Contradicting Effects of NAFTA - the Largest Trading Bloc in the World - Term Paper Example

Trade Agreements LETTER OF TRANSMITTAL I hereby certify that the work presented in this paper is original. All information gathered from secondary sources are clearly referenced and authors acknowledged. TABLE OF CONTENTS Title PAGE Title page 1 Letter of transmittal 2 Table of contents 3 List of illustrations 4 Executive summary 5 Introduction 7 Body 7 Qualification of a business free trade agreement 8 Types of trade agreements 9 Types of trade agreements 9 Types of agreement in USA 11 a. Canada – United States free trade agreement. 11 b. North American free movement tariff 12 Business free trade agreements: negative effects on USA economy 12 Growing trade deficits and job losses 13 EFFECT OF NAFTA O N FOREIGN INVESTMENT 15 The US economy, NAFTA and globalization 15 Conclusion 16 Recommendations 17 List of illustration Figure 1 14 Figure 2 15 Executive summary Business trade agreements are agreements that are reached by different countries in order to come up with policies and regulations for a barrier free trade. Business trade blocs are widespread in the world and face many challenges in their execution. The contracts that are made are binding and countries that have signed must adhere. Trade agreements have existed over time in form of multilateral and bilateral trade. The trade blocs have faced a number of challenges in their operation that have been able to overcome and others have not. Though they have many positive effects, negative effects cannot be overlooked as they also make their effect to be felt. This forms the need to write this report. NAFTA is an example of trading bloc in USA, which came into effect in January 1 1994. It is the largest trading bloc in the world and for this reason; we have used it as a basis of our argument. We have also used other trade deficits to back up our arguments. 1. Introduction A free trade area is a form of integration in the countries represented. The countries enter to either a bilateral trade agreement or multilateral trade agreement. We shall define the meaning of the two different types of trade and give an example on each. USA has entered into a number of agreements with different countries for reasons such as: boosting trade, gaining a wider market for its finished and unfinished products among others. Trade barriers such as customs duty and tariffs have been removed facilitating free movement of goods and services in the countries (Davidson 1990). Agreements such as NAFTA agreement that was precendented by United States – Canada trade agreement has had both positive and negative effects in the growth of economy of the country. In the next pages we shall look both at the positive impacts of trade agreements made by USA and dwell more on the negative impacts of the trade. We shall use the NAFTA agreement as the basis of our arguments and other trade deficits to backup these arguments. Also illustrations will be used to show the situation in the ground. 2. Body Business free trade agreements are treaties made between two people or countries to remove barriers of trade between them. These barriers may include tariffs and taxes. These free trade agreements between countries also allow people to move freely with minimum or no restrictions in member countries. The business free trade agreements help in liberalization of international movement of goods and services across countries. Countries that have business free trade agreements sign a Free Trade Agreement (FTA), which reduces barriers of trade in member countries. Countries that engage in these types of agreements are always complementary as the agreement is supposed to be beneficial. That is if commodity A is present in country 1 and not present in country 2 and commodity B is present in country 2 and not present in country 1 the two countries may sign a business free trade agreement to help in movement of goods freely between the two countries as there is mutual benefit between them. 3. Qualification of a business free trade agreement It is important to enter into a business agreement that will benefit the parties involved rather than one party. In order to know the most eligible country to trade with, parties must obtain firsthand information on the supplier they wish. In addition, it is important to find out information from other countries to enter into an agreement that is lasting and reliable to their convenience. It is then important for one to look at the eligibility of the product in the country of origin. This means one has to see whether it is used in the country of origin and how the native people rate it. It is also important to look at the percentage content of the product. Minimum percentage of the finished product must be local content of the country of origin. An example is the North American Free Trade Agreement (NAFTA). It has put in place three rules governing its free trade agreement. These rules include Tariff shift – this considerable conversion takes place in a country signed to NAFTA. The supplier must produce a certificate of origin showing that the goods have their origin in the country that is associated with the Free Trade Agreement. With these, further calculations are not made (Hoekman & Alessandro 2011). The qualified suppliers use an automated system to stay up to date with international compliance regulations. They can also conduct their trade online without doing it practically. During The Bill of Material analysis, a functional solution is used to do the needed calculations for FTA. De minimis – if the non - content of the finished good 7% or less of transaction value, the good will not be disqualified from preferential treatment. Regional value content – it is a percentage calculation of value of products that is a representative of North American content. 4. Types of trade agreements There are two types of trade agreements: Multilateral trade; it is an agreement in a written accord between two countries to trade with each other. It has the rules, regulations, and policies that members are supposed to adhere. An example is the People’s Republic of China and United States of America (Hoekman & Alessandro 2011). Bilateral trade; this is trade between two countries that mostly exists like barter trade. Hard currency is not used for transactions. An example is the United States and Canada trade relationship. Trade agreements have many benefits. They include: They foster economic growth by increasing the trade of a nation. Trade agreements increase the market of one country that consumer choice of goods increases. This therefore increases trade in the country and consumer satisfaction is assured. Example is NAFTA where countries in the trading region have a wider market therefore trading in the region is enhanced (Li 2011). Trade agreements create jobs. When an agreement is reached complementary services are put in place such as the headquarter office or particular office for the specific agreement. In addition, trade is increased and the market widens, investors are attracted to invest in these areas. These in turn creates job opportunities for the locals and other people. Complementary jobs for the people who will work for these upcoming centres also get employment. This reduces the rate of unemployment in the country. Nearly ten percent of jobs in USA rely on imports and exports of goods. Exports worth one billion dollars create about fifteen thousand new jobs (business roundtable: benefits of trade). Creation of new markets. New markets are opened by trade liberalization between trading partners. Goods produced in one country can get ready markets in countries they have entered partnerships to. The barriers of trade are also reduced by the trade agreements that mean that the supply will be able to meet the demand encouraging the trade. If trade barriers are reduced the global economic welfare will be boosted by as much as 613 billion dollars (business roundtable: Benefits of trade) Competitiveness. Industry competitiveness is increased by free trade agreements because of the free and pure markets (Bejan 2011). Exports from one region of the pact to another will force domestic producers to lower their prices of their goods to be able to survive in the market. Consumers benefit from these because they can afford to buy more goods and these enables producers to stay in the market (Cato institute: trade agreements and the WTO) Foreign investment. Foreign investment is increased in the US as investors from outside are able to import and export raw materials and finished products easily. This maximizes their profits and raises the economic growth of US. Markets open up and in turn, more investment is drawn (Bejan 2011). Protection. US economy and United States companies are protected by ensuring laws are applied to all member countries equally and that other members of the agreement will not cheat. These agreements have set rules and regulations that each member country must adhere. Because there is a binding contract a country can appeal if one country goes against the contract e.g. by imposing tariffs that were abolished by the contract 4.2 Types of agreement in USA i. Canada – United States free trade agreement. Leaders of both countries signed it into agreement in 1988. The main purposes for the agreement were; To eliminate the barriers of trade in goods and services between the two countries Enable conducive and fair competition within the trade area Liberalize conditions for investment significantly within the trade area Come up with efficient procedures for administration of the agreement jointly and how to resolve disputes between them (Villaltaa & Ohiocheoya 2011). Build foundations for other multilateral and bilateral cooperation to enhance benefits of the agreement. The effects of the agreements were: Increase in trade between Canada and USA. Gross products increased from 25% in the 20th century to 50% in 2000 (Francis & Zheng 2011) The agreement also increased trade between the two countries where trades could obtain goods from member countries easily ii. North American free movement tariff This agreement took over the Canadian – United States free movement tariff in 1994. It is the largest trading bloc in the world in terms of purchasing power parity. The aim of the agreement was to reduce trade barriers between Mexico, Canada and the United States. It also was made to boost economy in the member countries and to open a wider market for trade. The agreement also brought improvement in the sectors of agriculture, intellectual property, environment and transport. 5. Business free trade agreements: negative effects on USA economy It is always assumed that free trade agreements always have a positive impact to the countries involved and to the economy at large. While this is real there are also negative impacts that arise from it. In this report we shall be seeking to know the negative impact of the free trade agreements in USA (Francis & Zheng 2011) It is usually assumed that free trade agreements will create jobs but also they lead to loss of these jobs. Jobs can be created and destroyed by trade. Importation of goods from other countries to USA will destroy jobs because people that are employed in local production of the goods will have no more work to do. Importation will mean that USA will lower the quantity of the goods produced by the quantity that will be imported. Therefore, some workers are laid off to ensure that selling price is higher than the production cost (Choi & Schott 2001). Exportation of goods leads to employment as more goods and services than the one produced will be needed increasing the need for more workers to work in this areas of production. Trade balance in this case is affected and this means the equilibrium of employment is also affected. this is something often ignored by many trade analysts who contribute a lot in making of this contracts therefore engaging in false accounts. NAFTA is one trade agreement that is usually faced with this problem. Its supporters advertize the advantages of massive exports but keep quiet on the effects accompanied by tremendous import growth (Scott 2000). According to President Bush, former American president once said that, since 1993 a total of two million jobs in the United States are NAFTA related (Bush 2002). This means that for a viable evaluation to be made on the impact of trade, domestic economy must be measured in terms of the imports and the exports. E.g. if Canada imports 1000 cars from Mexico instead of building the cars then many Canadian workers will lose their jobs or will have to find their jobs anywhere else but for the Mexicans the same number of people who lost their jobs in Canada is the same number of people to gain employment in the assembling industry in Mexico. During the NAFTA making agreement, it was esteemed that the USA would gain greater market for their export in Mexico as it was esteemed that the expansion of the middle class society in Mexico will be the direct market for the exported products (Ayres & McDonald 2012). Therefore, USA exported more consumer product to Mexico to meet the needs of the rising middle class. USA therefore exported unfinished products of assemblies such as computers, automobiles, refrigerators. This was brought by NAFTA agreement. These parts are imported by Mexico duty free and duties are paid to the value added in Mexico. This ha increased U.S exports from 39% in 1993 to 61% in 2002 (INEGI 2003a, 2003b) 5.1 Growing trade deficits and job losses Between the years 1994 and the year 2000, employment in the United States rose tremendously. This was after the implementation of NAFTA. Since then employment started falling and the level of unemployment started rising in early 2001. In the period between 2001 and 2003, a total of 2.4 million were lost in domestic economy (BLS 2003). Due to the rise in unemployment trade deficits have become more pronounced in USA as growth of jobs has been drained in the economy. These jobs have been mostly lost in the manufacturing industry that was before known to employ many people especially after the NAFTA agreement came into force. In 2002, USA made foreign exports totaling up to 11.6% to Mexico and Canada. A most viable measure of net trade flows would be; Net impact of trade = total imports – domestic exports In the figure below, the number of jobs NAFTA has led loss in 50 states and District of Columbia. In September, 2003 trade deficit of goods in US with Mexico and Canada increased by 12% (U.S Census Bureau 2003). From this we can estimate that for the rest of 2003 job losses will not deviate far from this and may remain at the same rate. 5.2 EFFECT OF NAFTA O N FOREIGN INVESTMENT In chapter eleven of the NAFTA agreement, the agreement was supposed to protect the investors and by doing this, they would encourage foreign direct investment. In chapter, 11 a number of performance have been outlawed and this is: a. Exporting a given percentage of goods b. Achieving a given level of domestic content c. Transferring technology d. Other limits on the use of foreign exchange (NAFTA secretariat 2003, article 1106). These were used by Canada and Mexico to ensure that maximum benefits of Foreign Direct Investments (FDI) were obtained and used to encourage the development of domestic economies. NAFTA also added exceptional guarantees that were made to protect the value of corporate investments. It also due to changes in government policy or regulations it gave them rights to earn profits. NAFTA in addition created clauses that would provide for compensation for investments lost and profits lost in the future that are caused by regulations that were termed to be “tantamount to expropriation” (NAFTA secretariat 2003, article 1110) Governments efforts to regulate business have been hampered by the “investor state” clause where companies are protected to earn profits from their foreign investments (Hemispheric Social Alliance 2003, 68-74) The signing of NAFTA led to a huge surge of Foreign Direct Investments in Mexico and Canada. This was because NAFTA agreement represented a commitment on Mexican and Canadian governments in developing a strategy hinging to attract foreign investment. This was done by harmonizing investment deregulation with United States standards. The agreement of NAFTA led to high increase in Foreign Direct Investment in Mexico. This is because it made Mexico an attractive export place for labor-intensive manufacturing (Monge-Naranjo, 2002). 5.3 The US economy, NAFTA and globalization As stated earlier, between 1991 and 2001 in US twenty one million jobs had been created. Later loss of jobs were encountered which were attributed to NAFTA and other sources of trade deficits. Unemployment, shifting of workers, low pay and low quality jobs were experienced. Deep insight into these trends of loss of jobs especially manufacturing jobs, low income, income inequality and decline of wages have been attributed to NAFTA and growing trade deficits. Other contributors include declining rates of unionization, high levels of unemployment that seem to be sustained, privatization and deregulation. Trade deficits contribute 15% to 20% of the inequality in wages (U.S Trade Deficit Review Commission 2000, 110-18). NAFTA directly or indirectly has made a significant conclusion to the state of the US economy. Prosperity of the US workforce is under threat because of NAFTA which has brought unequal development levels. Degradation of environment standards and a rise in massive unemployment in USA 6. Conclusion The NAFTA which is the largest trading bloc in the world and the largest trading agreement USA has made has brought both positive and negative effects in the country. Many of these seem to be contradicting. The massive unemployment that has been felt in the country since the recession of 2001 has been one major negative effect whose impact has been felt the more. Due to this growth of US economy has been slow and also many leaders who are member countries have been seen to overlook the major negative effects caused in favor of the reduced barriers of trade such as tax and tariffs that are reduced by this agreements (Ocampo & Ros 2011). NAFTA has also been seen to protect foreign investors more than the government by helping them leap maximum benefits from the agreement. 7. Recommendations. 1. The NAFTA agreement should be reviewed in light with the changing economic world. 2. Trade deficits should be controlled so as to positively contribute to the economy of the USA 3. Leaders should try to face the consequences rather than run away from the negative impact. 8. References Davidson, Paul J. The Canada-U.s.a. Free Trade Agreement: Its Impact on Business with Asia. Ottawa: Asian Pacific Research and Resource Centre, Carleton University, 1990. Print. Hoekman, Bernard ; Nicita, Alessandro World Development, 2011, Vol.39(12), pp.2069-2079 Li, Liaoliao Journal of Academy of Business and Economics, June, 2011, Vol.11(4), p.146(8) Bejan, Maria. Review of Economic Dynamics, 2011, Vol.14(4), pp.667-685 Villalta P,Gonzalo, Ohiocheoya, Omiunu. Liverpool Law Review, 2011, Vol.32(3), pp.225-235 Francis, John ; Zheng, Yuqing. Applied Economics, 2011, Vol.43(13), p.1657-1671 Choi, I., & Schott, J. J. (2001). Free trade between Korea and the United States?. Washington, DC: Institute for Internat. Affairs. Ayres, J. M. K., & Macdonald, L. (2012). North America in question: Regional integration in an era of economic turbulence. Ocampo, J. A., & Ros, J. (2011). The Oxford handbook of Latin American economics. Oxford: Oxford University Press. Read More