Working Papers

"The Impact of NAFTA on Prices and Competition: Evidence from Mexican Manufacturing Plants" with Ayumu Ken Kikkawa and Yuan Mei

Abstract This paper uses detailed plant-product-destination-level information from Mexican manufacturing plants to assess the impact of the North American Free Trade Agreement (NAFTA) on prices and competition in Mexico. Using a structural model of production, we decompose product prices into markups and marginal costs and analyze how NAFTA's tariff reductions affected these components. We find that declines in output tariffs, intermediate input tariffs and U.S. tariffs on Mexican products, led to significant reductions in the marginal cost of both domestic and exported products. These reductions, however, were not entirely passed through to consumers as producers increased their markups in response to declines in costs. For domestic products, we find evidence of pro-competitive gains from NAFTA, with declines in output tariffs lowering prices and markups. For exported products, we find that producers responded to cuts in U.S. tariffs on Mexican products by increasing prices and markups, as they took advantage of improved market access. We find that Mexican consumers benefited through lower prices, and that Mexican producers benefited from lower input prices and increased their profitability through higher markups.

Work in Progress

“Chinese Import Competition in Mexico: Better than None ”

Abstract. This paper uses comprehensive microdata of Mexican manufacturing plants to analyze the impact of the rise in Chinese competition on prices and markups in Mexico. I use product-level quantity and price data to estimate marginal costs and markups for Mexican products. I estimate the impact of the increased Chinese competition driven by a rise in Chinese productivity. Preliminary evidence suggests that consumers benefitted significantly from the increase in Chinese competition: prices of the products that experienced the largest increase in Chinese productivity declined substantially. I find that Mexican manufacturers also benefitted from the surge of Chinese imports. While increased competition compelled them to lower their prices, they gained from cheaper imported intermediate inputs. For the average product, the decline in marginal costs driven by cheaper Chinese intermediate inputs was larger than the decline in prices, leading to an increase in markups.