Preferential Trade Liberalization and the Path-Dependent Expansion of Exports

In the presence of sunk costs to exporting, preferential tariff liberalization may have a prolonged, dynamic effect on the pattern of a beneficiary country's exports. In particular, preferential tariff liberalization might trigger a geographic spread of exports to third markets outside the preferential trading area. I test this hypothesis for the pattern of Mexican exports after the inception of NAFTA to several Latin American trading partners. After controlling for product specific shocks and the overall trend in export growth, the evidence is consistent with the hypothesis that initial exports to the United States further prompted exports to third markets. The results suggest a significant impact on exports to large or geographically proximate countries (Argentina, Brazil, Peru, Costa Rica, Guatemala, Honduras and Panama). The stunning growth in the extensive margin as a count measure owes much to rather simple goods, while more sophisticated goods exert a substantial impact on the value of Mexican exports. The findings also document the existence of considerable tariff-induced trade diversion for goods with little skill or technology content.