International Trade Agreements - Essay Example

International Trade Agreements International Trade Agreements Introduction International Trade Agreements refer to a wide-ranging tariff, tax and trade treaties that normally include even the investment treaties. These trade agreements create immense opportunities for different trading blocs to grow by reducing or eliminating regulatory barriers, quotas and tariffs among them (Schott, 2009). The trade pacts have also helped opening up foreign markets for exporters. These specific policies and types of trade pacts, adopted by a trade bloc, influence the resultant level of economic integration. The North American Free Trade Agreement (NAFTA) is among the famous international trade agreements. NAFTA is a trade agreement signed by the United States, Canada and Mexico (Schott, 2009). This trade pact systematically created a trilateral trade bloc in North America. The North American Agreement on Labour Cooperation and North American Agreement on Environmental Cooperation are two important supplements of the NAFTA. Following a series of diplomatic negotiations dating back to 1990, Brian Mulroney (Canadian Prime Minister), Carlos Salinas (Mexican President), and George H. W. Bush (U.S. President) signed the free trade agreement on December 17, 1992. NAFTA has helped the three member countries to create the largest free trade region globally since its inception on 1 January, 1994. NAFTA has significantly helped raise the living standards and generate tremendous economic growth of people living in the United States, Canada, and Mexico. Economic Model Tariffs A tariff (or duty) is a tax often imposed on exported or imported goods and services (Gandolfo, 2013). Tariffs can potentially control or restrict trade between countries or regions, as well as limit the number/amount of imported or exported goods and services. Tariffs increase prices of imported products in order to protect domestic markets from cheap imports, such as Chinese car tires (Gandolfo, 2013). They make certain goods or services produced within local markets appear less expensive and affordable to consumers compared to imported products (Damanpour, 2000). NAFTA established a special preferential tariff for goods produced by the three member countries – the United States, Mexico, and Canada. In particular, NAFTA sought to remove tariff barriers to manufacturing, services, agricultural, and investment restrictions, as well as protect intellectual property rights of the three countries. The trade agreement also addressed labour and environmental concerns. Before NAFTA, Mexico imposed at least a 30 percent tariff on imports into the country (Damanpour, 2000). In addition, Mexican tariffs on products from the U.S. were 250 percent higher compared to U.S. duties on most products from Mexico. NAFTA addressed existing imbalance by systematically phasing tariffs out over 15 years. The agreement ensured successful abolishment of about 50 percent of the tariffs after ratification while the remaining duties would undergo gradual elimination. NAFTA ensured elimination of non-tariff barriers by 2008, including opening the interior and border of Mexico to the U.S. truckers and licensing requirements. Small exporters encountered nontariff barriers, the biggest hurdle to conducting business in Mexico (Kujawa et al., 1993). Mexico established these nontariff barriers to protect the local industries. Additionally, NAFTA aimed at reduce tariffs on auto parts, motor vehicles, and automobile policy/rules of origin. NAFTA gave products imported from the trade agreement member countries “national goods” status. Accordingly, no local, provincial, or state governments could impose tariffs or taxes on such goods. Additionally, the agreement provided that customs duties are removed at the implementation time or scheduled to be eliminated in stages (Kujawa et al., 1993). With the removal of tariffs, NAFTA has ostensibly opened up fresh opportunities for both small and medium size businesses in member countries. Also, the trade agreement has resulted in a positive tendency whereby Mexican consumers spend more on U.S. products each year compared to their counterparts in Europe and Japan. Trade between the three NAFTA members has grown sharply. However, the trade agreement has contributed to the rising trade deficits for the United States with both Canada and Mexico since the U.S. often imports from the two NAFTA countries than it exports to these North American trading partners (Kujawa et al., 1993). Impact of NAFTA on member countries and industries NAFTA countries have achieved considerable economic growth and development following the implementation of the free trade agreement and its supplements. The landmark of trade in Mexico is maquiladoras. These are Mexican factories that often take in raw materials from other countries and produce commodities for export (Patton, 2010). Since the establishment of NAFTA (1994), the maquiladora sector has attained remarkable growth in income by 15.5%. Other sectors of the Mexican economy have also benefitted considerably thanks to the free trade pact signed by the country, Canada, and the United States. However, Mexico has recorded a significant decrease in the share of exports particularly from the maquiladora-border states (Patton, 2010). The agricultural agreement between Mexico and the United States and its overall effect is highly contested because the former overlooked the need to invest in the essential infrastructure, including highways and railroads. As a result, the living conditions have been difficult for the Mexico’s poor. Additionally, the agricultural exports of Mexico between 1994 and 2001 increased by 9.4% a year, and its imports rose by 6.9% annually during the same period. Meat industry is among the most affected of all Mexican agricultural sectors. NAFTA has played a remarkable role as a major catalyst for transforming Mexico from being a small player to the second largest importer of agricultural products from the U.S. in 2004. The free trade eliminated the hurdles that hampered trade and business activities between Mexico and the United States. Meat industry in the U.S. has grown progressively and steadily over the last two decades since Mexico provides a growing market. Since NAFTA’s implementation, Mexico’s corn production has also substantially increased. Nonetheless, internal demand for corn has increased beyond the country’s sufficiency hence the need to import the product from the U.S. and other countries. Overall, production of most agricultural products has stabilized since 2000 due to ultimate expansion of a program of subsidies. According to the U.S. Chamber of Commerce, NAFTA has fundamentally contributed to increased US trade with Mexico and Canada from $337 billion (in 1993) to $1.2 trillion (in 2011). Goods trade deficit of the U.S. with NAFTA was approximately $94.6 billion in 2010 (Patton, 2010). The 2010 goods trade deficit represents a 36.4 percent increase (about $25 billion) over 2009. Besides, the country had a surplus in its services trade amounting to $28.3 billion thanks to its trade with other NAFTA member countries. According to a study published in the issue of American Journal of Agricultural Economics (August 2008), NAFTA has significantly increased agricultural exports of the United States to Canada and Mexico despite virtually all the increases occurring more than a decade after the free trade ratification (Patton, 2010). However, the free trade agreement is also blamed for sending more than 700,000 American manufacturing jobs to Mexico since its implementation. The foreign direct investment (FDI) of the United States in NAFTA member countries increased to $327.5 billion in 2009. This was 8.8 percent increase compared to the U.S. FDI in 2008. The country’s FDI in NAFTA member countries (Mexico and Canada) is in manufacturing, mining, insurance/finance, and nonbank holding companies (Schott, 2009). On the other hand, the FDI of Mexico and Canada in the U.S. was $237.2 billion in 2009. This was 16.5 percent increase from 2008. Also, the subsidies of the U.S. government to the corn sector in the year 2000 totalled $10.1 billion. High trade barriers before the inception of NAFTA and copious other regional or international trade agreements impeded growth of many industries in the U.S. Manufacturing, agricultural and mining industries were hard hit by tariffs and other trade barriers. For instance, agricultural exports from the U.S. to Canada and Mexico tremendously increased upon ratification of NAFTA and other free trade agreements (Schott, 2009). The success of each NAFTA country in increasing their production capacity underscores their role and stake in the trade agreement. Although NAFTA did not intrinsically present any system threat to the U.S and the entire North American environment, several NAFTA-related threats to the environment have occurred in specific areas. In most cases, the government environment policy, sustainability mechanisms, and infrastructure did not adjust to the anticipated increase in the scale of production attributed to trade liberalization (Schott, 2009). Some governments and industries neglected their environmental policy in the wake of trade liberalization. In addition, NAFTA’s measures in relation to investment protection and measures that aimed to protect member countries against barriers attributed to non-tariff trade threatened to impede fairly vigorous environmental policy. However, the most severe of all pollution increases caused by NAFTA were found in the U.S. and Mexican transportation equipment sector, petroleum sector in Mexico, and the base metal sector (Schott, 2009). Unlike Mexico and the United States, Canada did not experience disastrous environmental threats due to NAFTA because it had put in place effective measures to protect its environment against pollution and enhance sustainability. NAFTA has played a remarkable role towards transforming transportation industry of all member countries. For instance, NAFTA founded the CANAMEX Corridor to facilitate road transport between Mexico and Canada. The Corridor has also been proposed for use by pipeline, fibre optic telecommunications, and rail infrastructure (Patton, 2010). CANAMEX Corridor is a major milestone in NAFTA’s attempts to develop the transportation industry. Meanwhile, agriculture remains one of the vastly controversial topics within NAFTA. Apparently, the three member countries negotiated and signed an agricultural pact trilaterally. That is, the member countries signed three separate pacts between each pair of parties. For instance, the US-Canada agreement entails considerable restrictions and tariff quotas on various agricultural products, such as poultry, sugar and dairy products (Patton, 2010). On the other hand, the Mexico-US agreement allows for trade liberalization within a scaffold or framework of phase-out periods. NAFTA chapters contain guidelines on dispute resolution, environmental conservation policy, tariffs, trade barriers, and modalities that guide ratification and future adjustments. Overall, NAFTA has positively and negatively impacted the member countries and international trade. The three countries benefited positively in an economic sense regarding their substantial GDP growth. For example, NAFTA significantly contributed to the growth of furniture industry in Canada (Schott, 2009). Also, manufacturing employment in Canada was held steady and balanced despite a global downward trend in most developed countries. The free trade agreement has particularly impacted US-Canada trade economically, boosting bilateral agricultural/farming flows. Canada recorded a substantial increase in its exports to Mexico and the United States, which totalled to $381.3 billion in 2008 alone (Schott, 2009). On the other hand, Canada’s imports from NAFTA stood at $245.1 billion during the same year. NAFTA has proved to provide a solid foundation for creating Canada’s propensity (Gandolfo, 2013). The NAFTA surpassed CUFTA (the 1989 Canada-US Free Trade Agreement). As a result, the US and Canada successfully signed a historic trade agreement that essentially placed them at the helm of trade liberalization. Also, the free trade agreement has emerged to be one of the solid foundations for fostering growth of the US, Canada, and Mexico (Gandolfo, 2013). Lastly, NAFTA aims to promote trade liberalization so that the three member countries can sufficiently benefit through their engagements in regional trade pact. CONCLUSION In conclusion, NAFTA is a free trade pact of North American region that has systematically set the guidelines or rules of trade and investment between Mexico, the United States, and Canada. NAFTA has successfully eliminated an enormous amount of tariff and non-tariff barriers that have affected trade and investment between member countries (Paik, 1996). The agreement establishes comprehensible rules for trade and other commercial activities between the three countries. NAFTA has increased trade and investment levels in North America, leading to better prices, steady economic growth, and job creation. Consumers, workers, farmers, families, and businesses in North America have greatly benefitted from the trade pact. It has also provided businesses in the region with access to better technologies, materials, and investment capital (Paik, 1996). Nevertheless, the three countries seem reluctant to address the various labour and environmental concerns since implementation of NAFTA. Like many international trade agreements, NAFTA has created enormous opportunities for different trading partners to grow by reducing or eliminating regulatory barriers, quotas and tariffs between them. References Damanpour, F. (2000). North American free trade agreement with a focus on the U.S. states participation and Mexico. Managerial Finance, 26(1), 53-71. Gandolfo, G. (2013). International trade theory and policy. Kujawa, D., Kim, S. H., & Kim, H. (1993). A North American free-trade agreement: The first step toward one America. Multinational Business Review, 1(2), 12. Paik, Y. (1996). Exploring the North American free trade agreement: Initial reaction from Asia. International Journal of Commerce & Management, 6(1-2), 51. Patton, J. (2010). North American free trade agreement (NAFTA) trade disputes attributed to asymmetric relationships leading to the United States bad neighbor policies with Canada and Mexico. Journal of International Management Studies, 5(2), 1-11. Schott, J. J. (2009). North American free trade agreement (NAFTA). Princeton: Princeton University Press. Read More