The Effects of Offshore Assembly on Industry Location: Evidence from U.S. Border Cities

Abstract

In this paper, I examine how the growth of offshore assembly in Mexico has affected manufacturing activity in U.S. border cities. Under the offshore assembly provision of the U.S. tariff schedule, goods that are assembled abroad using U.S.-manufactured components receive preferential tariff treatment upon reentry into the United States. Foreign assembly plants in Mexico, most of which are owned by U.S.-based multinationals, are overwhelmingly concentrated along the border with the United States. I combine data on employment and earnings in two-digit manufacturing industries for U.S. border cities with data on employment and value added in foreign assembly plants in the corresponding Mexican border cities. I study the effect that the expansion of offshore assembly in a Mexican border city has on durable and nondurable manufacturing activities in the neighboring U.S. border city. The estimation results show strong support for the hypothesis that the growth of export assembly in Mexico increases the demand for manufacturing goods produced in U.S. border cities. Implications of the North American Free Trade Agreement for the U.S.-Mexico border region are discussed.