Spatial equilibrium and the regional effects of trade liberalization: Evidence from Mexico

While there is increasing evidence on the effects of trade liberalization on local labor markets, regional variation in cost and quality of living remains essential to understanding the broader welfare impacts of trade policy. This paper examines how trade liberalization influenced wage disparities between college-educated and noncollege-educated workers, as well as urban amenities, across Mexican municipalities from 1990 to 2010, during the implementation of the 1994 North American Free Trade Agreement (NAFTA). Using a detailed database that estimates each municipality’s exposure to international trade based on the lowest-cost transport route to the nearest US truck port, I find that areas more exposed to trade experienced reductions in wage gaps between college and non-college workers. However, these reductions were more pronounced in nominal wages than in real wages (adjusted for housing costs). Additionally, more exposed municipalities saw smaller improvements in urban amenities. Consequently, while low-skill workers benefited from higher nominal wages, these gains were partly offset by rising living costs and lower urban amenities. These findings highlight the importance of housing affordability and public goods provision as policy tools to address the uneven effects of trade reforms.