NAFTA (North American Free Trade Agreement)

  • Created by: FloraD
  • Created on: 04-06-16 12:50

Law of Comparative Advantage and Economies of Scal

THE LAW OF COMPARATIVE ADVANTAGE: countries should specialise in producing and exporting only the goods that they can produce at a lower relative cost than any other countries. Where a coutntry is more efficient in the production oftwo commodities than another countrey, it should specialise in the commodity in which its comparative advantage is greater.

ECONOMIES OF SCALE:  The greater the scale of production the lower the avergae costs of producing each unit. Fixed costs such as heating and lighting are not likely to increase if production goes up within the same factory; nor will more security or cleaning staff be needed.

Practical free trade policies always include:

  • The removal of tariffs
  • The establishment of trade rules e.g. anti-dumping procedures
  • The deregulation of services e.g. the USA frequently considers state services to be a subsidy to employers - therefore unfair
  • The treatment of foreign investment as though it were national
  • The maintenance of intellectual property rights - copyright regulations are strictly enforced
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NAFTA came into effect in 1994 - The USA, Mexico and Canada became a single, giant, integrated market of almost 400 million people with $6.5trillion worth of goods and services traded annually

Mexico is the world's second largest importer of US-manufactured goods and the third largest importer of US agricultural products.

Before NAFTA, Mexican tariffs averaged about 250% compaed to US duties. After the pact, about half of the tariffs on trade between Mexico and the USA were eliminated. 

By far the most important thing has been the relative decline in US international competetiveness - central to this was the rise of Japan and Europe as serious rivals in the US domestic market. 

Free trade meant that the USA now faces competition from the revitalised economies of Western Europe and Japan - it was losing on its traditional bedrock industries: cars, consumer electronics, textiles and apparel.

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The NAFTA partners of the USA, Canada and Mexico now purchase 27% of US agricultural exports.

Two-way agricultural trade between the USA and Mexico has increased more than 55% since 1994, reaching more than $11.6 billion in 2004.

By July 2002, an official 400,000 people had claimed for relief on the special programme of benefits the governement had allowed, because it expected some job losses.

One and a half million jobs were lost in manufacturing,while service employment grew by over 10 million.

Average wages in the service sector are only 77% of those in manufacturing.

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Maquiladoras are US-owned assembly plants in Mexico that employ mexican labour to make products mostly for export back back to the USA.

In 1965 the Mexican goernment set up a Border Industrialisation Programme, which created export platforms for US companies on favourable terms.

Aproximately 2100 maquiladora plants produce electronic goods, auto parts, chemicals, furniture, machinery and other goods.

600,000 workers are employed in the maquiladoras and 90% of the plants are US-owned - Ford Motors, Kodak, IBM & PepsiCo

The reduction in employment in US manufacturing has been significant, as the growth of manufacturing employment in Mexico.

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Disappointing growth?

The Mexican government has proclaimed NAFTA  success and for some Mexicans it clearly has been...HOWEVER:

  • Growth overall has been disappointing at only 1% per annum through the 10 years of NAFTA.
  • Most profits go to US-owned companies.
  • Disappointing 'trickle down' of these benefits to nation as a whole
  • Mexico now imports much of the huge US corn surplus: 8.8 million tonnes in 1993, 20.3 million tonnes by 2000
  • Mexican government pursuing a large scale programme of government social engineering aimed at forcing Mexico's rural population off the land and into the cities
  • Funding on farm programmes dropped from $2 billion in 1994, to $500 million by 2000
  • Rural depopulation has continued, as has the pressure to migrate to the USA.
  • For the first 7/8 years the maquiladoras boomed, but in the last few years, an estimated 200,000 maquiladora jobs have left Mexico for China, were workers are paid one-eighth the Mexican wage.
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The Formation of NAFTA

The formation of NAFTA in the 1990s was hastened by three factors:

  • The ever-increasing economic challenge from Western Europe and Asia
  • The completion of the internal market of the EU and the establishement of the European Economic Area in 1993
  • Growing concern that nations left outside trade blocks would be commercially disadvantaged


The first significant move was the Canada-United States Automotive Products Trade Agreement (Auto Pact) + the Canada-United States Free Trade Agreement (FTA or CUSTA)

In 1990, Mexico formally requested a free trade relationship with its northern neighbours - Mexico, whose economy was less than 5% of those of the US and Canada combined.

Never before had a trade bloc included membersof both the developed and developing worlds.

When NAFTA was established in 1994, its 390 million consumers (with a combined GDP ofover $7.6 trillion) became the world's largest trade bloc.

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The NAFTA Agreement

The 1994 agreement planned for:

  • All tariffs on goods qualifying as North American to be phased out within ten years - special rules applied to key sectors such as agriculture, energy, textiles and clothing
  • Trade in services would also be facilitated
  • Other provisions would give relief or protection to other 'sensitive industries' + outline technical and environmental standards

Safeguards in NAFTA:

  • An annual review of any suspected examples of dumping of cheap products by one member into another's country
  • Monitoring the enforcement of NAFTA - related regulations such as environmental standards, minimum wages, child labour and health and security at work 
  • Fines of up to $20 million could be imposed
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Differences between the EU and NAFTA

The NAFTA agreement is limited to trade and thus does not:

  • permit free movement of labour
  • attempt to redistribute wealth to poorer regions within its boundaries
  • seek to establish a common currency
  • seek political union
  • aim to establish a customs union with common external tariffs
  • affect existing border controls
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The impacts of NAFTA on the USA

  • Within the USA the strongest supporters of NAFTA have been multinational corporations
  • Trade unions have long feared that free trade with Mexico would result in wage and benefit reductions if US firms were to remain competitive against cheap Mexican labour
  • In 1999 the avergae factory worker in the US earned more than eight times as much as his Mexican counterpart
  • Suggested there would be more sever environmental degradation in Mexico, where environmental law are lax and often not enforced
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The impacts of NAFTA on Canada

  • Canadian exports to the US and Mexico increased 80% and 65% respectively in the first five years of NAFTA
  • US investment in Canada reached $147.3 billion in 1998 - Investment from Mexico reached $464 million in 1998
  • More than one million new jobs created
  • 68% of foreign direct investment into Canada came from the US and Mexico
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The impacts of NAFTA on Mexico

  • Supporters of NAFTA in Mexico say the new market is forcing Mexican companies to adopt higher foreign standards and business practices
  • It is now impossible for the country to return to the disastrous protectionist policies of the past
  • Mexico trades at reduced or zero tariff with over 60% of the world
  • Over 88% of exports go to the US, homwever, while total US imports grew by 110.3% during the 1990s, Mexican exports to the US grew by 252.5%
  • Mexican farmers have been v. badly hit - most farm plots are less than 10 hectares and operate with very modest equipment
  • They now have to compete with large-scale high technology American and Canadian agribusiness
  • Due to impact of cheaper wheat from the US and Canada, farmers have had to turn to buts, peaches, aspargaus, chickpeas, cucumbers, watermelons and olives
  • Critics say that Mexico does not have an industrial policy apart from promoting maquiladoras
  • Less than 3% of maquiladoras input is produced locally
  • Employment in maquiladoras in now 1.3 million compared with 546,000 when NAFTA began
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