Auto-Trade Agreements in the World - Essay Example

? Auto trade agreements of The North America Free Trade Agreement was signed in 1986 by three main countries namely Mexico, Canada and the United States of America. This trade agreement was to create a trilateral trading block with the benefits of the open trade between the three countries. This agreement came into force in the year 1994 thus creating one of the biggest free trade zones in the world. The signing of this trade agreement between these three states enabled foreign direct investment in these three countries which enable them to gain numerous benefits (Hufbauer & Schott 2005). The type of the investment strategy that the Nissan Company is using in Mexico is Foreign Direct Investment (FDI) strategy which has enabled this company to invest its assets in the country. A company can decide to invest directly in a certain nation in order to enjoy the benefits of Foreign Direct Investment strategy. However this strategy has its own shortcomings depending on the economic and the political conditions of the host country. 1a). Foreign Direct Investment as a strategy in investment has various advantages and disadvantages. One of the main advantages of Foreign Direct Investment is that a company is able to expand its market therefore making the company compete with other firms at a global level. New customers will be attracted and thus the company will be able to make more profits. FDI has improved the level of competition between various firms in that a company will strive at producing the best quality product in order to attract the customers and keep the business in operation. For the Nissan company to prosper in the competitive market it must be able to make good quality cars that can easily attract customers. Through this investment strategy, the Nissan Company is able to integrate the use of the new technology that is available in Mexico. The new technology can help the Nissan Company to produce automobiles which are of improved quality as well as being unique in the market (Siddharthan and Lakhera, 2005). Foreign Direct Investment has enabled economic growth in Mexico as the host country. This is because investment in a country enables a nation to get finances or government income through the collection of taxes thus boosting the economic growth of the nation. The finances can as well be collected through the foreign exchange concepts. Through the FDI there is technology diffusion as well as knowledge transfer. In this context, the Nissan Company can benefit from the knowledge of the people of Mexico as well as integrating the technology of the Mexican people in the Automobile industry. Foreign Direct Investment also helps in the creation of job opportunities since the parent company will be willing to employ new people in the host country who will help in steering the company to success. The employment of skilled workers in the host country is also beneficial to the company in that these people understand the culture of their country thus it will be easy for these employees to interact effectively with the potential customers. Direct Foreign Investment has a negative impact on the domestic firms that are available in the host country in the Nissan Company might phase out many firms in Mexico which are not competitive in the market. The introduction of sophisticated technology in the Mexican market might threaten small firms thus making them to close down their businesses. The existence of too many firms that expand through the Foreign Direct Investment strategy might cause an increase in the inflation rates of Mexico as the host country which will consequently lead to the rise in prices of good. The end result is that the Nissan Company will have to re-adjust its prices thus making losses in the long run. This strategy used by the Nissan Company enables it to gain the competitive advantage in the global market since the integration of new technology enables the company to produce high quality product that can compete at the global market (Siddharthan & Lakhera 2005). 1 b). Economic exposure can be defined as the risk that is faced by a certain company that has invested its assets in a foreign country. The main risk that can be faced by the Nissan Company in Mexico is the changes in the foreign exchange rate. When the strength of the Mexican currency weakens it will imply that inflation rates will be high thus making the production costs to be high. The end result is that the prices in which the Company will be willing to sell its automobiles will increase thus reducing the number of customers that will be buying the product at the stated price (Kanas, 1996). 1c). Foreign Direct Investment helps to bring employment opportunities to the host country. When the Nissan Company invests in Mexico, it will help in creating the employment opportunities for the Mexican people thus boosting their living standards. Another benefit is the transfer of resources in that Mexico will benefit from the Nissan Company’s introduction of new technology in to the country thus leading to the improvement in the product quality especially in the automobile industry. Balance of Payment (Bop) is a method that is used by a nation to monitor all the international transactions that is taking place in a country. It stipulates that all exports must balance the imports. In the case of the Nissan Company investing in Mexico, the host country will earn money through the exportation of the automobiles by the Nissan Company thus helping in the balancing of payments for Mexico (Siddharthan & Lakhera 2005). 2. a). The possible impacts of these changes to the region is that the 40% local content rule will help to protect the Brazil’s automobile industry from the companies like those in Mexico which are well established in the market. This rule will therefore encourage many people in Brazil to produce many automobiles that can be exported to other nations. The extension of the agreement to accommodate Brazil to manufacture trucks and buses will enable Brazil to compete equally with Mexico who sold many automobiles by the fact that it was making larger vehicles. Brazil will be able to expand its market thus getting a larger market for its products. The end result is that Brazil will be able to increase its sales and exports to a figure that is greater than the $372 million that was realized previously. A limit to tariff-free imports through a quota will imply that Brazil will be able to reduce the number of vehicles that are imported to Brazil by increasing the amount of tariffs to imports in the Automobile industry. This will discourage many firms from exporting their products to Brazil but instead encourage the firms in Brazil to export their products (Siddharthan & Lakhera 2005). 2b). This type of trade change will have varied consequences on the economic development in Brazil in that the limiting of the level of importation to Brazil will reduce the level in which the government will earn its income. When countries import their products to the country, the Brazil government will be able to tax the imported goods thus earning the income that can be used in development. The 40% local content will enable the local automobile firms in Brazil to establish themselves in the market thus making the local people to improve their living standards. When the agreement allows Brazil to make buses and trucks, the exports of this country will increase because of its increased market as many people in the foreign countries will be able to purchase the automobile from Brazil thus increasing the Government’s earnings from exportation. References Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: Achievements and challenges. Washington, DC: Institute for International Economics. Kanas, A. (1996). Exchange rate economic exposure when market share matters and hedging using currency options. Management International Review, 36(1), 67-67. Viewed on 9th May 9, 2012 from http://search.proquest.com/docview/202691069?accountid=45049 Siddharthan, N. S., & Lakhera, M. L. (2005). Foreign direct investment and location advantages: Japanese perceptions of India compared to china and ASEAN*. Journal of International and Area Studies, 12(1), 99-110. 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