Peculiarites of NAFTA Agreement - Essay Example

23 March 2007 NAFTA Introduction Neighboring countries long at political peace, Canada and the United States have been separated by economic barriers for nearly as long. The 1960s witnessed a significant increase in nationalist sentiment critical of FDI. During the following decade many concrete and controversial actions were undertaken that aimed at reducing the foreign presence (Hakim and Litan 43). The signing of the FTA between Canada and the United States was accompanied by significant debate in the former country, and indeed the agreement eventually became the dominant issue in a national election. In the popular mind, increased economic integration posed many threats to Canada due to the larger scale and perceived technological superiority of U.S. producers. Economists suppose that greater U.S. penetration would be both more exports into Canada and more foreign investment. NAFTA agreement came into force on January 1994. Since that time, NAFTA is one of the largest economic blocs in the world. It involves Canada, Mexico and the USA (Hakim and Litan 2). Reduction of Tariffs and other Controls Basic economics predicts that the reduction of tariffs and other controls on imported goods will probably lower domestic production and employment in these sectors. There should also be a corresponding increase in activities oriented towards exports (MacArthur 33). In principle, one can investigate the net effect of liberalization on output and employment. Currently, this question has important ramifications in both Canada and Mexico, even though the contexts are quite different--Canada has lowered some barriers as part of the Free Trade Agreement signed with the United States, while Mexicos adhesion to the GATT required a unilateral tariff reduction, much larger than that of Canada. In both these countries, the tariff reduction has been accompanied by a recession, which has been sharper in Mexico. Neither case is an ideal test of liberalization (Hakim and Litan 62). Canada has been lowering tariffs for some time, while Mexicos recession had begun before the GAIT accord, as a result of the debt crisis. With regard to Canada, the tendency is that more of the coefficients on the liberalization dummy variables in the labor demand equation are large and statistically significant. This is the case for the following sectors; food, leather, textiles, wood, printing, transport equipment, and electrical equipment. This finding is robust to changes in the specification of the equation. Thus, even given the level of production, there still was a strong tendency for labor use to fall (MacArthur 31). In other words, a good part of the employment problem in Canada is completely independent of trade liberalization. NAFTA would eliminate most tariffs on trade among the three countries, it would substantially reduce nontariff barriers to trade (NTBs), and it would ensure the free flow of capital throughout the region. Unlike the European Community, NAFTA would ensure neither common trade barriers against the rest of the world nor the free flow of labor (Macdonald 173). Although it would establish a dispute resolution mechanism, there are no plans to create central North American government bodies like the European Parliament and the EC bureaucracy. Neither is there serious talk about a common currency system in NAFTA like that of the EC, although both Canadian and Mexican monetary authorities carefully manage their currencies exchange rates with the U.S. dollar (MacArthur 38). Liberalization of Trade The economic gains derived by liberalizing trade are net gains—there are both winners and losers. This point has grown in significance as international trade has become more important to the U.S. economy. The benefits of trade liberalization may outweigh their associated costs, as many have argued concerning the U.S.-Mexico free trade agreement. But economists cannot ignore the fact that critical segments of the U.S. economy may experience severe dislocation as a result of such liberalization (Macdonald 174). Experience suggests that these dislocation effects are usually concentrated by industry and region, making the adjustment process even more difficult. Empirical studies suggest that trade-dislocated workers tend to be minorities, women, and older workers. These workers face high barriers to adjustment. The responsibility to assist those workers adversely affected by changes in international trade can be argued on ethical, economic, and political grounds. It seems only just to help the few who are adversely affected by policies designed to benefit the economy as a whole. Government labor market programs serve as one vehicle for helping reduce the adjustment burden borne by these workers. On the other hand, inadequate programs feed the sense of insecurity that targeted workers experience as they face the prospect of economic change, thus strengthening their opposition to such change and jeopardizing any potentially greater economywide benefits that might result from trade liberalization (Mayer 32). Lack of Labor Mobility Lack of labor mobility in NAFTA could be largely offset by capital flows. One would expect capital to flow from the relatively capital-rich Canada and the United States to the relatively capital-poor Mexico. Indeed, it is by exogenously imposing a substantial capital flow of this sort that many of the static models are able to show a significant welfare gain to Mexico. Two points about capital flows should be stressed, however. First, differences in capital-labor ratios between Mexico and its northern neighbors cannot be the sole explanation for the large differences in output per worker (MacArthur 110). Consequently, simply equalizing capital-labor ratios cannot be the solution to the problem of eliminating income differences. Second, when analyzing the savings and investment decisions that determine capital flows, critics take into account the significant differences in the age profiles of populations in Mexico and its neighbors (Mayer 39). “This "capital acts, labor reacts" model explains both the protectionist, anti-NAFTA stances of North American unions before the passage of the agreement, as well as the increasingly internationalist position adopted after its implementation” (Connolly and Tennant-Burt 148). Some of the current high return on capital in Mexico can be accounted for by an inefficient and oligopolistic financial services sector. NAFTA might increase the efficiency of this sector. Even more significantly (MacArthur 112), NAFTA would create a stable economic environment that would encourage private investment in Mexico. It would do this in at least two ways. First, it would lock the Mexican government into the free trade policy and the liberal policy toward foreign direct investment that it is currently pursuing unilaterally. Second, it would shield Mexican producers from protectionist tendencies in the United States, which fluctuate with the business cycle and are sensitive to a variety of special interest groups. Some of this increase had been due to the liberalization of Mexican laws regarding such investments, and some has undoubtedly resulted from improvements in the expectations for Mexicos economic future. Productivity Growth NAFTA increases productivity growth. A low capital-labor ratio cannot be the only factor in explaining the low level of output per worker in Mexico compared to that in a country like the United States. Modeling dynamic increasing returns as the result of learning by doing is a reduced form specification for a very complex microeconomic process. It captures the effects of the learning curve documented by industrial engineers and, to some extent, the adoption of more efficient production techniques from abroad and from other domestic industries (MacArthur 12), The learning that takes place is not solely related to physical production techniques but also to the development of complex financial and economic arrangements between producers of primary and intermediate goods and producers of final goods. The ability of a country to benefit from learning by doing depends on the educational level of the work force. It also depends on whether a country is at the frontier of development of new products and production techniques or if it can import these from abroad: It is easier to play catch-up than to be the technological leader. Increased openness also allows a country to import more specialized inputs to the production process. The most interesting aspect of this theory, however, is the perspective it gives us on trade and growth. The natural interpretation of the theory that emphasizes specialization in final products is that technology is embodied in people and is not tradeable (Connolly and Tennant-Burt 148). Trade may influence the pattern of production, including both the scale of production and the pattern of specialization, and in this way, it affects growth. In the model with specialized inputs, technology is embodied in product variety, and there is a more subtle interaction between trade and growth. Recall that increases in the number of varieties of intermediate goods raise output. Therefore, if these varieties are freely traded, a country can either produce them itself or purchase them from other countries. By importing these products, a small country can grow as fast as a large one. When there is less than perfectly free trade in differentiated products, economists expect to find that both scale and trade in differentiated products are positively related to growth (Mayer 62). NAFTA and Globalization The major push behind NAFTA is globalization—the production and distribution of products and/or services of a homogeneous type and quality on a worldwide basis. The producers and distributors enjoy economies of scale through large-volume production of standardized products and services. Most of these goods and services are provided by MNEs operating across national borders (Connolly and Tennant-Burt 149). To an extent, the MNEs of the triad homogenize tastes and help spread consumerism. Throughout the wealthier nations of Europe and North America and in Japan, there is a growing acceptance of standardized consumer electronics goods, automobiles, computers, electric appliances, and so on. To a large degree, the MNEs have to respond to consumer needs and tastes, and they are successful because there is a demand for their products and services (Mayer 82). Instead, MNEs will have to deal with the twin goals of globalization and national responsiveness. National responsiveness involves the need for corporations operating across national borders to invest in understanding the different tastes of consumers in segmented regional markets and the ability to respond to different national standards and regulations imposed by autonomous governments and agencies. Even Robert Reich now recognizes that MNEs are not just "national champions" and that they also respond to host-country values as well as home-country ones (Hakim and Litan 92). The information technology revolution has helped globalization. The mass production of cheap personal computers, fax machines, and cellular telephones makes information flow faster and deeper across borders and within companies. And the greater flexibility and mobility facilitated by information technology enhances the ability of managers and companies to produce and distribute products and services on a global basis. As explained earlier, most of the action by MNEs is concentrated in the triad markets of North America, the European Community, and Japan. In the next decade, the nature of the triad markets will change as they become more protectionist. There are already strong indications of an increase in U.S. protectionist devices, such as the super 301 trade law, the widespread use of countervailing duty (CVD) laws, and concern about Japanese MNEs operating in the United States. There is also some evidence in the EC of an increase in antidumping (AD) actions and the possibility of a "Fortress Europe" developing as the single internal market emerges (Hakim and Litan 82). However, the global economic interdependence already achieved through the activities of the large MNEs will not be halted. Indeed, a group of new MNEs, from the Asian economies of South Korea, Taiwan, and other newly industrialized economies will emerge, largely within the Japanese sphere of influence. Mexico wants to be part of this trend, instead of remaining a poorer nation lacking access to one of the triad markets. Without NAFTA, there would have been increasing social and economic discontent in Mexico over the next decade because television, newspapers, and other media will continue to spread information about more affluent life-styles to a region that needs NAFTA to improve its economic infrastructure, corporate know-how, and political system in order to compete in global markets (MacArthur 55). Conclusion Responding to the twin challenges of globalization and national responsiveness requires new thinking by managers and policy advisers. The days of simple globalization are limited. At the beginning of the 21 century companies must make major investments in being nationally responsive—in understanding what makes people tick and why people differ across borders. Cultural understanding is becoming as important as research and development (R&D). And even as the globalization of production and distribution feeds one desire, it also creates a hunger for more individual care and attention, a two-headed monster that needs the response of a two-pronged corporate strategy. Put more formally, the corporation now faces a basic challenge of transaction cost economics in dealing with the public on a global basis. Works Cited 1. Connolly, C., Tennant-Burt, J. The NAFTA Labor Agreement and U.S. Employment-Discrimination Law. Social Justice, 24 (1997): 148-158. 2. Hakim, P., Litan, R. E. The Future of North American Integration: Beyond Nafta. Brookings Institution Press, 2002. 3. MacArthur, J. R. The Selling of "Free Trade": NAFTA, Washington, and the Subversion of American Democracy. University of California Press, 2001. 4. Macdonald, J. Th. NAFTA and the Emergence of Continental Labor Cooperation American Review of Canadian Studies, 33 (2003): 173-178. 5. Mayer, F. Interpreting NAFTA: The science and art of political analysis. Columbia University Press, 1998. Read More