Nafta Agreement What Mexico essay example

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I. The Origins of NAFTA The underlying rationale not only of NAFTA, but of all free trade agreements is the belief that international trade is a win-win proposition. This belief is based on theories developed by theorists such as Adam Smith and David Ricardo, who dismissed the mercantilist view that a country could only gain at the expense of its rival. In their view, mutual gains for all parties involved would be created if two conditions were met: 1. If each country specialized in producing and selling the goods that it could produce most efficiently relative to another country ( = law of comparative advantage) and 2.

If there were a free and unregulated flow of goods among and between countries. Though the belief in the economic and moral rightness of free trade became a national dogma in Britain in 1846, it took a while for the free trade fever to hit the Americas, where the governing class held long and hard to protectionism and where Alexander Hamilton's Infant Industry Argument raised in 1792 was still very popular. This trend finally climaxed in the infamous Smoot Hawley Act of 1930, which raised U.S. tariff rates by almost 50% between 1930 and 1932. What followed was the great depression of the 1930's with astronomic unemployment rates, deteriorating living standards and a total collapse of international trade. As a result, the world economy was reassessed and restructured after it was found that trade barriers had contributed a great deal to causing the problems. Hence, a new trend towards free trade emerged and, finally, the necessary steps to secure free trade were taken: First, the Bretton Woods conference of 1944 created the International Monetary Fund (IMF) and the World Bank.

Then, in 1946, the General Agreement on Tariff and Trade (GATT) was created at the first session of the Preparatory Committee of UN Conference on Trade and Employment. Conventional wisdom attributes much of the prosperity that occurred in the global economy since the 1940's to the existence of GATT. In particular, GATT is considered to be responsible for the dramatic increase in world trade and the absence of any serious trade friction. In the face of this, today's numerous free trade agreements, such as NAFTA and ASEAN, have been founded in the spirit of GATT and free trade.

Apart from these general reasons, there were also very particular reasons for the founding of NAFTA. By far the most important was the decline of US international competitiveness in the late 70's and 80's. The USA found that the international trade system was no longer working solely in its favour, but also brought fierce competition in its traditionally strong industry areas from revitalized economies of Western Europe and Japan. As a result, the USA tried to secure its competitive edge by promoting the expansion of GATT rules into non-traditional areas such as high technology, pharmaceutical and communication systems. Moreover, the USA were increasingly dissatisfied with the GATT's dispute resolution. Finally, in the advent of the EU, the USA found that it was time to build and exploit its own market, which meant looking around in its neighbourhood - Canada, Mexico and Central and Latin America.

Political and economical relations with Canada had always been rather unproblematic; hence the US turned its focus towards Mexico. Like many other Latin American countries, Mexico was suffering from a severe debt crisis and was at the mercy of the international money and capital markets and just like them, Mexico tried to get rid of the crisis through economic and political liberalization. However, Mexico took the most aggressive measures by joining GATT in 1986 and also indicated that it would be interested in securing a "Canadian" deal with the US. II.

The NAFTA Agreement What Mexico referred to was the U.S. -Canadian Free Trade Agreement signed in 1988. In place since January 1, 1994, NAFTA is an experiment that builds upon the aforementioned agreement. It sets guidelines for the elimination of most trade and investment barriers between Canada, Mexico and the USA over a period of 15 years. More precisely, the objectives of the agreement are as follows: 1. Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the parties. 2.

Promote conditions of fair competition in the free trade area 3. Increase substantially investment opportunities in the territories of the parties. 4. Provide adequate and effective protection and enforcement of intellectual property rights in each party's territory. 5.

Create effective procedures for the implementation and application of the agreement for its joint administration and for the resolution of disputes. 6. Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the agreement. Two issues of the NAFTA Agreement deserve a closer look: a) Relations to other agreements b) The concept of National Treatment. "Relations to other agreements" (Article 103) affirms the existing rights and obligations of the parties to each other under the GATT and other agreements to which such parties are party. This part of the agreement has been an actual cause of past problems, especially in relation to the WTO / GATT and is very likely to cause more problems in the future.

This report will have a closer look at Article 103 in chapter V. "The concept of national treatment" (Article 301) means, with respect to a state or province, treatment no less favourable than the most favourable treatment accorded by such state or province. This concept is widely similar to the The MostFavoredNation (MFN) concept of the GATT, which obligated all GATT members to extend any tariff (or related) concession granted to one GATT member to all other GATT members. The MFN rule is supposed to have the effect of accelerating the process of trade barrier elimination since it require a wide dispersion of concessions among member countries.. The NAFTA Debate The US Congress approved NAFTA in November 1993 after a public campaign that confronted a broad coalition of social groups, including unions, environmentalists, human rights advocates, farmers and consumer groups on one side with Fortune 500 corporations, large environmental groups, Latino organizations and much of the academic and small business communities on the other side. Supporters of NAFTA pointed out that the trade agreement would lead to a net increase of good US jobs because the trade liberalization would support and facilitate US exports to Mexico and Canada especially in high-wage industries. Moreover, they believed NAFTA would help Mexico to build a more modern economy and stronger democracy.

NAFTA opponents emphasized that US companies would move to Mexico to take advantage of the low wages and rising productivity there. This would not only mean higher unemployment and lower wages in the USA, but also a threat to US labour protections because the Mexican government denied basic worker rights. In other words, NAFTA opponents feared that child labour and sweatshops could be introduced to the US market as a means of staying competitive. Indeed, according to a 1992 Wall Street Journal survey, 40% of all business executives indicated that they were strongly considering shifting at least some production to Mexico if NAFTA came into effect.

25% said they would likely use NAFTA to renegotiate US wages. To appease NAFTA critics, US President Clinton promoted a number of side agreements on labour and environment. This created a number of institutions to handle complaints regarding the violation of environmental and labour laws and to set up funds for environmental cleaning. Finally, about one year after the founding of the NAFTA, Clinton claimed that the trade agreement was a success and announced plans to expand NAFTA to include additional countries, starting with Chile. IV. The Impact of NAFTA Not everyone shares Clinton's view that NAFTA is a success.

While the economic benefits of the NAFTA remain largely undisputed, many critics of NAFTA are quick to point out that they had been right in the NAFTA debate in terms of the agreement's negative impact on working conditions, jobs and other issues. To illuminate the success issue, this chapter will take a closer look at the ups and downs of NAFTA. 1) The Upside of the NAFTA Coin NAFTA is a free trade agreement - logically, its advantages are almost exclusively derived from improvements of economic figures. Four distinctive areas of impact can be identified: Impact on trilateral trade, impact on Mexico, Canada and the USA.

1. Impact on Trilateral Trade: Trilateral trade between Mexico, Canada and the United States has significantly increased between 1993 and 1999 (see table below). Intra-regional exports grew at an annual rate of 11% per year, resulting in an increase of approx. 92%. Interestingly, this figure is significantly higher than the increase in exportation between NAFTA countries and the rest of the world during that same period (35%). In absolute terms, these exports accounted for $571 billion in 1999, which is $274 billion more than in 1993.

Source: Bank of Mexico, US Department of Trade, and Statistics Canada There has also been a significant growth of intra-regional exportation, which resulted in exports accounting for an increased share in the total external sales of the three countries, from 46% in 1993 to 55% in 1999. Intra-regional flows increased their share in the total trade of the three countries, from 41% to 47% during the period in question. Source: Bank of Mexico, US Department of Trade, Statistics Canada. 2.

Impact on Mexico: In 1999, Mexican exports to the US increased to $120.8 billion, or 182% more compared to 1993 ($42.8 billion). Imports from the US reached $105.5 billion, or 133% more than in the year prior to NAFTA ($45.3 billion). Source: Bank of Mexico In 1993, exports to the US were 82.7% of total external sales, and in 1999 this share rose to 88.3%. Imports from the US are 74.5% of the total imports into Mexico. Mexico managed to increase its share in total US imports from 6.9% in 1993 to 10.6% in 1999. In 1993, Mexico received 9% of US exports; while this figure had increased to 12.7% for 1999.

Currently, Mexico is the second-largest market for US exports, ahead of Japan, but after Canada, with which the US conducts the largest bilateral trade exchange ($365 billion), and in 1999, US-Mexico bilateral trade exceeded US-Japan bilateral trade, which placed Mexico as the United States's e cond-largest trading partner. From January 1994 to September 1999, North American investment in Mexico increased to $31 billion, which represents 63.6% of the foreign direct investment in Mexico during that particular period. The US is the largest investor in Mexico (accounting for 60% of the total FDI) while Canada holds fifth place (3.8% of the FDI). Of the 11,732 companies with North American capital, 36% manufacture goods, while 21.5% specialize in trade, and 8.1% in financial services. It should be taken into account that during the first five years of NAFTA, US and Canadian investment in Mexico averaged more than $5.7 billion per year. Between January and September of 1999, said investments grew to $3.8 billion.

As of September 1999 Source: SECO FI, Directorate General of Foreign Investment 3. Impact on the United States: In 1998, US exports to Canada and Mexico represented 35% of total (31% in 1993) exports. Canada, however, still remains the number one US trading partner. Bilateral trade was $331 billion, followed by Japan ($185 billion) and Mexico ($174 billion).

In the five years since NAFTA was implemented, US exports to Mexico have grown by nearly 91% ($38 billion to be precise). This is nothing less than the greatest increase registered by the US with any of its trading partners during the period in question. US exports to Canada and Mexico grew by $93 billion between 1993 and 1998, which is far more than the $83 billion increase registered jointly for the EU and the Asia-Pacific region during that same time. In conclusion, there was a $7 billion net effect on the trade balance, a $13 billion increase in the American GDP and $5 billion increase in business investment in the US.

4. Impact on Canada: In 1998, trilateral trade within NAFTA amounted for C$752 billion. Canadian trade with the US and Mexico was C$484 billion. Since the treaty came into effect, Canada's trade with the US has increased by 80%, while trade with Mexico has about doubled. Canadian exportation has risen significantly and has been particularly successful in such industries with high added value, such as the automobile, machinery and industrial goods sectors. The increase of exportation to NAFTA partners in 1998 also counteracted the decrease in exports to other important international markets that was caused by the economic crisis and its consequences.

Reflecting this tendency, the share of Canadian exports to NAFTA members rose from 80.8% in 1993 to 84.3% in 1998. Canadian imports from NAFTA partners increased significantly over the five years as well, especially in machinery, communications articles and automobile equipment. Canadian exports to the US have increased by 80% since the foundation of NAFTA, reaching C$271 billion in 1998. Since 1993, bilateral trade with the US has increased by 80% to a total of C$475 billion. As a result, Canada and the US exchange C$1.5 billion worth of goods every day.

The principal trade items for the two countries are machinery and transport equipment and Canada continues to be the main destination for US exports. Canadian imports from the US reached C$203 billion in 1998, which means an increase of 78% during the five years of NAFTA. One important benefit that NAFTA has brought for Canada has been improved access to the Mexican market. Canadian firms have been able to increase their sales considerably in sectors that were previously restricted, for example in the production of automobile parts, financial services, energy and fisheries.

Canadian exports to Mexico have increased consistently since the ratification of NAFTA, reaching C$1.4 billion in 1998, which is an increase of 65% over the previous five years. Canadian imports from Mexico, on the other hand, have more than doubled since 1993, reaching C$7.6 billion in 1998. Similarly, bilateral trade doubled to reach C$9 billion in that very year. The value of the bilateral trade of services with the US has doubled since the Canada-US Free Trade Agreement of 1989, totaling C$58.9 billion in 1998. In the five years since NAFTA's foundation, the exportation of services from Canada to the US has increased by 64% and is now C$26.7 billion, while US imports to Canada increased by 24% to reach C$32.2 billion. 2) The Downside of the NAFTA Coin The NAFTA's social ambitions are modest.

In December 1994, the Mexican government was forced to devalue the peso, which increased the US trade deficit with Mexico dramatically. Although NAFTA did not create the crisis, it contributed to it by creating a climate of investor optimism that kept foreign capital flowing into Mexico despite deep social and economic problems, including an overvalued peso. More than three quarters of this capital was in portfolio investment ( = hot money) rather than productive investment. Moreover, during the NAFTA negotiations and later on, the USA kept up pressure on Mexico to dismiss all forms of capital control, and since NAFTA also forbids investment controls, the Mexican government could not prevent the rapid capital flight that occurred after the peso devaluation. As a result, millions of Mexicans lost jobs, property, and savings and considerable harm was done to the Mexican economy. Apart from that, many American workers lost their jobs because their employers moved production to Canada or Mexico or lost revenues as a result of increased imports from the other two members.

On November 1, 1996, more than 90,000 American workers had qualified for a retraining programme by losing their jobs through direct NAFTA impact. The actual job loss, however, is considered to be even greater since it has to be assumed that many laid-off workers were unaware of the retraining programme or could not prove that they lost their jobs due to the NAFTA Agreement. NAFTA is also being blamed to have failed to improve the working conditions in Mexico. Numerous complaints regarding violations at three Mexican and one US manufacturing plants had been filed, but without any result for any of the workers involved because a major flaw of the NAFTA Agreement allows trade restrictions only in the case of violations related to minimum wage, health and safety, and child labour. Violations of core labour rights, including freedom of association, strikes, and collective bargaining, can only lead to consultation. In addition, complaints can only be filed against a government while the corporate lawbreakers do not have to fear any sanctions.

Last but not least, NAFTA's North American Development Bank, which was designed to provide low-interest financing for environmental projects, did not approve a single project within the first two years after the foundation of NAFTA. This was in strong contradiction with the promise of the US government that the bank would inject up to $3 billion in the border region. Moreover, NAFTA's environmental threats reach far beyond the US-Mexican border. In fact, the agreement locks in an unsustainable structural adjustment model that the World Bank and IMF began imposing on Mexico in the early 1980's. This model measures success by increases in natural resource extraction. V. Current NAFTA Issues Two current issues connected to NAFTA shall be addressed: Firstly, the idea of business-oriented sectors in the USA to ease immigration restrictions on Mexico. Secondly, the very recent decision of US President George W. Bush to impose tariffs of 8% to 30% on a wide variety of imported steel products for a period of three years.

1. Immigration: Since 1970, the number of Mexicans living in the US has risen from around 800,000 to more than 8 million, half of them illegal. This immigration from Mexico is only part of an immigration wave that pushed America's foreign-born rate to 11.2% of the total population in 2002 up from 4.7% 30 years ago. However, easing immigration for all foreign immigrants is not an issue in the US. Instead, the discussion is focused on the immigration from Mexico, more precisely about an amnesty for illegal Mexicans living in the country. At first, one might think that this is an issue connected only to Mexican-US relations and has little to do with NAFTA.

However, it should be kept in mind that both countries are NAFTA members. Moreover, the economic success of NAFTA and the entailing closer relationship with Mexico are the main reasons for the current discussion: Many business-oriented sectors in the USA have seen that they benefited from getting into business relations with Mexico on the basis of the agreement. Not least, the boom of the US economy over the past 10 years (regardless the current slowdown) has led to a significant increase in demand for the type of labour that Mexico provides. All this has, indeed, strong implications for NAFTA: On one hand, if the USA ease their immigration restrictions, Canada might have to follow to be able to further tap the cheap labour market. On the other hand, granting amnesty to illegal Mexican immigrants means that they would receive a Green Card. Since all US residents are free to travel across the Canadian border, this might mean an immigration wave of Mexicans to Canada as well.

Most importantly, however, easing immigration restrictions on Mexico could symbolize a first step towards widening the scope of the NAFTA agreement: towards a free flow of goods and people, meaning getting one step closer to a North American Union. 2. Steel Tariffs: On March 5, 2002, US President George W. Bush announced that he would impose tariffs of 8-30% on a great variety of imported steel products for a period of five years. This is seen as a reaction to the fact that roughly 30 American steel companies have filed for bankruptcy between 1998 and 2002.

The tariffs are in contradiction with current WTO regulations and are therefore likely to cause problems between the NAFTA and the WTO / GATT. Part I, Article 103, Paragraph 2 of the NAFTA Agreement defines the relations of NAFTA with other agreements, such as the GATT: "In the event of any inconsistency between this agreement and such other agreements, this agreement shall prevail to the extent of the inconsistency, except as otherwise provided in this agreement". Although the formulation of the relations seems to be clear enough, it has already caused several problems in the history of NAFTA because both the NAFTA and WTO Agreements are written agreements between states governed by international law, and therefore "treaties" within the definition prescribed by the Vienna Convention on the Law of Treaties (VCLT). The VCLT provides that when states are parties to treaties governing the same subject matter (as in the case of WTO vs. NAFTA), the later treaty takes precedence over the earlier. The NAFTA, however, entered into force on January 1, 1994 and the WTO on January 1, 1995. This suggests that the WTO Agreement prevails over the NAFTA Agreement, which is in clear contradiction with the part of the NAFTA Agreement cited above.

As a result, the tariffs imposed by Bush are likely to cause legal problems between both organisations now and in the future. VI. Conclusions & Recommendations It has become apparent that the foundation of NAFTA has benefits as well as disadvantages. The benefits are clearly located in the economic sector, especially in the trilateral trade.

The disadvantages of the agreement, however, can be found mainly in the political / legal sector. Since, economically, NAFTA works well, the authors of this report do not hold it necessary to give recommendations in this regard. Instead, we will propose some improvements to the political / legal sector: 1) At this moment, the primary beneficiaries of the NAFTA Agreement are large enterprises. The environment and the welfare of workers are largely being neglected. Therefore, we recommend shifting the focus away from the current beneficiaries towards an approach to economic integration that makes workers and communities the primary beneficiaries of NAFTA while keeping in mind environmental issues. This should be supported by allowing for more transparency in the decision-making process of NAFTA officials and a stronger participation of representatives of the affected sectors than before.

2) We also recommend using political means to narrow the gap in income between the three member countries. Unless the gap is narrowed, there will be no way to reduce the incentives for US enterprises to move to Mexico, hence there will be no way to improve working conditions and environmental protection. 3) Moreover, Mexico's debt obligations should be reduced. Just like in other Latin American countries, Mexico has to use much of its national income to repay debts and pay interest. Unless this is changed, the Mexican government will continue to attract short-term foreign investments. Moreover, it is likely that the government will do so by allowing further violation of worker rights and further exploitation of the environment.

4) Last but not least, we recommend using stronger penalties for violations of labour and environmental laws. We are confident that implementing these propositions would lead to greater economic equality and environmental sustainability throughout the North American continent - an improvement that is more than overdue. In conclusion, however, we agree with Abbott (1999) that. ".. while the NAFTA could certainly do more in the are of environmental protection, the institutional structure created by the NAFTA would seem to be better than the absence of such structure". V.


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