Impact of Free Trade in Mexico - Case Study Example

Economic Development Name: Unit: Course: Professor: Submission Date: Table of Contents Economic Development 1 Table of Contents 2 Economic Development: General Overview 5 Impact of Free Trade in Mexico 6 Barriers that Globalization Transcends 7 Economic Flexibility and Resilience: China 7 Outward Oriented and Inward Orientation Trade Strategy 8 Conclusion 10 References 11 Economic Development: General Overview Economic development (ED) refers to economy progressions, and which can be qualitatively measured. It refers to general improvement in the standards of living, paradigm shift or transition from economic aspects based on agriculture to industrialization and new (modern) technologies adoption. A country, experiencing economic development is always timely in putting in place the right product, thus gaining huge returns. Globally, all countries face similar challenges of achieving higher living standards, economic growth and financial stability despite their economic development. There exist various channels that can be embraced to attain these objectives, of which each country has a unique channel following the distinctive political systems and national economies environment. For instance, in the past two decades China has adapted various unique ingredients contributing to the noticeable high growth rate, which is quite different to that adapted by Malta and Malaysia (IMF, 2008). Globalization refers to opening to the international world economies and being integrated to international business in reference to technological knowledge across international borders, manpower movement, financial inflows, trade, as well as environmental, political and cultural globalization aspects. Globalization provides a broad scope for authentic worldwide development opportunities for the internal or local markets reaching the wide international business though it has not realized uniform progression. To some nations, globalization is seen as a stepping stone to success while to other nations is seen as a threat to economic development, as it may deprive countries of their internal market sovereignty (World Health Organization, 2016). This essay will focus on various reasons that have seen up and downturn in economic development in various nations for the last two decades with a key evaluation on international business trade and globalization. Impact of Free Trade in Mexico Mexico has had strong protectionist policies in trade between 1930s-1980s with a main objective that this would contribute to independence from foreign power and subsequently ensure industrialization. However, this did contribute to deeper levels of poverty in the end following economic fluctuations. Thus, opening of the national boundaries to free trade has had significant effects to the growth of various nations. For instance, the North American Free Trade Agreement (NAFTA) effected in 1994 to necessitated bilateral trade between the United States and the Mexico has contributed greatly to the economic relationship (Villareal, 2010). Further, the countries have built their bond in other aspects that are not directly linked to investment and trade such as health issues, migration, environmental and security issues. The NAFTA effects on Mexican economic status and Mexico impacts both political and economic interest on the U.S. The desire to create jobs, increase exports, attract foreign investors with the main objective of promoting economic development and stabilizing Mexican economy were the key motivator for the Mexican to enter into FTA with the U.S. (Villareal, 2010). Mexico is a fertile zone for export with most of its product being exported to the U.S. Mexico’s exports was 31% of GDP in 2008, which was a 21% increment compared to twenty years ago. Following the implementation of NAFTA free trade, investment and trade barriers were eliminated among its trading partners. For instance, about 50% Mexico import from U.S. and 70% export from Mexico to the U.S. was given duty-free treatment. In reference to World Bank 2005 assessment on the NAFTA economic impacts on Mexico, conclusions were that, NAFTA has been a key bridge to Mexico’s development nearing those of Canada and the U.S. Further, Mexican manufacturers with the NAFTA assistance were able to adopt the technological innovations of the U.S. fast subsequently creating employment opportunities. Also, the general macroeconomics wide variation or volatility in the growth rate of the GDP declined in Mexico since the effect of NAFTA. In addition, The NAFTA did neutralize the Mexican high sensitivity economic sectors to embrace the U.S. economic developments as well as ensuring higher synchronizing levels of Canada, the U.S. and Mexico business cycles (Villareal, 2010). Despite the NAFTA notable milestone in the Mexican economy, Mexico faces steep competition following high costs in electricity, transportation and other key infrastructures costs in economic development. Besides, the country has high number of low and uneducated labor-force (Dahlman, 2006). Barriers that Globalization Transcends Central element of globalization is widening the domestic market to embrace world trade by reducing or eliminating barriers to trade as in import tariffs. Large imports provide consumers with various choices for goods at friendly prices, still providing the domestic industries with strong incentive to ensure they remain competitive. Exports among the developing countries, is a major economic growth source and provides employment opportunities as local market offer product beyond their borders. Thus, international trade increases innovation that meets the competitiveness in the world trade and that transcends cultural barriers (Wild & Wild, 2015). Economic Flexibility and Resilience: China Subsequently, international trade encourages economic flexibility and resilience as high levels of imports help to counterbalance severe domestic supply shocks. For instance, the China’s motivation to invest in African countries in order to eradicate poverty did combine intervention and economic incentive to encourage private investment within the African continent. In 2008, China had hit 45% of its trade with African countries which was $107 billion. Chinese have diverse activities in Africa from financing large state owned companies by Policy Banks in China to invest in African countries, to engaging in government to government relations, to having private sponsored entrepreneurs with their own initiative enter African countries and invest. China has been eager to access rich raw material in the African countries such as diamond, oils and mineral among other commodities. China since 2004 has entered in resources deals of about $14 billion with African resource-rich nation. With such form of investment Angola for example, contracted companies from China to build highly needed infrastructures such as water systems, schools, hospitals, railways and roads. The Chinese companies are constructing hydropower projects in the Congo republic which are being paid using government loan from China and of which will be repaid using oil in the country. The Chinese Export-Import Bank does fund those projects by providing loans not as foreign aids rather at market rates. Although these loans promote development, the Chinese do not keep their bid promise of creating jobs to the local people as they bring their own expertise. Also, they keep local wage rates and maintain low working standards as well providing less competitive work compared to the domestic firms. Nevertheless, China remains a fundamental economic cooperation and trade partner with the African countries (Schimtz, 2012). Outward Oriented and Inward Orientation Trade Strategy Various countries have adapted various strategies in their reliance on their R&D and or on Foreign Direct Investment (FDI) which have greatly contributed to their success or failure stories in their economic development. Also, how far such countries have been inwardly oriented or outwardly oriented has added to their economic growth characteristics over decades. For instance, all Asian countries which are successful have adapted outward oriented trade strategy, while other non-East-Asian countries did embrace inward orientation in the trading strategy (Dahlman, 2006). An inward orientation refers to the countries which have worked on to develop their technology and ensure their domestic market is free from outside competition. With an outward orientation, the countries welcome foreign ideas and uses exports as a motivating factor for its local firms to achieve high production regardless of whether there is level of protectionism, but it does not mean such strategy has abolished tariff barriers or embraces low tariff. Generally, Russia, Mexico and Brazil the companies have not realized great successes in the last two decades in general. The three are large economies with significant R&D investment and excellent mass of professional. They all have achieved critical milestones in technological excellence such as deep oil exploration in Brazil, space and aeronautics and nuclear. Despite these islands of excellence, the three remain enclaves of economies (Dahlman, 2006). Focusing on Brazil, science and technology has been the key focus that and has advanced higher education institutions and R&D investment. Despite being a large developing country, Brazilian industry has been less competitive, because it has been inward oriented, a fact which has seen the countries remain an exporter of primary commodities despite much effort on the government to invest on R&D (Karodia, Soni & David, 2014). The country is self-sufficiency in most of resources, and this can explain the slow move to globalization. It has only 30% GDP trade share and has high non-tariff barriers and tariff barriers. Therefore, its domestic industry has limited international competition pressures. Subsequently, foreign investors have been oriented inward toward the internal market with limited exports. Hence, Brazil remains to be among those countries with lowest manufactured export in relation to GDP ratios. Further Brazil faces more macroeconomics instability. It also has high indirect and direct taxes leading to high costs of indirect labor, high capital cost and high labor market rigidities. Further, Brazil has low competitive manufactured exports coupled with wide informal economy (Dahlman, 2006). Diversification of Brazilian export could help increase its GDP. For instance, the Mauritian economy has been growing since its independence at an average of 5%. Its GDP in 2011 was $6,000 compared to that of 1968 of $260. This has been attributed to its trade policies that guarantee openness despite its small internal domestic market. Such policies have been formulated to necessitate new sectors such as biomedical and healthcare activities, property and hospitality development, land-based oceanic activities, and the promulgation of the knowledge hub (Sannassee, Seetanah & Lamport, 2014). Conclusion The globalization is both a blessing to many developing countries although it comes with a package of challenges that may either contribute to growth of some countries at the expense of their traders. International business requires that a country may realize its potential, threats, strengths and opportunities likely to experience. Strategy of entry to globalization, diversification to international export, and entry into free trade agreements have been some of reasons behind success of many countries in the past two decades, such as china, Mauritius and Mexico. However, challenges of costly infrastructures, high informal workforce and inward orientation coupled with high taxation rates have held a strong knot to the success of many nations such as Mexico and Brazil. References Dahlman, C. (2006). Technology, Globalization and International Competitiveness: Challenges for Developing Countries. Retrieved 3/10/2016 From, Http://Www.Un.Org/Esa/Sustdev/Publications/Industrial_Development/1_2.Pdf International Monetary Fund, (2008). Globalization: A Brief Overview. Retrieved 3/10/2016 From, Https://Www.Imf.Org/External/Np/Exr/Ib/2008/053008.Htm Karodia, A.M., Soni, D. & David, J.E. (2014). International Competitiveness, Globalization And Technology For Developing Countries: Some Reflections From Previous Research. Singaporean Journal Of Business Economics And Management Studies, 2(9):25-35. Sannassee, R.V., Seetanah, B. & Lamport, M.J. (2014). Export Diversification and Economic Growth the Case of Mauritius. Connecting To Global Market, World Trade Organization. Schimtz, A. (2012). Challenges and Opportunities in International Business. Creative Commons. Retrieved 10/3/2016 From, Http://2012books.Lardbucket.Org/Books/Challenges-And-Opportunities-In-International-Business/S06-International-Trade-And-Foreig.Html Villarreal, M.A. (2010). NAFTA and the Mexican Economy. Congressional Research Service. Retrieved 3/10/2016 From, Http://Fas.Org/Sgp/Crs/Row/RL34733.Pdf Wild & Wild, (2015). Value Pack International Business: The Challenges of Globalization Global Edition+Mymanagementlab With Etext, 8 Edition, Pearson Australia. ISBN:9781488688034 World Health Organization, (2016). Trade, Foreign Policy Diplomacy and Health: Globalization. Retrieved 3/10/2016 From, Http://Www.Who.Int/Trade/Glossary/Story043/En/. Read More