M02EFA CRITICAL ISSUES IN GLOBAL BUSINESS.

Module Leader: DR. S.Thandi

Name: Sonu Singh Student I.D: 3051908

Table of Contents
NAFTA ..........................................................................................................................................3 Overview: ...................................................................................................................................3 Objectives of NAFTA: ..............................................................................................................4 Benefits of NAFTA:...................................................................................................................4 Myth and Facts related to NAFTA:......................................................................................8 Conclusions:............................................................................................................................ 10 Refrences : ............................................................................................................................... 11

NAFTA

Overview:
North American free trade agreement is popularly known as NAFTA and it came into force in Jan 1 1994.This trilateral trade bloc in north America is one of the most successful trade agreements in history and has created worlds largest free trade area serving 444 million people and generating approximately $17trillion worth of goods and services annually. It is a all-inclusive agreement between Canada, Mexico and united states to liberalize trade and eliminate all the tariff and quotas as of Jan 2008. This trade agreement eliminated almost all the tariff and quota barriers to agricultural trade and the agreement began on Jan 1 1994 and concluded on Jan 1 2008.This agreement has largely contributed to the development of agricultural trade and investment between United States, Canada and Mexico has mainly been beneficial for consumers, ranchers and farmers all over the north of America. Trade among these three countries soared since the agreement from $297 billion in 1993 to $735 billion in 2009. United States attends in a very good position because of the agreement as since 1993 U.S.A. goods exports has grown from $142 billion to $434 billion in 2009 and the imports from these countries has grown from $151 billion to $400 billion in 2009.The economic downturn has effected the trade between these nations but ultimately the positive outweighs the negative in this agreement. This agreement also encourages cross border investment and expands cooperation regarding the environment and labour. (http://www.naftaworks.org)

Objectives of NAFTA:
The major objectives of NAFTA are as follows: 1. To eliminate barriers of trade and facilitate the movements of goods and services freely among the participating nations. 2. To promote fair competition in the trilateral bloc. 3. To encourage the investment opportunities. 4. To protect and enforce intellectual property rights in each partys territory. 5. To effectively manage the procedures for the implementation of the agreement. 6. To effectively solve and collaborate the disputes. 7. To further develop and boost the benefits of the agreements. (http://www.naftaworks.org)

Benefits of NAFTA:
Due to NAFTA specific improvements were seen in the following areas; 1. GDP. 2. Trade 3. Investment. 4. Economic growth. 5. U.S.A. Exports. 6. Handled trade disputes. 7. Economic transparency between members. 8. Market access for all kinds of firms. (Small, medium and large) (http://wallstcheatsheet.com)

The major benefits of NAFTA are critically discussed below for Canada, Mexico and the United States. 1. Increased trade. It stands as one of the major objectives of NAFTA and it has succeeded in doing that by eliminating the trade barriers all across North of America. The tariff and quotas were reduced significantly to facilitate free trade between the parties and thus trade has tripled from $297 in 1993 to $1 trillion in 2007.One of the major reasons for increase in trade is that NAFTA agreement gave the right to the member countries to bid on government contracts. (Hill, 2007) 2. Boosted U.S farm exports. Mexico is top importers of soybean, rice, beef, apples, beans and meal and thus the Mexican tariffs were very high and thus NAFTA helped to eliminate tariffs and boosted farm exports. As a result of the agreement agricultural exports to Canada and Mexico from U.S.A has boosted from 22% in 1993 to 30% in the year 2007. (Source: USTR, NAFTA Facts, March 2008) 3. Created Trade Surplus in Services. The service sector mainly financial and health services compromise of more than 40% of the U.S GDP. As a result of NAFTA U.S services exports boosted from $25 billion in 1993 to $106.8 billion in 2007 to Canada and Mexico. As a result of NAFTA all the trade barriers in service sector were either eliminated or minimized amongst the participating countries thus boosting trade. 4. Reduced oil and Grocery prices. U.S as a importer of oil was very reliable on middle-east and Venezuela .Due to NAFTA majority of the oil was imported from Canada and Mexico which amounted to $157.8 billion (shale oil) as both these countries are friendly countries and it is easy to import from them compared to the Middle- East and as a result of these imports the oil prices 5

have gone down considerably. The same is also applicable for food imports, which in 2008 was $28.9 billion. (Carol, 2009) 5. Increase in FDI Inflows and Outflows. Since the NAFTA agreement FDI has grew both ways between Canada, Mexico and USA. American FDI has nearly tripled since the agreement to $348.7 billion in 2007, similarly Canadian and Mexican FDI in U.S. grew to $219.2 billion. 6. Improved agricultural trade: Agricultural trade grew to 10.9% from 2003 to 2004 between United States and Mexico also the agricultural trade between United States and Canada increased to 8% in the same year. In the fiscal year 2004 exports of essential commodities from the United States to both countries set records. (http://www.cbp.gov) 7. Encourages trade and development: As of 2007 the total trade was approximately $1.0 trillion inclusive of all goods and services between these countries of which $452 billions exports and $568 billion is imports. The main exports items machinery, vehicle parts, electrical machinery, plastics, oil and mineral fuel. The commercial private sectors also showed an increase of 13.2% in 2007 when compared to 2006. 8. Encourages specialization: NAFTA agreement encourages each of the members to focus and concentrate on a particular line of products and helps them to specialize in the same industry becoming more cost effective and efficient. In 2008 the NAFTA member countries were the third largest suppliers of good and services to the United States. NAFTA alone accounted for 26.4% of overall US imports. The main imported items were vehicles, machinery, oil, vegetables, live stock, processed foods, snacks etc. (Kose, 2004)

 9. Broader array of competitive priced goods: Due to the concept of open marketing and slashing the trade barriers to the minimum competition of imported products increased to facilitate fair competition of goods and services. Also due to the US imports of Canadian products on a large scale give the US consumers a more variety of choices of products at competitive rates. Also due to reduced tariffs (2%) of Mexico more than two thirds of US exports to Mexico are duty free. 10. Enhanced job market: Due to the development of NAFTA the job markets in the participating countries also increased rapidly. There was a give and take from both sides as Mexico can use the advanced technologies that US had for the development of goods and services on the other hand US can avail the resources of cheap labour available from Mexico. Thus after the establishment of NAFTA the job markets in the three countries have grown tremendously and has allowed the countries to use each others resources for growth and development.

Myth and Facts related to NAFTA:

Myth: NAFTA has not been successful in fulfilling its main goals of growing trade and investment between the U.S. Canada and Mexico Fact: Business investment opportunities in the U.S.A. have risen by 117 %since the agreement took place in 1993 when compared to a 45% increase between 1979 and 1993.also the trade among the NAFTA members tripled from 1993 to 2007. Myth: NAFTA resulted in U.S.A job losses: Fact: Since the agreement in the year 1993 there was a rise in the employment, which rose from 110.8 million people in 1993 to 137.6 million people in 2007, which is 24%, increase in total. The unemployment rate before NAFTA was about 7.1%, which dropped down to 5.1% during the year 1994-2007. Myth: NAFTA has adversely effected Americas manufacturing base: Fact: Manufacturing exports in the year 2007 was all time high with a record value of $982 billion also during the period from 1993 to 2006 the output rose by 58% as compared to 42% from 1980 to 1993. (http://www.ustr.gov)

Myth: NAFTA has suppressed US wages Fact: there was a total rise of 23.6 % over the period of 1993 to 2007 compared to 11% from 1979-1993.which shows that the wages grew in USA instead of declining.

Myth: Agriculture sector has not benefitted from NAFTA Fact: Since 1993 two-way agriculture between U.S.A. and Mexico increased 149% since NAFTA came in to force in 1993. Also the agricultural trade between USA and Canada increased 112%since 1993.canada is now the No.1 market for U.S agricultural exports. Also Mexico is now the second largest market for U.S.A taking over Japan in 2004.(http://www.nafta-customs.org) Myth: Wages in Mexico were adversely affected by NAFTA. Fact: since the peso crisis in 1994 the wages in Mexico has grown steadily and have increased every year because of more no of FDI and development in many regions of Mexico. (Davis, 2007)

Myth: NAFTA did not pay attention towards the environment. Fact: NAFTA established binational bodies especially for the agreement, which certify and finance environmental infrastructure projects so that the residents living near the U.S Mexico border have a clean and pure surroundings. They have provided nearly $1 billion for 135 environmental infrastructure projects with a total anticipated cost of $2.89 billion and allocated $33.5 million in support and $21.6 million in grants for over 450 other border environmental projects. The Mexican government has also made considerable new funds in environmental protection, escalating the centralized funds for the environmental sector by 81% between 2003 and 2008. (Davis, 2007) 9

Conclusions:
From the above critical analysis of NAFTA trade agreement on Canada, Mexico and United States we can conclude that the positives of the trade agreement overcome the negatives and thus overall the agreement has been beneficial for the trade in the region of North America and helped these countries to grow and develop in the global competitive markets. Analyzing Canada we can conclude that NAFTA made easier for the Canadian firms to operate in the competitive US market by eliminating the trade barriers. On the same lines it also gave way to the US firms to get their goods to Canada without bothering about the tariffs and hence the prices were comparatively lower because of NAFTA. Thus NAFTA supports the Canadian economy through lower prices, efficiently maintaining trade of goods and services and opening the gateway to new markets in the USA. The business cycles in Mexico have been extensively affected by the boost in the regional integration among the members countries of NAFTA. Overall NAFTA has positively affected the growth and development of Mexico in the past decade. Due to the introduction of NAFTA the contributions of exports and investments to the Mexican GDP has increased over the period of time thus effecting the economic growth of the country in a positive way. The Mexican experience under NAFTA illustrates the major benefits from free trade agreements and from the broader trend toward globalization and integration of goods and financial markets. NAFTA also gave rise to a dramatic increase in trade and financial flows. Mexicos trade with NAFTA partners accounted for around 40 percent of its GDP in 2002. USA has more secure access to energy and other major natural resources from Canada and Mexico. NAFTA has boosted the trade in this region due to various reasons and some of the major reasons are elimination of the tariffs for exports, countries specializing in the sector where they have competitive advantage and buy other things from neighboring countries to promote fair competition. Thus North American free trade agreement has helped Canada Mexico and United States to grow and develop socially and also economically. 10

References:

About.com

US

Economy

[online]

available

from

<http://useconomy.about.com/od/tradepolicy/p/NAFTA_Advantage.htm> [09 Oct 2010] Carol,W. (2009) 'NAFTA and Mexico: Sorting Out the Facts'. Insights on Law and Society 9 p10-27. CBP.com nafta/> [11 Oct 2010] Christopher,H. (2007) 'NAFTA'. The NAFTA Superhighway 285 p13-22 Council Foreign Relations NAFTA Economic Impact [online] available from <http://www.cfr.org/publication/15790/naftas_economic_impact.html> [11 Oct 2010] Davis,S. (2007) 'The Effect of NAFTA on Energy and Environmental Efficiency in Mexico'. Policy Studies Journal 35 p291-322 Hill, C.L. (2007) International Business: Competing In Global Market Place. Edinburgh: McGraw-Hill. Hufbauer,G.C.; Schott,J. (2005) NAFTA Revisited:Achivements and Challenges Washington,DC: Institute Of International Economics. Kose,M.A.;Towe,C.M. (2004) 'How Has NAFTA Affected the Mexican Economy? Review and Evidence'. IMF Working Paper. Lustig,N.;Bosworth,B. (1992) North American Free Trade. Washington,DC: The Brookings Institution. NAFTA [online] available from

<http://www.cbp.gov/xp/cgov/trade/trade_programs/international_agreements/free_trade/

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NAFTA Customs NAFTA Customs [online] available from <http://www.naftacustoms.org/> [11 Oct 2010] NAFTA NAFTA [online] available from <http://www.nafta-sec-

alena.org/en/view.aspx?x=343&mtpiID=ALL> [11 Oct 2010] NAFTA Understanding NAFTA [online] available from

<http://www.naftaworks.org/benefits-of-nafta.php> [11 Oct 2010] Rugman, A.M.; Collinson, S. (1995) Fifth edn. International Business Edinburgh: McGraw-Hill Inc. United States Trade Representative NAFTA Benefits [online] available from <http://www.ustr.gov/sites/default/files/NAFTA Benefits.pdf> [07 Oct 2010] Wallstcheatsheet Winners and Losers: The Cost And The Benefits Of NAFTA [online] available from <http://wallstcheatsheet.com/breaking-news/economy/the-costs-andbenefits-of-nafta/?p=5189/> [07 Oct 2010]

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