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This paper studies the impact of trade liberalization on economic growth for Mexico. A four-variable vector autoregression (VAR) is used to study the relationships between trade, FDI and economic growth using quarterly data from 1989 to 2013. The estimated results from the Granger causality/Block exogeneity test show that economic growth is affected by real non-oil exports, real imports and real foreign direct investment. There is only one bidirectional causality, that between GDP an FDI, and two additional one-way causalities, one between FDI and imports and one between imports and non-oil exports. Thus the system is circular: all variables directly or indirectly affect each other. The Impulse Response Functions and Variance Decomposition show that non-oil exports and FDI have little or no impact on GDP, not supporting the growth-led hypothesis or the one that postulates that FDI promotes growth; nor dowe find that GDP has a significant effect on non-oil exports, rejecting the hypothesis that growth induces exports. Finally we find that imports have a significant effect on GDP, supporting the import-compression hypothesis.

Exports, Imports, FDI and GDP in Mexico: 1989-2013