Trade between the United States and Mexico slowed down sharply between 2001 and 2003, primarily because of slower growth in both countries. During this period, gross domestic product (GDP) growth fell to 1.6 percent per year on average in the United States and 0.6 percent in Mexico. Consequently, U.S. exports to Mexico fell 4.4 percent on average per year for 2001–03. U.S. imports of goods and services from Mexico grew only 0.6 percent on average per year over the same period.

      Currently, with both countries again growing strongly, U.S.–Mexico trade seems to be back on track, rising at an annual rate of 13.5 percent since January. This article looks at how trade between the United States and Mexico has increased synchronization of the two economies, examines both countries’ trade by industry and explores how enhanced trade between these countries affects border economic growth.

      Inter-industry trade refers to countries exporting and importing the products of different industries based on comparative advantage provided by their national characteristics or initial endowments. This is the standard concept of trade taught in every elementary economics textbook, describing how opening trade between two countries unequivocally enhances the welfare of both.

      Three important results follow from this theory of inter-industry trade. First, after trade opens, a country will export goods that are relatively intensive in abundant domestic factors. The United States will export technology because of its relative abundance of skilled labor or wheat because of its farmland. It will import goods like textiles or apparel that are intensive in scarce, low-wage labor. Second, trade benefits the abundant factors (skilled labor, farmers) and hurts the scarce factor (low-wage labor). The country as a whole gains, but there are well-defined losers. Third, export industries expand while industries competing with imports contract, perhaps causing extensive unemployment and long-term readjustment.

      There is another form of trade, however, that is not based on the competition between scarce and abundant factors. Intra-industry trade occurs within industries and even between countries making the same good and using similar factors of production. This trade can arise because goods are similar but not identical — Japanese car manufacturers are known for quality, U.S. automakers for innovations like the...

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