THE EFFECTS OF U.S.‐CHINA TRADE ON EMPLOYMENT AND WAGES IN THE U.S.‐MEXICO BORDER REGION

I. INTRODUCTION The maquiladora industry represents a vital part of the economic interdependence along the border between the United States and the Mexico. The land ports between these two neighboring countries accounts for about 83% of their trade with one another in 2003 (Canas and Coronado, 2004). With China's accession in the World Trade Organization (World Trade Organization) in 2001, Mexico faced increased foreign competition, which threatens to deteriorate the well-established supply-chain relationship between the U.S. border city suppliers and the maquiladora industry (Canas and Coronado, 2004). Since mid-2000 to August 2003, 18% of the maquiladoras have shut down (Acevedo, 2003). (1) Moreover, there were months in 2001 in which production in the maquiladoras decreased by as much as 20% (Acevedo, 2003). It is important to note that there are other factors that may have influenced the slowdown in the maquiladora industry. For example, Hanson and Robertson (2003) and Gerber and Carrillo (2002) discuss the contraction of external demand due to the U.S. economic recession and the increase in the Mexican wage rate relative to competing Asian economies. In addition to these economic developments, the raise in China's economic growth and its position as the second-major exporter to the United States is generating much concern in border cities such as San Diego, California/ Tijuana, Baja California and El Paso, Texas/Ciudad Juarez, Mexico as well as the Mexican economy as a whole. (2) As noted by Vargas (2001), Texas border counties flourished from their proximity to their maquiladora neighbors. According to Vargas (2001), trade flows through the Texas-Mexico border create demand for jobs in border cities in services such as real estate, legal, accounting, and finance. Moreover, border city manufacturing also benefits from maquiladoras as U.S. suppliers expand or relocate their production to be close to their customer bases across the border (Vargas, 2001). The opportunity to supply the maquiladora is important since nearly 100% of the firm's inputs are imported (Robertson, 2003). However, this cross-border interdependence is being challenged. The increased reduction of transportation and communications costs along with the advancement of technology has allowed China to increase its role in production sharing to serve the U.S. market. (3) In particular, U.S. imports coming from China increased by 25% between 2000 and 2002, while those from Mexico decreased by 0.74% (Watkins, 2003). In addition to its larger export shares in products such as footwear, toys, lamps and lighting fittings, and luggage, China recently surpassed Mexico in exports of other sectors such as computer hardware. Meanwhile, Mexico's exports to the United States and, most noticeably, the production and employment of Mexican maquiladoras have decreased since the end of 2000 (Gerber and Mundra, 2003). The purpose of this research was to examine whether U.S. trade with China has significantly impacted employment and wages in counties along the U.S.-Mexico border. Specifically, we use disaggregated industry-level data to evaluate the effect of increased trade with China on employment and wages in four border counties: (a) San Diego, California; (b) Santa Cruz, Arizona; (c) El Paso, Texas; and (d) Webb, Texas. These counties contain the sister cities of San Diego, Nogales, El Paso, and Laredo, respectively, whose economies are highly integrated with the maquiladora industry. Thus, they provide a natural setting for the study of how increased competition from China has affected local economies along the U.S.-Mexico border region. Our empirical results show that, controlling for traditional covariates such as the alternative wage, demand for local goods and services, as well as macroeconomic factors including shocks to national employment, the U.S. business cycle, and U.S.-Mexico exchange rates, higher imports from China are significantly related to lower employment and wages in U. …