Mexico's external restriction and trade composition: A bilateral approach

Abstract

Recent studies have questioned the explanatory power of Thirlwall's Law in the case of Mexico and other developing countries, due to its omission of foreign trade specialization and use of time series for empirical evaluation. In response to these criticisms, this article estimates income elasticities of export and import demand using dynamic panel models in a bilateral framework between Mexico and 39 trading partners, including the composition of exports and imports as key regressors. Once controlled for the composition of international trade, the results from the estimates using the weak version of Thirlwall's Law accurately predict the economic growth observed in Mexico between 1990 and 2016.