SID: Name:

12315918 Alberto García Richaud

12315930 Andrea Heinze Mortera
12316007 Valeria Ruiz Mollinedo
Introduction

Globalization is a historical event that has been occurring for years that impacts
international trade, currency rates, and pricing for export, import, and commerce. Growth
and innovation are the bases of the economy, and both are affected by globalization.
Globalization impacts the entire economy since it promotes innovation by influencing a
country's economic progress. Globalization affects the pricing and efficiency of
commodities imported or exported from a nation.

NAFTA was implemented on January 1, 1994. It was polemic when it was suggested since
it was the first free trade zone between two strong, industrialized countries like the
United States and Canada, and one underdeveloped one like Mexico. "Since about 500
years ago, the world economy began undergoing a "Great Divergence" (Pomeranz 2000).
During this period, those nations now called "developed" began to achieve better
economic performance and finally exceeded the countries now labeled "developing" in
terms of global revenue share.

The North American Free Trade Agreement is a component of globalization in different

areas. In an ideal world, this process would be an inherent element of the ongoing
development of a unified global society beyond national sovereignty, with no opposition
from any government, nation, or organization. However, twenty years after the founding
of NAFTA, the Mexican economy remains strongly dependent on the United States,
demonstrating the political weakness of interdependence. The advancement of
globalization promoted the need to renegotiate NAFTA, now called USMCA.
1.0 How globalization affected NAFTA and the economic impact on all three parties
involved under the new criteria.

While NAFTA had positive effects on the economy, it also had some problems with
keeping up with the advance of globalization; On August 16, 2017, the United States,
Mexico, and Canada began renegotiating NAFTA, because of these disadvantages. On
September 30, 2018, the three countries reached an agreement.

Globalization has helped countries to share efforts and resources to produce better
products at lower prices by practicing outsourcing, “the business practice of hiring a party
outside a company to perform services or create goods that were traditionally performed
in-house by the company's employees and staff. (Twin, 2022)

Incorporating a developing economy like Mexico into NAFTA was meant to make use of
the excess labor to boost American economic competitiveness. It was logical to expect a
trade deficit to arise when reduced components were manufactured in Mexico and
blended into final goods in the U.S. The success of intermediate product exports was
followed by the export of finished goods at cheaper prices than those found in US
markets, improving the purchasing power of American families.

Outsourcing started to be a problem for the US since several industrial businesses

relocated some of their output to Mexico because labor was cheaper. It caused the loss of
approximately 5 million manufacturing jobs in the US and a trade deficit that "as of
November of 2016, the US trade deficit with Mexico stood at approximately US $58 billion”
(TECMA, 2017).

After the renegotiation, the USMCA boosted from 62.5 to 75 percent the number of
automotive parts that the United States must produce. The new agreement also said that
for a car or truck to be exempt from tariffs, 45 percent of its parts should be made by
workers who earn at least $16 per hour, which is not a problem for Canada, but it is for
Mexico since this is more than the average salary for Mexican auto workers. However,
there may be benefits for Mexican auto workers, such as higher salaries and collective
bargaining rights.

Moving on to the food industry, NAFTA resulted in the loss of 1.3 million agriculture job
positions in Mexico; Meanwhile, the 2002 Farm Bill supported American agriculture by up
to 40% of net farm revenue. An important fact is that when NAFTA eliminated trade taxes,
businesses shipped corn and other crops to Mexico at a non-competitive cost for farmers
in Mexico, causing the lowering of farm subsidies from 33.2 percent of overall farm
revenue in 1990 to 13.2% in 2001.

If we analyze 1991 and 2003, the earnings of agricultural workers declined considerably.
Using special tabulations from INEGI, as is shown in table 1, the monthly salary of
employees decreased, and it fell much more dramatically for self-employed farmers, who
used to earn 1959 pesos and ended up earning just 228 pesos in 2003 for the same
amount of effort. On the other hand, employers' salaries increased from 626 pesos to
1165 pesos. This information shows that while agricultural employers benefited from
NAFTA, farmers faced enormous revenue losses.

Table 1. “Agriculture Incomes, 1991 and 2003” (INEGI, 2003)

The United States had a huge "victory" for American dairy farmers after the renegotiation.
The USMCA rules will make it simpler for American products to enter the limited Canadian
market. Historically, hefty Canadian taxes have created a barrier for US dairy goods in this
industry. Canada kept tariffs on ultra-filtered milk under the previous NAFTA trade
framework, discouraging its dairy product manufacturers from purchasing from the US.
Ultra-filtered milk is the primary component in the production of yogurt, cheese, and
powdered milk. Under the USMCA, ultra-filtered milk can enter Canadian trade duty-free.
This new trade rule will be harmful to Canadian dairy producers.
2.0 Why Canada and Mexico claimed a Cultural exemption over NAFTA.

Cultural exemption applies to the cultural industries “engaged in the publication,

distribution or sale of books, magazines, film, video, and music, as well as broadcasting”
(UNESCO, 2020).

Canada has had this exception since the first time it signed the NAFTA agreement due to
the immense respect and pride Canada has for their culture. In the renegotiation, the
prime minister said: "It is inconceivable to Canadians that an American network might buy
Canadian media affiliates, whether it's newspapers or TV stations or TV networks. It would
be a giving up of our sovereignty and our identity, which we will simply not accept" (CBC
News, 2018). This sector not only plays a role in its identity since it is crucial for its
economy. In 2017, it contributed 3% to Canada's GDP and 3.5% of their employment.

With the NAFTA agreement, the Mexican government didn't pose the possibility of having
a cultural exception clause, because they thought that their culture was strong enough to
overcome any cultural influence. Although this has not happened yet, Mexicans have
adopted several things from the US, for example, Halloween. It is said that Halloween
became popular thanks to the cinema and popular culture of the neighboring country in
the 80s. Seeing the cultural change over the years made the government rethink the idea
of the cultural exception, so they decided it would be best to ask for it, just like Canada, to
keep their culture and grow it within the country.

3.0 The main political and legal factors that led to UMSCA

In 2016, Donald Trump used the NAFTA agreement as one of his political promises. While
he was running for president, he said that he would engage in renegotiations or walk away
from NAFTA, arguing that the US had a trade deficit with Mexico and lost many
manufacturing jobs. President Trump called NAFTA the “worst trade deal ever made” and
promoted the renegotiation to create the USMCA. During that campaign, as shown in
figure 1, only 45% of the people in the US expressed that free trade agreements were a
good thing for the country, according to a Pew Research Center Survey.

At the same time, as shown in figure 2, only 30% of the republicans in the US believed that
NAFTA was a good agreement for the country, which led to the support of Trump’s
campaign and to renegotiate it. The claims to oppose NAFTA were that it provoked a job
loss in manufacturing. According to VICE News, when NAFTA was executed, there was a
27% decline in those jobs and "a flip in the balance of trade between Mexico and US",
creating a deficit of 64.4 billion dollars (Vice News, 2017).
 Figure 1: “Free trade agreements survey”. (Pew Research Center, 2017)

Figure 2: “NAFTA survey”. (Pew Research Center, 2017)

Although no evidence supports that NAFTA was the cause of these accusations, it was
used to keep republicans in favor of Trump's campaign and election. When he became
president, he sent notice to the congress of his intentions in renegotiating the agreement,
and it all came into motion. They agreed and pledged to renegotiate because Trump
threatened to withdraw from the agreement, which would be a massive loss for all.

Moving to the legal elements, the main reason was that since NAFTA was negotiated 25
years before 2017, it had “a lot of chapters that were outdated and needed to reflect
modern standards. For example, on digital trade, which wasn't big when it was signed”
(Earley, 2021)
3.0 USMCA's level of economic integration.

The North American Free Trade Agreement (NAFTA), which was the first to integrate the
region's economy, is built upon the United States-Mexico-Canada Agreement (USMCA),
which also offers a new framework for North American relations. USMCA was the first free
trade deal that the labor union (AFL-CIO) supported, and the Senate adopted.

The Biden administration has made it explicit that one of its primary priorities would be
strengthening diplomatic ties with the United States' traditional allies, notably Canada and
Mexico. The Biden administration's emphasis on alliance diplomacy following Trump's
"America First" policy would be well-indicated by an early and precise commitment to
strengthening the economic links between Canada, Mexico, and the United States.

The USMCA's value is clear; Major export destinations for the United States include
Canada and Mexico, where 70% of Mexican exports reach the U.S. and Canada, and 62%
of Canadian exports reach the U.S. and Mexico. The value contributed to regional supply
chains is considerably boosted by trade between the countries, mainly in the auto sector,
which makes up the majority of manufactured trade between the three countries.
Furthermore, given the consequences of COVID-19 and the increasing vulnerability of
reliance on Chinese supply chains, the need for robust supply networks has become
understandable; The Biden administration has ordered an evaluation of American supply
chains to reduce American dependence on Chinese manufacturers of essential
components. Integrated North American supply chains may provide a competitive
alternative to Chinese manufacturing, allowing some companies to transfer their
operations here.

The government must show its support to keep the many entities created by the
agreement active and productive. A new Competitiveness Committee will bring together
members from the three countries to assess implementation and identify areas for more
cooperation to increase regional competitiveness. Additionally, it offers the power to
review and modify associated trade and investment policies periodically, but only if the
governments participate actively in the process.

To guarantee the agreement's seamless implementation and high compliance,

policymakers must sustain their efforts and attention in the upcoming months. George
Schultz, a former secretary of state, compared diplomacy to gardening, saying it required
regular care and the removal of weeds before they invaded the productive area; When it
comes to trade relations, policymakers must exercise the same caution: monitoring
counterparts, resolving minor irritants before they escalate into major conflicts, creating
plans to address recent issues that affect everyone, and building on successes that
increase opportunity and hope for all.
4.0 Toyota’s international strategy, and how COVID-19 amongst other factors
affected this strategy.

As a result of the USMCA's greater regional content, car companies are being forced to
relocate their suppliers, especially those from Europe and Asia. Toyota intends to continue
employing the tariff advantage to maintain its position in the North American market. The
company's North America's VP of buying, Greg Laskey, claims that the firm is now on this
path and it's looking for new suppliers in the country to develop enduring relationships for
its future manufacturing.

According to the American Automobile Labeling Act, Asian manufacturers like Nissan,
Toyota, Honda, and KIA report an average regional content of 67%, which is lower than
the new threshold of 75% to avoid tariffs. As a result, there is room for growth for
companies that provide auto parts in the region.

Since 2003, when its 844,000-square-foot facility in Baja California was launched, Toyota
has been producing goods in Mexico. The business opened a second factory in Apaseo el
Grande, Guanajuato, in 2015 because of a significant increase in demand. The demand for
Toyota's Tacoma pickup trucks has been so high that the firm recently announced a $170
million extension to its Guanajuato factory, increasing Toyota's ability to produce up to
138,000 of the vehicles annually. Toyota is happy that a trilateral trade deal was agreed by
the United States, Mexico, and Canada to update North America's industrial
infrastructure. This deal is crucial in safeguarding the 137,000 American employment at
Toyota that is tied to the car industry.

More than $3 billion in parts and components are currently imported annually by Toyota
Motor North America from Mexico. As its network of Mexican suppliers grows, the
company is looking for partners who can show that they are competitive in pricing and
have a solid foundation in terms of quality, safety, process improvement, and a strategic
approach to decision-making. As businesses recover from the global industrial shutdown
brought on by the COVID-19 pandemic, the necessity for this resilience and strategic
approach has grown. According to Laskey, "it is more crucial for companies affected by the
pandemic to have partners who can adjust to changing circumstances".

As a result of months of unmet demand, Toyota had a two-month closure followed by a

significant increase in sales. Sales for the company increased 16% in September compared
to the same month last year. It will take strong relationships and a linked supply chain, like
the one already used in Mexico, to handle unexpected surges and adapt to new
difficulties. Toyota has the chance to enhance its supply chain in Mexico at all tier levels
due to the increased demand for parts made in North America. The manufacturer's
evolving supplier requirements as it transitions into its new role as a "mobility company"
are the cause of the spike in demand for alternatives to conventional vehicle
transportation.
Conclusion

Even though some people around the world think globalization is only meant for
developed economies, and therefore only big countries benefit from it, it is something
that has pushed the world into a new era. This new era seeks changes that need the
creation of trades and agreements.

All of this is something companies of any industry must consider when doing business in
certain countries since it can affect them positively or negatively. We encourage
companies to research and study the market and country before making any agreement,
this can make the company successful in their future businesses.

As mentioned before, thanks to the NAFTA agreement, all the parts have gained different
things, whether it's by having more money, fabrics, or jobs. The debate about if the
agreement was a good idea or not continues. However, the answer depends on who you
ask, overall, it seems to have made good changes for all three parties involved. As shown
in figure 3, according to a survey conducted by Pew Research Center we can see what
each of them thinks.

In the end, these agreements between countries engage in good relationships with one
another, profiting all economies, some more than others but all at last.

Figure 3: “How NAFTA was perceived” (Pew Research Center, 2017)

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