International Business

Assignment on North American Free Trade Agreement [NAFTA]

Submitted by Kaustubh Suryawanshi (P-13)

Submitted to Mr. Deepak Agnihotri

MMS SEM III OPERATIONS

VIDYA PRASARK MANDALS

DR. V. N. BEDEKAR INSTITUTE OF MANAGEMENT STUDIES, THANE

Executive Summary:NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) includes Canada, the United States and Mexico. It went into effect on January 1, 1994. NAFTA has a logical rationale, in terms of both geographic location and trading importance. The two way trading relationship between the United States and Canada is the largest in the world. NAFTA is a powerful trading bloc with combined population greater than the 15 member EU. What is significant when compare with the EU, is the tremendous size of the U.S. economy in comparison with those of Canada and Mexico. In addition Canada has much richer economy than that of Mexico, even though its population is about the third that of Mexico. Though being a free trade agreement NAFTAs cooperation extend beyond reduction in tariffs and non tariff barriers, including provisions for services, investment and intellectual property. The agreement also introduced new dispute resolution process.

NAFTA provides the static and dynamic effects of economic integration, for e.g. Canadian and U.S. consumers benefited from lower cost agricultural products from Mexico, a static effect of economic liberalization. U.S. producers benefit from large and growing Mexican market, a dynamic effect.

NAFTA is good example of trade diversion, as some U.S. trade with and investments in Asia have been diverted to Mexico.

An important component of NAFTA is the concept of rules of origin (goods and services must originate in north America to get access to lower tariffs) and regional content (at least 50% of the net cost of the products must come from NAFTA region). Special provisions made on the part of labor standards and environmental standards.

There are pros and cons associated to any trade agreement, and NAFTA is no exception. The trade and investments in NAFTA have increased significantly but on the other hand it posed serious challenges to economies in terms of wages, investments, labors and illegal immigration. The following report is an attempt to study the NAFTA in details.

THE NORTH AMERICAN FREE TRADE AGREEMENT [NAFTA]

NAFTA - A result of an attempt made by America to have regional economic integration. The government of United States and Canada in 1988 agreed to enter into a free trade agreement, which took effect January 1, 1989. The goal of the agreement was to eliminate all tariffs on bilateral trade between Canada and U.S. by 1998. This was followed in 1991 by talks among the U.S., Canada and Mexico aimed at establishing North American Free Trade Agreement for the three countries. The agreement became law in January 1, 1994.

So , The North American Free Trade Agreement (NAFTA) is a comprehensive trade agreement that sets the rules of trade and investment between Canada, the United States, and Mexico. NAFTA has systematically eliminated most tariff and non-tariff barriers to free trade and investment between the three NAFTA countries. NAFTA has a population of over 363 million and hence it is one of the significant trading areas in the globe.

Objectives:1. To create new business opportunities particularly in Mexico 2. To enhance the competitive advantage of companies operating in USA, Canada and Mexico in wider international markets 3. To reduce the prices of the products and services by increasing the competition 4. To enhance industrial development and thereby employment throughout the region 5. To provide stable and predictable political environment for the investors 6. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to USA 7. To assist Mexico in earning additional foreign exchange to meet its foreign debt burden 8. To improve and consolidate political relationship among member countries

Measures:1. Opening up the government procurement markets in each member country of NAFTA 2. Resident of NAFTA countries can invest in any other NAFTA countries freely 3. Protection of intellectual property rights of the NAFTA member countries 4. Simplification and harmonization of product standards in all the member countries of NAFTA 5. Free flow of employees and business people from one member country to another. Prevention of non- Mexican firms assembling goods in Mexico

6. Avoidance of re-export of the products imported by any member country from the third party. This condition is not applicable, in case certain percentage of manufacturing costs are incurred in the importing country. This percentage is 50 incase of USA and Canada and 80 in case of Mexico 7. Pollution control along the USA-Mexico border

Benefits:Since NAFTA came into effect, trade and investment levels in North America have increased, bringing strong economic growth, job creation, and better prices and selection in consumer goods. North American businesses, consumers, families, workers, and farmers have all benefited. For more information about NAFTAs many benefits.
Increased Trade:

Trade between the NAFTA signatories tripled, from $297 billion in 1993 to $1 trillion in 2007 (latest data available). Exports from the U.S. to Canada and Mexico grew from $142 billion to $452 billion. Exports from Canada and Mexico to the U.S. increased from $151 billion to $568 billion. One reason trade grew because NAFTA provided the ability for firms in member countries to bid on government contracts. It also protected intellectual properties.
Boosted U.S. Farm Exports:

NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second largest for corn, soybeans and oils. As a result of NAFTA, the percent of U.S. agricultural exports to Canada and Mexico has grown from 22% in 1993 to 30% in 2007.

Created Trade Surplus in Services:

More than 40% of U.S. GDP is services, such as financial services and health care. These aren't easily transported, so being able to export them to nearby countries is important. NAFTA boosted U.S. service exports to Canada and Mexico from $25 billion in 1993 to $106.8 billion in 2007 (latest data available). Service exports were $40 billion. NAFTA eliminated trade barriers in nearly all service sectors, which are often highly regulated. NAFTA requires governments to publish all regulations, lowering hidden costs of doing business.
Reduced Oil and Grocery Prices:

The U.S. imported $157.8 billion in oil from Mexico and Canada shale oil. This also reduces U.S. reliance on oil imports from the Middle East and Venezuela.

Since NAFTA eliminates tariffs, oil prices are lower. The same is true for food imports, which totaled $28.9 billion in 2008.
Stepped Up Foreign Direct Investment:

Since NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada and Mexico more than tripled to $348.7 billion (as of 2007, latest data available). Canadian and Mexican FDI in the U.S. grew to $219.2 billion. NAFTA reduces investors' risk by guaranteeing they will have the same legal rights as local investors. Through NAFTA, investors can make legal claims against the government if it nationalizes their industry or takes their property by eminent domain.

Disadvantages of NAFTA:
NAFTA has many disadvantages. First and foremost, is that NAFTA made it possible for many U.S. manufacturers to move jobs to lower-cost Mexico. The manufacturers that remained lowered wages to compete in those industries. The second disadvantage was that many of Mexico's farmers were put out of business by U.S.-subsidized farm products. NAFTA provisions for Mexican labor and environmental protection were not strong enough to prevent those workers from being exploited.
U.S. Jobs Were Lost:

Since labor is cheaper in Mexico, many manufacturing industries moved part of their production from high-cost U.S. states. Between 1994 and 2010, the U.S. trade deficits with Mexico totaled $97.2 billion, displacing 682,900 U.S. jobs. (However, 116,400 occurred after 2007, and could have been a result of the financial crisis.) Nearly 80% of the losses were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances.
U.S. Wages Were Suppressed:

Not all companies in these industries moved to Mexico. The ones that used the threat of moving during union organizing drives. When it became a choice between joining the union or losing the factory, workers chose the factory. Without union support, the workers had little bargaining power. This suppressed wage growth. Between 1993 and 1995, 50% of all companies in the industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate had grown to 65%.
Mexico's Farmers Were Put Out of Business:

Thanks to NAFTA, Mexico lost 1.3 million farm jobs. The 2002 Farm Bill subsidized U.S. agribusiness by as much as 40% of net farm income. When NAFTA removed tariffs,

corn and other grains were exported to Mexico below cost. Rural Mexican farmers could not compete. At the same time, Mexico reduced its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001. Most of those subsidies went to Mexico's large farms, anyway.
Maquiladora Workers Were Exploited:

NAFTA expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico's labor force. These workers have "no labor rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job," according to Continental Social Alliance. Mexico's Environment Deteriorated: In response to NAFTA competitive pressure, Mexico agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into more marginal land, resulting in deforestation at a rate of 630,000 hectares per year.
A threat to National sovereignty:-

One of the most controversial and troubling aspects of NAFTA is the investor rights clause, which permits NAFTA government to be sued directly by foreign investors who claim future profits were interrupted by public interest laws.

References: Daniels, Rodebaugh, International Business, Prentice Hall publication, New Delhi, 2010 Subba Rao, International Business, Himalaya publication, 2009 http://useconomy.about.com/od/tradepolicy/p/NAFTA_.htm