North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA) Name Course number Instructor’s name Date Table of Contents Title page…………………………………………………………………………………….i Table of contents…………………………………………………………………………….1 Abstract……………………………………………………………………………………...2 Introduction………………….………………………………………………………………3 Background of NAFTA………………………………………………………… …………..3 The international business perspective of NAFTA………………………………………….4 NAFTA’s impact in North America and the rest of the world...………………… …………5 Conclusion……………………………………………......………………………………….9 References……………………………………………......………………………………….10 Abstract The North America Free Trade Agreement aimed to increase free movement of goods and services across the boundaries and facilitate economic growth. The three countries have become some of the most open to trade in the world, and this has resulted in increased foreign direct investment among them. It has also laid the framework for free trade with other countries such as the large economies of the European Union and Asia. NAFTA has resulted in increased growth among the three countries indicated by the increased trilateral trade flow. There have been some pitfalls such as loss of jobs in the US and Mexico due to the restrictions on the food sector. Canada has also faced problems such as weak production and innovation and restrictions on oil export. However, as countries continue seeking integration agreements NAFTA members can adopt a strategic position to remain competitive through enhanced partnership particularly in the manufacturing industry. Introduction The North America Free Trade Agreement (NAFTA) was signed between the United States, Canada and Mexico in January 1994. Prior to NAFTA, the US and Canada had the US-Canada Free Trade Agreement (CFTA). NAFTA has been said to be flawed as it is pro-corporate and it ignores the suffering of ordinary citizens in Mexico particularly those dependent on agribusiness. It has not accomplished its targeted objectives of bridging the income gap between Mexico and the two developed countries trading partners. There is need for greater integration to particularly in the manufacturing industry for the three to remain competitive in the global market against competitors in Europe and Asia. Background of NAFTA NAFTA is a cooperative economic intergovernmental organization created with the intention of promoting the free flow of goods across the three nations. It eliminates trade barriers to facilitate cross border trade. The three countries form the largest free trade area in the world as it links 450 million people and produces $17 trillion in goods and services (Robertson, 2013). Regional integration has been extreme and rapid in North America under NAFTA. It demolished trade barriers such as protective tariffs and local preferences. It also did away with government support programs except for inconvenient situations in the US such as for its farm bill. NAFTA also extended intellectual property monopolies beyond those mandated by the World Trade Organization (WTO) (Carlsen, 2009). At its inception, many feared that it would result in job losses in the US because of outsourcing production to Mexico to reduce the cost of production. The effect of trade on Canada and the US has been modest because it only contributes to a small percentage of their GDP (Villarreal & Fergusson, 2013). There are efforts to alter the agreement through the Trans Pacific Partnership negotiations with countries in the Asia pacific region launched in 2008. This is in a bid to create a 21st century agreement, cater for issues such as market access rules for trade and investment and address worker displacement issues that have resulted from the agreement (Villarreal & Fergusson, 2013). The international business perspective of NAFTA NAFTA fostered trade liberalization to enhance overall economic growth. It was an unusual FTA because it linked two developed countries with one developing country with low income. It was expected that the partnership would result in job creation that would bridge the huge disparity between Mexico and the two developed countries. Upon its enactment, several economic events have occurred. For instance, the US experienced remarkable economic growth. Through the 1990s, Mexico experienced a massive devaluation of the peso in the late 1990s and the recent global financial crisis. These incidents may have affected NAFTA attributed trade (Villarreal & Fergusson, 2013). For instance, the economic downturns experienced in 2001 and 2008 contributed to a decrease in imports from and exports to Mexico and Canada. NAFTA failed to build transition strategies that would take account of the huge asymmetry between the national economies involved. For instance in 1994, Mexico’s economy was 1/15th the size of the US and millions of Mexicans lived in extreme poverty. NAFTA failed to provide a means of dealing with the unleveled playing field. Rather, it hoped that market forces would resolve all the potential problems. Economic integration thrived, and the US-Mexico border has become one of the highly integrated in the world. It is reported that $35 million worth of goods cross the border every hour (Carlsen, 2009). In 2009, Canada and Mexico were the US’s top two purchasers of goods as well as the top suppliers of goods. Trade between the US and Canada represents the largest flow of income, goods and services in the world. It records an average of $1.2 billion per day (Robertson, 2013). Mexico is the second largest US’ trade partner since NAFTA. In 2002, the US and Mexico trade was valued at $232 billion annually which was 225% increase since NAFTA’s enactment (Carlsen, 2009). Trade has also increased between Canada and Mexico from $6.5 billion to $15 billion. Mexico is Canada’s fourth most valuable export market while Canada is Mexico’s second most valuable export market (Carlsen, 2009). NAFTA was drafted with the direct participation of transnational corporations, which took advantage of liberalization of trade to strategize. They strategically took advantage of mapping areas where they would gain from natural resources, cheap labor, low regulation and operating costs, and government subsidies. This was strategic in the sense that it allowed production at the cheapest possible rate. For instance, the agribusiness firm Cargill net income increased from $597 in 1998-99 to $3.95 billion in 2007-08 (Carlsen, 2009). NAFTA’s impact in North America and the rest of the world Trade among the three NAFTA countries has more than doubled with total merchandise trade between the US and Mexico nearly tripled from $81.6 billion in 1993 to $266.6 billion in 2004 (Carlsen, 2009). However, it is reported that evaluations on NAFTA’s impact have indicated flat growth rate in Mexico and job loss in the United States. Canadians, on the other hand, protest loss of sovereign control and of ability to do sustainable planning of natural resource use because of obligatory exports to the US under NAFTA (Carlsen, 2009). In Mexico NAFTA has resulted in small-scale farmers losing their livelihoods because of competition from imported corn and other...