16 _Central America and NAFTA_ The Mexican supply and demand intercepts were chosen first to calibrate the numbers to match the actual initial data, or next, to show some interesting scenarios that allow Mexican growth either from capital accumulation or from increased economic efficiency as a result of liberalization.

58. Table E.7 shows different scenarios for each commodity group. The scenario reported in column (1) is formed by calibrating the Mexican and U.S. functions to reproduce the 1985 data on the ratio of Mexican trade to Mexican production and the ratio of Mexican production to U.S. imports. In Column (2) we try to increase the size of Mexico to correspond with the highest growth scenario defined in Table E.2. The reason for exploring this rather extreme assumption is that the effect of NAFTA on Central America depends fundamentally on the economic size of Mexico. If Mexico is small, Central America will lose. If Mexico is a bit larger, Central America will lose even more. But if Mexico is "large enough" Central America can actually benefit from NAFTA. To determine if this is a plausible outcome, we need to know how big must Mexico be to have this ameliorative affect.

59. The computations reported in Section 8.A.3 show that Mexican net exports of labor intensive goods would be multiplied by approximately 6 times under the highgrowth scenario after a decade of growth. Moreover, the capital/labor ratio would be multiplied by nearly 2.5 times. We assume that specific subcategories of net-exports grow at the same rate as the labor intensive net-export aggregate, that capital-labor growth translates into a roughly similar growth in production per worker, and that U.S. import growth is equal to population growth, then we can get some rough estimates on the relevant ratios in Table E.7. Specifically, with Mexican net exports increasing by a factor of 6 and production by a factor of 2.5 the Mexican net-export to production ratio would be multiplied by 6/2.5-roughly 2.5 times-and the Mexican production to U.S. imports ratio would grow by nearly 2 times. These are the predicted figures that drive the calibration in column (2). If this is not enough to produce a bifurcated equilibrium, then the size of Mexico is increased first to produce a bifurcated equilibrium, column (3), and next an equilibrium in which Central America is made better off, column (4).

60. Clothing and Pottery exhibit all four columns, column (1) with a relatively small Mexico, column (2) a mid-size Mexico still without bifurcation, and columns (3) and (4) the cases of a bifurcated equilibrium and a ROW benefiting from NAFTA, respectively. In the first two columns the ROW price suffers a mild deterioration, with a Mexican share of U.S. imports jumping up strongly. When we replicate the 1985 data in column (1) the lost earnings for ROW are rather small, 3.8 percent in Clothing and 4.8 percent in Pottery. The Mexico with growth case, column (2), causes greater losses for Central America as a result of greater price declines and a smaller market share. If Mexican production is increased by more than a factor of 10 and the ratio of Mexican production to U.S. imports is increased to around 90 percent, a bifurcated equilibrium occurs, with Central America losing 17 percent of its revenues in Clothing and 8.7 percent of its revenues from Pottery. If Mexico is a bit larger still, with preNAFTA output levels exceeding U.S. imports, then Central America can gain, earning