The Impact of NAFTA on Prices and Competition: Evidence from Mexican Manufacturing Plants

This thesis uses detailed plant-product-destination-level information from Mexican manufacturing plants to assess the impact of the North American Free Trade Agreement (NAFTA) on prices and competition in Mexico. Using a structural model of production, I decompose product prices into markups and marginal costs and analyze how NAFTA's tariff reductions affected these components. I find that declines in output tariffs, intermediate input tariffs and U.S. tariffs on Mexican products, led to significant reductions in the marginal cost of both domestic and exported products. These reductions, however, were not entirely passed through to consumers as producers increased their markups in response to declines in costs. For domestic products, I find evidence of pro-competitive gains from NAFTA, with declines in output tariffs lowering prices and markups. For exported products, I find that producers responded to cuts in U.S. tariffs on Mexican products by increasing prices and markups, as they took advantage of improved market access. My results demonstrate that while both Mexican consumers and producers benefitted from NAFTA, producers benefitted significantly more.