Download North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA)
I.
Brief overview of NAFTA (mainly for in-class presentation)
a.
NAFTA Introduction
b.
Original Expectations
II.
NAFTA over the last 12 years
a.
Impact on the U.S. economy
i.
Jobs (Employment Growth)
ii.
Labor
iii.
Income
iv.
Imports vs. Exports (Trade Deficit)
1.
Agriculture
v.
Economic growth
b.
Impact on Canadian economy
c.
Impact on Mexican economy
d.
Global Impact
i.
International Business
ii.
FDI (Foreign Direct Investment)
III.
NAFTA - The Good, the bad and the ugly
a.
Successes
b.
Short Comings
i.
Lessons Learned
c.
Broken Promises
IV.
NAFTA’s role going forward
a.
What needs to be fixed?
i.
Current Issues and Challenges
b.
How do you fix it?
i.
Solutions being considered
I. Brief Overview:
NAFTA, The North American Free Trade Agreement, came into existence on January 1,
1994. NAFTA is basically a free-trade agreement between the three North American countries of
the Unites States, Canada, and Mexico. The main idea behind this treaty was to provide the
people and the businesses of the North American countries many incentives to trade amongst
each other. The duties on U.S goods shipped to Mexico were reduced by 50 percent, and other
restrictions were to be removed from many categories, such as motor vehicles, computers,
automotive parts, and agricultural goods. NAFTA was also put into action in order to protect the
intellectual property rights of the businesses, such as patents, copyrights, and trademarks. Other
supplemental agreements were also signed in later years, which allowed for worker and
environmental protection. Although many people might think that the NAFTA is like the EU
(European Union), it is quite different. NAFTA, unlike EU, does not set up a collection of
supranational governmental bodies, nor creates any law that is superior to the national law of
each of the member countries (Wikipedia; International Trade Canada).
II. NAFTA in the last 12 Years:
The signing of the NAFTA was a controversial issue, even before it came into existence.
Many people still debate whether this was a good move and many have contemplated on the
treaty’s effects on human rights, the environment, as well as the culture of the three countries
a. Impact on U.S. Economy
Perhaps the one sector of the U.S. economy that has been affected the most by the
NAFTA is the labor union. Almost all of the labor unions in the US have opposed
NAFTA because they fear that they would lose their jobs to the Mexicans because of
lower wage rates there. The income of the workers has also been affected as the
businesses have had to lower their wage rates in order to remain in competition with
those which are producing in Mexico. The agricultural sector of USA, however, has seen
an overall positive effect as it has worked towards greater integration of markets in North
America. This has further worked to enhance the competitiveness of the U.S. agricultural
products. “From implementation of NAFTA through 1996, total U.S. agricultural trade
ha(d) grown rapidly, rising from nearly $68 billion (exports $43 billion, imports $25
billion) to about $94 billion (exports $60 billion, imports $34 billion). In relative terms,
the share of trade with NAFTA partners ha(d) held steady at about 24 percent of total
U.S. agricultural trade” (Raney and Shagam 1996).
b. Impact on Canadian Economy
Much of the impact on the Canadian economy has been the same as it has been
for the US. The workers have complained that their wage rates are going down as the
businesses in Canada are now looking to have their production plants etc in Mexico. In
addition, other opposition has been presented to NAFTA since some of the clauses
mentioned in the treaty disallow the Canadian government to stop the sale of any
commodity in the future if it has been sold once as a commodity.
“This of course applies to the water from Canada's Great Lakes and rivers, fueling fears
over the possible destruction of Canadian ecosystems and Canada's water supply. Other
fears come from the effects NAFTA has had on Canadian law making” (Wikipedia).
c. Impact on Mexican Economy
In the beginning, Mexico had hoped to gain from the agreement by a growth in the
national output, falling unemployment rates, and increasing trade with the U.S. The
NAFTA has, perhaps, benefited Mexico the most out of all the other two countries. This
can perhaps be best reflected in the rapid growth of the Mexican maquiladora industry.
“A maquiladora is a labor-intensive organization that imports inputs, often from the
United States, and then processes and exports them. Because maquiladoras often link the
border economies of U.S. and Mexican cities, these plants have been some of the major
beneficiaries of NAFTA. In 1993, Maquiladoras numbered only 2,143. Just six years
later, the number of maquiladoras had increased 73% to 3,703” (Fugate 2005). This
shows that NAFTA has positively affected the Mexican economy, more than it has any
other country.
III. NAFTA: The Good, the Bad, and the Ugly:
As mentioned earlier, NAFTA has remained controversial, even before its birth. The
main argument that many politicians have given against NAFTA is that they fear it would turn
countries such as Canada into permanent branch plant economies. The farmers in Mexico have
been opposing NAFTA because they believe that all the subsidies that the US farmers get from
their government undermines the Mexican agricultural prices, which in turn is forcing many of
the Mexican farmers out of business. Many sectors in Mexico have shown a steady decline in the
wages. Many uprisings have taken place in Mexico, e.g. the Zapatista revolutionaries, and this
has caused many social and political problems for the Mexicans. “Furthermore, NAFTA was
accompanied by dramatic reduction of the influence of trade unions in Mexico's urban areas.
NAFTA has been accompanied by a dramatic increase of illegal immigration from Mexico to the
United States; presumably, a significant fraction of these people are farmers forced off their land
by bankruptcy. Opposition to NAFTA also comes from environmental, social justice, and other
advocacy organizations that believe NAFTA has detrimental non-economic impacts to public
health, the environment, etc” (Wikipedia).
Yet, there are those that argue that NAFTA has done much to help the citizens of all three
countries. The standard of living in Mexico, and to some extent in Canada, has also gone up as
compared to the United States. Many economists and socialists argue that NAFTA has done
nothing but to help integrate the three economies and has given the people a better chance. They
argue that “Canada and Mexico have reaped gains from free trade with the largest economy in
the world, while the United States has benefited from unhindered access to their markets and
products as well” (Wikipedia). A fact, that NAFTA still continues to pay its dividends, is a
constant reminder to the controversialists and those who oppose it that NAFTA is a success and
is helping all three countries make their profits (Griswold 2004).
IV. NAFTA’s Role Forward:
One of the things that NAFTA should look forward to and try to implement in the North
American continent is the process of dollarization. It is believed by many leading economists and
theorists that the process of dollarization is very important and that it would greatly further the
cause of NAFTA. “Dollarization occurs when residents of a country extensively use the U.S.
dollar or another foreign currency alongside or instead of the domestic currency. Unofficial
dollarization occurs when individuals hold foreign-currency bank deposits or notes (paper
money) to protect against high inflation in the domestic currency. Official dollarization occurs
when a government adopts foreign currency as the predominant or exclusive legal tender” (Mack
1999). This is proposing that the NAFTA becomes more like the EU, and has a single currency.
Many have used the term dollarization, but they fail to close in on the real context of the
situation. ‘Dollarization’ has been quite often very loosely used in many of the literature and
references, where it is said that the foreign money would completely take over the local
currency. This is hardly true. What many people fail to understand is the great benefit that this
can have on behalf of and for the cause of NAFTA. It is extremely important to keep three useful
concepts to keep in mind when considering the incorporation of it via NAFTA: “Asset
Dollarization - The term Asset Dollarization refers to the use of foreign currency in any of the
three functions of money: unit of account, means of exchange and store of value. Currency
Substitution refers to the use of foreign money only as means of exchange. Thus, an economy
can be highly dollarized, but not subject to currency substitution. Domestic currency may still be
used for transactions. Liability Dollarization - A key point that has emerged in the recent
literature of currency and banking crises in emerging markets is that either the domestic banking
system or the government can have relatively large foreign currency debt obligations. This
concept is called liability dollarization. Therefore, a country can be scarcely dollarized in the
asset side, but the loans made by the banking system can be mostly in foreign currency. Partial
and Full Dollarization - Full Dollarization is a situation in which a country abandons its own
currency and adopts another country's currency as a means of payment and unit of account e.g.
Panama. Few countries in the world has dollarized completely” (The World Bank Group).
One of the greatest advantages of dollarization would be that it would make Dollarization
would make Mexico a home market replica of the process of discovering comparative advantage
in the very large dollar market. NAFTA has also been trying to incorporate Argentina into the
member states and for Argentina, dollarization would remove all doubt about the supremacy of
Argentine consumers with their dollars. NAFTA has considered the prospects that if a country
was to convert to dollarization, it would automatically be extended an invitation to enter
NAFTA. This is an incentive that has been given to many countries to dollarize. This is why
many have theorized that bringing in Argentina would be a good choice for NAFTA. “Although
unilateral dollarization by Argentina and Mexico is exactly the right initial step; a United States
partnership with dollarized neighbor countries is too good an opportunity to be missed” (Angell
1999).
Even though there are some set backs that might take place in the event of dollarization in
various nations, it would still have a very beneficial impact on NAFTA and its member countries
of course. If each country was to conduct its transactions only in dollars, it would remove the
limited flexibility of the central banks. This would make all the member countries as more
attractive to FDI (Foreign Direct Investments) as there would be no exchange rates problems. In
addition, dealing with the same currency would mean that the NAFTA can keep a tighter control
over the inflation and the monetary supply of the member countries. Going ‘dollar’ would be
beneficial for all the parties involved and it would help NAFTA in achieving much of what it
actually set out to do when it was first conceived.
“It should be pointed out, however, that a sovereign nation's ability to promise not to
pursue actions which it might in the future deem to be in its own interest are limited even under a
completely dollarized regime. Take the case of a liquidity crisis in a dollarized nation's banking
sector. If that nation believed that its banking sector was threatened, it could impose restrictions
on international capital movements to keep foreign assets in the country. Holders of these assets
could well end up experiencing capital losses due to default. To some extent, then, under
dollarization country risk would be substituted for currency risk. The net reduction in interest
rates from such a move would therefore be reduced” (Spiegal 1999).
Conclusion
It has been very difficult to actually analyze the exact macroeconomic effects that have
taken place over the member countries since the signing of NAFTA, and this has been because of
the large number of external variables that occur in this lavish environment of our global
economy. However, the general trend that has been observed after viewing the various economic
studies that have been conducted, have shown that instead of increasing the volume of trade,
NAFTA has led to trade diversion, where the NAFTA members are now importing more from
each other at the expense of other countries worldwide. As mentioned above, dollarization is one
of the solutions to this problem and it can greatly reduce many of the qualms that many different
and various organizations and people have against NAFTA.
Work Cited:
1. Angell, Wayne, Dr. “Dollarization: What a Wonderful Opportunity,” Hearing on Official
Dollarization in Emerging-Market Countries, April 22, 1999.
http://www.economiaysociedad.com/dollarization.htm (Accessed February 9, 2006)
2. Fugate, Jeff, “A Recipe for Success,” Yale Economic Review, Spring 2005: Online at:
http://www.yaleeconomicreview.com/spring2005/nafta.php (Accessed February 9, 2006)
3. Griswold, Daniel T., “After 10 Years, NAFTA Continue to Pay Dividends,” CATO
Institute, January 8, 2004. http://www.cato.org/dailys/01-08-04.html (Accessed February
9, 2006)
4. International Trade Canada, “Canada and the North American Trade Alliance,” Online,
http://www.dfait-maeci.gc.ca/nafta-alena/menu-en.asp (Accessed February 9, 2006)
5. Mack, Connie, “Basic of Dollarization,” Joint Economic Committee Staff Report, January
2000. http://users.erols.com/kurrency/basicsup.htm (Accessed February 9, 2006)
6. Raney, Terri, and Shayle Shagam, “NAFTA’s Impact on U.S Agriculture: The First 3
Years,” Agricultural Outlook, Economic Research Service/USDA, September 1996.
7. Spiegal, Mark M, “Dollarizaion,” Federal Reserve Bank of San Francisco Economic
Letter, September 24, 1999 http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el9929.html (Accessed February 9, 2006)
8. Wikipedia, “North American Free Trade Alliance,” Online,
http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement (Accessed
February 9, 2006)
9. The World Bank Group, “On the Definition of Dollarization,” Online,
http://lnweb18.worldbank.org/External/lac/lac.nsf/bc67c81027cc470e852567d6006c2776
/b8099e91bf7df8f5852568ce005cf400?OpenDocument (Accessed February 9, 2006)