Trade liberalization, trade balance and foreign direct investment in Mexico, 1980-2006

Using autoregressive distributive lag techniques (ARDL), this paper sets four structural equations for non oil exports, oil exports, total imports and real Foreign Direct Investment (FDI) in Mexico. Trade liberalization is modeled through dummy variables and the implicit national export and import tariffs. During the first part of the process of trade liberalization in Mexico (19821993), there was a severe structural deterioration of the trade balance in Mexico. FDI increased but just slightly. In a second part that started in 1994, the North American Free Trade Agreement (NAFTA) generated high amounts of FDI flows. However, this reverted the deterioration only partially.