Trading Blocs NAFTA - Case Study Example

Trading Blocs: NAFTA The North American Free Trade Agreement or NAFTA is a regional trade bloc in North America. It consists of countries such as Canada, Mexico, and the United States. It was established in the beginning of 1994, in order to exploit the opportunities opened up by globalization. In terms of GDP, NAFTA is the largest trade bloc in the world at present. There are many people who support and oppose the concept of formation of regional trade blocs for regional integration. This paper analyses the arguments in favor and against trade blocs in terms of regional integration taking NAFTA as an example. Positive effects of NAFTA on regional integration Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008 (North American Free Trade Agreement (NAFTA), 2011). It should be noted that the elimination of non-tariff barriers would help free flow of goods and services between United States and Mexico. Same way free flow of goods and services are in place with Canada also. In short, these three countries are benefitted immensely because of the formation of NAFTA. Another major advantage of NAFTA is the increment of bargaining power of these countries in international market. These three countries are producing certain goods and services which are rare in other countries. Regional co-operation helps these countries to fix prices for their products in international market. In the absence of regional co-operation, these countries may compete each other international market which is not good for the interests of any of these countries. In short, NAFTA helps America, Mexico and Canada to work on a common platform to safeguard their interests. Increased cooperation between these countries may result in increased integration of this region under one umbrella. NAFTA created the world's largest free trade area, which now links 450 million people producing $17 trillion worth of goods and services. U.S. goods exports to NAFTA in 2010 were $411.5 billion, up 23.4% ($78 billion) from 2009, and 149% from 1994 and up 190% from 1993. U.S. exports to NAFTA accounted for 32.2% of overall U.S. exports in 2010 (Office of the United States Trade Representative). The above statistics clearly suggest the importance of NAFTA in enhancing trade activities between America, Canada and Mexico. Trade between the United States and its NAFTA partners increased a lot after the formulation of NAFTA. In the absence of such an agreement, America would have engaged in trade agreements with other countries in Asia or Europe. Such a scenario would not help North American region very much. In short, formation of NAFTA is definitely helping the integration of North American region. Negative effects of NAFTA on regional integration “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”(Amadeo, 2012). Movement of jobs from US to Mexico will definitely create problems in America. America is already struggling to find enough job opportunities to its citizens. Manpower costs in America is extremely higher than that in Mexico which encourages American companies to get their work done from Mexico easily by exploiting the norms of NAFTA. Mexico is benefitted immensely because of its ability to attract American organizations in utilizing their manpower. “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” (Amadeo, 2012). Although Mexicans are benefitted from the movement of jobs from America to their country, they are facing immense problems because of the intrusions of American agricultural products in their territory. Mexican farmers are not getting enough prices to their agricultural products because of the intrusion of the cheap agricultural products from America. In short, Mexican manpower sector is benefitted whereas its agricultural sector is suffering because of NAFTA. NAFTA did not adequately take into account the asymmetries existing between the three countries. Therefore Mexico entered the competition with serious disadvantages that it was not able to overcome and that in many cases were exacerbated. Unlike the European Union, NAFTA did not offer compensation or adjustment funds, or major infrastructure projects. Investment financing in Mexico was, and continues to be, non-existent or extremely expensive, making conversion or expansion difficult for companies not already linked to international sources of capital (Mexico after 10 years of NAFTA: The price of going to market, n.d, p.1). Unlike America and Canada, Mexico is not a highly developed country. So it would be difficult for them to accept all the norms of NAFTA easily. In other words, developed countries may get more benefits out of regional trade bloc agreements than the developing or poor countries. America can Canada can take risky steps to compete effectively in the market whereas Mexico should be more cautious in taking such approaches because of their poor economic growth related to other countries. Mexico thought that the formation of NAFTA would help them almost barrier free access to American market. However, they failed to do so because of America’s reservations in allowing Mexico to access its market without any barriers. Canada was also reluctant in granting free access permission to its market to the Mexicans. In short, Mexicans are less benefitted from NAFTA compared to Americans or Canadians. America is also suffering from the formation of NAFTA. Even though trade between the member countries has been doubled after the formation of NAFTA, it should be noted that “America’s trade deficit with Canada was $22 billion in 2009. Prior to that, the deficit was $78 billion in 2008 and $68 billion in 2007. With Mexico, America’s trade deficit was $48 billion in 2009 and $65 billion in 2008”(Fredman, 2012). Conclusions To conclude, regional trade blocs have many advantages and disadvantages. NAFTA definitely increases the pace of integration process of North America; however, there are certain concerns also in these countries about the negative effects of NAFTA. References Amadeo, K. (2012). Disadvantages of NAFTA. Retrieved from http://useconomy.about.com/od/tradepolicy/p/NAFTA_Problems.htm Fredman, J. (2012). The Disadvantages of the NAFTA Agreement. Retrieved from http://www.ehow.com/info_7743678_disadvantages-nafta-agreement.html Mexico after 10 years of NAFTA: The price of going to market (n.d). Retrieved from http://www.google.co.in/url?sa=t&rct=j&q=disadvantages%20of%20nafta&source=web&cd=9&sqi=2&ved=0CG4QFjAI&url=http%3A%2F%2Fwww.twnside.org.sg%2Ftitle2%2Fresurgence%2F182-183%2FCover06.doc&ei=nMBJT6uNOYfZrQeR5_SfDw&usg=AFQjCNEV8kDGri0E3FiMq2AGc69cSIFkrw North American Free Trade Agreement (NAFTA). (2011), Retrieved from http://www.fas.usda.gov/itp/policy/nafta/nafta.asp Office of the United States Trade Representative. (2008). North American Free Trade Agreement (NAFTA). Retrieved from http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta Read More