The Making of North American Free Trade Agreement - Term Paper Example

North American Free trade Agreement (NAFTA): North American Free Trade Agreement (NAFTA) is a trilateral trade agreement signed between the states of United States of America, Canada and Mexico. The NAFTA agreement came into force in 1994 and it created the largest trade bloc in the world in terms of the cumulative Gross Domestic Product of the three partners of the trade agreement (Maxwell A. Cameron, Brian W. Tomlin , 2002). The objective of NAFTA is to eliminate all tariff and non-tariff barriers in the movement of goods between United States, Mexico and Canada. Around 50% of the US imports from Mexico were immediately freed from import tariffs with the coming in of the agreement in force in 1994 (Weintraub S , 2004). Similarly tariffs on more than 33% of the US exports into Mexico were also eliminated with the ratification of NAFTA. By January 1, 2008 all remaining tariffs and quantitative restrictions to the movement of goods in the NAFTA trade bloc were completely eliminated. This trade bloc comprises of more than 450 million people and more than $ 17 trillion of goods and services produced. NAFTA has given a trade boost in the region as was expected. In the year 2010 the total United States trade with Mexico and Canada was worth $ 918 billion. Goods exported from United States to Canada and Mexico were worth $ 412 billion. Goods imported into United States were worth $ 506 billion. Thus the total trade deficit of United States with its NAFTA trading partners was worth $ 94 billion. While there was deficit on the goods front, the United States enjoyed a surplus on the services front. The total value of the services exported from United States was $ 63.5 billion. The total value of services imported into United States from Canada and Mexico was $ 35 billion. Thus the total services surplus of United States was $ 28.5 billion ( USTR, 2010). The export of United States to NAFTA countries accounted for 32% of the total global exports of United States. The United States goods trade deficit with NAFTA also accounted for 26.8% of the total goods trade deficit of United States in 2010 ( USTR, 2010). Advantages of NAFTA: The advantages of NAFTA lie in that it promotes free trade in the region. The elimination of tariff and non-tariff barriers eliminates protectionism. According to some estimates the NAFTA since its implementation in 1994 has increased United States GDP by .5% every year ( Office of USTR, 2010). It has reduced the transaction and psychic costs of doing business in the trade bloc. This has made doing business easier in the region and has spurred investments in export oriented industries. It has also brought down the costs of imports and has therefore helped in checking inflation. Total trade between the three NAFTA partners- US, Canada and Mexico- in the year before ratification of NAFTA (1993) was $ 297 billion. This had expanded to $ 1 trillion in 2007( Office of USTR, 2007). NAFTA also provides greater protection for intellectual property. This promotes innovation. NAFTA gave a boost to the United States farm exports by enabling the elimination of high tariffs that Mexico imposed on US farm exports. Mexico is now the number one destination for beef, rice, soybean and corn produced in United States. US farm exports to Canada and Mexico increased from 22% in 1993 to 32% in 2010. NAFTA also gave a boost to services export from United States into Canada and Mexico. The services export to Canada and Mexico grew from $ 25 billion in 1993 to $ 63.5 billion in 2010. NAFTA also checks protectionist sentiments of the different governments by requiring them to publish all regulations relating to trade. NAFTA has also reduced the oil dependency of United States on hostile countries like Venezuela. Because of no tariffs, the oil imported from Mexico and Canada comes at a lower price. Food prices have also come down because of food imports from Mexico and Canada at lower prices. The NAFTA agreement has given a boost to Foreign Direct Investment in the three country trade bloc. Since the ratification of NAFTA in 1994, foreign direct investment has increased by 14 times in Mexico. One of the major objectives of NAFTA was to boost trade between United States and Mexico. NAFTA has succeeded in achieving this objective very well. The job losses for U.S. workers has been much less than predicted by the opponents of the free trade agreement. The agreement has also created jobs in sectors where the American economy has comparative advantage over its NAFTA partners. Actually many empirical studies suggest that on the whole NAFTA has actually ended up creating jobs, and cutting inflation without hurting wages in a big way. On the side of Mexico, NAFTA seems to be even more beneficial. Before the signing of NAFTA exports to United States accounted for 13% of the total economy of Mexico. Today they account for 25% of the total economy of Mexico. Maquiladoras (the assembly plants in Mexico ) have created more than a million jobs since the ratification of NAFTA. The export boom due to NAFTA accounts for more than 50% of all jobs created in Mexico since 1994 ( the year in which NAFTA was ratified). The real wages in Mexico have also risen significantly. NAFTA has also given a huge boost to Foreign Direct Investment in Mexico. The international investors have been reassured by the legal framework provided by NAFTA and therefore they have increased their exposure in Mexico. It was because of NAFTA that the Mexican economy recovered so quickly after the December 1994 devaluation of the Mexican Peso. Economist Joseph Stiglitz of the Stanford University is of firm opinion that the quick recovery of Mexico had everything to do with NAFTA and the resultant closer integration of the Mexican economy with the United States economy. In the six year period between 1994 and 2000, US exports to Mexico grew by a whopping 170%. The growth of total US exports during this period was 68%. The Mexican exports into United States during this period grew by 241% ( Office of the USTR, 2000) . The NAFTA also seems to have helped United States’ burgeoning trade deficit. The balance of trade of United States with Mexico is much more balanced than its balance with other major trading partners like China and Japan. United States’ deficit with Mexico over the past one decade has averaged 10%. The average trade deficit of US with European Union during this period is 14%; with Japan is 38% and with China is 72%( Office of the United States Trade Representative, 2010). According to one conservative estimate of Standard & Poor’s NAFTA has shaved off about .15 percentage points from the annual inflation rate of United States of America. This has been caused by the lower priced imports from Mexico and Canada. According to United States International trade Commission, the Maquiladoras or the Mexican assembly plants get 82% of their components from US suppliers. In comparison to this, assembly plants elsewhere, like those in Asia, use far lesser components from United States. The NAFTA has caused a shift towards higher skilled jobs in United States. This is compatible with the rising skills of the workers in United States (Hufbauer GC and Schott, JJ, 2005). Disadvantages of NAFTA: On the flip side NAFTA may have contributed to job losses in United States because of the tendency of many US manufacturers to shift manufacturing to lower cost locations in Mexico (Edward J. Chambers, Peter H. Smith, 2002). It is also feared that many of the farmers in Mexico were impacted adversely because of the free imports of subsidized United States farm products into Mexico. However, in spite of the adverse impact on some farm sectors of Mexico, the reality is that Mexico’s farm exports to its NAFTA partners, US and Canada has actually tripled since the ratification of NAFTA. Tariffs on maize, one of the main staple crops of Mexico, has come down from 200% in 1994 to 0% in 2008. In such a scenario it is mainly the small farmers of Mexico who have been impacted adversely by elimination of tariffs under the NAFTA. The government of Mexico has also done little to prepare the farmers during the transition phase of fourteen years or so. Four-fifths of the farmers of Mexico are small scale farmers having less than 12 acres of farm holdings (Lederman D, W Maloney and L Servén ,2005). The NAFTA agreement also had some adverse impact on the growth of wages in the manufacturing industry in United States. Some companies were found to be using the threat of moving to Mexico for suppressing the wage growth. Maquiladoras are factories in Mexico that take in imported raw materials from United States and assemble finished products at lower costs because of lower labor wages in Mexico. The Maquiladoras were given a boost by the NAFTA agreement and critics of NAFTA blame this for the loss of manufacturing jobs in United States (David Bacon ,2004 ). There is also a lot of criticism of NAFTA in Canada on the grounds that it would have an adverse impact on the ecology and environment of Canada in the medium run. There have been instances where some companies have even tried to export bulk water through marine tankers from Canada to United States. The fear in Canada stems from the fact that if something is sold even once as commodity, then under NAFTA, the government cannot stop its sale in future. Criticism of trade agreements like NAFTA: Jagdish Bhagwati of Columbia University is one of the most prominent free trade economists who support global free trade. In spite of his being a votary of free trade, Professor Bhagwati is not in favor of bilateral and trilateral free trade agreements like North American free trade agreement (NAFTA). Mr. Bhagwati says that such trade agreements while promoting free trade among members increase protection against non-member nations. Ultimately such protectionism has the effect of driving the world into exclusive trading zones which are a return to the tit-for-tat alliances of 1930. Bilateral and trilateral agreements like NAFTA can therefore undermine the cause of globalization and World Trade Organization (WTO). Free trade agreement between United States of America and Republic of South Korea (Korus FTA): South Korea and United States signed a free trade agreement (like NAFTA) between them on June 30, 2007. A revised and renegotiated version was again signed in December 2010. However this free trade agreement is still to be ratified by the National Assembly of South Korea and United States Congress. It has therefore still not been implemented. Once the agreement is ratified and implemented it will lead to elimination of 95% tariffs on goods between US and South Korea in five years. This free trade agreement is the second largest trade agreement of United States after the NAFTA. Advantages and merits of the proposed South Korean Free Trade Agreement: This free trade agreement will give broader access to US car makers in the South Korean market. This agreement is therefore supported by the Ford Motor Company and United Auto workers. Automobiles are a large component of the trade deficit that United States has with South Korea. The KORUS FTA will lead to abolition of taxes imposed in South Korean on large cars produced in United States of America. South Korea will also have to reduce 40% of the tariffs on the beef imported from United States over a period of fifteen years. The KORUS FTA, on implementation, will make $ 1 billion worth of United States’ farm exports into South Korea duty free (Robert Scott, 2010). The majority of the remaining tariffs and quantitative restrictions will be phased out within 10 years of the ratification and implementation of the free trade agreement (FTA). It will also eliminate tariffs on 95% of the consumer and industrial products traded between the two countries within the three years of its ratification. South Korean tariffs on industrial products are currently very high, averaging around 6.5%. These act as the biggest barrier for United States’ exports. The elimination of these tariffs after the Free trade agreement is implemented will give a major boost to the United States’ exports and industry. United States is the largest economy in the world. South Korea is the eleventh largest economy in the world. The KORUS FTA will create a free trade zone between these two large economies. Disadvantages and faults of the free trade agreement between United States and South Korea: The Free Trade Agreement excludes many areas in the services sector. Services sector is one of the strengths of the United States economy while it is a weakness of the South Korean economy. The productivity in the services sector is low in the South Korean economy. The US economy would have benefitted extensively if service areas like healthcare and education were included in the Free Trade Agreement. Rice has also been excluded, at South Korea’s insistence, from the Free Trade Agreement. The North American Free Trade Agreement ( NAFTA ) had its two supplements on labor and environment in the form of North American Agreement on Environmental Cooperation ( NAAEC ) and North American Agreement on Labor Cooperation ( NAALC). The Free trade agreement with South Korea has no such supplementary agreements on environment and labor. It requires both United States and South Korea to enforce their own labor and environmental laws. It, however, ensures access to legal mechanisms for ensuring that the labor and environmental laws are implemented. Critics of the Free Trade Agreement argue that the implementation of the Free Trade Agreement will lead to losses of around 159,000 jobs in various sectors of the US economy. The supporters of the agreement counter this by saying that it will actually create 280,000 more jobs in the US economy. Conclusion: Should the North American Free Trade Agreement be revisited : Most trade economists would agree that NAFTA has worked. Empirical evidence is in favor of the success of the free trade agreement in achieving its objectives. Both intra-area trade and foreign investments have expanded greatly (Economist, 2003). NAFTA succeeded in stimulating trade and cross-border flows of investments. Jobs were created in some sectors while they were destroyed in some others. But NAFTA clearly succeeded in meeting its twin objectives of stimulating trade and investments (Economist, 2003). It also succeeded in raising wages, lowering inflation slightly and increasing the expected rates of growth in all the three member countries. And NAFTA clearly has worked for all the three member states- United States, Canada and Mexico. It also helped Mexico in recovering quickly from the Tequila crisis which was followed by a devaluation of peso. Should the Free Trade Agreement with South Korea be ratified : The revised free trade agreement with South Korea that was signed in December 2010 should definitely be ratified. It is in the interests of both United States and Korea. The United States’ automobile, farming, consumer goods and industrial products segment will greatly benefit from the KORUS FTA. The Free Trade Agreement is also expected to raise the GDP growth of South Korea by .6% for the next decade. Therefore it is a win-win situation for both the parties and it should be ratified as soon as possible. It will boost trade and foreign investment in both United States and South Korea. References: Lederman D, W Maloney and L Servén ,2005,Lessons from NAFTA for Latin America and the Caribbean: Stanford University Press: Palo Alto, USA. Weintraub S , 2004, NAFTA's Impact on North America The First Decade, CSIS Press: Washington, USA. Hufbauer GC and Schott, JJ, 2005, NAFTA Revisited, Institute for International Economics, Washington D.C. Edward J. Chambers, Peter H. Smith ,2002, NAFTA in the new millennium, University of California, San Diego. Center for U.S.-Mexican Studies. Maxwell A. Cameron, Brian W. Tomlin ,2002, The making of NAFTA: how the deal was done. Cornell University Press. David Bacon. ,2004, The Children of NAFTA: Labor wars on the U.S./Mexico Border, Berkeley: University of California Press. Economist, 2003, Ten years of NAFTA:Free Trade on Trial. Robert Scott, 2010, Trade Policy and Job Loss: U.S. Trade Deals with Colombia and Korea Will be Costly, Economic Policy Institute. www.ustr.gov Read More