North American Free Trade Agreement - Research Paper Example

North American Free Trade Agreement (NAFTА) Table of Contents Table of Contents 1 Abstract 2 Executive Summary 2 Introduction 2 Background 3 Implementation of NAFTA 5 Pre-NAFTA and Post-NAFTA Period 6 Advantages and Disadvantages of NAFTA 19 Conclusion 20 Reference 21 Abstract The foremost desire of every country is to stabilize its economy. The wealthier economies eventually wield political power and determine the fate of the other less wealthy ones. Economic development is born out of trade and merely domestic trade is not sufficient. However, foreign trade has some intrinsic barriers that hinder the development of both the economies. Free trade is thus a possible solution that is initiated by the countries who want to globalize their trade. Executive Summary In this paper, one of the most popular trade policies, The North American Free Trade Agreement (NAFTA) has been discussed. NAFTA was a policy that was undertaken to strengthen the economy of the participating countries. The background of NAFTA presents the history of the agreement and mentions the prominent players who were instrumental in implementing it. NAFTA has successfully eliminated all the barriers of government intervention and tariffs in the participating countries. NAFTA has brought significant changes in the trade pattern of America, Canada and Mexico. However, along with major advantages, NAFTA did have certain drawbacks for which many opposed the agreement initially. Introduction Globalization brought with it developments that became noticed for their immediate effect. No economy or country itself-sufficient. The countries of the world are inter-dependent on each other for their growth and development. Trade between two or more countries allows proper allocation of resources. In order to remove the scarcity or to meet the demand in a certain country, trade between the countries occurs. Trade between the countries includes the process of import and export. This helps to bridge the gap between abundance and scarcity of a particular product. The government intervention affects the import and export process. The government has to keep an eye on what is coming in the country and what is going out. The government imposes certain restrictions to regulate foreign trade in order to prevent the exploitation of indigenous market and to maintain the policies made by the government itself. However, often these restrictions become a barrier in the growth of a country. By allowing free trade or by withdrawing certain unnecessary restrictions the government can create a ‘win-win’ situation for the both countries. Many countries have realized the importance of globalization and make new policies to promote free trade. In order to enhance the free trade, U.S., Canada and Mexico had designed an agreement that was expected to remove the tariff barriers between these three countries for fifteen years. This agreement is called The North American Free Trade Agreement (NAFTA) and it was introduced on January 1, 1994. “NAFTA includes two important side agreements on environmental and labor issues that extend into cooperative efforts to reconcile policies, and procedures for dispute resolution between the member states” (Topulos. 2009). Background Before the implementation of NAFTA, an agreement already existed between the United States and Canada called U.S-Canada Free-Trade Agreement (FTA).it was suspended after NAFTA came into existence. This agreement was come into force on January 1, 1989. The successful implementation of this agreement and the favorable outcome made the U.S. government enter another similar agreement with Mexico by which both the countries decided to deregulate the free trade. The U.S. government asked Canadian government to suspend the previous agreement before entering the new one. During 1990’s, the presidents of U.S., Canada, and Mexico were George S. W. Bush, Brian Mulroney and Carlos Salinas respectively. The U.S. president George S. W. Bush was the most prominent among them who advocated the agreement and played a vital role in its formation. However, before implementation NAFTA, Bill Clinton replaced George S. W. Bush and became the new prime minister of U.S. and Kim Campbell replaced Brian Mulroney to become the president of Canada. Clinton too supported this agreement and helped in promoting and implementing NAFTA. “NAFTA follows the prescriptions of liberalization - including the deregulation of government restrictions to allow increased trade, direct foreign investment, and foreign ownership of businesses” (Renk et.al. 1997). The advocates of NAFTA, argued that deregulation in free trade policies would lead to development and help the Mexican government to revive itself from the troubled economy. For Canada it would be like an extension of FTA to the Mexican government. “The U.S. economy was in recession, unemployment was on the rise, and many businesses had begun to feel the effects of globalization” (Lantis. 2009). Therefore, there was a controversy as many feared that it would raise the already increasing unemployment. They thought that many American would lose their job as low cost labor in easily available in Mexico. The human right organizations argued that easy availability of cheap labor would lead to labor exploitation. The U.S. Congress also had that fear in mind, so to avoid such exploitation they decided not to enter NAFTA until a new anti-exploitation labor agreement was implemented within the NAFTA (Brown. n.d.). Mexican government initially did not want any change in the domestic labor policies but the Mexican government was in trouble and they urgently wanted industrial development and foreign investment. So, they become ready to compromise and entered the NAFTA treaty with U.S. The main reason that led to all this complication was the low wage rates in Mexico. Apart from that, the environmentalists also argued that deregulation would increase industrialization and that would affect the environment causing more pollution. The background of NAFTA is full of controversies arising out of labor concern. However, the U.S. tried to resolve these issues by negotiating with Mexico and Canada so that it does not affect the U.S. economy by any means. Implementation of NAFTA NAFTA was formulated with the intension of removing tariff barriers for free trade within the U.S., Canada and Mexico. NAFTA ensures that the investors from these countries will be treated as domestic investors and no restriction will be imposed on them. In this agreement U.S. got an upper hand over the other two countries. The articles of NAFTA hold policies that helped to make the trade between these nations flexible. The customs have been made uniform. Only North American goods were made tariff free. NAFTA has provisions for dispute settlement arising due to custom duty, antidumping and investor state dispute. To protect the property rights like patents, copyright and trademarks, NAFTA has imposed strict regulations. The investors of the participating countries are treated without any discrimination. The investors are allowed to cover all type of ownerships in the NAFTA countries. But the investments are restricted in some areas like R&D, marine, basic telecommunications etc. NAFTA has also included policies for cross border services. The agreement made earlier between U.S. and Canada established the principles for the service sector. The services that are covered include accounting, land transport, consulting, commercial education, environmental services, advertising, construction, tourism, health care, legal services etc. Maintaining the standard of trade and products are important aspect of an economy. The NAFTA policy instructed each of the NAFTA countries to execute an assessment body that would be responsible for the maintenance of standards of products. The NAFTA ensures the business visits by business persons do not hamper the domestic labor force. The business visitors, professionals, investor, etc can make a permanent entry in the NAFTA countries under its migration law. NAFTA assures that goods and services from NAFTA countries are given the same treatment as the national products and services. Antidumping and countervailing duties are restricted and non compliance with it might lead to an investigation. Apart from these agreement polices, there were other side agreements that takes into consideration environmental issues, labor protection issues and emergency actions (World Trade Ref. n.d.). Pre-NAFTA and Post-NAFTA Period The NAFTA was introduced in order to liberalize the foreign trade. U.S. was the one who benefitted the most. However, it helped Canada as well as Mexico to strengthen their economy. The GDP rates, the import and export rate and the employment rates changed drastically in NAFTA countries. Especially, the Mexican economy had taken a rise. In the pre-NAFTA period, the U.S. economy was already strong as compared to Canada and Mexico. Canadian economy was strengthened after the Foreign Trade Agreement between U.S. and Canada. The urgency to develop its economy was more pronounced in Mexico as the government was going through weak financial period. For entering the agreement, Mexican government had to compromise in many areas. As the foreign trade was made free from tariff barriers and other governmental interference, the business among the NAFTA countries rose higher as compared to the non NAFTA countries. The rates of import-export among the NAFTA countries had increased prominently. Figure 1 presents the fact that in the pre NAFTA period; Mexico already had lower tariff rates compared to other non-NAFTA countries. Canada was already engaged in the FTA prior to NAFTA period. However, tariffs in US were further reduced for Mexico and Canada after the post-NAFTA period. Figure 1:U.S. Tariffs for Mexico, Canada, and Non-NAFTA Partners (Source: Agama. et.al. 2002) Figure 2 shows that in the pre-NAFTA period, the import and export in Mexico with U.S. and rest of the world were poor. After NAFTA, the trade relation between Mexico and U.S. were higher compared to the rest of the world. Within five years, import and export trade with U.S. was doubled. This improved the Mexican economy significantly. Figure 2: Mexican Trade with the U.S. and Rest of the World, $ bin. (Source: Agama. et.al. 2002) Rise in foreign trade with U.S. caused significant growth in Mexico’s real GDP. After NAFTA, Mexico faced a crisis in 1995 but was able to recover soon. Since that period Mexican economy kept escalating. This figure shows that prior to NAFTA, Mexican economy needed intensive help to overcome the troubled times. Figure 3: Mexico’s Real GDP, constant 1995 $ millions (1980-1999) (Source: Agama. et.al. 2002) Table 1 shows the import relation of Mexico to the different regions of the world. Before the NAFTA period, the import relation of Mexico with South and Central America was high which kept the same trend even after NAFTA but import to U.S. rose significantly. The U.S. being a strong economy had a significant influence over the Mexican economy. Table 1: Mexico's Share of World and Region Imports (Source: Agama. et.al. 2002) The Mexican economy became dependent on the U.S. economy and lost its domestic capability. Prior to NAFTA, the growth of the both countries were inversely related, after the NAFTA, the growth of the Mexican economy seems to be highly correlated with the U.S. economy, except in 1995, when Mexico faced a recession due to the peso crisis. In the post NAFTA period, the curve of Mexican economy tends to follow the curve of U.S. economy. Figure 4: Annual Growth Rates of Real GDP, United States and Mexico, (Source: Blecker. et.al. 2009) The NAFTA agreement freed the trade from tariff barriers and U.S. got more engaged with Canada and Mexico. This agreement paved way for new markets for the U.S. traders apart from their domestic market and the treatment in those new markets was quite like the domestic market. They used this opportunity with the best outcomes. Table 2 shows the value of import export in Canada, Mexico and rest of the world. We can observe that, there is a significant increase in import and export from U.S. with NAFTA countries as compared to the rest of the world. Trade relation with Mexico was made more prominent and Mexico gained special importance in the U.S. economy. The change in the growth rate of trade with Mexico was noticeable. Table 2: value of U.S. Goods Trade with Maxico, Canada and rest of the World, $ bin. (Source: Agama. et.al. 2002) The change in U.S. and Canada trade relation was not significant as they were already in the Free Trade Agreement. However, the growth rate of both the countries increased as both of them got a new market in Mexico. Table 3 represents the U.S. and Canada’s GDP, unemployment rate, growth data and the inflation rates before and after NAFTA period. The table shows a positive growth for both the countries after the NAFTA period. The GDP rates and the growth rates increased and stabilized. The unemployment rate kept decreasing with time after the NAFTA period. The inflation rates were also maintained within a decent range. Table 3: U.S. and Canada Growth rate Data (Source: Mavrokordatos. et.al. 2010) The graphical version of unemployment, growth rates and inflation rates of U.S and Canada has been shown in the figure 5, 6 and 7. Figure 5 shows the decrease in the unemployment after NAFTA. In the pre-NAFTA period the unemployment rate was high in both the countries which significantly decreased after the implementation of NAFTA. Figure 5 (Source: Mavrokordatos. et.al. 2010) According to figure 6, the growth rate of U.S. and Canada are highly correlated as they both keep the same direction before and after the NAFTA period. The reason is that the Foreign Trade Agreement between the U.S. and Canada was already in vogue. Figure 6 (Source: Mavrokordatos. et.al. 2010) The inflation rate became much stable in post NAFTA period whereas in the pre-NAFTA period it was uncertain and high. Figure 7 shows the upper and the lower range inflation curve for both countries have narrowed indicating stability. Figure 7 (Source: Mavrokordatos. et.al. 2010) Figure 8 shows that, U.S. import and export with Canada has increased significantly. Earlier in the presence of FTA, it had increased and after NAFTA it again increased, whereas, surprisingly the net export with non-NAFTA countries had reduced. Figure 8 (Source: Mavrokordatos. et.al. 2010) Figure 9 shows that the industrial output of U.S. and Canada before the NAFTA period was uncertain and after NAFTA it became stable like the inflation rates. Figure 9 (Source: Mavrokordatos. et.al. 2010) All the figures of the graphs and the tables show that NAFTA brought huge developments to all the participating countries. The strong U.S. economy became stronger and the weak Mexican economy became stable and Canadian economy developed further after the exit of FTA and entry of NAFTA. Advantages and Disadvantages of NAFTA In the previous section the situation before NAFTA and after NAFTA has been analyzed and the results show major growth in Mexico and Canada. In U.S. also industrialization process escalated and agricultural growth became prominent. Figure 8 and 9 shows that NAFTA helped to increase and to stabilize the trade and industrial output. The import and export among the NAFTA countries increased significantly. The U.S. farm export to Mexico was boosted as the high tariff in Mexican market was eliminated. NAFTA also benefited the agriculture of the participating countries. “The share of total U.S. agricultural exports destined for Canada or Mexico has grown from 22% in 1993 to 30% in 2007” (USTR, 2008). Figure 10 shows that the U.S. exports to NAFTA countries have increased by $9.3 billion. Figure 10: US agricultural Exports to Canada and Mexico. (Source: West et.al. 2005) The financial service and health care service sectors were the ones that benefited the most. Oil and grocery price in Mexico and Canada also decreased as the tariffs on U.S. imported oil was abolished. The FDI was also enhanced as the investors’ risks were reduced as they got the same legal treatment like the local investors. “NAFTA Countries FDI in the United States (stock) was $229.8 billion in 2008, up 7.3% from 2007” (USTR, 2010). However, in spite of all the advantages, NAFTA was not free from flaws. There were a group of people who argued against it. The most prominent disadvantage was that, cheap availability of US agricultural products victimized the Mexican farmers. “Food First, a California-based policy institute, reports that California rice costs between $700 and $800 an acre to produce but receives $650 an acre on the world market and that U.S. wheat is exported at 46% below cost” (Carlson. 2003). On the flip side, cheap labor from Mexico increased unemployment in U.S. and U.S. wages were reduced. Many of the manufacturing units shifted to Mexico due to low cost labor. Fast industrialization and competitive market also affected the environment. In order to beat the U.S. farmers, the Mexican farmer started using more fertilizers, causing environmental pollution. Conclusion The U.S. and the Canadian government had already tasted the fruitful outcomes of the FTA and NAFTA was a bigger step towards economic development. NAFTA helped all the three countries to develop their economic condition. Figures and tables show an upward movement of scales. The U.S. economy got the advantage of tariff barriers and the Mexican economy became stabilized as NAFTA helped it to overcome the peso crisis. Nonetheless, it also received strong opposition as many were of the opinion that U.S. economy might suffer as a result of unemployment. However, the real sufferers were the rural Mexican farmers as they failed to compete with the cheap agricultural products of U.S. Reference Agama, L.A. & McDaniel. C.A. (October 2002).The NAFTA Preference and U.S.-Mexicon Trade. Retrieved May 21, 2010 from http://www.usitc.gov/publications/332/working_papers/ec200210a.pdf. Blecker, R.A. & Esquivel, G. (October 2009). NAFTA, Trade, and Development. May 22, 2010 from http://www.american.edu/cas/economics/pdf/upload/2009-24.pdf. Brown, G. & Strickland, H. (No date). North American Free Trade Agreement. BACKGROUND. Retrieved May 21, 2010 from http://wehner.tamu.edu/mgmt.www/NAFTA/spring99/Groups99/4/group4_1.htm. Carlsen, Laura. (February 25, 2003). Americas Policy Report The Mexican Farmers' Movement: Exposing the Myths of Free Trade. The Myth of the Free Market. Retrieved May 22, 2010 from http://www.ifg.org/analysis/wto/cancun/mythtrade.htm. Lantis, J.S. (2009). The life and death of international treaties: double-edged diplomacy and the politics of ratification in comparative perspective. US. Oxford University Press. Mavrokordatos, P. Michael, A. & Stascinsky, S. (February 2010). TRADE BETWEEN U.S. AND CANADA: BEFORE AND AFTER NAFTA. Retrieved May 22, 2010 from http://asbbs.org/files/2010/ASBBS2010v1/PDF/M/Mavrokordatos.pdf. Renk, B. Jarvis, B. & Guttmacher, J. (December, 1997). The Path of the NAFTA Aftermath. NAFTA Background. Retrieved May 21, 2010 from http://www.earlham.edu/~pols/17Fall97/nafta/Background.htm Topulos, K. Nonevber, (2009). NAFTA. J.Micheal Goodson Law Library, Duke University of Law. . Retrieved May 21, 2010 from http://www.law.duke.edu/lib/researchguides/pdf/nafta.pdf. . USTR (Office of the United States Trade Representative). (March 2008). NAFTA Facts. NAFTA – Myth vs. Facts. Retrieved May 22, 2010 from http://www.ustr.gov/sites/default/files/NAFTA-Myth-versus-Fact.pdf. USTR (Office of the United States Trade Representative). (May 07, 2010). North American Free Trade Agreement (NAFTA). Investment. Retrieved May 22, 2010 from http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta. West, C. Wasson, C. & Bhatia, B. (November 14, 2005). Effects NAFTA and CAFTA Have on America. ADVANTAGES OF NAFTA. Retrieved May 21, 2010 from http://www.cab.latech.edu/~mkroll/510_papers/fall_05/group5.pdf. World Trade Ref. (No date.). NAFTA Implementation. International Trade Administration, U.S. Department of Commerce. Retrieved May 21, 2010 from http://www.worldtraderef.com/WTR_site/NAFTA/implementation.html. Read More