BA 422: PROJECT IN BUSINESS ECONOMICS

MAJOR RESEARCH PRJECT

By Thompson Kerua Bachelor of Commerce in Business Economics2014 Finalist – DBS UNITECH

Topic Under Study

Nature and Functions of the North American Free Trade Agreement (NAFTA) and its Benefits to the Member States

General Background: What is a Free Trade?

Nature and Function of NAFTA Discussion Research Methodology Conclusion

Outline of the Presentation

What is a Free Trade? Absence of Trade Barriers

Tariffs – tax on imported goods Subsidies – gov’t grants to local producers Tax Breaks – lower taxes for domestic products lower cost Labeling and Packaging – expensive for foreign products Import Quotas – impose on certain goods to enter other

country In absence of these protectionist policies trade is

freely facilitated in concept of developed and developing countries.

In a free trade zone, free market mechanism plays a greater role – allocation of resources are done by market mechanism

Countries benefit from comparative advantage – countries can produce what they can produce efficiently at lowest cost and import from other countries what those countries can produce better or cheaper

General Background of Free Trade

Free Trade and Globalization Movement of countries away from protectionist

policies and towards free trade policies allow freely movements of factor endowments between countries.

Modern economic prosperity lies beyond the boundaries – finding suppliers and customers

Free trade policies exist makes it possible and exist at Bilateral (Country to country) Regional Level where trade blocs are created

E.g. NAFTA, European Union, etc. The WTO promotes worldwide free trade

policies

General Background of Free Trade

NAFTA in Brief NAFTA stands for North America Free Trade

Agreement Year of Formation: 1994 Head Quarters: Mexico City (Mexico), Ottawa

(Canada) and Washington D.C. (USA) Description: The North American Free Trade

Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States and entered into force on 1 January 1994 in order to establish a trilateral trade bloc in North America.

The North American Free Trade Agreement – NAFTA

The objective of NAFTA as outlined in chapter 1 of NAFTA’s Article 102 are: eliminate barriers to trade in, and facilitate the cross border

movement of, goods and services between the territories of the Parties

promote conditions of fair competition in the free trade area increase substantially investment opportunities in their

territories provide adequate and effective protection and enforcement

of intellectual property rights in each Party's territory create effective procedures for the implementation and

application of this Agreement, and for its joint administration and the resolution of disputes

establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement

Main Objectives Behind NAFTA

Membership NAFTA has three member States, namely

Canada, Mexico and United States.

Member States inside NAFTA

Prior to NAFTA, Canada and U.S are developed countries with strong traditions of liberal political and economic policies while Mexico had neither.

After WW2 Mexico engaged in protectionism and import-substitution policies, as opposed to export-led growth. This policies backfired – in 1980’s Mexico had triple-

digit inflation, backward industries and extensive international debt.

In 1985 Mexico began to liberalize Regional integration in North America – The first move

was made by Ronald Reagan in U.S, who proposed a “North American Agreement”

Early 1980s Mexico remain aloof, Canada and US grow closer and signed series of agreements that cumulated in the Canada-US Free Trade Agreement in 1988. At this crucial juncture, Mexico signaled it was ready to join the negotiation and NAFTA talks were started.

Main Events Leading to NAFTA

To get NAFTA passed Bill Clinton insisted on environment and labour protections that Mexico is a large poor country unlike Spain and Portugal in the European Community (income difference is ½ and population is 13% of the total). Mexico’s income was 1/7 of the US and 24% population of the North America.

However, the big North American trilateral regional integration come into force in January 1st of 1994.

Signed by presidents at that time: US president Bill Clinton, Mexican president Carlos Salinas and Canadian Prime Minister Brian Mulroney

Main Events Leading to NAFTA

North American Population Dis-

tribution in 1980s USA

CanadaMexico

NAFTA's governance structure is minimal and cantered on two institutions, the Free Trade Commission (FTC) and the Secretariat.

NAFTA Structure and Decision Making Procedure

FTC is the principal body of NAFTA – it oversees NAFTA’s performance and evaluation

It is responsible for dispute settlement It is composed of US trade representatives,

the Canadian Minister for International Trade , and the Mexican Secretary of Commerce and Industrial Development.

Expert working groups and committees carry out the day-to-day work of the FTC which is powered by Article 2001 (1) of NAFTA

The Free Trade Commission (FTC)

The Secretariat serves as an administrator for the FTC and is organized on a national basis, with each member responsible for supporting its own staff.

Assists FTC – along with dispute panels, committees and working groups

The NAFTA Secretariat is located in separate national offices Mexico City, Ottawa and Washington D.C.

The national secretariat is complemented by a NAFTA Coordinating Secretariat (NAFTACS) Located in Mexico Created on January 14, 1995 Purposely to administer labor and environment issues

inside NAFTA The Secretariat has no real power over the FTC

The Secretariat of NAFTA

NAFTA created the world’s largest free trade area. It allows the 450 million people in the U.S., Canada and Mexico to export to each other at a lower cost.

As a result, it is responsible for $1.2 trillion in goods and services annually. Estimates are that NAFTA increases the U.S. economy, as measured by GDP, by as much as 0.5% a year. (Source: USTR, Quantification of NAFTA Benefits)

Benefits of NAFTA

NAFTA’s main objective is to ease trade barriers and enhance trade between involved nations. It eliminates tariffs – freely movement of goods

and services within NAFTA countries without import and export tax

There are also absence of quotas, tax brakes, subsidies

NAFTA creates agreements on international rights for business investors – bids on gov’t contracts.

Enhancement of Trade

Enhancement of Trade

Source: Data retrieved from U.S. International Trade Commission’s Interactive Tariff and Trade Data Web: http://dataweb.usitc.gov

Another major benefit of NAFTA for its member countries is that it enhances investment, especially foreign investment. This is attributed to the protection offered by NAFTA and the reduced risks as well. Foreign investors are basically granted similar protection as domestic or local investors. Like, Canadian firms benefit from the opportunity of bidding on government contracts in Mexico and America, creating more opportunities.

Low or not tariffs gives opportunity for countries to invest in other countries With low/no tariffs translates to lower operational

cost leads small business growth and compete with larger corporations

Increases Foreign Direct Investment (FDI) inside NAFTA

Foreign Direct Investment inside NAFTA

Since NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada and Mexico more than tripled to $452 billion in 2012. Canadian and Mexican FDI in the U.S. grew to $240.2 billion, up from $219.2 billion in 2007. That means this much investment poured into U.S. manufacturing, finance/insurance, and banking companies

Foreign Direct InvestmentForeign Direct Investment in Mexico and US since 1994 in

Millions $UD

Source: retrieved from U.S. Department of Commerce, Bureau of Economic Analysis website, http://www.breauofeconomicanalysis.gov/commerce

By fostering opportunities for businesses and industries in the NAFTA region, free trade rewards risk-taking by increasing sales, profit margins, and market share.

Companies can choose to build on those profits by expanding their operations, entering new market sectors, and creating better-paying jobs.

NAFTA Enhance Economic Growth

NAFTA has created a vibrant employment marketplace that allows each country to use the strength of the agreement to bolster existing talent and set the stage for future job growth.

As Mexico economy grows due to an increase in manufacturing and assembly positions, the country requires skilled laborers, high-tech equipment and training that the U.S. and Canada can supply. This sharing of knowledge increases employment opportunities across the continent

According to U.S. Trade Representative Barshefsky, U.S. exports support over 12 million jobs in America, and trade-related jobs pay an average of 13 percent to 16 percent higher wages than do non-trade-related jobs

NAFTA Generates More Jobs

Agriculture has seen tremendous gains for all parties under NAFTA.

The two-way agricultural trade between the United States and Mexico increased by 10.9% from 2003 to 2004.

Similarly, the agricultural trade agreement between the United States and Canada increased 8% from 2003 to 2004. In 2004, the export of various vital commodities from US to both the countries set records.

NAFTA Increases Agriculture Trade

NAFTA Increases Agriculture Trade

Source: Global Agriculture Trading System, FAS/USDA, http://www.fasusla.gov/gats/defaults.aspx

NAFTA has allowed the three countries to take advantage of niches and specialize in those areas.

In practical terms, Canada may produce nickel at a mine in Ontario and export the raw metal to California, where engineers need the element for new battery technologies. The high-tech components are built in California and sent to Mexico for assembly into a finished product.

From raw materials to finished product, NAFTA opens doors and allows the three nations to remain competitive on the world market.

NAFTA Encourages Manufacture

A number of NAFTA benefits drive the cost of consumer goods down in all three countries.

The creation of a single trade area allows companies to achieve much better economies of scale.

With the elimination of taxes and tariffs on goods that are shipped between the US, Canada, and Mexico, the cost of goods the involved automatically decreases.

Lower price of goods in turn will decrease inflation which refers to a period of increased prices for all basic goods and services for a particular country.

With lower prices, the economy of the country involved is stimulated by means of increased spending by the people involved.

Less Expensive Goods and Reduction of Inflation

When a regulation changes, it can be difficult to determine which changes in the economy were directly caused by the regulatory change, and which were caused indirectly or by unrelated factors. NAFTA is clearly responsible for some, but others have a less clear cause.

Mexican Worker have benefited less than expected NAFTA encouraged significant U.S. investment in Mexico

near the boarder with middle class labour, but the Asian cheap labour discourage the arrangement.

NAFTA lifted tariffs but no regulations NAFTA may have eliminated tariffs between the U.S.,

Canada and Mexico, but it didn't do away with the numerous customs regulation that can stifle trade.

Unemployment in US and Canada due to cheap labour from Mexico

Due to limited trade barriers foreign products outcompete domestic products

Some Disadvantage of NAFTA

Some Disadvantage of NAFTA

US Unemployment rate since 1990 - 2000

Source: www.fao.org

Main principles National treatment is the main principle in NAFTA. A

NAFTA member cannot treat its own goods or services differently to goods or services imported from another member. There are obligations in limited circumstances that apply among the three parties.

Exception to general principles NAFTA incorporates GATT Article XX. It also

includes an amended GATT Article XXI, which allows members to discriminate according to their essential security requirements.

NAFTA with GATT and WTO Rules

Rules of origin Only goods that “originate” from NAFTA countries

receive preferential treatment under the Agreement.

Tariff reductions There is a general obligation for NAFTA members to

eliminate all tariffs on goods that meet the rules of origin test. Tariffs are to be phased out over a period of time according to one of four categories, either immediate, over 5 annual steps, over 10 annual steps or 15 annual steps.

NAFTA with GATT and WTO Rules

Non-tariff measures NAFTA prohibits use of non-tariff measures and

incorporates the full terms of GATT Article XI obligations for import and export restrictions. Members must eliminate existing quantitative restrictions unless they are specifically permitted

NAFTA with GATT and WTO Rules

Investment NAFTA lays down rules on investment. It accords national

treatment and MFN for investors and their investments with respect to establishment, acquisition, expansion, management, conduct operation and sale.

They must accord each other a minimum standard of treatment in accordance with international law.

NAFTA with GATT and WTO Rules

Intellectual Property NAFTA is patterned on the TRIPs Agreement. It

commits each member to provide protection and enforcement of intellectual property rights

All countries agree to comply with the Geneva, Berne and Paris Conventions and the Convention for the Protection of New Varieties of Plants.

NAFTA with GATT and WTO Rules

Labor and Environment NAFTA has no specific provisions on labor and the

environment. NAFTA expressly affirms the rights of the parties under the WTO Agreement and other multilateral and bilateral agreements. NAFTA will prevail where there is any inconsistency with nominated environment agreements. There are separate side agreements to NAFTA on the environment and on labor.

NAFTA with GATT and WTO Rules

Study Design The study was done qualitatively The study was mainly based on available

information on the web and books in the library

The information gathered are paraphrased, edited and organized for the purpose of this study.

Research Methodology Used

Methods of Data Analysis and Presentation

This study used the above method of data analysis and presentation

Research Methodology Used

The North American Free Trade Agreement (NAFTA) is nearly two decades old and it’s unclear to many whether the Member countries has been benefiting or loosing from the deal. The answer is: a bit of both.

The U.S., Canadian, and Mexican economies have all benefited from NAFTA. Not as much as they should have, because—even after 20 years—the three countries still haven’t properly integrated their economies, which makes them competitive in many areas where they should be cooperative.

Conclusion

The U.S., Canada, and Mexico have unique strengths that perfectly complement each other. Canada has abundant natural resources and energy supplies. Mexico has a significant, comparatively young, low-cost labor force in close proximity to the United States. The U.S. has one of the world’s top higher-education systems and is the global leader in technology and innovation. For these economies to benefit fully from NAFTA, these strengths need to be integrated.

Conclusion

Eh Pora! Apa Kana Ketch!

Thank You!

Any Questions???