Nafta pgdm b-(118,134,145)

NAFTA – North American Free Trade Agreement

By,K.K. Srinivas (PGDM-B 118)

Nishant Jaiswal (PGDM-B 134)V. Sathwik Mohan (PGDM-B 145)

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NAFTA – North American Free Trade Agreement

• Established/ Formation – January 1st 1994.

• Member Countries – 3 (United States of America, Canada, Mexico)

• Languages spoken – English, French and Spanish

http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement

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Tracing the History of formation of the Free Trade Agreement:

• Free Trade between US and Canada dates back to 1855, under the Reciprocity treaty. (During this time, Canada was under the British rule)

• US nationalist opposition: US cancelled treaty in 1866, because of strong opposition from the country’s (US’s) national protectionist elements.

• Canadian opposition: The critics of those Canadians, who encouraged closer economic ties with the US, termed it as ‘encouraging political annexation’.

• Bilateral agreements: 1935-1980 saw a number of bilateral trade agreements, one of which is the Auto Pact (Automotive Parts Trade Agreement, 1960).

• FIR – Foreign Investment review agency in Canada• 1985 – Murloney’s government abolished FIR • On October 4th 1988, US and Canada signed a Free Trade Agreement finally. This

was called the Canada-US-FTA.• Later in 1994, Mexico was added to this Trade Agreement and this created the birth

of a trilateral agreement, what we now know as NAFTA.

http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement

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Reasons for formation of a Free Trade Agreement:

The objectives of this Agreement, mentioned in NAFTA’s Part one, Chapter one, Article 102, as elaborated more specifically through its principles and rules, including national treatment, most-favoured-nation treatment and transparency, are to:• eliminate barriers to trade in, and facilitate the cross-border movement of,

goods and services between the territories of the Parties;• promote conditions of fair competition in the free trade area;• increase substantially, investment opportunities in the territories of the Parties;• provide adequate and effective protection and enforcement of intellectual

property rights in each Party's territory;• create effective procedures for the implementation and application of this

Agreement, for its joint administration and for the resolution of disputes;• establish a framework for further trilateral, regional and multilateral cooperation

to expand and enhance the benefits of this Agreement;

http://www.nafta-sec-alena.org/en/view.aspx?x=343&mtpiID=122

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NAFTA in 2008

NAFTA Partners Canada U.S. Mexico Combined

Languages English, French English Spanish

Trade with NAFTA partners (current US $)

570.8 billion 919.9 billion 393.5 billion 946.1 billion

Inbound FDI(current US $)

240.0 billion 229.8 billion 156.0 billion

Jobs created 1993-2008

4.3 million 25.1 million 9.3 million 39.7 million

National Employment

Level

17.1 million 145.4 million 43.2 million 205.7 million

http://www.naftanow.org/facts/default_en.asp

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Similarities & Differences

http://www.tradingeconomics.com/

Canada U.S. Mexico

Inflation rate (2011) 2.90% 3.40% 3.50%Growth rate (2011) 3.40% 1.50% 4.50%Unemployment rate (2011) 7.40% 8.60% 5.16%Interest rate (2011) 1.00% 0.25% 4.50%Industrial production(2011) 0.70% 3.70% 3.30%

Canada U.S. Mexico

GDP (absolute, in million US$, 2011) 1574.05 14582.4 1039.66Population (millions, 2011) 34.28 311 112.34Exports (million US$, 2011) 38030 179168 31017Imports (million US$, 2011) 38910 222635 31249Balance of trade (million US$, 2011) -880 -43466 -232

Differences:

Similarities:

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• Similarities– History

• Differences– Defence

Similarities & Differences

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Impact on member countries• Agriculture–Benefits for US–Mexico’s import licensing system– Protection for import sensitive products– Sanitary and Phytosanitary measures (SPS)– Export subsidies–Grade and quality standards–Rules of origin – NAFTA Certificate of Origin

http://www.fas.usda.gov/info/factsheets/NAFTA.asp

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Impact on member countries• Maquiladoras• OECD Transfer Pricing Guidelines – Arm’s

length

• Increase in jobs• Increase in manufacturing output• Increase in wages• Steps to improve environment

http://www.ustr.gov/sites/default/files/NAFTA-Myth-versus-Fact.pdf

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NAFTA – milestones

• North America: The World’s Largest Free Trade Area – NAFTA created the world’s largest free trade area, which

today has 457.6 million people and a combined gross domestic product of USD 17.2 trillion.

• Expanding Trade – From 1993 to 2006, trade among the NAFTA countries

almost tripled, from USD 304 billion to USD 903 billion– Canada’s exports to its NAFTA partners increased by 173

percent in 2006– U.S. exports to Mexico and Canada grew by 157 percent in

2006– Mexican exports to the U.S. grew by 392 percent in 2006

http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf

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NAFTA – milestones(Contd..)

• Attracting Investment – By establishing a strong, certain, and transparent

framework for investment, the NAFTA creates an environment of confidence and stability required to make long-term investments.

– In 2006, FDI by each of the NAFTA partners in the other countries reached USD 533 billion, more than triple the USD 138 billion figure registered in 1993.

– NAFTA has also stimulated increased investment from countries outside of NAFTA.


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• Expanding Prosperity While Enhancing Security– To mutually reinforce economic prosperity and security ,

NAFTA members launched the Security and Prosperity Partnership (SPP) in 2005

– It was meant to enhance cooperation on issues that affect the security and prosperity of North America, and the quality of life of its citizens

• Protecting the Environment – green technologies to environmental problems– With Commission for Environmental Cooperation (CEC),

promoted policies and actions that provide mutual benefits for the environment, trade, and the economy


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• Respecting Labor Rights– NAALC• creates mechanisms for cooperative activities• intergovernmental consultations• independent evaluations• dispute settlement

– Through NAALC, NAFTA partners seek • to improve working conditions • living standards• to promote a broad set of labor principles• effectively enforce their labor laws.


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NAFTA – milestones (Contd..)

• Trade with non-member countries– Since 1994:

• Canada has free trade agreements with Israel, Chile, Costa Rica and Jordan

• The United States has free trade agreements with Jordan, Chile, Singapore, Australia, Morocco, Bahrain, the Dominican Republic and five countries in Central America

• The United States has recently signed free trade agreements with Peru, Colombia, Panama, and Korea, and is currently negotiating a free trade agreement with Malaysia

• Mexico has free trade agreements with Chile, the European Union, EFTA, Israel, Bolivia, Colombia, Nicaragua, Costa Rica, Uruguay and Japan


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US trade with non member countries

Export Import Balance

Europe 273,444.0 369,829.5 -96,385.6

China 84,235.4 329,685.1 -245,449.8

India 17,704.9 30,826.6 -13,121.6

Colombia 11,736.4 18,750.1 -7,013.8

Peru 6,822.2 5,096.7 1,725.5

Panama 6,786.2 335.8 6,450.4

US trade for 2011 (million US dollars)

http://www.census.gov/foreign-trade/balance/c5330.html

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NAFTA vs EUNAFTA EU

Population (2008) 0.5 billion 0.5 billionGNI (US $) (2008) 16 trillion 15.5 trillionNumber of member countries

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Common external tariff

NAFTA does not have a common external tariff

EU has a common external tariff

Currency All the three member nations have different currencies

Most of the member countries have a common currency i.e. Euro (Exception being UK)

Work permit Inhabitants from one member country cannot go and work in other member country without passing several bureaucracy barriers

People can live in the member countries as long as they want and also work as much as they want to without passing any criterions

http://romyeconomics.blogspot.com/2008/08/nafta-vs-eu.html

http://eugenioram3.blogspot.com 17

NAFTA EU

Location advantage North America is close to South America and East Asia. Thus the ways for trading products and services are much longer than for the EU

It is next to Asia and Russia as well close to Africa and transfers to America are well developed too

Theory of Absolute Advantage and Comparative Advantage

These theories cannot be applied in the NAFTA because Mexico depends almost %100 in the US their imports are 90% from the US and their exports are 90% to the US

In the European Union, some countries are more specialized in on product and some aren’t even if they are very close in production they will specialized and make more of the product

NAFTA vs EU

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NAFTA and further stages of economic integration:

NAFTA is currently in the first stage of economic integration, i.e. it is a Free Trade Area.

NAFTA faces the following challenges in transcending to higher stages of economic integration:• NAFTA doesn’t have a common external tariff

• Barriers and regulations in terms of different currencies, restrictions for migration/transfer of labor/capital

• The illegal immigration of nationals from Mexico into US has drawn strong opposition and disapproval from US protectionist elements

• Lack of trust between Canada-US and Mexico-US, as Canada and Mexico feel that US dominates them and restricts their trade.

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Challenges for NAFTA

http://www.economywatch.com/international-organizations/north-american-free-trade-agreement.html

• Address the issue of 10 million illegal Mexican immigrants in the US

• Resolve trade deficit of US with Canada and Mexico

• Trade diversion (Especially for Mexico) from non-member countries to member countries

• Resolve current trade disputes – Sugar trade between Mexico & US (Mexican Export Quota dispute), Cross-Border trucking (Mexico to US) etc.

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Implications for MNEs

• Rules of origin

• High economic risk in US because of the trade deficit

• Low growth rates in US, Canada and Mexico

• MNEs strategy recommended – Pan American

Source: Free trade in the Americas: economic and political issues for governments By Sidney Weintraub, Alan M. Rugman, Gavin Boyd

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