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We provide evidence that production-side links between Mexico and U.S. manufacturing sectors became stronger after NAFTA was enacted and, as a consequence, business cycles in these countries became more synchronized. This suggests that the positive effect of bilateral trade on business cycle synchronization found in previous studies for the case of industrial countries may also hold for industrial and less developed country pairs. The recent entry of other unskilled labor-abundant countries into global trade, however, seems to be affecting Mexico's competitiveness in some industries and causing Mexico to be losing market share in the U.S. import market. As a consequence, this event could lead to a permanent negative shift in Mexico's manufacturing output levels, relative to the U.S., and could possibly weaken the degree of business cycle synchronization between these countries. A related effect is shown to be that, in some industries where strong Mexico-U.S. production-sharing links persist, overall North American output is apparently being affected by the global movement of these activities towards the Asian block.

Bilateral Trade and Business Cycle Synchronization: Evidence from Mexico and United States Manufacturing Industries