An Economic Analysis of U.S. FDI in China and Mexico: A GTAP-FDI Model Perspective

This paper improves the Lakatos and Fukui (2014) version of the GTAP-FDI model by building the linkage between exports and foreign direct investment (FDI) into the model. Using this model, we examine how U.S. offshoring activities in China and Mexico would change if the two major U.S. trading partners adopt similar investment policies towards the United States, in three different sectors: computer and electronic products; transportation equipment; and wholesale and retail trade, where there is a large presence of U.S. foreign affiliates in China and Mexico. The simulations from our CGE model indicate that both China and Mexico would benefit from the U.S. FDI inflow, though the impact is bigger over the Mexican economy than the Chinese economy. For China’s computer and electronic products sector in particular, the simulation results indicate that China plays a role as a production base and export center for computer and electronic products to the United States. The inflow of U.S. capital into China’s computer and electronic products sector expands the production of U.S. foreign affiliates in China, and in turn drives up these foreign affiliates’ exports of computer and electronic products back to the United States. Meanwhile, change in output and trade flows in Hongkong indicates that Hongkong is an important input provider for the production of computer and electronic products in China. Simulation results from the liberalization in Mexico’s transportation equipment sector indicate that the inflow of U.S. capital into Mexico’s motor vehicle sector would expand the production of U.S. foreign affiliates and in turn their exports back to the United States.