Regional Economic Integration, Research Paper Example

North American Free Trade Agreement (NAFTA) is a trade agreement between the United States, Canada, and Mexico to remove most barriers to trade and investment among the three countries (United States Department of Agriculture (USDA)). All three trading partners have benefitted from NAFTA even though USA and Canada are at a different economic stage as compared to Mexico. USA and Canada are innovation-driven economies with advanced technologies and business models and where service industries are becoming a bigger part of the overall economy. In contrast, Mexico is a factor-driven economy that competes on the basis of cheaper labor as well as lower manufacturing costs (The National Competitiveness Center).

The benefits of economic integration are that they result in more efficient allocation of factors of production as production facilities move to areas with lower costs. In addition, companies get access to bigger markets due to removal of trade barriers which help them achieve economies of scale and increase profits. Increased trade also leads to greater cooperation on political level because of higher economic stakes. This may explain why U.S. has been assisting Mexico in its dealings with drug cartels. The public also benefits due to lower prices which helps keep inflation rate low. NAFTA has been beneficial because the U.S. and Canada have vastly different economic structures from Mexico, resulting in high level of comparative advantages due to specialization. The increased competition due to lower trade barriers also leads to improved products and services and forces the companies to accelerate their learning.

For innovation-driven economies like U.S. and Canada, the business opportunities are to allocate more resources towards the service sector which have higher profit margins and away from the manufacturing sector. In addition, many industries in both economies are now facing saturated markets at home and have huge growth opportunities in Mexico which has a growing middle income class. The benefits to a factor-driven economy like Mexico are that it has the opportunity to adapt modern technology and business models and moreover, the government will enjoy greater tax revenues due to higher manufacturing activity in the country. The government can use the higher tax revenues to improve its infrastructure as well as develop other economic sectors.

Disadvantages

The disadvantages of economic integration are that wages and workers benefits may go down rather than up because companies will transfer production activities to areas with low labor costs. In addition, the companies will have access to a larger pool of labor force and thus, the bigger labor supply will adversely affect the wages and salaries. Factor-driven economies like Mexico may not have the incentive to develop innovation-oriented industries due to high demand for their manufacturing activities because capital investments flow where the demand is. The unemployment levels may go up, especially in the sectors that decline as a result of mobilization of factors of production. The decline of automobile industry in the U.S. has been blamed at cheaper production costs outside the U.S. including Mexico where many U.S. automobile manufacturers now have production plants.

In addition, many small businesses go extinct because they cannot compete with the more efficient big businesses. Some business also suffer because their rivals get government subsidies and unfair competitive advantage. Loss of 1.3 million farm jobs in Mexico is an example because they could not compete with the U.S. farmers who were getting government subsidies as a result of 2002 Farm Bill. Similarly, one partner may bear the major cost of environmental pollution and in the case of NAFTA, it was Mexico due to the transfer of manufacturing activities from U.S. to Mexico. The environment cost of Mexican agribusinesses using more fertilizers has been estimated at $36 billion per year and in addition, deforestation is occurring at a rate of 630,000 hectares per year(Amadeo).

References

Amadeo, K. (n.d.). Disadvantages of NAFTA. Retrieved October 4, 2011, from http://useconomy.about.com/od/tradepolicy/p/NAFTA_Problems.htm

The National Competitiveness Center. (n.d.). Stages of Economic Development. Retrieved October 4, 2011, from http://www.saudincc.org.sa/About-National-Competitiveness/Stages-of-Economic-Development.aspx

United States Department of Agriculture (USDA). (n.d.). North American Free Trade Agreement (NAFTA). Retrieved October 4, 2011, from http://www.fas.usda.gov/itp/policy/nafta/nafta.asp