The classical model of trade focuses on complete specialization which is all about utilizing and re-allocating the resources in the manufacturing of the products which have a comparative advantage. Generally, complete specialization is hardly found in any of the countries. But while considering US and Mexico, we can infer that the resources are employed relatively higher in the US than in Mexico implying that some resource may be available more in Mexico than the US at a minimum cost.
Interestingly, as per the date of 2015, Unites States has exported goods and services worth $118 B to Mexico and imported $219B (OEC, 2015) and the US is in a trade deficit with Mexico
Moreover, United States is in the state of technological development with its resources efficiently utilized whereas, in Mexico, there are still enough unallocated and un-utilized resources. By the virtue of which the Autarky Price Ratio (APR), a price ratio of selling a product within the country is relatively less in Mexico in-compare to the APR’s of United States, a circumstance created in an economy due to the unemployment of the resources.
So, given the Term of Trades as defined by the trading partners which always remains in between the APR of the trading countries(i.e United States and Mexico), and along the principal of classical model , the country having the higher differences in the Term of Trade and APR gains than with the nearer ones (Appleyard & Field, 2014) . Since the APR of the US is higher than that of Mexico, so at the given Term of Trades, Mexico gains more in NAFTA than the US.
Presenting the above arguments, undoubtedly, I also would like to state that, the trade between these two countries is not a zero-sum game, US also enjoys the benefits as it has procured products from Mexico in which it has a comparative disadvantage. As mentioned above, imports from Mexico in the US accounts for 13% of total import the country has made. The only moderating variable here that comes into the action is the implication of foreign exchange rate and wages rates.
And I personally believe that, since the factors of production are relatively cheaper in Mexico in compare to the USA, it is seen Mexico is outweighing the USA in trade but on the other hand the US has also exported significant amount of the merchandise and services to Mexico. Certainly, if the trade has not been here between the countries, they both would have been worsen-off. And in times in days ahead, if the fiscal and monetary policies are not kept in place by Mexico, with more specialization and increased wage rate, the APR of Mexico may also increase, making its export to the US dearer. Here, a policy level implication for the US could be choosing other trade partners, maintaining protectionist move (build a wall in the border), playing implied mercantilism or initiating currency war whose impact could be the global economic outcry.
Bibliography
Appleyard, D. R., & Field, A. J. (2014). International Economics . Irwin: McGraw-Hill.
OEC. (2015). OEC. Retrieved September 2, 2017, from www.atlas.media.mit.edu: http://atlas.media.mit.edu/en/profile/country/usa/#Imports
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