Trade and business-cycle synchronization: evidence from Mexican and U.S. manufacturing industries

We provide evidence that production-side links between Mexico and U.S. manufacturing sectors became stronger after NAFTA was enacted and, as a consequence, business cycles in these countries became synchronized. This suggests that the positive effect of trade on business-cycle synchronization found in previous studies for industrial countries could also hold for trade between industrial and less developed countries. The entry of other unskilled-labor-abundant countries into global trade, however, seems to be affecting Mexico's competitiveness in some industries and causing Mexico's share in the U.S. market to decline. If third-country competition reduces Mexico's manufacturing output relative to the U.S., would that weaken the degree of business cycle synchronization between these two countries? Furthermore, in some industries in which strong Mexico-U.S. production-sharing links seem to persist, overall North American output is apparently being affected by the global movement of these activities towards the Asian bloc.