International Business and North American Free Trade Agreement - Essay Example

The NAFTA Question When the North American Free Trade Agreement or NAFTA was announced in August 12, 1992, most observers, particularly economists, agreed that the removal of the trade barriers among the three countries – Canada, the United States and Mexico – offered both advantages and disadvantages for all the parties involved. The promise of the agreement was of course the creation of one huge market, wherein countries could increase cross-border investment opportunities. On the one hand, the debate in Canada preceding the ratification was dominated by the critics who pointed to the small current-trade between Canada and Mexico, Mexican competition with Canadian goods in US markets and the supposed failure of the then existing Canadian-US trade agreement. Today, after sixteen years does the Canadian experience confirm the fears of the critics or did NAFTA live up to the expectations? Benefits For Canada, the NAFTA is an improvement on its previous trade agreement with the United States – the Canada-US Free Trade Agreement (CUFTA) - in a number of respects. Canada now has an extension of duty drawbacks and greater discipline over standards, which should reduce border conflicts with the US. I would like to underscore, as well that the best part of the agreement in my opinion is that Canada, along with the US and Mexico have the same low or zero most favored nation tariff on imports such as computers. This old custom union model has huge advantages because rules of origin are not required for trade in that product within the union. In addition, Canada also reaps some benefits in the area of agriculture. Between 1991 and 2002, Canadian exports absorbed by the United States rose from 39 to 67 percent. (Volrath 2004) The Canadian oil is also gobbled up exclusively by the United States along with its underlying strategic political mileage for the country. On the economic side, investments also poured in, particularly those from foreign companies who want to access the NAFTA market. In a way, this fact provides an argument against those NAFTA critics who argue that investment is lost to Mexico due to cheap labor. As it is, there are countries and firms who prefer Canada over Mexico because the country’s labor pool is skilled and educated; and over the US, because of the appeal of lower costs and a moderate tax regime. This is underscored by the tremendous rise in the foreign direct investment in the country. Annual figures during the first seven years of NAFTA reflected an average of $21.4 billion investments for the country, almost four times the average registered over the seven years preceding the trade agreement. (Myles & Cahoon 2004) Disadvantages It is easy to understand that the drawbacks of NAFTA have outweighed the intended benefits of a free trade. The most serious impact is felt by the Canadian workers who lost about 300,000 jobs to the relatively cheap labor costs of Mexico. Furthermore, wages have also come down over the decade reaching about 20 percent as productivity increases are appropriated entirely by capital. (Jayati 2004) The main ammunition of critics against NAFTA in this regard is that the rationale of boosting Canadian productivity, which in effect should have raised wages and standards of living never really materialized. Moreover, we have the contention that the onslaught of investments and foreign takeover of Canadian local businesses contribute to the rapid erosion of Canadian cultural identity and values as well as in the Canadian social system, which is considered as the best in the world. For instance, there is the permeation of the fast food culture and the “you are what you have” mentality as a consequence of low wage and part-time types of employment. In addition, unemployment insurance and other social security provisions have also been significantly curtailed. We could not risk to trade these values in favor of benefits that so far have yet to make itself felt among us. Conclusion Considering all these factors, both adverse and positive, it is helpful to be circumspect. NAFTA, for Canada, is a strategic tool in order to be competitive, specifically in regard to its competitive advantage with the US. If Canada, were not a participant in the NAFTA, it would have faced a hub-and-spoke trading system in which the US would have one bilateral free trade agreement with Canada and another with Mexico and would be the only country to be a participant in both. In other words, only a firm located in the United States would have free access to all three markets. A Mexican or Canadian location would limit the firm to free trade in only two markets. The hub-and-spoke problem runs far deeper than this. According to Richard S. Belous and Jonathan Lemco (1995), if Canada had not participated in the NAFTA, the U.S. might, by adding more spoke binationals, have been able to carve up the hemisphere in a series of discriminatory bilateral agreements. (p. 144) In such an agreement, Canadian industry would have been less and less able to compete with American industry. The point is this, as illustrated by the seemingly less benefits that Canada gets from NAFTA: The incentive to participate in the NAFTA was not so much the economic advantages of getting in – although these advantages are of course substantial – but instead, it is the avoidance of the alleged problems associated with staying out. This perspective is now open to debate. Is prioritizing such behavior over tangible economic benefits necessary given the increasing and damaging effects to the Canadian economy? With the sixteen years of Canadian experience, it becomes more and more apparent that the choice is a mistake. The problem with the NAFTA is about the broken promises and the failure in meeting expectations. And a major reason for this is that free trade allows firms to disregard national governments, individual identity and business practices. At present, there is a growing perception, quantified by dismal economic statistics, among the Canadian public that the NAFTA is no longer beneficial for Canada. And so this poses a serious challenge to the Canadian government. Can they address the biggest question, which is the loss of jobs and the deteriorating living standards? Confronting these issues is fundamental so as not too risk a public backlash in the Canadian polity. The Canadian government should exert more effort developing policies, perhaps even renegotiating some NAFTA provisions, in order to be able to strengthen its core industries and protect the local businesses that not just support the majority of its workers but are fundamental in maintaining a high Canadian living standard. References Belous, Richard and Lemco, Jonathan. (1995). NAFTA as a Model of Development. SUNY Press. Ghosh, Jayati. (2004). Ten Years of NAFTA. IDEAS. Retrieved Jul 21, 2008, from http://www.networkideas.org/news/jan2004/news13_NAFTA.htm Myles & Cahoon Volrath Read More