Question

It is argued that if a rich high wage country such as the United States were to expand trade with a relatively poor and low wage country such as Mexico, then U.S. industry would migrate south, and U.S. wages would fall to the level of Mexico's. What do you think about this argument?

Answer 1

The argument is valid to a great extent.

As we already know, US tops world countries in terms of GDP and Mexico is not even close to US in terms of GDP . Trade expansion of US with a low-income country was expected to bring more benefits and prosperity to US. The signing of NAFTA agreement in 1993 between US, Canada and Mexico further raised expectations.

But the reality tells a different story.

* Trade expansion led to the displacement of production.

* American giants like Ford , Volkswagen and Nestle moved their production units to Mexico . They were attracted by the cheap labour in Mexico.The ability to temporarily import raw materials duty free also made manufacturing in Mexico an enticing option.

* The trade proximity between US and Mexico was helful in shortening the supply chain as well as delivery costs.

* As a Result, there was huge job loss in US . Around 879280 jobs were lost . Most of these were high - wage positions in manufacturing industries.

* As a result, there was also a fall in real wages for production workers. (Due to Demand for labour becoming less than the supply of labour. )

Thus, experience itself has proved that trade expansion with low- income country like Mexico leads to a fall in wages in US.

However the wages hasn't fallen to the level in Mexico.