NAFTA In January 1994, the United States, Mexico, and Canada implemented the North American Free Trade Agreement (NAFTA). The goal of NAFTA is to create better trading conditions through tariff reduction, removal of investment barriers, and improvement of intellectual property protection. NAFTA continues to gradually reduce tariffs on set dates and aims to eliminate all tariffs by the year 2004. Before NAFTA was established, investing in Mexico was a difficult process. Investors needed the Mexican Government’s approval and were also required to meet specific investment guidelines. These requirements necessitated investors to export a set level of goods and services, utilize domestic goods and services, and transfer technology to competitors.
Under NAFTA, investors no longer need government approval to invest and are treated as domestic investors. NAFTA has also increased intellectual property rights and allowed companies to obtain patents in Mexico and Canada. In the past, companies were hesitant to export research and development intensive goods; with increased intellectual property protection, however, exports of these goods has shown a definite increase. As a result of better trading conditions, exports and imports of most other goods have increased along with the research and development intensive goods. In Mexico, the elimination of investment barriers has allowed investment to expand. Increased trading and investment has then created many jobs, raised the Gross Domestic Product, and lowered consumer prices.
The macroeconomic principles defined in Economics 103 relate to NAFTA’s impact on aggregate supply and demand, employment, investment, and their effects on national income. The free trade established by MERCOSUR also involves countries within South America. MERCOSUR, the Southern Common Market ( Mercado Common del Sur) was established in 1991 after a series of other free trade treaties failed to meet the standards of the countries involved. It is set up on the basis of free trade zones and eventually to lead to a common market. Before MERCOSUR there was ALALC, the Latin American Free Trade Association. It was formed in 1960 and set up free trade zones through the periodic negotiations between the members of the association. ALALC ended in the 1970’s due to these negotiations because they were left to the discretion of the countries involved and unfair practices started to occur.
After ALAC, came ALADI, the Latin American Integration Association. Founded in 1980, it established economic preference zones instead of free trade. This encouraged economic growth and increased actions and agreements between countries that previously had no connections. In 1986 Argentina and Brazil signed a Treaty for Integration, Cooperation, and Development which was originally set up to remove tariff barriers and tie together the macroeconomic policies of the two countries. This Treaty is what led to MERCOSUR. MERCOSUR is a process of integration to form a common market on the foundations of open regionalism. In March of 1991 Paraguay and Uruguay joined MERCOSUR and most recently Chile became a part of the market in 1996.
The goals set by the agreement are to create free transit of production goods and lifting of non-tariff restrictions on transit goods. It was set up to adopt a common trade policy with nations that are not a part of the market and to set up a fixed common external tariff for all to follow. There are quite a few other goals that was set by MERCOSUR including a clause that states that the countries involved will be able to adjust their laws for the purpose of strengthening the agreement. The main point of MERCOSUR is to set up free trade among South American countries and to encourage new countries to join (americasnet.com). Another related trade agreement conveying the benefits of international trade is the General Agreement on Trade and Tariffs (GATT). A trade agreement that conveys the positive outcomes of international trade is the General Agreement on Trade and Tariffs (GATT). It was created in 1947 and like NAFTA promotes international trade through the reduction of tariffs.
Today, GATT encompasses over one hundred countries and 90% of the world’s trade goods (Sabir 1). There have been eight different versions of GATT, each resulting in a new trade agreement. The most recent is referred to as the Uruguay Round and is one of the largest and most comprehensive trade pacts in history (Deng 1). The Uruguay Round Agreement cuts tariffs by one-third, increases coverage for textiles, clothing and agriculture and creates a new World Trade Organization (Congressional Digest 258). The WTO settles dispute settlements, regulates the policies agreed upon and reviews countries’ trade practices and policies.
In addition, the Uruguay round proposes reductions in nontariff protective barriers to trade (Gottheil 350). The Uruguay Round and WTO make up an important part of GATT. GATT as a whole is based on principles that ensure all participating countries receive benefits. These principles include nondiscrimination, protection of domestic industries and provision of stable basis for trade (Congressional Digest 258). With such a solid foundation, the policies of GATT have taken force. Much like NAFTA, GATT proposes to increase trade through the reduction of tariffs.
However, GATT is more inclusive of the international economy. As NAFTA, MERCOSUR, and GATT establish free trade throughout the Americas and other parts of the world, the European Free Trade Agreement (EFTA) represents countries throughout Western Europe. It was initially formed in 1960 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the UK. The overall objective of the EFTA and of these founding states was to remove trade barriers throughout Western Europe, such as import tariffs and quotas, and to uphold open practices in world trade (EFTA Page). The framework of the EFTA has changed significantly since its initial founding as many member states have come and gone along the way. In 1972, the existing EFTA countries signed free trade agreements with the European Union, thus eliminating import tariffs on industrial products.
Since then the EFTA has worked to strengthen its relationship with the European Community. The current constituents of the ever changing EFTA include Iceland, Liechtenstein, Norway, and Switzerland (EFTA Page). The free trade agreements established by the EFTA cover intra-EFTA trade, trade with the European Union, and free trade outside of the EFTA or EU. The EFTA is currently in the midst of procuring free trade agreements with countries in Central and Eastern Europe and even with other countries around the world (EFTA Page). These free trade agreements serve to promote unified movement within the EFTA’s economic relationships and to strengthen Europe’s international trade alliances.
According to EFTA web page, free trade established by the EFTA is an, “essential process in the continuous building of economic, social, and political ties between the countries of Europe and thus enhancing our common objective of closer European integration” (EFTA Page). Agreements with the EFTA reduce tariffs between countries, enhance and allow for more stable foreign investment, and support the removal of trade barriers. In establishing all of these rights, the EFTA hopes to create an environment that is supportive of entrepreneurship, competition, and economic activity within its various market structures (EFTA Page). Analysis Free Trade agreements are prevalent throughout the world, each representing trade within a particular region. The success of free trade is unique to each individual trade organization.
NAFTA, MERCOSUR, GATT, and the EFTA, overall, have created founded many positive aspects in international trade. The free trade that NAFTA has established among the United States, Mexico, and Canada has greatly benefited the U.S. economy. During the years from 1994 to 1997, U.S. trade with Mexico and Canada rose 44 percent.
This extensive growth is accredited primarily to the reduction of tariffs. As tariffs were lowered, U.S. goods became cheaper and more competitive in Mexican and Canadian markets, and at this lower price level the quantity demanded of U.S. goods increased. On the attached graph, as the price level drops from A to B, the quantity demanded increases from C to D; it becomes less expensive for U.S.
firms to supply goods to Canada and Mexico as the supply curve shifts from AS to AS’. In order to meet the new demand, the firms must hire new workers and increase investment. Between 1994 and 1997, 90 to 160 thousand jobs were created in the U.S. due to the increase of trade with Mexico, and 2.4 million jobs were dependent upon trade with Mexico and Canada. The increase in employment and investment then leads to increased national income. The work of NAFTA has also served to benefit Mexico’s economy; in accordance with the United States’ economy, Mexico’s exports have increased, more than doubling since 1993.
The elimination of investment barriers has caused a dramatic rise in foreign investment from four billion in 1993 to ten billion dollars in 1998. NAFTA has enabled Volkswagen, IBM, and the textile industry to seek labor and materials in Mexico. In 1994, a Canada-based entrepreneur invested four million dollars in a metal-stamping plant. The plant is now a major material suppler for Volkswagen although it was originally intended to employ only 130 people. The plant currently employs 1,300 workers and generates 57 million dollars in sales each year.
NAFTA has also allowed IBM to create plants in Guadalajara that would otherwise have been built in Asia. As a result, the exports of IBM de Mexico have increased from 350 million to 2 billion dollars in five years and the increased exports have created over 270 jobs. Mexico’s textile industry, too, has grown as a result of NAFTA, in 1996 overtaking China to become the largest supplier of textiles to the United States. U.S. mills invest hundreds of millions of dollars to build plants in Mexico as an effect of the reduced tariffs and shipping time. It takes only eighteen hours to ship goods to the Mexican border, while it takes twenty-one hours to China. Increased investment and exports have created jobs and increased GDP.
In 1998, Mexico’s economy grew 4.5 percent and economists predict that it will grow an additional 2.5 percent in ’99. Free trade under NAFTA has also encouraged international specialization, the production of only the goods that a particular economy can produce most efficiently. If the U.S. for example, is efficiently manufacturing cars and Mexico, producing corn, then the U.S. should produce only cars and Mexico, only corn.
They are more efficient if they each produce at their highest output, and trade for other goods. International specialization increases efficiency, lowering consumer prices; consumers no longer have to pay for inefficiently produced goods. The benefits of NAFTA are therefore, increased employment, raised national income, and lower consumer prices. MERCOSUR, again like NAFTA, has had an overall positive influence on free trade throughout the Americas. The economic goal of MERCOSUR is to be able to coordinate the macroeconomic and sectional policies of the countries involved in relation to foreign trade and several other common markets. It also ensures free trade competition among the nations with in the agreement.
It was formed to improve the economies by making them more competitive and efficient (Embassy of Uruguay). The time line goal of MERCOSUR was to start with Argentina and Brazil in 1995 to reduce tariffs some and in 1996 to reduce tariffs by 25 percent and increase each year by another 25 percent until in 1999 tariffs were 100 percent gone. Because Paraguay an …