Regional Analysis of NAFTA - Essay Example

Running Head: A REGIONAL ANALYSIS OF NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) A Regional Analysis of North American Free Trade Agreement in APA Style by Student's Name Course Name University During the past years, the world has witnessed the rapid progress of globalization with the creation and establishment of regional blocs and free trade zones. This transformation gives rise to the unification of the global economies into a single village making economic transaction faster and more efficient. Generally, regional integration reduces or completely eliminates trade barriers facilitating the inflow and outflow of goods, services, people and capital within economic geographical borders. Through these tariffs and quotas are lifted in order to make trading more efficient between countries more efficient and less costly. This trend of regional integration, irrefutably, posts opportunities for business organizations and gives birth to multinational companies. The formation of free trade zones and regional blocs irrefutable lowers the cost of business operation because generally, it encourages countries to attract the inflow of foreign direct investments through tax holidays and other financial incentives. It should be noted that this practice is very common especially in developing countries where foreign direct investment is viewed as a way to curb unemployment, increase local competition, enhance the efficiency of the domestic industry players and stimulate the whole economy. Regional integration also opens doors for other business activities through joint venture, licensing, franchising, and others. Regional integration also posts opportunities of costs savings to business organizations. Through trade blocs, companies are also able to take advantage of lower input costs of certain materials which can be readily imported from other countries since tariffs and quotas are eliminated. It should also be noted that globalization also made possible the transfer of service from one country to another. Coupled with the rapid development and wide popularity of the internet and other advance technologies, business organizations are able to lower their costs of operation by outsourcing various back-office services from countries which have relatively lower wage requirements but with a pool of skilled workforce. Through business process outsourcing, companies enhance their profitability by incurring lower operational expenses while enabling them to focus on their major activities and core competencies. The North American Free Trade Agreement is a regional bloc with members including Canada, Mexico, and United States (North American Free Trade Agreement 2006). It is apparent that the countries comprising this regional bloc present different stages of economic development. During the time of integration, the United States is already recognized as one of the economic superpowers in the world with its high level of GDP and wages. The United State's largest sector in the economy is the services which employs almost 75% of the entire population (US Department of State 2007). Similarly, Canada is one of the world's wealthiest nations with its high per capita income. This country has been growing rapidly in the past years with low unemployment rate and large government surpluses on the federal level. The country has remarkably maintained the best economic performance in the G8 since the recession in 2001. It should be noted that Canada is the second largest nation in the world next to the United States (US Department of State 2007). Mexico, in comparison, lags behind its trade partners in terms of economic performance. Even though it recently manages to improve its income, Mexico still suffers from the large disparity of income between the upper and lower social classes. Compared to its trading partners, the country has a far lower wage rate (US Department of State 2007). With its establishment in the 1994, this agreement has brought numerous developments in each of the countries' business sector. For one, it facilitated the entry of business operations in Mexico from its two trading partners in order to take advantage of the country's semi-skilled workforce and low wage rate. Thus, large companies in the US and Canada opts to outsource their labor intensive processes in Mexico lowering their operational costs, enhancing the value of their products and enabling them to price more competitively than the other players in the market (Myers 2004). Because of the regional integration, companies from the larger trading partners can easily transport their inputs duty and tariff-free for assembly to Mexico and ship them back again for further other processing and distribution. This become advantageous to the latter as this move efficiently reduces the country's level of unemployment, increases the overall income level, and boosts its Gross Domestic Product. In the case of US and Canada, job outsourcing in Mexico has enabled them to lower their operational and administrative costs while enabling them to focus on their strengths and core competencies. The United States and Canada also enjoys the free flow of products and services within their geographic borders. In fact, these countries accounts for the largest volume and amount of bilateral trade of goods and services in the world. Business organizations undoubtedly enjoy free access to the profitable markets in these countries. It should be noted that the United States and Canada both have a wealthy customer base with high purchasing power making them very attractive for business organizations who are trying to reach the whole market and even for market nichers. Since the economic status of these two countries is more or less the same, companies will not be changing a lot of features in their products. However, the regional bloc also exposes companies to problems specifically in human resource. Workers in the United States and Canada are clamoring for their rights because of downsizing as companies from the larger countries outsource their labor from Mexico. Mexican domestic businesses are also exposed to more intense competition from lower priced goods from its trading partners. Regional integration also harms its domestic industry as less efficient firms are forced to close down being unable to cope with the competition form more efficient foreign players. Lower priced goods entering Mexico are perceived as more attractive than the higher priced ones produced within its borders. As with other regional blocs, NAFTA has facilitated the movement of goods, services, and capital within its member countries' borders. These have positive implications for business organizations especially in terms of market base and cost savings. However, important measures should also be taken in order to minimize its adverse effects to other less efficient companies which are shaken off due to intense competition. References US Department of State. (2007). Retrieved 25 July 2007, from http://www.state.gov/r/pa/ei/bgn/ Myers, L. (2004). "US underestimates jobs lost to outsourcing, labor experts assert." Retrieved 25 July 2007, from http://www.news.cornell.edu/chronicle/04/10.21.04/outsourcing_jobs.html North American Free Trade Association. (2006). Retrieved 25 February 2007, from http://www.fas.usda.gov/info/factsheets/NAFTA.asp Read More