Impact of trade liberalization on the location of firms: NAFTA and the automobile industry

This study investigates the short-term impact of NAFTA on automobile production patterns by constructing a multiregional monopolistic-competition model, which accommodates three types of vehicle assembler and two classes of vertically linked parts supplier. By revealing the changes in potential profits of the firms in each region, the partial equilibrium model allows us to identify the types of automobile that will most likely be produced in Mexico as a result of reductions in tariffs and non-tariff barriers. The simulation results indicate that as trade barriers fall, ceteris paribus, producers of small cars will find it more desirable than large-car manufacturers to operate in Mexico. Recent developments seem to support the results of this model.