International Financial Management and NAFTA - Essay Example

International Financial Management School Trade regions such as NAFTA and trade blocs such as OPEC are created to bring together countries with common trading interests. These organizations maybe made based on geographical proximity of member states or on the ownership of common assets. OPEC was signed in 1960 and currently constitutes of 12 members from which five were its founding members. NAFTA on the other hand is relatively much younger and was signed in 1994 by the three North American countries. These bodies face multiple issues which directly impact the member countries however the aim is to find solutions to these problems in the regular meetings conducted by these bodies. To the common man trade is simply the exchange of goods and services between two individuals, groups, and organizations. When trade begins to happen across regional boundaries it is categorized as international trade. Modern day phenomenon such as advancement in technology and globalization have allowed for international trade to happen at a much faster rate over a much larger scale. For this trade to occur smoothly and in order to avoid confusion and chaos; regulation and systematic order are extremely important. For this reason regions join hands to make trade blocs and trade regions which not only allow for a more efficient process but help both the trader and the buyer. In this essay we will be discussing the role of two trading giants, Organization of the Petroleum Exporting Countries (OPEC), and North American Free Trade Agreement (NAFTA); both of whose introduction caused dramatic changes to the way modern age trade is conducted. Before moving forth it is essential to differentiate between a trade region and a trade bloc. A trade region is essentially an agreement based on regional boundaries. Member countries join such a region based on their geographical location and hence enjoy many trade privileges. An example of a trade region is NAFTA where North American countries come together to form member states. A trade bloc maybe a trade region but it is not necessary since members are made not on geographical proximity but based on ownership of common assets. An example of a trade bloc is OPEC where countries exporting petroleum have come together to ease trade. OPEC was established when five countries (Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela) signed a trade agreement in Baghdad in September 1960. These five countries were then known as the founding members for this organization and were in later years joined by many more countries. Gabon and Indonesia were also member countries however in 1995 and 2009 respectively they terminated their memberships from the organization. Currently OPEC constitutes of 12 member countries. (opec.org) The NAFTA agreement was signed by Canada, Mexico and the United Sates and this agreement took effect from the 1st of January, 1994. This agreement incorporated these three countries into a regional trade bloc. Although they were quite different in their sizes and sources of national wealth; the aim was to reach a mutually beneficial arrangement for all three member states. This agreement claimed to be more than just a mere free trade agreement and claimed a total GNI greater than that promised by the 25-member European Union (EU). The table below presents the names of member countries belonging to the trade agreements along with their respective currencies. Country Name Currency NAFTA Canada Canadian Dollar Mexico Peso USA US Dollar OPEC Algeria Dinar Angola Kwanza Ecuador US Dollar Iraq Dinar Islamic Republic of Iran Riyal Kuwait Kuwaiti Dianr Libya Dinar Nigeria Naira Qatar Riyal Saudi Arabia Riyal UAE Dirham Venezula Bolívar Fuerte The OPEC agreement was signed based on it a Statute; which is a long document that dictates not only the mission and vision of the organization but instructs member country behavior. Signatory countries are expected to conduct oil trade in a way that is mutually beneficial to all the trading partners. The mission as stated in the Statute is to harmonize petroleum policies of the member countries. Such a unified petroleum policy will allow for stabilized oil markets and therefore guarantee an economic and regular supply to the consumers; which will guarantee the producers a constant income and a good return on investment. (opec.org) The main driving force behind the establishment of NAFTA was to encourage trade by eliminating restrictive trade practices. They did so by eradicating tariff and non-tariff barriers on most goods originating in and traded between these countries over a fifteen-year period. NAFTA does this by providing preferential tariff treatment for certain products traded between these countries. However in order to benefit from this preferential treatment it is essential to meet strict documentation and certification procedures. Currently, preferential treatment points to either reduced or complete elimination of tariff rates, depending on the type of product. In order for a product to qualify for NAFTA’s preferential tariff treatments requires they must have an Accurate Harmonized System (HS) classification along with supporting documentation. The businesses selling these products must also have an official designation of the country of origin which is to be documented along with the NAFTA certificates. Apart from reducing and eliminating tariffs, NAFTA serves other key functions for its member states. It seeks to harmonize rules for trade among the partners so that possible conflict and misunderstandings are eliminated. The agreement acts as a regulator by ensuring the fair implementation of intellectual property rights among the member states. Under the NAFTA agreement the effects of trade on third parties are crucial. The agreement strictly monitors how the trade practices effect the labor and environment. It does so by setting up regional labor laws and standards, and by strengthening environmental standards. (Daniels) Keeping in mind the harsh economic times plaguing all countries in the world organizations of all scales are trying their best to maintain the perfect balance between liberal and conservative policy structures. It is the time to play safe and use tried and tested techniques to best achieve desired results. Some prominent topics under discussion at the annual meetings of OPEC in 2011 included how the international market for oil had once again witnessed intense fluctuation which had caused the OPEC Reference Basket price to rise to US $113 per barrel but then fall to well below $99 per barrel on a few unfortunate occasions. The member states were interested in identifying reasons for such fluctuations and then follow these with necessary precautionary measures for the future. This is identified as the biggest problem by the OPEC member countries since fluctuations in the market go against their very reason for existence. Furthermore such instability in prices also makes it difficult for the supplying countries to forecast demand which often results in either under-delivering or over-delivering of crude oil. In his opening address at the 160th meeting the Minister of Petroleum of Iran, Rostam Ghasemi bought the members attention to the issue “tremendous uncertainty” prevalent in the oil market. (opec.org) Another topic of interest over the past five years has been the environment and the discovery of sustainable development. The members indulge in multi-lateral environmental talks. Furthermore another prominent topic has been the under utilization of refineries by member states due to which product inventories have continued to rise. Members were urged to come up with solutions to these problems so that trade remains both sustainable and profitable. In their 2010, 158th meeting the members also approved a long-term strategy for trade. Since its establishment this was second long term strategy approved by OPEC. This long-term strategy was successful in crucial overall objectives and in identifying the key challenges faced and to be faced by the organization. Possible scenarios were explored that would be able to accurately predict the future energy requirements. They also planned a wind tunnel testing mechanism which would test the strategy over the next five years so that implementation gaps may be removed. The main issue gripping the NAFTA agreement is in regard to environmental concerns. As trade continues to increase rapidly and firms are confronted with an increasing demand they expand their production capacities exponentially which tends to impact the environment negatively especially in the industrial areas. Another problem that they are trying to tackle is related to the negative effects that free trade has on employment especially in USA. Businesses find cheaper labor in Mexico and hence opt for it. This results in massive unemployment for the US economy since the labor is generally more expensive here. (Kehoe) In order to deal with such problems the NAFTA agreement is constantly taking up new innovative ideas. In their recent meeting the member states have agreed upon three dimensions whereby they can avoid the above stated problems. These include increase in jobs by spurring a growth in industries, a stable growth in Mexico and to protect and stimulate US investment. The citizens of the US are generally unhappy with the agreement because of the negative impact on their economy and employment of this agreement. Hence in its talks NAFTA is trying to come up with solutions that may please American citizens and benefit their economy more. In the table below the GDP and Export accounts of NAFTA and OPEC countries are summarized. Country Name GDP* Export** NAFTA Canada 40,300 450.6 Mexico 15,100 336.3 USA 48,100 1.511 trillion OPEC Algeria 7,200 78.51 Angola 5,900 65.63 Ecuador 8,300 23.54 Iraq 3,900 78.38 Islamic Republic of Iran 12,200 131.8 Kuwait 40,700 94.47 Libya N/A N/A Nigeria 2,600 101.1 Qatar 102,700 104.3 Saudi Arabia 24,000 350.7 UAE 48,500 265.3 Venezuela 12,700 89.38 *per capita GDP, figures are given in international dollars based on 2011 estimates. (CIA Factbook) **in billion US $ based on 2011 estimates. (CIA Factbook) Agreements and organizations are primarily set up with the intention to benefit their members as much as is possible, however sometimes although the intentions are clear the effects aren’t always possible as was the case in NAFTA for America. Policy makers then must be careful to see whether such things happen because of their policies or are there issues inherent in the system. Corrective measures must be taken accordingly. So that maximum benefit is ensured. References Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2009). Cross-national Cooperation And Agreements. International business: environments and operations (12th ed., p. 139). Upper Saddle River, NJ: Prentice Hall. Kehoe, W. J. (n.d.). NAFTA: CONCEPT, PROBLEMS, PROMISE. people.Virginia.EDU. Retrieved March 25, 2012, from http://people.virginia.edu/~wjk/nafta.html OPEC : Member Countries. (n.d.). OPEC : Home. Retrieved March 24, 2012, from http://www.opec.org/opec_web/en/about_us/25.htm The World Factbook. (n.d.). Central Intelligence Agency . Retrieved March 25, 2012, from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html Read More