DP2176 Who Determines Mexican Trade Policy?

Author(s): Jaime de Melo , Jean-Marie Grether , Marcelo Olarreaga

Publication Date: June 1999

Keyword(s): Endogenous Protection , Foreign Direct Investment , Mexico

JEL(s): F13 , F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP2176.asp

This paper uses a political economy approach to analyze the pattern of Mexican manufacturing sector protection during the period of trade policy reforms between 1985 and 1989 when Mexico experiences both an important inflow of foreign direct investment (FDI), and a significant trade liberalization. The approach takes into account the potential role of FDI on endogenous tariff formation. It turns out that the data are coherent with the proposed approach in which trade policy formulation reflects political support and in which the sectoral presence of FDI has a strong influence on the determination of the pattern of tariff protection before and during the reform. In particular in Mexican manufacturing, FDI-intensive sectors received higher protection in import-competing sectors, though the move towards greater openness was associated with a reduction in the influence of industrial and FDI lobbying.