NAFTA

Canada, Mexico and USA signed a historic trade accord on December 17,
1992.
Key features of NAFTA included (1) tri-national market are of more than 443
million (2) combined purchasing power of $16 trillion and GDP per capita of $
45257 (2007). (3) NAFTA is the first ever reciprocal FTA between two
industrial countries and a developing country. (4) Exports as %of GDP were
29(Canada),18(Mexico) and 6(USA)
 WHY MEXICO IN
ONE of the potent reasons was that Mexico’s authoritarian political system,
repressed economy and resulting poverty were creating problems that could
not be contained at the border in perpetuity. The choice was easy: either
help Mexico develop as part of integrated part of North America or watch
the economic gap widen and risk for USA increase.
 NAFTA
NAFTA went into effect on January 1, 1994. Based on the earlier
USA-Canada FTA, NAFTA dismantled trade barriers for industrial goods and
included agreements on services, investments, IPR and agriculture. Ever
since 1960, under Maquiladora Program, US firms had been able to locate
manufacturing facilities in an area just south of the US border and access low
cost labour and other benefits without any tariff.
NAFTA:Labour Adjustment
Side agreements include on labour adjustment which came in response to
American workers’ concern that jobs in USA would be exported to Mexico as it
has lower labour wages, weak child labour laws and so on. The agreement
involves such issues as restrictions on child labour, health and safety
standards and minimum wages. Mexico has pledged to link increase in
minimum wage to productivity increase.
Environment Cooperation
It ensures the right of USA to safeguard the environment. NAFTA
upholds all existing health, safety and environmental standards.
 IMPORT SURGES
It creates an early warning mechanism to identify those sectors where a
sudden, explosive trade growth may do significant harm to the domestic
industry. It further provides that in the future, a working team can provide for
revisions in the treaty text based on the experience with the existing
safeguard mechanism. Provision is also made for temporary retreat of import
duties in case of damage to domestic industry.
 NAFTA: Exchange Rate
In the long run, exchange rate should move towards level that would
equalise the prices of an identical basket of goods and services in
any two countries .As prices vary greatly among countries,
adjustment needs to be made in GDP for differences in purchasing
power.
 NAFTA’S Benefits and
Costs for Mexico &Canada
Mexico’s gains have come at the expense of other low wage nations—Korea
and Taiwan. With a low-wage and low skilled workforce, Mexico could
produce more of agri products, sugar, tuna and glass; labour-intensive mfg.
products and their exports such as appliances and low cost autos. The
economy has benefitted with rising wage income and employment, output
and foreign exchange earnings.
 Mexico Agriculture
Mexican agr. workers are small farmers, comprise about a quarter of
country’s population. Mexican producers of rice, beef , pork and
poultry have faced tough US competition in its own market owing to
NAFTA. US products enjoy easy credit, better transportation and
technology and major subsidies.
 CANADA
For Canada about NAFTA, he main concern was that closer
integration with US economy would threaten Canada’s social welfare
model to be considered uncompetitive. There is little threat to
Canadian model as people are willing to pay the higher taxes for its
way of life.
 CANADA’S BENEFITS
Safeguards, its status in trade, no loss of its free trade preferences to
US market, its desire to be part of broad market access to Central and
South America. Canada-Mexico trade has been modest.
 NAFTA& Economies of
scale
Prior to NAFTA, GM’s assembly plants in Mexico assembled small
volumes of many products, resulting in high cost and somewhat
inferior quality. Post-NAFTA, Mexico specialise in a few high volume
products, showing lower costs and higher quality.
NAFTA’S Costs and Benefits for USA.
• US economy is benefitted by expanding trade opportunties, reducing
prices, increasing competition and reaping economies of large scale
production. Endowed with large physical capital and high-skilled
workforce, its product range has expanded to chemicals, plastics,
cement, electronics, machine tools and household appliances. US
has reliable source of petroleum, less illegal immigration and
enhances political stability.
• Overall economic gains have been small for USA, its economy is 25
times the size of the economy, many trade barriers were
dismantled earlier.
US MIXED RESULTS
• US labour unions have raised concern about the low wage regime in
Mexico: Job losses in USA by locating low-skilled jobs to Mexico.
Basic auto parts such as piston rings are vulnerable to Mexican
competition. Hourly mfg. compensation is a small fraction compared
to those of US & Canadian labour.
• Productivity of average AMERICAN worker was estimated to be
$94120 in 2007 as against $23409 in Mexico, almost four times
higher.
• Stable legal and political system in USA relative to Mexico.
• Environmental concern-polluting Mexican plants, increased air
and water pollution.
PROPONENTS OF NAFTA
• An opportunity to create an enlarged productive base for the region
• As displacement is going to be smaller than expected ,it will have
minor negative effect on US and Canadian economies. A situation
of trade diversion.
• To make the treaty more effective, an agency was established
in Canada to resolve the environmental issues.
• It is only with a greater exposure to intra-NAFTA trade, effects
have generally been greater.
 Effects of NAFTA on
trade creation&
diversion
During 1994-98, the flow of US imports from Cnada was estimated to have
increased by 1.074 trillion, with $690 billion of that trade expansion i.e.,
trade creation and $384 billion of trade diversion.
Overall, NAFTA resulted in greater trade creation tha trade diversion for US.
 NAFTA &Trade Diversion
Textiles and apparel trade boomed for Mexico in post –NAFTA period
by late 1990s.
China entry into WTO in 2001, turned the table. Barriers to China’s
textile trade were reduced. Mexican trade advantage suffered
 Trucking Crisis
In 1995, Bill Clinton imposed restrictions on Mexican trucks as the latter has
no roadside inspection or drug testing for its drivers. No labelling of toxic
cargo.
NAFTA arbitration panel however suggested that US was in violation of its
treaty obligations. In 2007, under a pilot program, a limited no. of
Mexican carriers were allowed in USA. In 2009, this agreement was
terminated.
 Mexican Retaliation
Mexco released a list of 89 items which attracted import duties of 10to
45% California, Oregon and Washington agr exports were affected.
Rather Mexico imported these products from Eurpe, Latin America and
Canada.
 NAFTA: OCA
Favourable factors:
The greater the linkages between countries, the more suitable it is to oopt for them
single currency. (i) trade within NAFTA is substantial ii) similarity of economic
structures. Canada’s average income per capita, inflation and interest rates are very
close to USA. Mexico is an exception. Loss of sovereignty both for Canada and
Mexico rules very high. Political grounds overweigh economic parameters.