Main Economic Indicators and How They Changed before and after NAFTA - Example

And 11 September NAFTA Table of Contents Introduction …………………………………………………………………………………2 1. Definition and brief history of NAFTA 1.2. Purpose and importance of NAFTA 2. Body 2.1. United States and NAFTA …………………………………………………………….4 2.1.1. Main economic indicators and how they changed before and after NAFTA 2.1.1.1. GDP, GDP growth 2.1.1.2. Trade (EX, IM) 2.1.1.3. Country specialization 2.1.1.4. Unemployment 2.1.1.5. FDI 2.2. Mexico and NAFTA 2.2.1. Main economic indicators and how they changed before and after NAFTA 2.2.1.1. GDP, GDP growth 2.2.1.2. Trade (EX, IM) 2.2.1.3. Country specialization 2.2.1.4. Unemployment 2.2.1.5. FDI 2.2.1.6. Maquiladoras 2.3. Canada and NAFTA 2.3.1. Main economic indicators and how they changed before and after NAFTA 2.3.1.1. GDP, GDP growth 2.3.1.2. Trade (EX, IM) 2.3.1.3. Country specialization 2.3.1.4. Unemployment 2.3.1.5. FDI 3. Conclusion 500 3.1. Summary Effects 3.2. Potential impacts in the future 4. Works Cited 5. Appendix Introduction Definition and History of NAFTA The North American Free Trade Agreement (NAFTA) is the agreement, signed between the countries of North American countries (the U.S., Canada, and Mexico) in order to establish free trade area in the region. On December 17, 1992 President George H.W. Bush has signed the agreement, and a year later, on December 8, 1993 the NAFTA implementation Act was signed into law by President Clinton (Villarreal and Fergusson, 1). NAFTA came into actual force on January 1, 1994 which implied free trade between three countries of the North America: the United States, Canada and Mexico (Villarreal and Fergusson, 1). Purpose and importance of NAFTA The purpose of the agreement was to liberalize trade by removing trade barriers, to improve access for trade in services, to strengthen protection of intellectual property rights, to establish investment rules, and to create a dispute settlement mechanism among the three countries (ECLAC n.p.). NAFTA, being the “most comprehensive free trade agreement” had some groundbreaking provisions and was important step for all three NAFTA partners. First of all, the agreement enabled the countries to enhance economic linkages with its NAFTA partners, to increase availability of lower-priced consumer goods, to create more efficient production processes, and to improve working conditions and living standards (Villarreal and Fergusson, 1). While the experts believe that its difficult to measure the overall impact of NAFTA on economics of the partner-countries because of influence of such economic factors as inflation, economic growth and currency fluctuations (Villarreal and Fergusson, 1), it is possible to compare some major economic indicators of each country before NAFTA (Pre-NAFTA period) and after its implementation. United States and NAFTA Below is provided an overview of the major economic indicators of the USA before NAFTA followed with the comparative analysis of how did they change after the USA has joined NAFTA. These main economic indicators include: GDP and its growth, trade activity (including export and import), major country specialization activities, unemployment, and FDI. GDP, GDP growth Before the United States entered the free trade agreement with its North American neighbors, the country GDP was $ 6, 66 trillion of US dollars. In 1994, the US GDP was already $7, 07 trillion and continued to grow steadily within the whole period, reaching $13, 19 trillion by 2006 (Pete, Andrew and Stan 342). Since 1993 (pre-NAFTA period), the U.S. GDP has grown about 63 percent by 2012 (see Appendix, Graph 2) (Glassman, n.p.). Trade (EX, IM) Exports The US goods export to Mexico and Canada grew significantly during the period from 1993 to 2013, from $142 billion to $ 526,5 billion, respectively (US Department of Commerce, International Trade Administration, 26; Ustr.gov n.p.). An overall increase for the period before the USA has joined NAFTA (pre-NAFTA) in 1993 and 2013 was 271%. Based on the geographical principle, U.S. export to NAFTA has also gained a significant share out of the overall U.S. exports – 33,3% (Ustr.gov n.p.). The U.S. exports of private commercial services (government and military services are not included) to NAFTA has also grown significantly during the period from 1993 to 2012 (latest data available) by 223% (Ustr.gov n.p.). In 2013, the leading export categories of the U.S. were: Machinery, vehicles (parts), electrical machinery, mineral fuel, plastic, and agricultural products (processed food, beef and beef products, fresh fruit and vegatables, dairy products, pork and pork products) (Ustr.gov n.p.). Imports The US goods import from Mexico and Canada has grown even more significantly than the export activity: from $151 billion in 1993 to $612,5 billion in 2013 (US Department of Commerce, International Trade Administration, 26; Ustr.gov n.p). An overall increase for the period before the USA has joined NAFTA (pre-NAFTA) in 1993 and 2013 was 305% (Ustr.gov n.p.). U.S. has imported goods and services from NAFTA for 27% of the overall its imports in 2013. The U.S. imports of private commercial services (government and military services are not included) from NAFTA has grown by 171% during the period from 1993 to 2012 (latest data available) (Ustr.gov n.p.). In 2013, the leading import categories of the U.S. were: mineral fuel and oil, vehicles, electrical machinery, machinery, returns, and agricultural products (fresh and processed fruit (excluding bananas) and vegetables; snack foods, red meats, and fresh/chilled/frozen products (Ustr.gov n.p.). Graphical illustration of the U.S. Trade with NAFTA Partners during the period from 1993 to 2012 is presented in the Graph 1 (see Appendix). The graph visually illustrates trade deficit of the United States during its membership in NAFTA, with import exceeding export. Country specialization The U.S. trade specialization has several top categories, including machinery, electrical machinery, mineral fuel and oil, vehicles, plastic, and agricultural products (US Embassy 1). Thus, for example, in 2012 the US has exported to Mexico: Machinery for $36 billion; Electrical machinery for $34 billion; Mineral fuel and oil for $ 23, 8 billion; Vehicles for $20,4 billion; Plastic for $13, 9 billion; Agricultural products for $18, 9 billion. Unemployment At the time when NAFTA was signed, the largest traded goods industries in relation to employment were food manufacturers, non-electrical machinery, chemical, computer and electronics, fabricated materials, and transportation equipment (O’Leary, Eberts and Pittelko, 11). While in some of these industries employment rate was growing (computers and electronics, food manufacturers), in other industries employment has decreased significantly (O’Leary, Eberts and Pittelko, 14). Thus, for example the industries that have lost employment were textiles and fabrics (-67%), apparel manufacturing (-75%), and leather and allied (-70%) (O’Leary, Eberts and Pittelko, 11). Table 1 (see Appendix) provides a detailed overview of employment rate change during the period from 1993 to 2008 with a split on industries. Despite the fact that some industries have “suffered” from the NAFTA, the overall unemployment rate in the United States had a positive change since 1994. While at 1993, the unemployment rate in the United States was 6, 9%, by 2006 it has been steadily decreasing (except the period from 2001 to 2004) to 4, 62 % by 2006 (Pete, Andrew and Stan 342). FDI Liberalization of the FDI policy in the U.S., Mexico, and Canada was one of the initial conditions of the NAFTA (Feils, Rahman 148). The effect of this policy had significant positive impact on inward FDI into the United States. The U.S. foreign direct investment (FDI) in NAFTA partner countries exceeded $452, 5 billion in 2012, whereas the main investments were made into nonbank holding companies, finance/insurance, and manufacturing sectors (Ustr.gov n.p.). The amount of FDI that NAFTA countries invested in the United States (stock) in 2012 was $240, 2 billion. The NAFTA partner countries invested mainly in the banking, finance/insurance and manufacturing sectors (Ustr.gov n.p.). Mexico and NAFTA Inclusion to NAFTA has enabled Mexico to approach to the levels of development of the USA and Canada. The research results carried out by (Lederman, Maloney, Serven, 2) have shown that the impact on Mexico was more than positive, as the Mexico’s global exports would have been about 50 percent lower and FDI would have been about 40 percent lower if it were not in NAFTA (Lederman, Maloney, Serven, 2). More detailed overview of the effects on the Mexican economy is provided below. GDP, GDP growth Mexican real GDP has grown by 18,6 percent during the last 2 years after the country has entered into free trade relationships with the United States and Canada (Weisbrot, Lefebvre and Sammut 1). While this GDP growth might be viewed as considerable, it is still questionable, if to comparing this data with the period from 1960 to 1980 when the Mexican real GDP per person has grown by 98, 7 percent (Weisbrot, Lefebvre and Sammut 1). On the other hand the overall Mexican GDP has grown about for 65 percent by 2012 since 1993 (Pre-NAFTA period) (see Appendix, Graph 2) (Glassman, n.p.). While this overall estimate are seemed to have positive effect on the Mexican economy, the country is ranked on the 18th place of 20 Latin American countries in terms of real GDP growth per person (Weisbrot, Lefebvre and Sammut 5). Trade (EX, IM) After Mexico has joined North American Free Trade era, its trade activity has increased tremendously in terms of both exports and imports. From 1993 to 2012, total U.S. trade with Mexico increased by 506 % (US Embassy 1). Exports Since its inception of NAFTA, the Mexican trade activity with NAFTA countries has increased notably (IMF, 12). Thus, for example, within a decade after NAFTA, Mexico’s export to Canada and the United States has more than doubled (IMF, 12). In 1993, export between the U.S. and Mexico totaled in $ 50,843.5 million of the U.S. dollars; in 2013 export activity between these two NAFTA countries has generated $ 226,079.1 million (United States Census Bureau n.p.). Imports In 1993, import activity between the U.S. and Mexico resulted in $ 49,493.7 million of the U.S. dollars; while in 2013 imports exceeded $280, 528,8 million (United States Census Bureau n.p.). Country specialization The major sectors in which the country specialized included: agriculture, energy, and manufacturing (Moreno-Brid, Rivas Valdivia and Santamaría 18). However, the Mexican exporting specialization has undergone significant changes after the country has entered the free trade relationships with the NAFTA partners. If in 1994 the country exported 21, 4% of its natural resources, in 2001 export of this product category has fallen down to 14,7% (Moreno-Brid, Rivas Valdivia and Santamaría 18). Manufacturing not based on natural resources, on the contrary, has climbed from 57,6% in 1994 to 78,1 in 2001 (Moreno-Brid, Rivas Valdivia and Santamaría 18). Unemployment The average unemployment rate in Mexico during 1990-1994 was 3, 1 percent which was lower than the unemployment rate of 5% for today (Weisbrot, Lefebvre and Sammut 11). During the overall 20 years period of Mexico being in NAFTA, the unemployment rate has been falling steadily down to 2, 2 percent in 2000; since then the unemployment rate has grown up to 6,1% by 2010 and declined to 5% by 2014 (Weisbrot, Lefebvre and Sammut 11). If to compare the unemployment rates in Mexico with the unemployment rates in the United States or Canada, Mexico has quite a favorable position on this part. However, the experts (Weisbrot, Lefebvre and Sammut 11) believe that the Mexican unemployment numbers “seriously understate the true lack of jobs, but they show a significant deterioration in the labor market during the NAFTA years”. This statement is supported with the argument that there were tricky conditions of counting workers as unemployed combined with lack of proper social safety and no unemployment insurance (Weisbrot, Lefebvre and Sammut 11). All these factors drastically distorted unemployment statistics. One of the sectors that have faced the most significant unemployment was the agricultural sector, as NAFTA’s removement of tariffs on agricultural goods with a transition period of 2008 made Mexican producers and local farmers much less productive than the American (Weisbrot, Lefebvre and Sammut 13). FDI Inception of NAFTA has strengthened foreign direct investment flows not only in the United States and Canada, but also Mexico. Thus, for example, the agreement enabled Mexico to boost FDI flows to the country from US $ 12 billion in 1993 to $US 54 billion by 2002 (IMF, 16). The FDI of the United States into Mexico in 1993 was $15, 2 billion and by 2012 it reached $101 billion (Villarreal and Fergusson, 30). The major sectors of the U.S. investment are nonbank holding companies, manufacturing, and finance/insurance sectors (Ustr.gov n.p.). However, the manufacturing industry was the most attractive for FDI as it gained 53% of all FDI inflows to Mexico within the first 10 years after NAFTA onset (Moreno-Brid, Rivas Valdivia and Santamaría 17). These FDI was focused on three sub-sectors: metal products, chemical products, food, beverages and tobacco (Moreno-Brid, Rivas Valdivia and Santamaría 17). Mexico’s FDI to the United States (stock) also has grown significantly during the last 19 years’ period: from $1, 24 billion in 1993 to $ 14, 8 billion in 2012 (Villarreal and Fergusson, 30). Mexican investors focus on such sectors as banking, manufacturing, and wholesale trade (Ustr.gov n.p.). Maquiladora Mexican partnership in a free trade era with its North American neighbors has also resulted in the rapid growth of maquiladora plants. Maquiladora is the organizational outsourcing form, where “maquiladora plant imports inputs in-bond from the United States, processes them in some way, and then ships them back to the United States” (Gruben 2). Even though macuiladora’s existed in Mexico since the 1960s, within 5 years after the NAFTA came into force maquiladora employment grew by 86 percent (Gruben 2). In the early 1990’s maquiladoras provided more than 40% of Mexican total exports, and more than half of Mexican total exports of manufactured goods (Moreno-Brid, Rivas Valdivia and Santamaría 17). While the research studies indicate that NAFTA by itself has not contributed much to the growth of maquiladora program in Mexico since 1994, this growth could be aligned with the changes in demand factors and in supply-side/cost factors (Gruben 30). Canada and NAFTA Canada has enclosed the FTA with the U.S. on January 1989 and thus the period of trade liberalization between these countries began earlier than it began in Mexico (Villarreal and Fergusson, 20). However, the effect of NAFTA implementation was also significant for Canada, and the major key economic indicators are presented and discussed below. GDP, GDP growth Before Canada has joined the NAFTA, its GDP was $ 0, 564 trillion of US dollars. In 1994, the Canada’s GDP was at the same level as it was the previous year. However, since 1995 the GDP of Canada has been steadily growing, exceeding $1, 27 trillion by 2006 (Pete, Andrew and Stan 342). Since 1993 (pre-NAFTA period), the overall Canadian GDP has grown about 66 percent by 2012 (see Appendix, Graph 2) (Glassman, n.p.). Trade Exports Due to the FTA signed between Canada and the United States in 1989, Canada’s share of export to the U.S. was steadily increasing since the end of 1980s. During the first three year after NAFTA’s onset, the Canadian exports to the United States has grown by 22, 3%, 14%, and 6, 9% in 1994, 1995, and 1996, respectively (ECLAC n.p.). By 2002, Canada’s share of total exports to the United States reached 87, 7 percent, however it has declined to 74, 5% by 2012 (Villarreal and Fergusson, 20). Canada is not only the largest export partner to the USA, but also the largest import partner. Even though the U.S. is the major trading partner of Canada, NAFTA has enabled Canada to develop trading activity with Mexico as well. Within the first three years the Canadian export to Mexico has grown up by 31, 2%, 5, 4%, and 6, 1% in 1994, 1995, and 1996, respectively (ECLAC n.p.). The top goods that Canada exported to Mexico were: canola seeds, motor vehicle parts, oil seeds, digital processing units, wood pulp, semi-chemical, and bituminous coal (ECLAC n.p.). Imports After the NAFTA came into force, Canada’s share of the U.S. import has been growing notably: by 20, 5%, 9, 8 %, and 4, 3% in 1994, 1995, and 1996, respectively. Later, the country’s import started to decline resulting in 14, 4 percent by 2012 (Villarreal and Fergusson, 20). This tendency is a result of China’s growing position as a major trading partner in the world (Villarreal and Fergusson, 21). The major products that Canada was importing from the U.S. were: electronics, steel, and plastics (ECLAC n.p.). Trading relationships between Canada and Mexico has been strengthened after NAFTA not only on the exporting background, but on the importing as well. Thus, Canada’s imports from Mexico has grown by 21, 5%, 18, 2%, and 12, 4% in 1994, 1995, and 1996, respectively (ECLAC n.p.). From Mexico, Canada mainly imported the following goods: vegetables, fruits, motor vehicles and machinery, organic chemicals and mineral fuels (ECLAC n.p.). Country specialization Canadian exporting activity was specialized on the following sectors: machinery, equipment, manufactured goods, fuel and raw materials (natural gas, crude oil, and coniferous wood (ECLAC n.p.). Unemployment Unemployment rate in Canada has positively changed after Canada has entered into NAFTA in 1994. While at 1993 the unemployment rate in Canada was 11, 2%, by 2006 it has been steadily decreasing (except the period from 2001 to 2004) to 6, 29% by 2006 (Pete, Andrew and Stan 342) FDI NAFTA has enabled Canada to increase a two-way investment with the United States. The United States was the largest single investor in Canada in terms of both stock and flow of investment (Villarreal and Fergusson, 22). FDI into Canada in 1993 was $69, 9 billion and by 2012 it reached $351, 5 billion (Villarreal and Fergusson, 22). Canada’s FDI to the United States also has grown significantly during 19 years’ period: from $40, 4 billion in 1993 to $ 225, 3 billion in 2012 (Villarreal and Fergusson, 30). Due to NAFTA commitment, Canada has also gained access to the Mexican market and thus its FDI activity has been energized significantly since the agreement signing. The most active sector where Canada was investing to Mexico was the industrial sector (52, 3%); financial services (33%), commerce (8%), and mines and extraction industry (6%) (ECLAC n.p.). Conclusion Summary Effects Based on the economic indicators analyzed for the NAFTA countries (the United States, Mexico, and Canada) it is possible to draw a conclusion that partially the purposes of NAFTA have been achieved: the trade was liberalized, access for trade in services became easier, FDI inflows and outflows have been increased. However, the benefits from NAFTA were different for every country. The United States and Canada both being developed countries has even more increased its GDPs after NAFTA came into force. Both countries have already had access to the markets of each since 1989 and further have strengthened its trading relationships. Access to the Mexican market on a free trade basis has enabled three partners to make the relationships even more productive. Among all three countries there were observed positive changes towards GDP growth, trade activity increase, and FDI activization. There were observed some different effects on unemployment rate in the United States and Mexico. In the United States unemployment rate has increased in specific industries thus indicating on negative effect, however, the aggregate effect was perceived as positive. In Mexico, official statistics on unemployment rate has shown quite favorable unemployment rates, even lower than in the U.S. and Canada. However, as it has been discovered the formal data were distorting the true information in result of tricky surveys and absence of unemployment insurance. Another important factor related to Mexican employment was the rapid growth of maquiladora plants and employment on these plants. Unemployment in Canada has shown positive tendency towards decrease since NAFTA. For all three countries NAFTA has enabled to attract more FDI to the county and also helped to make the business environment more attractive for FDI inflows. Potential impacts in the future NAFTA has undergone many criticisms towards its effect on every country, especially on Mexico. Some of the major concerns that might have potential impacts in addition to those effects that have been discussed previously include: related crime, environmental abuse, continued high levels of illegal immigration (particularly from Mexico), growing income disparities, trafficking of illegal drugs, and growing income disparities (Clyde 4). Works Cited Clyde, H. NAFTA Revisited Achievement And Challenges. 1st ed. Peterson Institute of International Economics. ECLAC,. NAFTA Implementation In Canada: The First Three Years. Eclac.org. Web. 13 Jun. 2014. Feils, Dorothee J., and Manzur Rahman. "Regional Economic Integration and Foreign Direct Investment: The Case of NAFTA." Management International Review 48.2 (2008): 147-63. ProQuest. Web. 13 June 2014. Gruben, W. Did NAFTA Really Cause Mexico’S High Maquiladora Growth?. 1st ed. Center for Latin American Economics Working Paper CLAE 0 3 0 1, 2001. Web. 13 Jun. 2014. Glassman, Mark. Nafta 20 Years After: Neither Miracle Nor Disaster. Businessweek.com. N. p., 2013. Web. 13 Jun. 2014. Lederman, D, W Maloney, and L Servén. Lessons From NAFTA FOR LATIN AMERICA AND THE CARIBBEAN. 1st ed. Washington: The International Bank for Reconstruction and Development / The World Bank, 2005. Moreno-Brid, J, J Rivas Valdivia, and J Santamaría. M Exico: Economic Growth Exports And Industrial Performance After NAFTA. 1st ed. Economic Development Unit, 2005. Available at http://www.cepal.org/publicaciones/xml/5/23725/L700.pdf O’Leary, C. J., R. W. Eberts and B. M. Pittelko,“Effects of NAFTA on US Employment and Policy Responses”, OECD Trade Policy Working Papers, No. 131 (2012), OECD Publishing. http://dx.doi.org/10.1787/5k9ffbqlvk0r-en Pete, Mavrokordatos, Michael Andrew, and Stascinsky Stan. TRADE BETWEEN U.S. AND CANADA: BEFORE AND AFTER NAFTA. 1st ed. ASBBS Annual Conference: Las Vegas: N. p., 2010. Web. 13 Jun. 2014. Available at: http://asbbs.org/files/2010/ASBBS2010v1/PDF/M/Mavrokordatos.pdf Teslik, Lee. NAFTAs Economic Impact. Council on Foreign Relations. Web. 13 Jun. 2014. Available at: http://www.cfr.org/trade/naftas-economic-impact/p15790 United States Census Bureau,. Foreign Trade - U.S. Trade With Mexico. Census.gov. N. p., 2014. Web. 13 Jun. 2014. US Department of Commerce, International Trade Administration, Top U.S. Export Markets 2008. 2008. Available at http://trade.gov/media/publications/pdf/tm_091208.pdf U.S. Embassy,. Mexico City NAFTA Factsheet. 1st ed. 2014. Web. 13 Jun. 2014. Available at: http://photos.state.gov/libraries/mexico/310329/april2014/2014_01_NAFTA.pdf Ustr.gov,. North American Free Trade Agreement (NAFTA) | Office Of The United States Trade Representative. N. p., 2013. Web. 12 Jun. 2014. Available at: http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta Ustr.gov,. U.S.-Mexico Trade Facts. N. p., 2014. Web. 13 Jun. 2014. Available at: http://www.ustr.gov/countries-regions/americas/mexico Villarreal, A, and I Fergusson. NAFTA At 20: Overview And Trade Effects. 1st ed. Congressional Research Service, 2014. Web. 13 Jun. 2014. Weisbrot, Mark, Stephan Lefebvre, and Joseph Sammut. Did NAFTA Help Mexico? An Assessment After 20 Y Ears. 1st ed. Washington: Cente r fo r Economi c an d Polic y Resea r ch, 2014. Available at: http://www.cepr.net/documents/nafta-20-years-2014-02.pdf Appendix Graph 1. U.S. Trade with NAFTA Partners: 1993-2012 (Teslik n.p.). Table 1. GDP growth since 1993 Glassman, Mark. Nafta 20 Years After: Neither Miracle Nor Disaster. Businessweek.com. N. p., 2013. Web. 13 Jun. 2014. Source: O’Leary, Eberts and Pittelko, 14 Read More