NAFTA Ten Years Later Term Paper

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Economics of NAFTA

There have been a number of changes in the global economy of the world over the past decade. It is important to examine the North American Free Trade Agreement (NAFTA) and determine if it has helped and/or hindered the economies of all three countries, if it has accomplished what it was established to do, and if over the past ten years it has resulted in additional trade agreements within the Americas.

Beginnings

The North American Free Trade Agreement (NAFTA) went into effect July 1994. It was built on the "Canada-U.S. Free Trade Area (CUSTA), which was formed January 1, 1989. Under CUSTA most tariffs and quantity trade restrictions were to be removed within 10 years and disputes were referred to a panel of experts (hubcap.clemsom.edu/~gjwells/WTO/tsld015.htm)." Mexico inquired about joining CUSTA after it was formed, prompting negotiations in June 1991 and the formal announcement of the NAFTA agreement on August 12, 1991.

Goals of NAFTA

When NAFTA went into effect, its initial goals were to "eliminate all tariffs over a 15-year period from January 1, 1994 (10 years for industrial products), replace non-tariff barriers (NTBs) with tariff-rate quotas (TRQs) with the barriers being phased out over a 10- to 15-year period. There were safeguards built-in, and it planned to eliminate NTBs (e.g., Mexican import licenses) (hubcap.clemsom.edu/~gjwells/WTO/tsld015.htm)."

NAFTA also proposed to create "freer agricultural trade, increase U.S. telecommunication sales to Mexico, allow U.S. And Canadian banks to offer financial services in Mexico, liberalize the Mexican insurance industry, allow investors from a member country to be treated as if they were from the domestic country, and increase patent protection (hubcap.clemsom.edu/~gjwells/WTO/tsld015.htm)."

Problems of NAFTA

There were potential problems noted when NAFTA was formed. There was concern the environment would be adversely affected, the earnings for United States blue-collar workers would decline, and that there would be a negative impact on countries not involved in the agreement. Several United States industries, such as "apparel, furniture and fixtures, and leather products companies also found they were adversely impacted (hubcap.clemsom.edu/~gjwells/WTO/tsld015.htm)."

The Textile and Apparel Industry

NAFTA outlined guidelines specific to the textile and apparel industry. These guidelines included "eliminating tariffs over a 10-year period, the United States removing import quotas, providing safeguards during transition, applying rules of origin, and labeling requirements (hubcap.clemsom.edu/~gjwells/WTO/tsld015.htm)."

Many workers in North Carolina textile plants have blamed NAFTA for increased lay-offs and plant closings. However, in 2002 the Executive Director of the American Textile Manufacturing Institute stated "NAFTA actually provided the textile industry an opportunity to sell American-made fabrics and yarn to garment makers in Mexico. Since NAFTA went into effect in 1994, the exports of yarns and fabrics into Mexico tripled to over $6 billion, and there was a similar increase to Canada. During the previous year, exported fabrics and yarn that NAFTA partners converted to apparel and shipped back to the United States markets represented 12% of the American textile industry's output (http://www.ncpoliticalreview.com/0302/textiles.htm)."

Researchers into the textile workers complaints found that some of the chief reasons a textile plant closed were "its inability or refusal to change and adapt to the challenges of doing business in a global economy, or its insistence that business must continue to exist as it had in the past (http://www.ncpoliticalreview.com/0302/textiles.htm)."

More Hindrance Than Help

NAFTA was first proposed and enacted under the guise of being beneficial for Canada, the United States and Mexico, however many citizens feel the negative impact of NAFTA far outweighs any benefits realized.

Some of the negative impacts noted after NAFTA was enacted include:

Increased volume of tainted food and illegal drugs coming into the United States due to increased shipping volume, NAFTA requirements that limit inspections, and inadequate funding.

Unsafe trucks entering the United States carrying corrosives, chemicals, explosives, jet fuel, poisons, toxic waste and pesticides.

A decline in real wages for the majority of workers in all three NAFTA countries, and a loss of high-wage manufacturing jobs, forcing United States workers to find new employment in lower-paying jobs without benefits in the service sector. Studies show that during the next ten years, the jobs with the greatest growth will be "cashiers, janitors, retail sales clerks, and waiters and waitresses (http://www.citizen.org/trade/nafta/votes/articles.cfm?ID=1712)."

When NAFTA was first introduced, many corporations promised to create specific positions for workers. Instead of increasing their workforce, these companies have actually relocated a number of their plants in other countries, resulting in the loss of jobs for thousands of employees.

NAFTA Trade Deficit

In 1993, the United States had a "trade surplus with Mexico of $1.7 billion, however after NAFTA, the surplus collapsed into a major trade deficit of $16 billion (http://www.citizen.org/trade/nafta/votes/articles.cfm?ID=1712)." While some feel the trade deficit was due to the devaluation of the peso, others stress that the deficit began months before the peso's collapse and the economic problems which plagued Mexico.

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It is important to note that "China, Japan and the European Union, Mexico's other major trade partners, who also had trade surpluses with Mexico in 1993, have maintained their surpluses throughout Mexico's economic crisis. Only the United States suffered a massive and persistent new trade deficit (http://www.citizen.org/trade/nafta/votes/articles.cfm?ID=1712)."

Causes for Change

In 1992, when the rules of origin were introduced, they were "meant to protect North American suppliers of raw materials and components from non-North American competition after their effective date of 2001 (Hendricks)." However, the "large increases in foreign direct investment in North America, plus falling tariffs worldwide because of the successful completion of the Uruguay Round of world trade talks in 1994, which created the WTO, actually made the rules counterproductive (Hendricks)."

Economic Gains

In the past year there have been large economic gains realized by Asia, and the European Union has grown to 25 members. In comparison, "tariffs have continued to fall worldwide under the World Trade Organization, confirming the belief that NAFTA is in serious need of updating (Hendricks)."

Tenth Anniversary

On the Tenth Anniversary of NAFTA, after a meeting in San Antonio, "top trade officials from the United States, Mexico and Canada announced sweeping changes in the pact in an effort to keep North America competitive globally (Hendricks)."

Changes

The trade ministers from Canada, Mexico and the United States agreed to "revisions in NAFTA's roles of origin. The rule simplification, set to go into effect on January 1, 2005, is expected to affect $20 billion of trade annually. It is the biggest set of changes in NAFTA's decade of existence, coming after another $15 billion in tariff-reducing steps went into effect between the United States and Canada last year, with Mexico added in July (Hendricks)."

In an effort to keep the three North American countries competitive, the trade ministers laid the groundwork to "continue slashing North American tariffs, eventually reaching zero-tariff levels for $200 billion in trade yearly (Hendricks)."

Rules of Origin revision in was also made concerning "the definitions of 'origin' for merchandise trade in foods, consumer and industrial goods, with toys being the largest product area in the new definitions (Hendricks)."

An example of the how the change in definitions will affect the global economy would be: under the "original NAFTA rules of origin, which went into effect in 2001, tariffs were added to raw materials, like raw spice agricultural ingredients that entered North America for cooking, processing, refining and packaging for sale worldwide. Under the new rules, 'origin' is conferred to the processing of raw materials and components, like raw spice agricultural products. That reduces the duties levied as materials enter North America and leave for international sales, reducing the prices and making products competitive in the global marketplace (Hendricks)."

The trade ministers, known as the NAFTA Commission, have outlined plans to extend the change in definition by January 1, 2006 to include "chemicals, pharmaceuticals, plastics, rubber, motor vehicles (and their parts), footwear and copper, plus 'any items for which all of their countries have a common most-favored-nation duty rate of zero' (Hendricks)."

NAFTA and Manufacturing

Companies are finding that to remain competitive they must "achieve world class manufacturing levels due to new market trends, shaped by the globalization of the economy and the formation of large economic blocks, such as the European Union, NAFTA or MERCOSUR (http://www.uninova.pt/~cove/motivation.htm)."

There have been a number of "new industrial manufacturing concepts introduced in recent years as an answer to the new challenges of globalization, such as virtual manufacturing, lean enterprise, agile manufacturing, and holonic systems (http://www.uninova.pt/~cove/motivation.htm)."

FTAA new trade act may soon replace or implement NAFTA in North America. The provisions for the "Free Trade Act of the Americas (excluding Cuba) or FTAA are:

Extend NAFTA to the rest of the hemisphere (with the exception of Cuba)

Replace the NAFTA panel with the WTO as overseer and enforcer

Remove all barriers to trade (except free movement of workers and population across national borders), including tariff and non-tariff policies, services and intellectual property rights, and constitutions, laws, regulations and policies.

Extend the 'national treatment' provisions of NAFTA

Extend the 'investor-to-state rights' of NAFTA (spot.pcc.edu/~rwolf/Globalnotes.html)"

For the past seven years, "Trade Ministers of the governments involved and representatives of….....

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