Opportunity and Cost: Business Prospects Made Possible by NAFTA, Research Paper Example

NAFTA – North American Free Trade Agreement – is a trilateral trade bloc in North America created by the governments of the United States, Canada, and Mexico. The agreement of NAFTA was signed on December 17, 1992, in San Antonio, Texas by U.S. president George H.W. Bush, Canadian Prime Minister Brian Mulroney and Mexico’s President Carlos Salinas. But it needed to be ratified by each nation’s legislative or parliamentary branch before it could actually become law. In the U.S. the agreement was signed into law on December 8, 1993, by President Bill Clinton and went into effect on January 1, 1994, this date is considered to be the official date of the implementation of the NAFTA agreement.

The initial and main goal of this agreement was to remove tariff barriers between the U.S., Canada, and Mexico. As Vollrath (2004) states the long-term goal of NAFTA was to make the North American market more efficient and thereby enhance the economic well-being of the United States, Canada, and Mexico.  Another objective of the NAFTA’s creation was to give these three nations the ability to competitively compete with the rest of the world, and to conduct business in such a way that each of these countries would mutually benefit (Koechlin, 1992). So NAFTA established timetables for the elimination or reduction of tariffs and other barriers to the movement of goods, services and investment between Mexico, Canada and the USA.

In terms of combined purchasing power parity GDP of its members ( in 2007),^[update] the trade block is the largest in the world and second largest by nominal GDP comparison. It is also one of the most powerful, wide-reaching treaties in the world. The North American Free Trade Agreement (NAFTA) has two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

There are still a lot of arguments and debates on whether NAFTA has positive or negative effects on the three countries that participate in it. Some experts say that NAFTA has been beneficial to the elite and business owners of all the three countries, but it has affected negatively farmers in Mexico, U.S. workers in manufacturing and assembly industries who have lost their jobs and workers of certain Canadian industries as well. On the other hand some economists argue that NAFTA has helped Mexico to decrease its poverty rates and to raise its real income.

Due to the NAFTA agreements the agricultural trade between U.S., Canada and Mexico in the period between 1992 and 2001 has increased by 155 percent (from $ 11.2 billion to $28.6 billion).  Nowadays Canada is the largest importer of the U.S. agricultural goods, displacing even Japan, and Mexico is the largest export market for the United States of America, staying on the higher position than Europe. In 2007 U.S. exports to the NAFTA partners accounted for 35 percent of the total U.S. exports.

But still the short-term effects of NAFTA agreement were not that beneficial to all three countries, especially to Mexico. The lowering of barriers for goods and investments entering Mexican market has greatly accelerated the southward shift of U.S. manufacturers. This led to the movement of jobs to Mexico which has resulted in the peso crisis of 1994-1995. The effect of this crisis was the devastation of Mexican production and decrease in real wages of Mexican workers. This in turn led to the trade deficit of U.S. with Mexico which caused a great decrease in U.S. jobs as well. In 1995 in all three countries wages and benefits were driven away, and government regulations and safety nets were significantly weakened. In the period between 1994 and 1995 there was also a great decline in the Mexican domestic agricultural production which led to the increase in imports. In the short run the sectors that have been hurt the most by NAFTA’s implementation were electronics and textile industries, and agriculture. Sector that benefited the most in the short run was a financial sector.

But despite these disastrous short-term consequences Williams (2004) has researched that the country that has benefited the most from the NAFTA agreement in the long run is Mexico. Its annual growth in GDP averaged 5.4 percent from 1996 to 2000, which was well above the average of 3.9 that was observed in the period between 1990 and 1994. Freer trade and increased competition has much benefited Mexican livestock and food processing industries. NAFTA has also been good for Mexican agriculture.

The positive results of NAFTA on U.S. economy can be observed in such aspects as job employment, manufacturing, and compensation. Job employment in the USA has increased by 22 percent since 1993. The average unemployment rate in the period of 1994 – 2006 was 5.1 percent, which should be compared to the rate of 7.1 percent during 1981 – 1993 years. If to talk about manufacturing, it should be noted that U.S. manufacturing output rose by 63 percent between the period of 1993 and 2006. Therefore, real compensation for manufacturing workers has also improved greatly. Average real compensation grew at an average annual rate of 1.6 percent from 1993 to 2006.

Free trade under NAFTA has generated broad growth, and consumers in all three countries have won a lot of benefits from this agreement. Industry sectors that have adjusted and adapted the best to the new trade environment were automotive and electrical industries.

The initial goal of NAFTA in regards to the automobile industry was to allow U.S. to export its automobiles to the markets of Mexico and Canada, and thus to increase the market for American cars and to win for it a much more stable position with respect to the raising foreign competition. But in reality the effect of NAFTA on the U.S. automobile industry was not that great. As NAFTA has promoted free trade between the three countries, it gave an excellent opportunity to Canada and Mexico to invade U.S. market with the vehicles of their domestic production, that were cheaper to produce and therefore were sold at the lower prices than U.S. automobiles, and thus won a great market share for Mexican and Canadian producers. In such a way due to this increased competition and lower revenues many U.S. manufacturers had to close their national factories and open them in Mexico and Canada, where labor was much cheaper.

But on the other hand such a situation has greatly benefited Mexican and Canadian workers. The opening of automobile factories by U.S. manufactures in Mexico and Canada encouraged a lot of people to move from rural areas to the cities where better paying jobs could be found and in such a way their well-being was greatly improved.

On the overall the impact of NAFTA on the Mexican auto industry is considered to be positive. The agreement of NAFTA has provided a great level of certainty that gave automobile companies an opportunity to implement and execute long-term strategies connected with the possibility to access larger markets. Also due to the NAFTA agreement Mexican auto industry has received a lot of investments which helped to run the process of modernization and rationalization of auto companies’ operations. As Raver (2007) states by guaranteeing Mexico an access to the Canadian and U.S. markets, the NAFTA had a buffer effect on Mexico’s auto production. So two major effects of NAFTA on Mexican automobile industry were an increase in automobile production even despite the period of economic recession (1993-1997) and a guaranteed access to the U.S. and Canadian markets.

Another important aspect and impact of NAFTA was that it allowed a gradual importation of U.S. and Canadian-made products to complement the Mexican market. This benefited vehicles assemblers in the way that they could reduce their product cycle and thus become more competitive.

Nowadays Mexico is a main supplier of external parts for tractors, seats, wire harnesses, speedometers and tachometers, engines and other parts, production of which doesn’t require high level of technological content. For instance, engines represent about third of all automotive exports from Mexico.

Hafbauer (2005) states that motor vehicles and parts account for a larger share of intraregional trade in North America than any other product sector. Three-way auto trade in 2003 was $125 billion, representing 20 percent of the total trade among NAFTA partners. Between 1993 and 2003 the volume of NAFTA’s auto trade almost doubled, accounting for 18 percent of the total growth in NAFTA trade over this period.

The main negative aspect of NAFTA in regards to the automobile industry is the huge drop in the employment rates, especially in the United States and Mexico. Canada stays the only country of the three partners where auto employment is greater today than when NAFTA entered into effect. If to compare the wages of the U.S. auto workers it can be seen that the real purchasing power of auto wages has remained the same since 1990s.

But still it is the fact that the long-term effect of NAFTA on the automobile industry in the North America has been more positive than negative. Free trade has allowed auto companies in each country to specialize in the areas of the auto industry where they are the most efficient and such a situation is to the benefit of all three of them. And it also can be stated quite surely that without NAFTA it would be much harder for the automobile industry of North America to compete with Asian and European auto producers.

In regards to the electronic industry NAFTA, in general, has encouraged a regional reorganization of the consumer electronics industry. For example, all stages of TV production (including design and production of key components) were shifted from the USA to the northern Mexico. This allowed the northern Mexico’s region to become the main source of TV manufacturing for North America. Tariffs between three countries on most electronic products were eliminated during the first five years of NAFTA’s existence. And local content regulations have been passed that required the use of certain parts produced only in the North America for a range of selected products (computers, TVs, etc.). Mexico has become the number one supplier of internal combustion engine generators, electric motors, fire alarms, and semi-conductor devices. Under the agreement of NAFTA Mexico has become major producer of electronics products (in Guadalajara) and it is also on its way to supplanting China and other Asian countries as the main manufacturing center of electronics products.

NAFTA has definitely helped to boost the trade of electronic goods between three partners. During the first six years of NAFTA’s existence the U.S.-Mexico trade in electronics reached $53 billion, which was an increase of almost 220 percent since 1993. The NAFTA consumer electronics market reached a value of $64.4 billion in 2007 and the USA remains the leading country within the bloc, with market revenues of $56.6 billion in 2007. Mexican exports of scientific equipment to the United States have increased from $548 million in 1992-2002 to $3.4 billion in 2004, and Canada’s exports increased from $675 million to $1.8 billion.

In overall North American electronics industry has become more integrated and thus more competitive under NAFTA agreement, and is now able to keep up with all the innovations and transformations that take place in the industry. Electronics sector accounts for the top five U.S. imports from Mexico, which has helped to establish economies of scale, productivity increase, and enhanced competitiveness.

So a conclusion may be drawn that the passage of NAFTA agreement resulted in the definite increase in trade between Canada, the USA and Mexico, with a particular growth in trade between Mexico and the United States. NAFTA has standardized customs procedures and has increased transparency in both standards and government procurement, which has significantly helped manufacturers in the North American region. The implementation of NAFTA has made a great commitment to the increase of competitive positions for many North American industries, in particular for electronics and automobile sectors. And although the agreement of NAFTA had a great number of drawbacks in the short run, in the long run it has proved its economical benefit to all three nations. NAFTA has shown its positive impact not only on the trade relations between countries, but also on the consumers, competitiveness of workers, and the security of investments of the United States of America, Canada, and Mexico. It has also benefited the development of small businesses giving them a secure market access. So a general conclusion may be drawn that in the long run NAFTA hasn’t hurt the economy of neither country.

References

Lederman D., & Maloney W., & Servén L. (2005). Lessons from NAFTA for Latin America and the Caribbean. Stanford University Press: Palo Alto, USA.

Vollrath, T. (2004). Gauging NAFTA’S Success and Confronting Future Challenges. AgExporter Magazine, 01/04, 7-8.

Williams, D. (2004). Mexico’s NAFTA Experience. AgExporter Magazine, 01/04, 14-15.

Koechlin, T., & Larudee, M. (1992). The High Cost of NAFTA. Challenge, 35(5), 19+.

Raver, E. (2007, February). The Effect of NAFTA on US Auto Industry. Retrieved April 12, 2009, from http://www.associatedcontent.com/article/145249/the_effect_of_nafta_ on_the_us_auto.html

Hufbauer, G.C., & Schott, J.J. (2005). NAFTA Revisited: Achievements and Challenges. Washington, DC: Institute for International Economics.