrial 011 1100('; l)mspt'Cls/or Ol'er 350
,Hfllll!/lICIt/riIlR (III(/ Sen'ice llItillSlries (Wa shington . DC: Govcl'nl11l'nl PriT1tin).: Offke.
.J;lollary).
L .S Dl'p ;l l'tlllent o f L:lhor. BlIrl';l1I o f b bor sutislics (1I)H'»), I;':m/J!uyll/C'I// alld \\foRC.... AIIIlI/lIl
Al'C'I'tI,!.!,l.'s 1984. Uulll'lin 2249 (Washi ngton .
DC. : Go\(;.. rnment I'rinting Omt·l'. Non'm]:x.:'r).
Whitl', Jos""ph B. ( 19H9). "Car \'(IlU'$: Arter a Brier
Pall~"", J;lp:lnl'~e Al lI() .\ l:I kcr . . G;.i n on Detroit
Ag;J i n ,~ Wall SII'f.'(:l./o//rl/al, 23 May, Southwe-,>Il.'<.iillon, AI. A12.
William C, Gruben
Senior Economist
Federal Reserve Bank of Dallas
Mexican Maquiladora Growth:
Does It Cost U.S. Jobs?
he Mexican 1I1(1(jllif(ulora sector is ~. brge
:md growing assemhlage or fo rcign-ow ncd
manu(a<:turing pbnL~ that prodw:e chiefly for t'xport to tht.! United Stalt:S. Tht: rist: of this sector
(KUIl"fed p'!l'tly in responsl' 10 lilt.! j\'lexican govl"rnment's lihcr.tliz:ltion of <:t:rtain t~l riff laws :tnd
of law:-- I">t:rtin('nt 10 fo reign ownership of manufal'tu rin~ l'nt('rpri:--e:--.
While change:-. in 1\Ii:xie.t n <:ustoms bw l'Ol·ollr.lged Ihl' cmergt.'IKe of tht: maqui1ador:J.s.
l"l·rt:lin : I SJX'CI.~ of li.S l'uMomS law also facilitated
thi:- phenomenon. ;IS did :.I,'\'er.11 other fadors. In
fact. Ihe m:lquilador.1 scctor i.; just one example of
;t hro:lder pattern o f glohal J"eorg:lni7.ation in
m:lnufacluring o~r.. tion....
The rapid growth of tht.: lllaqllil:ldorn sCL10r
h~h gener.ned altention :1:- wdl as controversy.
US. labor o rga nization:- ;! r).Cue Ih:l t lll:lquibdor.ls
take johs from u.s. workt:r. . Defenders of Ihe
maql.lil:tdor.! ~rSh:~m d:lim that ils growl h is simply
pan of lht: overall gloh:llization of manuLicturing
acti\·ity. Tlll'y contend that Ihe (:ompclition is not
betWeL'n Mexi<:an and U.S. workers , but belwt;'en
Mt:xkan workers and thost: in the I':lcific newly
industrialized cou tllrie.~. or PACNICs.
[n l hi.~ :trtic1e. I disnlss the f;1(to rs contrihuting to maqui1:tdor.1 employment growth a nd offt:r
Tent;ni\'e st;tlis(k .. l cddelKc to .~ lIgges! that lXllh
.~idt: .. of IhL' <:ont rovt;'T:--Y :t ft: :thout cqually corrt:ct
In "uppon of the fir.;1 ar~lImenl. maquilador.! employment "t:em!"> 10 grow r.....ler when differe nti;lls
lX'twl"'t'n U.S and ~h:X1("an manuracturing w;.t~es
;tre widening ~kxiC'.!n and u.S. workers do compcte [n ~lIppon of tht;' second ;.trgllmenl. m;tqlli lad or.t ~rowlh acceler.!tcs w hen Mexican wages fall
T
Economic Ih:vicw - Jalluary 1990
helow PACN IC wages. That is, Mexic.tn and
PACNIC workers also compete.
The globalization of manufacturing
Tht: rise o f tht: maquil:tdor.! seclor is nO[ an
isolated e vent. Over the last three decades, an
inte rnational reorganization :1Od integr.lIion ocUlrrt.'d in the m;mu{acturing sector. E\'cn earlier,
firm!"> in de\'elopcd countries often locatL--d m:muf;tet ufing plants in les.... den:lopcd countries
TI10S<:' pla nts. hm\"c\"t:r. generally serv(."<.1 local or
r~gion;tl market!">. Foreign plants owned hy li.s.
compa nies, for exam ple. exponed little o r none of
their product.. to tht: United States. If a U.S. finn's
foreign am l iat~ t;'xported an input to the United
St:ltes, Ihe input was likely to I~ :1 r.lW maTerial.
nol a manufactured produ(·t. The S<lIne patterns of
produl"tion and importation \VcrI..' common for
J:lp:tnesc and European firms.
In the late l%Os, U.S. firms beg~m to integrate tht:ir fo reign :lmli;ne.~ into glOtXl1 systcllls of
produ<:lion. As the disp:lrity widem!d bet\vecn
labor costs in the United SlaTes and Icss devel·
oped countries. and as inte rnationa l COIllIllUniGItion and tr.!n:.port hecame easier and cheaper,
U.S. fjnn.~ I">t:camc more likely to lISC their fo ri:ign
manufa cturing affi1i:ltcs as j);.!ns of:t proci:SS dl!signed 10 serve U.s. market:'>.1 A<:<:ordingly. the
A telatcd mOllVallOl'l1or me QIObahzaOOJ'l 01 manulacl!¥itlg
acTMty may 0. I7Je secular /fanslormatlOfl of /he naru.-e of
ll'ldusrnai prOO1JC11Ofl As the lwent,clh cenlUf)' progresses.
f/l;fI?UfaclutWIQ ou~ f8qWes fewer raw matenats per UtIlI
., h:lrl' of prodw..1ion th:11 these foreign :IITili:ltl's
.,old 10 l l. S mark\"I!'> ro!'>l' !
Thi .. cha ng~: \\:I S not :-.implr.1 \\holesall'
:-.hift of L·.S -opl'r.Hl'd m anuf:lt:tu ri n).: activity to
fOl"l'ign loc.lIion .. : it w:t' a gl'O~r.lphi<:al reorg:lniI ...atlon of thl' .,tagl" o f prodliCiion. \X'hile 1ll:lnllfa(1Uring :1 Ki\'!.!n produl't, :-.ome stages of production 1ll:1)' in\"ul \'t! l:thor- im~·nsi\'e oper.ltion!'> that
requ ire Ie!'>:-. , ki ll or GIPlt:l1 Ih:1O o[h~: rs t\ ~ W:lgl'
diITt!rt"l1tiab \\·iden!.:d bt'1\\·t·l·n the United St:l1l's
:md k...... dt'\'cloJX'd COllntri\.·S. U,S fi rms hl'gan to
locatl:.' such I:lhor-i nlenshe !'>t:lge~ o f prodllt'tion i n
(·ountrie:-. \\·I1\.'f(:" the cos t 01 unski lled bbor \\·a .~
lo w .' 11e:-.i).\n :Ind clpila l-inlL'nsivl' pr()ductilm
tend!.!d to rl'lllain in the Unitl'd State..;.
The into.::rn:lti(maliz:lti()!l of Pflldu("\ion \\";.IS
l10t uni<.jlle to U.S. firms. Japanest' Finlls " Iso hl'g:m to 1Illegrate thei r fore i).\n aflll i:lI l·S into glohal
"y.,tt'lIIS o f pr(XIU(·l ion. b ut ",ith a signifiC:lr1t diffeft'nce Iroll1 lhe U,S. appro:lch: j :tP:II1t:st: tlnns
did not return tht"ir :tffili:l1es' manuf:tl'llln.:d pr<xlll("\~ to):lpan. but :-.cnt tlK·m to Ot hl'" lIlarkt:t:-..
01 OU/pVl With 1 _ fSW malcfl8llflPV/S
per UfIII 01 OIJlpCJl
CO'r>CS acorresponchngt:JeChnelll lhequanl,ly oIIfIpCJts thaI
musl
be $IlJt)ped
~COfdU'!f1ly. SIlIppIIlg COSIS
per
UflII 01
OUtpul IsJI FlY a mote e,,'enswe dtSCUSSIOfl 01 the dechtwlg
ClWMIy 01 raw malena/s per ...-ttl 01 OUlput see Drvd<er
(1966. 768-91)
Soo GrUflWaldandFlarrm (1985. 2 9). /cxdC1m!ed dIScusSIOflS 01 thl$ o/>eI)(lITIeIlOt'
, One pll8t1OfJlCf1()fl thaI malllla/sd 'lie ",cma/<Ofl81 adfusjQ(I
of (YodUCI>Of1 loarus ""m IlIf(}C suppl,as oIlow·s/(jlloo IowCOSI labOr
's 1116 process Of deskl l,ng
cal advances
s~,llad
Is/x)(
Severll! technolog,-
Since me mj(j. 1960s allow Ihe usc 01 10w-
'n (YodVCIlVa processcs thaI formerly uwd
hlgh·sk'/Ioa "'gh·wage labOr
Sec Wilson ( 1989)
, Items 806 30 and 807 (J() wero aCfIVad 'rom BarHar fulcs
The prOVlSHJ(l$ foona In Ilam 806 30 wafa Of'fJ,nally parr of
the CU$lOtn$ 5>mpIdocal,on ~I 01 1954 IOStfflPlily UTl{J(X/S 01
US -made QOOds IlIar subsequet11!y were procesSed in
Cansaa Item 807 00 arose from an e/tott 10 axNy a 1954
US CuS/oms Cootl det;ISHJ(l on 18f111 !featmanl 01 US
ptoduclS sent aOload BSS8fflO/ftd ,"/0 omcr ptodvclS. and
relutnetJ 10 Ifle Un<1e<1 Stalcs
FlY furlnar d.sctJsslOO of me
bac/c.grounds oIlheSfl "ems see St;ho8pfIe and PerezLopez (/9881
See -"acIOlS lnal Influence Plant LocallOfl Dec'SKJflS cha()l8f 5 III US Inlemar.onal Trade CotrmrSSJOtl (/988)
••
!'>uch :I!'> the Cnited SWtes .
u.s. customs laws and
manufacruring globalization
T \.·chnologk:tl change:-. th:1I fa d lilared tIle.'
use of fo reign lalxlr wt're rht: ch ief l~lU~ of
man llf;Kturin~.f:-. ).:Inhal izalion, hut U.S. Cll... toms
law at....:) pbyt'd a nol ahlL· role Par1icularly rel t:\':lI1t :m.c" the plUvisions fOf rei m po rt:llion in IWllls
H06.3D ;lI1d 807.00 o f the Ta riff Sdlt'dule~ of the
I 'n ited Statl'S ' Thl..":-e pro\'i..;ions allo\\" m:lnufacturl'r,. to eXIX)11 U.S.- made com po neI1t... for processing or :lsst:mhl)'. and then to rcimpor1 tht'
re.~u!ting product:- IIndt'r :-pt'cial t:lf ilT provbions
That is. thl: L .S cOl11lXml.."nb imhedded in the
l"Cimporl l:d produl'Is return duty· frL'e 10 the: United
States. and only tht, v:l lul' :Kkll'd hy foreign l11:!nllf;tclUring L.. MlhjL'ct to tariff Item H(J630 Ikrrnits
the fl'impOl1 of fahricated llletal p roducts into the
United St:il e~ fo r flll1her pr<)(:t':",ing Itelll 007.00
Ix:nnits on ly the foreign a...;!'>emhly of fin il;hl'd
gooLb for reexpon to the l 'nitcd St:lte.". hut not
other t)'rx·.~ o f manut":lClUring pn,X:t::-:-l's.
While a ft:t'cnl :-lll"\'l'Y :-ug).\e't, that tht'
H06.30 and 807 .00 (·ll!'>IOllb law pro\'i:-.ion~ Illay
ro~ ir i \'cly affecllhl.' compl.'titivcne...... of firms that
ll:.t! the111. the S:Ulll.' !'>utY!!)' found that those provi.~ion.' art: nOI [hl' primal) inct:nti\'es for estah lishing foreign production fa ci li ti t's.~ Ind\.,t.'"d . thl' prin d pal rea:-oon o t\.'(l for loc:l1ing prodm1ion fadlities
:.broad \\"a~ lalxlr-cost sa\·i ng" lmIXl/1:tntly. from
thL' st;m Lipoinl o f the m:tqllil:tdOl~1 progr.llll , more
than hal f of ;111 ., ul"\'ey fes lxmdenh .' aid Ihat thl'
prl::senc!.! of a frl.."l." zonL' or ill-oolld t~:Hment h y
the foreign go\'ertlmt'n t inll uelKl'd their decision
[0 1l .~C foreign assemh ly f:l("ililics.
An additional aspt'(·1 of U.S customs law
tilat facilil;l1l."s the oper.l1ions of the m:Kjuibdoras
is the Getlt'r:tl ized Systcm of Preferences (GS P).
Authorized under the Gener.II A~reement on "1":11"iIT.~ and TrJ.de (GAT]") and t:s t:tbltsht'd in Titlt' V
of tht: Trolde Ac t o f 1974. tilt: GSI' provides for the
dimin;lIion o f import dulil" Oil Cl'r1:u n dL'!'>lgnated
produ<.:h made in de\'c!oping countrit:s Mexico
\\"a~ de,ignatt'd :I' :I hendici:Il"Y de\'doping COllntry in l'r5 and h:l" continuL'u ;l~ :-.lKh !'>ince (hen
The b~l'..;t SCt:tor:.II group of pnxlul1s importL·d
from l\ k XICO under til\." GS I' tr.lditionaJly ha:- heen
('hellliGlb and rL'l:Lt\..od producls. which are nO!
Federal Ro."lW rvt" Bank o r Da llas
nann;llI~ a:-.-.ociated \\'ith m;lquilad()ra activity.
The :-l'omd largest :-l"clOr..t1 f.\roup of products
im(Xlnr.:d from Mexico under the GSP, hmvever,
has been machinery, ;tncl most of Ih...,:-t: products
an:: madl' in lllaquibdor;'ls St..-,·cr.11 products indio
gihk ror wn~ rage unck'r 806.30 o r I{07.00 enter
the L·nitr.:d States from "lexica under Ihe GSP.('
Chan'
Maquitadora Employment
Thousards 01 employees
<00
350
300
The developme nt af the maquilado ra sector
The maquikldur.1 progr.lm <.!t:vl"lorx-'tJ in
to the canccl b tion of tht: U.S. br.lceru
p rogr.lln, Du ring World W;l r II , lahor .. hortage:-. in
Ihe r.tilro;ld industr), and in ;tgriculltlre led Ihe
Cniled St:He:- [0 adm it 1\lexican laborers, o r bracel'OS, [ 0 work. Although the pro\'isions for r..tilrO:ld \\'orkl'rs expired in 1946, ruks allowing the
enlr.lIlt'l' of f:lnll \\'orkl'l'S rem:l incd ;111(1 were for·
ma lJ~' .~lT1l'lioned in the early 19;Os, ;\ Iany farm
worker.. kft the interi or o f ~IcXK"() and e,.,I:lbli.shed
perm:lIll'nt homes on the nonhern horder .so they
cOli ld take :-ca....onal agricultur.:ll joh:- in the Cnited
Siale., Thl':.e en~nt.. C:llI:.ed :.igntlk;tnl ropub tion
gro\\ Ih In l10rthcm Mexit'o, hut Ihey abo c lUsed
US l:ibor grollrs to t:xert political pn:s:-ure
again ..t the program In 1964, with IWi,OOO J'.it.;xiGin." working a,,, br,lceros, the United St:J\es termi ·
natl'U the p rogram, As ;1 reSu lt. unt:ll1ploymenl
r:.l te., be}!:!n to exceed 70 percent in some northem l\kxi('OII1 ci tic-:. To lind job), for (he tholl,sand:. of unemplured bl~Kt:ro:.. tile \kxic:m f.\0\,ernrnt:nI deSigned .1 program 10 t:lke :rd\,:Ullagt: of
tariff
111..'111:. H()() ;~O :md 1:ID7 .00~ Under tire Bordt:r Industri:tliz;uion Prof.\r.lm. Ille \1cxil.:an gm'ernl11ent
allo\\'l'd 100 percent fon.·ign control of plant opt'rati on .. in l\ okxico under .~p(;Cifi ....d conditions. It
al so pl'rmilh:d dUly-frel' imports of ma ll'ri;tis and
eql1ipml'nt. proVided that :111 oUlput would Ix:
exported fro11l ~1exiC(l . Tht·!\l,.· new nil....:. made il
e:l'>il::r for L' S and Ol her fo reign prodllt'(;,I'S to lISl'
1\\cXICO·., lo\\'-cosl 1alxJr to compl:"ll' wilh Asian
prOdl1Cl'r., '/
At fil':-t. ~ I exican bw required m:lquibdor.L..
to locate on the horder, hUI bier al1O\, l'd plants in
tire interior Despite !'vkxico's rt:iaxa tion o f restriction .. on pbnl local ion. more than 80 percent of
m:lqllibd()I~1 elllploY11ll'nl is stil l on the Ix)rder,
~1t:xico ;rbo relaxed ils requi n.::ment Ihat all
Jll:Lqllil:l d()I~ 1 produ('{s Ix" export ed, ~ow only 80
rc.,pun~"
u.s.
F.con o m ie Review - Janu a ry 1990
250
~ ~..... IIIIIIIIIIII
'70
75
'80
85
SOURCE OF PRIMARY DATA: Ins~lulo Naclonal de EstadislICa
Geograha e
In/onTltltlCOl.
percent of {otal output mu:.t he exportl-d ~ I ost
planb :.till do nOI sell ::my of their output In [\'Iexko. Onlr :llx)lJl one m:rquil:ldora in len has e\'en
:rpp1ied for a Ix'rmit to selllht:re. III
Growth in the maquiladoras
r-,'Iaquiladora growth has Ix.--cn r.lpid but er·
r.Hic. Ch;Lrt J depicts maquilador.1 emploYllleni far
Frx lurther d,scvsslO/"lS 01 me rciaIJOfl$hlp bet.veen maQlRI8dota actMty and me GSP, S8e us IntemallOfl8l Trade
Comrr><SSIOfI (1986. 54--67)
, Sec U 5 Internal'Oflal Trade Comm'SSIOfl (1988),8- I [s'c]
• Altflo<Jg/l lIle Intent of Ihls program was 10 f'nd jobs for the
dlsplaccd ~aceros. mosl ()t the W(KkMS hIred by Ihe
fJ()/ Iormcr ~aceros Most allhe bra·
CCfOS had beenmen, wMcmemapnryalwor$(e(s hlledby
maqv,ladotas were
maC1tJl/adotes are....:men The ptopotlJOrl 01 male workers
/lie maqtJIIadoras increased over the years. bt.sl I'I'D"rIerl
SI,/I hQkj most maquiladora JObS
In
MeI(J(;()S Sccre/alY allIldustry and C()rI'W'Il8rce IfIlrodl.lCed
me Border IndlJSllOallzalJOll Program to fecliltate the dette!,
opmenl althe types of U 5 'owned, labot·mlenslVO assem.
bly operatlO()s fle had seen in East ASia See Fernandez
Kelly(1987 lSI)
5c-e Dallas Morn.ng News (1989. 0·/)
,-
Chart 2
Growth in Maquiladora Employment
Peroon! change Irom pr8VlOUS year
350
300
250
200
150
100
50
o
_.J.... _.. __
.1_ ...
85
SOURCE OF PRIMARY DATA InShlulo Nadonal de EstadiS!'ca.
Geogralia • •nIOfm~bCa
each yo.:ar from 1966 to 198H. ~()(e th:1I averJ.ge
maqll ilador:.1 t:mployment for 19H8 exceed... that
for 197'; hy mort' than five time~ :10<1 mon: th:m
mnel)' ti1l1l's th:1I for 1966. Although maquibdorJ.
employment grew in :111 but three year!lo. rJles of
exp:m:-.ion in malluila<lora cmplo~'ment vary consilkr.lhly (Ch:1I1 2).
TIl(: Wc:l1e... t vari:lnce OC(;Urrl'<i dllrin~ the
initial ~1 :I~e of maquilado ra cxpan~ ion , 1966-70.
\VhilL' ch,engl's In Mcxican law hrought r:.lpid
growlh. conll':ldictory nl1es among ,\ jexiGln regutllory :l~cncie~ nealcd uncertainty amon~ inveslor~ and t!,lIn penL'd inn:!!'> to r e nthusbsm. After the
initia l .~urxt: of ,-:rowth , capacity constraints o n
infrastructure :Lnd in sonK' local labor rnarkels impeded l·xpansion. In 1967, for L'xarnpk:, m:lq uiladora employment rose by 32 1 percent. hut it fell
the next rear by more tha n S percent. Although
maquibdor:.e em ployment ro.;c in 1%9. it rt!Ill:lincd helow the level e ..tablished in 1967. 11
During ~I sc{.'ond stagt! of cxpans ion. from
1971 to 1976. i\!exil"an policy contr:ldit:lions began
FOI ad(j,tJ0n8/ d,$CU$$IOrlS on ffIe$e lopes and others rhal
s'a dU/f", In '" In<S SCCtJOr'l. sse Ba'8I<ls Escamilla (1988.
27-57)
"
to be resolved :md the growth-rate variances
diminisht..'<l. Ne,'erthcks.~ , extreme variance in
employment growtb remained. For example.
maquilador.l employment grew 140 percent in
1972. but fdl by :llm()~t 12 percenl in 1975 as a
U.S. f(.-'(:c~"ion a nd the overvaluation of the peso
discour"gt..-o maquilador.l :Ictivity. A U.S. reco\'ery
:md a Mexican devaluation prompted a turn:Iround in 1976.
During the second stage of expansion, it
became It:gal to loc-a(e maquilador.l~ :I\\'ay from
the northt:rn bordt:r 5:lles of as much as 20 per·
t:ent o f :1 maquilador.t"s output in J\kxican markets also wefe It:galizc:d.
By the thi rd stage of maquiladora expa nsion. 1977- HI , the indu!'>lty h:ld become much
more stahlc. Employment growth I':lnged be tween
'; pert:t!nl and 23 perCl~nt. with no cpisodes of
contraction . As the third period progressed. rapidly risi ng pt::>()-denominated wages in Mexico,
together with intervention in exchange markets,
pushed up Mexican \Va~es in dollar tenns. These
increaM's. together with episodes of markt!<I
weaknes... in the U.S. economy, d:lmpened enthusiasm for further investment in m:lquiladoras
Growth wa:- :-ubstantially !'>lower in 1980 and 19tH
than in 1978 and 1979
The third stage abo I.x"C Ullt: a period of
consolidalion. i\ 1:tquilador.l employment grew
much fastc r than the number of maquibdor.ls. In
the second stage of rnaquiladorJ. growth. avemge
t:mplormcnt po.::r maquilador:e was 129 workers.
In (he third stage, tbis figure rose to 198 and. by
19H1. it rC:ldK-o 216 Nevcrt he less. 1981 brought
signs of trouble :IS the numbe r of pl:ents felt for
the first timc since 1976. This dL"dine rcnected the
rene wed ovcrvalllaliol1 of the peso.
Tllc fourth stage of maquilador:.1 expansion
hegan with instability in both Iht: Illaquiladora
sector and Ihe MexiC:ln and U.s. economies. In
1982, the impact of oil -price decl ines plungt."<.i the
t.k xic:1Il economy into :1 protrJcled period of
l.oconomic weakness. Likcwise, in 1982. with tht!
deepening of the U.s rccession , avcr.lge maquiladora employment fell for the fi r!'>1 time since 197'5.
and the mllnber of plan t.~ also declined. These
problem:- werc followed hy a JX:riod of extended
growth. A matar dt'valuation of the JX:so in the
third quarter of 1982, :1 dL'dine in the dollardenominatl.'<.I le\'eJ o f i\kxican manuf:\Cturing
Fe<kral Reserve Bank o r Dallas
wages, and a U.S. recovery prompted maquiladora growth in 1983 Since then, maquib.doras
have ~rown t:vcry year.
Chart 3
Mexican and PACNIC Wages
3
PACNIC wages
SOURCE OF PRIMARY DATA
us
Deparlmenlof Labor
Chart 4
Growth in Maqu iladora Employment and
the Ratio of Mexican Wages to PACNIC Wages
Percenl
cnaoge
u
S donar..cienomonaled wages
Wage ratio (Mexican to PACNtC)
30
30
20
20
"
"
0
."
0
MaqUIladora employment growth
."
-.20
7 5 76 77 78 79 '80 '8182 '83 '&Ii '85 '86 117 '88
.2Q
Maquiladora employment growth and
international wage differentials
Close ties exist bclwt:en the gro"''1.h rate of
maquiladora emplo}'menl and the disparity betw~en Mexic.m wages and those in other lowwage coumries, such as the I'ACNICs_ Chart 3
compares Mexican manufacturing wages, denomimlled in dollars, with an aver.lgc of wages in four
PACNI Cs-lIollg Ko ng, Korea, Singapore. and
Taiwan. 111e tWO lines o n Chart 4 dt:pict a f"J.tio of
Mexican manufacturing wages to I'ACNIC manufa(1Uring wagcs and the rJte of growth in maquibdof"J t:mployment. After the r.uio of Mexicl!1
\vages 10 PACN IC wages rises, 11l:lquibdora employment growth tends 10 slow heGllISe Me xico is
not meeting the PACNIC wage competition:ls
effectively. When the ratio of ~-Icxican wages to
PACNIC wages is low, the growth rJle of maquilador.1 employment is high because ["'Iexico is beating the PACNIC wage competition.
I'\cvenhe1ess. maquilador.1 t.'mployment
sometimes grows e\'en when Mcxl(-an wages are
higher than PACNIC wages. Mexico's proximity to
the United St:nes can still rmkc its operations
che:lper than those in Asia I )
Changes in the ratio hctween Mexican and
PACNIC wages generally bg one year behind
changes in maquiladora employment growth
rJf~S . Note in Chan 4 thaI the f"Jtio of Mexican
\vages 10 PACN IC w:lgcs peaks in 1981, and
maquiladorJ employment falls the following year,
A dose relationship also exisl.~ Ix:twcen
growth in maquiladora employment and the ratio
of Mexica n manuf,lcturing wages to those in the
"Sec Grunwald, -The Assembly IndVSlTy m Mexoco, - on
GtunwaJd and FI8T1W1 (1985. 137-38) /(y furlher diSCUssion
Citunwald noles IhBllhe Mexocan maqudadota IIIdvsl/y has
a somewflal dlffefftnl rTIIX 01 ptodUCIS man 'IS coontercarts
.-.As/aneounlNes Local!ll{1U1 Mexl(;OKlSlcadof Aslaa/Jows
fre'{Jfl/-cc6/s saWlgs on sv.;h &JTO(iuC/S Gtunwald clams
thai 11100 locallOn 01 relarwely fIJ{Jh Iransport COSI ptodvctJOn
in Me.o:ICO causes Me.>Oc3n OUIDIJI to be Jess SCOSII!\'tI 10
wago CIlafIgCS man AsI.Jn OIJ/pIJI ~thet or not thrs cI.aJm
is COIrect (and Grunwsldolfers fIOewJ8fICC thallI IS). MexlSOU RCES OF PR IMARY DATA; lrt5t,tulO Nacaonal de EstalllsllCa.
Geografia • InlorrntllJCil.
U S O&partrnel'lt ol Labor
Economic Revicw - J a nWiry 1990
can
OI.Ilput IS highly set'lSIllV8 10 wage d'fferenf<als boll!
between McxlCafI and PACNIC wages and between MeXIcan and U 5 WBge$
l'
Chart 5
Growth in Maquiladora Employment and
the Ratio of Mexican Wages to U.S. Wages
U.S. and Mexican Wages
Percenl c:hange
US dollar-denorrunaled wages
Chart 6
.,
"
Wage ratio (Mexican 10 U.S.)
30
30
20
.20
"
,
."
"
,
u.s --0-
"
,
Maquiladora employment growlh
.·, 10
'75 '76
'n
'78 '79 '80 '8 1 '82 '83 '84 '85 '86 '87 '88
.-,c-c."
',I,--.- "---.,c,-c.,-,-C."---.80--C.-,,--.-,,o--.,-,-c...
--C.,-,__
SOURCES OF PRIMARY OATA: InSIrMO NacIonal de EsUldfstica.
Geogralia e Inlormatica.
U.S. Depar1m&n1 of Labor.
SOURCE OF PRIMARY DATA: U S Department at Labor.
United States. Chart 5 depicts a rouio of Mexican
manufacturing wages to U.S. wagcs, togcther with
growth roues of maquilador.l employmenl, while
Chan 6 compares W".Jges in Ihe rwo nations. Note
the dramatic decline, depicted in Chan ;, in the
mtio of Mexican to US wagt'S fo llowing the peak
in 198 L Thi:-; reduction prompted the risc in
maquiladora employment growth in the middle
and late 1980s.
chieny serve U.S. markets, so that changes in U.S.
demand affect rates of change in maqUiladora
activity . l.ikewise. there is lillk d ispute that disparities between wagt'S in Mexico and in other
countries hypotht'Sized as competitors explain a
substantial ponion of the growth of maqu iladoras.
When Mcxic.Jn wages fall relative to wages else\vherc, maquiladora employment grows.
Nevcnheless, a significant controversy over
the impact of differentials between Mexic-J.n
wages and those of other nations remai ns to be
addressed econometrically. This controversy involves the impact of international wage differentials on U.s. manu fact uri ng jobs. U.S. o pposition
to maquiladoras. and to U.S. legishlt io n that facilitates their orer.Ition. comes principa ll y from
organizL-'d labor in th{! Un ited States. Representatives of o rganized labor contend that maquiladora
investment by u.s. finns essentially exports jobs.
In contrast. advocatcs of the maquilado ras argue
that Mexico competes wilh the rest o f the world
for laOOr· intensivc production and that U.S. jobs
lost to the maquilador.ls would have been lost. in
any case, to other low-wage countries. 14
One approach to addressing this controversy
economdriC'.Jl1y would be 10 re present each of the
competing argunlt:nts by using measures o f wage
A simple econometric forecasting
model of maquiladora fluctuations
The C:llIses of fluctuations in maquiladof'd
out rut :rnd employment have been the subjecl" of
interest and concern in a number of slUdies. and
there is general agreement on m:lny rdated issues. 11 There is little d ispute that maquiladoras
Vargas and Hemandez ISlcl
(1988). Amo.rzurrUDa C ( I988)andFuenresFlores ( 1989)
" See. for flJlltfnple. Navarrete
" Fot MIler references to thestJ
CO(l/rOWK~
and rherr
parllCtf)afIf$. see U 5 /fltemallOflal TradeCormllS.s:01( 1986.
24'. and GrunwakJ and F/an'm (1985. 14)
Fedor:ra1
R~~
Bank of Dallas
difft!re ntia ls in an l'quation that explains fluctuation!'> in maquil:ldora em ployment
If tht.' argument from US organizcd blxJr
wt.'rt.' corn.'(:t, tlll'n a me:l.~urc of the relationship
betwecn ,\!exiGI!' and US. wages wou ld be signific:lnt in t.'xpl:tining fluctuations in m'lqlliiadorJ
employment. As r-.k xic:m \Vages fell relative to
U.S w;lges. maquiladorJ employment would in·
cre:lSl' A!'> 1\'it'xican wages rose relative to U.s.
\V:lges. maqllilador..l employment would f:11I or its
growth would slo\\' Accordingly. this \'ari:lhk
would 1"lI.' expt'ctL'<.lto I:lke on a negath'e sign in a
regres...;ion equ:ltion Ihal cxplains v:lri:ttions in
m;Kluibdor.l employment
If the m:lqllibdora advocates' :tr~lImeni
wwe correct. Ihl'n ;1 Illl'asure of the relationship
bdwl'cn i\'it.'xiC;ln W:I~I'~ and thosl' of other compt.'tin).l 10w-w;\).IC cou ntries would expl:i in flm:tU;Itions in maquiladora cmployme nt. As Mexican
wages fd l rd ative to (hose of competing lowW:I).It.' c()untries. maquil;ldorJ employment woukl
ri.se. A:'> 1\kxica n w:lges rose rdative to those of
compt:tin).l lo\\'-wage countries, maquilador.l employmcnt would fall or its growth \yould slO\v.
This variahle would abo take a neg:l1ive sign in :t
regrt:s.~lon l'quallon.
If Ix>th l'ol1lpc:tin~ argumentS have merit, it
Ill:!y bto' pos...;ihk to test thc rdath'c slrc ngth of
each m~lIInent h y including both wage variables
in tIll" same re~rl;!'s...;ion equation, ;md then CX:lmining the \';llues of the cocfficicnls. Providing that
both coetricient values werc Significantly different
from zero, forming a ratio of the tWO would suggest soml'thtn~ :1i)()11I the relative signifkancl' of
cach argumt.'nt.
In con"tructi ng ;t model th::lI would allow
o )nsider:ltion t)f tllcse com peTing arguments,
however. laho r ('ost f;lCto rs :Ire not the o nly determinants ()f mattllibdor:'1 e mployme nt flu ctuations
th:lt deser.t· cons ideration. During a 1974-75
crisis in till' maqllibdo r.1 industry, the Me xican
Secre t.lry of [ndu:'>try and Commerce noted that
"the dt'wee to which the present problems in tilt,
Illaquil:t indu:'>lry h;lvc been caused by tht' United
Slatt::'> rect:s.~lon has yet to be analyzed.~'~ Both
this sl:.Helllt:nl and the econometric com'l'ntions of
the liler.ltllft' on maquil:ldoms suggest thai iI
mt'asu rl' of u.s. uem:lIld also warmnts incl usion
in Stich :1 model :'> inct: maqu ilador.ls prod uce priIllarily for the U.S. 1ll:l rkct As U.S. dcm:lnd ri.ses,
Economic Review-January 1990
so would maqui1ador.l employment. As a result, I
expect the dcnumd variable to take o n :t positive
si~n in a rcWl'ssion equallon,
Accordingly, thn:.>e \'ariables appear to be
reasonahle cand idates to explain nuctuations in
l1l:lquilador..l employme nt. First. to C<.Ipturt: tht,
argume nt of o rg:mizcd laho r. I include a r,lIio o f
Mcxica n manufacturing wages to U.S. manufacturing wages As Mexic:':1n manufacturing wa~es fall
relative to U.S. nwnufacturing wages. maquiladorJ
employment is ex~ct(.'{lto increase. Second, to
capture the argument of maquilador.l .. dvocates, I
use a r.ltio of Mexic,ln man uf:i cturing w<lgt:s TO ;m
;I\'t'r.lge of manuf:lCturing wages in Iiong Kong,
Korea , Sing:lpor(;!, and Taiwan .l~ Third, to ca pture
tht: effect of nllctum io ns in U.S. demand, I indllde
U.S. ~ro.~s national product in 1982 dolbrs (real
GN P) .'~
Table 1 pl'~sc ntS the results of three regression equations, each of which incorpor.l1t:s two or
more of these vari:Jhles, using annual data for
1975-87 .1~ Regression cqu;l\ions thllt included,
respectin~ ly, thl' J\\exico-U.S. wage \'ari:lhle a nd
the U.S GNP variable a nd, scpar.ltely, the McxicoPACNIC wage variable :lIld the U.S. GNP vari-
My transJall()(l t;J a qlJOle IfIB/ sppears on AmozumJtoa C
(1988. 249)
If
me source 01 811 waQe dal8 vscd in this model is US
Departmenl 01 Labor. BurHu of LaOOf Sla/is/ics. Office of
PrOOVCtlV1ty and Tact1l10logy. &opplemenlary Tables fOf
'/ntafflStI()(l8/ COfI1P/.+risons 01 Hourly Compensation COSIS
lor PrOductl(}(1 Workers on ManufactuflnQ. ' BLS Report 154
(August 1988) lor 1915 and 1911- 81 and BLS Report 171
(August 1989) for 1916 These dSla ate annual and are
adjustad for d,fforooc9s among countfl9S on W()(ker benefirs
thar at9 fK)/ dlf9C/ wage payments
" In Ifll!lat/es/s. we used Ie~els anr;J, separately. Iogarotflms 01
levc/s In these tests. setl8l cOlfeia/1()(I was Slgru/icant &obscqucnlly. Ilist r;J,flerences 01 logarithmS were used, and
sefliil COIfel8tl()(l was $hOwn
fK)/
10 be SIgnifICant when
variables were placed ." IhJs form AN ICgrCSSl(l(l resuffs
displayed,., labJes deplcl mode/'lIrJ episodes ,., which /irsl
d,ffcrCf1C()S 0I1ogar,/hms ..ere ussd
" ThIs dalSl)8se IS ooviousfy VCf)' small Unfor/uNllely. 11 1$
me only pcnod for whK;h daUl eXl$ls /hal CorrBC/S for in/ef.
flS/lO'I8/ differences in W()(ker OBoe/its
21
Table 1
Results of Regression Equations
EquatIOn 1
Intercept
Coellicien!
I statiStIC
0.079
2089
Ratloo!
MexICan wages
to U.S. wages
U.S.
GNP
-<).300
-2.803
0.739
0.812
Summary star/sItes
R'
0.496
0369
Adjusted R'
Durbln·Watson
Autocorrelation check (probability)
2.547
0 ,117
Equation 2
Intercept
CoeJ!iclen!
t slallsllc
0.071
Ratioo!
Mexican wages
to PACNIC wages
U,S.
GNP
-0.314
- 2,743
1.776
0.579
0.640
Summary statistics
R'
0.485
0.356
2.743
0.070
AdjUsted R'
Durbln·Watson
Autocorrelation check (probability)
Equahon 3
Intercept
Ratio 01
Mexican wages
to PACNIC wages
Coelfic:ient
I statistic
0.078
1.695
-0.034
-0,047
RatIO of
MeXICan wages
to US. wages
U.S.
GNP
-0,268
-0.390
0.723
0.705
Summary SlallstiCs
R'
0.496
Adjusted RI
Durbin·Watson
Autocorrelation check (probability)
0.280
2.572
0.155
SOURCES OF PRIMARY DATA Inst<luto Naclonal de Estad istica, Geoglafla e
US Department 01 Comtnefce.
US Department 01 labor.
:ll1k, pr<I\ ldl..·IIK· I..'XI)l.,'l11..'d sign .... '·) ,\Ion::over. Ihl'
W:IJ.K' \';Iriahk mdu<k-d in t'".Kh of Ihe tWO-\ ';l ri:Iblt' 1..'<lll;lItO!l!'> \\;1 ... "'lgnltk;lIlt. although Iht' GNP
\ ';I ri:lhk' \\:1'" nOI 1\ third e<juatiun. which conl:lit1!'>
all Ih rl..'(.· \·;triahk· .... prodd...... fl.;':.lIlI ... \\'hoM! :'Igns
;m;, I.:on:-t!'>tl..'nt \\ jlh L·Xp...<:I;lIion ... bUl who:-e len'ls
Intorm~!lca
of :.ignifk;lIlt'l..' for till..' W;lgL' \,:m.lh k ... :11'1..' nOI !',
Although Ihl..' cOl..'ffidcm ... of tht..· \kxico-L.S,
,'agl..· \'al'iahk and thl..' \I t'xt("o· I't\Cr\lC \\"a).\l..· \'ariahk (ook on tht· expt'tll:d n l..').,: ;1\1\ l' 'I).:n,... in ;111
l'qu:ttion lIul induded (hem :tnd thl..' l' S G:-iP
'·ari:lhle. ndthl..'r of the 1\\"0 \\":Igl..' COl·!Tic ..... nb \\as
Federal
Kescf"~
Bank of 03113$
signific;mtly different from zero. Although this last
rc:slilt is incon.sistent with ex(X"Ctntions, these reductions in signifk:mce suggest :m (:·'tonometric
probl<.:m thnt ;:also appeared in ;:a s imilar maquilador.J-rdated modeling exercise by Rodolfo Navarrete Vargas and Jose Luis I lerm1ndcz ISic/.
This problem is -the existence of multicollinearity lx:tween the two variables that express
relative costs. -11 That is. movemenl~ in the two
wage v'Lriables are highly correlated with one
another.!l This correlation substanti:llly reduces
the ahility of regression analYl>is to scpar.Jtely
attribute variations in maquilador.:, employment to
each w'Lge v:Lriable. This problem probably explains \\lhy, despite years of controversy between
pro- and :Lnti -maquiladora groups, no published
research I.:ver addressed this question statistically.
We h;Lve no direct method for correcting
probl<:ms of 1l11llticollinearity in regression equation .~ beyond incre:lsing the numocr of obsL""rvations. Accordingly, the controversy between
pro- and anti-m'Lquilador.J groups cannot be dirL"Ctly ex'Lmin(.."(i by linear rcgre~ion a nalysis with
the present dma
A procedure docs (:XiSI, howc:ver. Ih.1I allow.s for the weighting o f the wage variabk:s in a
context Ihat ;:avoids multicollinearity. This procedure is pr;Ilciptll components an(l~.'$ js.
11lrough principal components analysis. the
variation of sever.:11 variables can be comprcsst.'<.l
into one or morc index variables. The resulting
index variable is known as a prinCipal compo/lent. Thc principal component is :1 linear combination of somc collection of variables, such as the
two w:!gc rJtios. A mathematic:!l procL'dure is
llsed to maximize the amount of variation of each
of the two wage variables that C;tn be captured in
one index. This variance-maximization procedure
suppresses the contaminating effects of onl.' wage
variable's correlation with the other. Multicollinearity ceases to be a problem.
Through this maximiz;nion procedure. a
coefficient becomes attached to each original
variable. In the comext of this study, the wager.llio v;:ariabks ;:arc the two original variables. More
important , the values of the coefficients eSlimatt.-d
for the nriables used to constmCl this index Mindicatc the relative importance of each original variable in the new derived componcnt.- l .,
This me;:ans th:n we can comp:lre the Weights
Econo mic Review-J an uary 1990
of the two wage variables when they arc used to
create the principal components index. Moreover,
we can compare these weights with confidence
that we have avo idL-d the problems of multicollinearity. Thus, if tbe weighl (or coefficient) for the
Mexico -U.S. wage ratio were Signifi cantly larger
than that o f tb~ Mcxico-PACNIC wage ratio, this
would sugg~st that Ihe maquiladol""d o pponents
\\"~r~ more correct than the maquiladora advcr
catt's, :md vice versa .
" rhe wage variables 8r61aggcd by 006 year. while the U 5
GNP vaflabla IS cOOlemporanaous This configuration 's
based on tho foilowlf!g aSsumpllQ(lS Fltsi. new planls
locale in Me}l./Co In response to chanr;BS In wage dlfferen·
IIIlls DelwCen that country and OIhar nallOflS The locallOfl or
relocallOfl process lakes tlfflB If! thiS case. one year Sec·
0IId. eXlsrlflO plants respond to IfICreascs Ifl U 5 demand
by hlflflg more labor TIley do not roklcale but SIfIlPIy l'lIfe
more lOO'Irers The IImtcdnumber oIobservallOfls available
lor the wlgo SflfteS docs nor per'"'t much e"permenlallOfl
WI/ll allernallV6 lag $lTlJClures Lagged wage rallOS. h0wever. oller consideraOly more e}l.plar\alory pqwcI /!Ian C()r)tempotanflOlJ$ W399 ,ellOS
'" CUo.n.Watson Sta/l$tICS Ie. sc:mc 01 the BqlJ8I.oons Slgflify
defJrees 01 Sflflal COfrcla/lOfl III tile If!deletmutate range In
each 01 /!leSe cases. iii the casa 01 tile IfIdex equa tlOfl
below. we COtl$lructed ARIMA (aulOregt6SSJvc ,.,regrated
rllOVIflQ aV6fage' ~tJOllS 10 characterIze tile relevanl
process 0I5e111JI COfrclatlOfl In every case, fhls piocedure
showe<J that the rtull hypomeSis ofzero Ifllertemporal couelatJOt't of Cfror terms could not 011 r6JllCled at the 0 OS level
Thai IS. these are wf"llte·rlOISe processes
,. Navarrere VargasandLulsHerMndezisicj (1988. 225). my
IranslatlOfi NOlelh81111eNavarrfJle Vergas-Hernandezmodel
IS quarterly and uses wage dars Ihalare not corrected for
IntarnallOflal dilierenees In worker benefits
n Even when th6 data are Iransformed into flrSI differences of
togan/hms. tho coefficient 01 correlallOfl berween tho two
wage vaflaOics IS 0985 ThIs is 5ubslan~VEI evidence of
serIOUS mul/lC{)//InCaflly In cootrast. /lIecoeffIClefI1 of carre·
IatlOfl between /tie /fanslormed V6fSlOfl 01 me MexICO.
PACN/C wage rattO 8fId the GNPV8fiabl6lS only 0 255 The
coelfic>Cf1t 01 COfr6latlOfl betweefl /tie /flJflslormed vetSlOfl
01 /fie M/1}I./CO-U S wage raltO ana /tie GNP vanable IS
3" The latfet two coeftic>ctlts oIcorreia/lOfl wgges.t thai
/tie lfISI{1flificatlCe 01 /tie GNP varllJlJle III /no! equatIOnS iii
whIt:;h 1/ appclJlS IS nor the rCSlJlt 01 muI/IcoIlIfIean/y
o
n MomS01 (1967. 226)
Table 2
Results of Principal Components Analysis
Ratio of
Mexican wages
to PACNIC wages
Simple
statistICs
Mean
Standard deviation
Total vanance • O. t059831
Ratfo of
Mexican wages
to U.S. wages
-0.129
0.233
-0.092
0.228
Principal
component
Eigenvalue
0.10461S
Eigenvector
Mexico/PACNIC
Mexico/U.S
0.714571
0699563
SOURCES OF PRIMARY DATA: Instltuto Naaooal de EstadislICa. Geogratja e lolormlllt.ea
U S Oepanmeot 01 Commerce
US Oepanmeot oIlabOf
Table 3
Results of Principal Components Regression
Intercept
Coefficient
I statistic
0.074
1,927
Principal
component
index
-o,21S
~2.792
U.S
GNP
0.665
0.735
Summary Slalislies
R'
Adjusted R1
Durbin-Watson
SOURCES Of
0.494
0.367
2.655
PR MARY DATA Inslituto Naaonal de ESIa!lisilCa. Geografia . lnlOfTTl<'bCa
US Oepattmeot 01 Commerce.
US. Oepattmeot olla/xlf
Fedcn. t Reserve Bank of Dallas
T:lbk l. provides th~ result.s of the maximizing procedure used to cr~;Hc the index number.
The index-const n lCtio n proct..--durc has .mached
virtua lly identic:'11 weights to the two variables.
l nese weights appear in the rows beneath the
heading ·cigcnvector. · Tahle 3 presents a regression equation using this furt.'Cast. The diagnostiC
:-.tatistics o f the equatio n are largely similar to
those of the three-v,triable ~quation. except that
the le\'c! of .~ ignifiGm ce on the wage vuiahle
eas ily relects the null hypothesis at the 0.05 level.
Th us. despit~ the insignific:mce of the o riginal
wage \'ari;lhles in the original three-varia hIe equation. the coefficient o f the index wage variable in
the new equation is signific;mtly different from
zero.
It is interesting to r'ote the ability of alternative modd s to forecast maquiladora growth out of
s;lJllplc. If thl' index modd fo recasted less ;lCCUrately than the original, multicollinear model, the
validity of the weighting scheme would be questionable: Indeed, a n important reason fo r constructing the forecasting t:qllatio ns in this exercise
is their uscfulne:-.s as a means o f estahlishing reliable weights.
Accordingly, I constructed two foJ't:casti ng
equations and lIS{.-d data for 1975-84 to forecasl
maqUiladora e mployment in 1985, 1986, and 1987.
One foreC"'.!sting eqll:u io n incorporates the twO
\....:Ige variahles and the u.s. real GNP variable. A
second equation incorpor.!tcs the wage index
with u.s real GNP. Each of the I WO (."quations
rdy on data for 1975-84 10 forecast maq uibdora
e mployment III 1985, 1986. and 1987,
Chart 7 depicts the forecasts of the two
equations with actual maquilador.l employment.
Despite the few obscrv;rrio ns used to construci
the equatio ns , the graph .~ llgges t s thaI both mod+
cis fo recast maqu ilado ra growth w ilh a high degree of :lCcur.ICY. The graph 'llso suggests that the
index+bascd model forecastS more accurately than
the originallllodel In tbis case, statistical measures of the respective fort.."Cast results demonstrate
that look!'> are nOI deceiving.
Tab le:-. .. and 5 provide forecast results and
related di;lgnostic stat istks. l • In these n:sults , rOO{
mean square e rrors ( RMSE) appears as a measure
of over.!lI out-of-samplc forec-..lst accuracy. Note
that the index+oosed mudd gives a lower RMSE
than thl' original three-varia hIe t..'qll;ltion. suggestEconomic Re view - j ;a nu;a ry 1990
Chart 7
Comparison of Actual Maquiladora
Employment and the Original and Principal
Components Forecast
300
250
,.,
"'.~-------c~--------~~------co
1984
1985
1986
1987
SOURCE OF PRI MAR Y DATA
Insmulo Naoonal de ESladistica .
Geog.alia e In'ormal,ea
ing the usefulness of the index equation as a
forecasting il15trumenl 'Ina! is, an equation containing a n index that weights the two wage variables about evenly fo rt.'CasLS somewhat more
accuratcJy than an equation that contains the
original wage vilriables.
This res ult proVides no conclu:.i\·e proof that
the principal compone nts-based weighting
sche me can conSistently provide a highly accumte
picture of the rcJ:ltivc effects of fluctuations in
each of the twO wage variables upon maquiladora
growth. There are too few observatio ns \0 allow
inquiry into the stability of thc model over time.
Nevertheless, thc results suggest that the weighting sche mi! m:ly offe r more accurate forecasts
.. Note lhar, '" TBbI8s 4 and 5. the lorec8srs IJrepresenredm
1M form 01 1"51 dilferencli$ 01 lo{Iaflrtvns 1h8 forecasts
were ptesenled If! IlII$lorm because /1IBI IS now /hey were
M:IU8IIy COflS/FIJCted. IJfId not 85 /lie esllfTlated VlMJeS 01
Be/WIt maqUllsdonJ employment ThIs pteS8flratlOfl faCllilales rhe perlorrnance 01 ciIagno$/1C CI>eC/cs CNm 7 does
depict /lie I9SIma/1Id values 01 tn8QI.IIIadora empIo)omenl In
Charr 7, IllS posSItIJe 10 _ /lie cJ,fffHfNICe ber-Ihe em~
forecasrs and Mlal. '" fl!JCl OCCCJ{roo
"
Table 4
Forecast Results Using Original Model
Maquiladora
employment
Actual values
Ratio 01
Me~ican
wages to
PACNIC wages
1985
1986
1987
0.0112
-0.0114
-0,3611
Root mean square error
Ratio 01
Mexican
wages to
U.S, wages
0.0742
-0.0209
-0.3493
US
GNP
Predicted
Aclual
Residual
0.0656
00330
0.0281
0.1099
0,0851
0. 1989
0.0597
0 ,1644
0.2004
-0.0502
0.0792
0.00 14
0 ,0542
SOURCES OF PRIMARY DATA IIlSIItuto NaclOnal de Estadistica. Geogralia e Inlormahca
U S Deparlmerot of Commerce
U 5 DepMment at Labor
Table 5
Forecast Results Using Principal Components Model
Actual values
Principal
componen1
Indell
1985
1986
1987
0.0599
-0,0228
-0 ,5024
Roo t mean square error
Maquiladora
employment
US.
GNP
Predicted
Actual
Residual
0,0656
0.0330
0.028 1
0,1133
0,10 11
0.2034
0.0597
0.1644
0.2004
-0.0536
0.0633
0.0030
0.0479
SOURCES OF PRIMARY DATA Instltuto NaCIOf'1al de ESl3chstica. Geogralla e Into~toca
U S Department of Convneree
U S Oepartmem 01 Labor
111:111 II\\.· :-;("]lc1lll' illl p licil i n [Ill: orij.!in.tl thrL"t.:-
\':Iri;thk l·qu:t1ion. Thi:-; rt:'~u h impliL·.. 11l:lt till' pri n t· i p.d ('O lli ponL' nt~- h:l $(-,d \Y<.:Ij.!hting .... dWllW morL'
.1(·(·UI~lte\y {·h:U~1Ct ('rize .... tilt:' trUL' re\. t1I \·L· \\·L·Ij.!llI .~
of tho.: 1\\ 0 ar).,:WJI(::nt' In I lle 1l1:lquibdor.t ("(lll tro\ L'r,y Ihan do tilt:' \\·t:'ight-. i n the o ri).!lIla L ll1uhi("Illl,nL':I!' L'<.[U:III(JIl.
Federal Resc:rvt" Bank of Dallas
Implications of the econometric results
!\bquibdora joh growth is sensitive 10 difTerences between Mexic:m and U.s w:lges. but it is
about I..'qll<llly sensitive to differences between
!\It:xican and PACNIC wages. Indt.'Cd, conSidering
the emphasis that m:lqlliladora opponents place
upon maquiladoras as a sink for U.S. johs, it is
striking to sl!e the irnponann: of the Mexico-I}ACNIC connection.
The question th:n remains is. however. how
stable are these results over time? 11lt.: number of
observations currently available for the \csts a rc
very sm:111. Wbether or not the results derived will
hold for future observation periods remains to be
seen. hut the estimation mcthodology presented
hcre :1I least permits other rese:lrclll'rs to m(lkc
st;lti.~tic: d amendments :lnd reconside!':Jtions as
additional data become available This is an
improvement over what W:IS possible hefore,
ix>cause the heretofore insoluble problem of
multicollinearity :tppears to have discouraged
othe r rese:lfche!'l:i from st:tli:.t ically addressing this
controvcrsy.
A s\:.'Cond u.'~cful condusion from the statistical excrd.~es is that :1 simple two-variahle model
can pnwide rcason:lhly :tecumtc out-or-sample
forecasts of maquiladol".t employment. Eqll:llly
striking is that this dl;:grl;:e of forecast accuracy
could ht' achieved de.~pitl! the usc of only a few
observat io ns in the estim:lting equ:IIion. The degree of stahility of the reJ:J.Iionships captured by
the forecasting equation, however, remains to be
sccn. The degree of stahility c:m he examined
only through the .. pplication of additional observations.
Summary and conclusions
The development of the maquiladora sector
is not an isolated event, hut it is only one artifact
of tht: glohali7':lIion of the manufacturing industry.
Advanct's in communications and t !".ln.~porta tion
techno logies precipitated the use of low-skilled,
f.conom.k
Rev~"' - J;lnuary
19'90
low-cost hlbor in Third World countries ,IS part of
an increasingly internationalized manufacturing
process A g<xxi manufactured hy th is process
cannot re:llly ht.. said to h:lve hcl;:n Ill:lde in a ny
particu lar country. Pan of the production procedure OCClLrs in the home country while other portions rake piace abroad.
Two results of the globali7':lIion of manufacturing haw been reduced production costs and a
s hift in dema nds for manufacturing labor away
from the Un itc...>d St:n cs and to less-developed
countries. This lalfer result generated controversy
among U.S. labor groups, who feel that manufactu ring jobs should stay in tht:: United States, even
if higher prices to U.S. con.~umers result.
U.S lahor groups :I rglle that the Mexican
maquiladol".l.~ t:lke jobs that should go to U.S.
workers. They c!;tim that di tTerentials between
Mexican and U.S. wages result in a loss of U.S.
jobs.
The truth ;Ippcars to be more compliC:lled
than these claims suggest. The econometric resulls
presented here suggest that maquilado!".l growth is
about as sensitive to differentials between Mt::xic.m and PACNIC w:lges as it is to differentials
between Mexica n and U.S wages. That is, Mexi·
<:an workers compete with workers in Asia just as
much as they compete with U.S. workers. This
result sugge.~ts thai. if all of th~ m:lquilado!".ls
were shut down tomorrow, many maquilador.l
jobs would nOI retun} to the United Slates. Instead, many of these johs would go to Taiwan.
Hong Kong. Sing:lpore, or Korea.
Con,..;idering the trend tow:lrd globalization
of manufacturing, this result should not be surprising. Indeed, this globalizlIIion process originated in Asi:l. r.tther than Mexico. Moreover. the
original program that facilit:.III. '<l
. Mexico's first
maquiladoras actually carne :IS a response \0 the
stimulus of these Asian phenomena.
In summary, both arguments arc partially
correct: maquiladoras moly take U.S. jobs. hut the
jobs might go to other Thi rd World countrit.'S if
Mexico's maquiladoras did not exist.
n
References
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emptco por b industri a maquiladora: Ciclos
economic6s en Estados Un ides 197B-1985,~
in Maquiladoras (Primera Reulli611 t\'a ciO/wl
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M
£ con o m.ic Revkw- J anua ry 1990
29
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