Working Papers

Abstract: Rules of Origin (RoOs) are a prevalent component of Free Trade Agreements (FTAs), serving as prerequisites that firms in member countries must fulfill to qualify for tariff reductions on their intra-regional exports. I focus on the automotive sector, where Regional Content Requirements (RCRs) increased on average by 16 p.p. relative to NAFTA’s average of 53%. Leveraging a new dataset on Mexican firm-to-firm trade, I developed an origin calculator to show three main findings. Firstly, the Mexican value chain exhibits strong interconnectedness, with 30% of firms serving 10 or more assemblers and contributing to a third of the transaction volume. Secondly, car part producers stand out as the most affected group within the value chain, experiencing a threefold decrease in compliance rates compared to car assemblers. Thirdly, the steep increase in RCRs is ameliorated by the roll-up provision, particularly in the realm of super-core parts and components—a provision that has recently been the subject of dispute among the FTA partners. Lastly, had the USMCA’s dispute settlement panel ruled in favor of the US interpretation, the compliance rate would have halved, in contrast to the estimated 18% decrease when the super-core roll-up is allowed.

Abstract: Developing a firm-to-firm trade model with endogenous production networks allows for estimating counterfactual outcomes for each firm in the economy. This level of disaggregation is pertinent when examining targeted shocks or policies that may have heterogenous effects across firms. Leveraging recent advancements in the matching literature, I introduce a novel equilibrium concept, wherein the production network exhibits chain stability. This is achieved by representing network formation as a matching game with transfers, where firms establish connections with providers and clients and assign distinct values to each relationship. These values are influenced by other links; for example, indirect upstream links impact the value of a connection with a provider through the provider’s marginal cost, while indirect downstream links affect the value of a relationship with a client via the client’s demand.

Abstract: The USMCA requires that 40 percent of automobile value content uses labor that is paid at least $16 per hour, 5 times Mexico’s current average hourly wage in the sector. Through the lens of a network model, we examine three major potential margins of adjustment for upstream automobile suppliers in Mexico. First, some firms may move towards greater subcontracting to reduce the costs of directly employed labor. Second, we may observe firms substituting towards capital and away from low-skill labor. And, finally, firms may choose to source inputs from outside the USMCA trade zone altogether. We study the local welfare effects on workers in Mexico’s automobile industry caused by these changes.