The Effects of the Mexican Economic Crisis on Trade and Employment in the United States
During late 1981 Mexico began experiencing a rapid deterioration in its current account balance which is frequently associated with an overvalued exchange rate. The government's initial reaction to this problem was to increase its official intervention in the foreign exchange market. This policy was abandoned in early 1982 as Mexico's international reserves were depleted by falling export revenues, capital flight, and an inability to obtain further loans in international credit markets. The adjustment program which followed included three devaluations of the peso, exchange controls, reduced import tariffs to mitigate the inflationary effects of the devaluation, and tighter monetary and fiscal policies. In response to this austerity program Mexico was able to obtain short-term loans from foreign central banks, U.S. government agencies, and multi-lateral institutions. Unfortunately, neither the adjustment programs nor the assistance it received from abroad was sufficient to prevent the foreign exchange crisis from creating a severe macroeconomic contraction.
While the effects of the foreign exchange crisis on Mexico's current account balance and domestic economy are well known, the effects on the U.S. economy have not been as widely addressed. This neglect is understandable as most work on the international transmission of economic disturbances focuses on the relationships among developed countries (DCs) and implicitly assumes that a disturbance emanating from a less developed country (LDC) would have a trivial impact on DC. However, Mexico is the third largest trading partner of the U.S. While the economic disturbance in Mexico may not have a large impact on the U.S. as a whole, it should have a measurable impact on U.S. trade with Mexico and, by extension, employment in export and import competing sectors.
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