North American Free Trade Agreement - Trade Essay Example

North American Free Trade Agreement

In November 1993 the U - North American Free Trade Agreement introduction.S. Congress approved the North American Free Trade Agreement (NAFTA). Its passage concluded two and one half years of policy negotiations between Mexico, Canada, and the United States designed to increase trade by expanding market access and reducing investment barriers. NAFTA has ushered in a new era in Canadian- the United States -Mexican relations, adding a trilateral dimension to relations that were previously managed on a bilateral basis. Canada’s involvement with U.S. trade as outlined in the U.S.-Canada Free Trade Agreement of 1988 resulted in Canada becoming the third party to the NAFTA negotiations in 1991. NAFTA is a milestone in the affairs of the continent and in international trade. The first formal arrangement of any kind between Canada, the United States, and Mexico, it is also the first trade pact including countries of such disproportionate power and levels of development. In global economic terms, NAFTA furthers a trend toward regional economic arrangements and establishes a precedent for cooperation between developed and developing countries. For Canada the agreement represents a reversal of long-standing efforts to resist the embrace of the powerful neighbor. This paper is not an abstract debate but rather one that centers on the effects free trade has already had. The changes in basic values among the publics of Canada are transforming economic, social, and political life, giving this country an increasingly compatible cultural perspective. In the long run, these changes have important implications for economic and political cooperation. The work will review the changes in policy orientation and priorities in Canada, and illustrate how Canadian policy remained defensive and reactive in the face of the NAFTA initiative.

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North America is steering a new course. Since the mid-1980s, the United States, Canada, and Mexico have been moving toward continental economic integration, culminating in the establishment of NAFTA in 1994 (Roberts & Wilson 1996). During the past decade one of the most divisive political debates in Canada focused on NAFTA. We experienced a highly polarized debate that was widely discussed in forums, conferences, and the media. Many people and organizations were wary of the consequences of the NAFTA on the social fabric of Canada, among which was the labor movement. Even though the agreement is now in its twelfth year, feelings are still very much alive on this issue.

NAFTA reduced barriers to trade and investment between Mexico, the United States, and Canada – three countries of dramatically different sizes and levels of development. The asymmetries of power and interdependence in patterns of North American trade and investment where well documented and have long been a central preoccupation for policy makers in both Canada and Latin America who where used to operating in the shadow of U.S. power. However, Canadian and Latin American foreign policy makers have abandoned efforts to find alternatives to closer economic integration with the United States and have joined the hemispheric free trade bandwagon.

The arguments for and against NAFTA must be considered in conjunction with the effect that NAFTA hade on the previously negotiated Canadian U. S. Free Trade Agreement. The U.S./Canadian/Mexican Free Trade Zone became the world’s largest free market with a total output of $6 trillion and a total trade of $225 billion (Konrad 1995). While Mexico is Canada’s largest trading partner in Latin America, bilateral merchandise trade between the two countries in 1992 was $2.9 billion annually. Canada is the largest trading partner of the United States. Total bilateral trade in goods and services was $212.7 billion in 1990, up from $169 billion in 1988 or a $47 billion increase in four years (Konrad 1995).

During the 1980s Canadians were confronted with escalating prices due to the lack of competition occurring within its borders. Considerable benefits could be realized through specialization by allowing Canadian firms to enjoy scale economies and by enhancing competition in Canada. The United States stood to gain as Canadian tariffs against American products were higher in virtually every product category than American tariffs were against Canadians. Free trade meant the eventual elimination of these barriers.

Sunder Magun, of the Economic Council Of Canada, recognizes Canadian gains via NAFTA. He claims that each country has a unique pattern of international specialization and built upon its strengths. Canada benefited from direct export gains in Mexican markets, trade diversion gains in Mexico, and productivity gains resulting from industry rationalization across the three economies. Gains accrued to Canada when real incomes of Mexicans rise, generating increased demand as a result of NAFTA.

According to a joint communication issued by the participating countries, the goal of the proposed NAFTA was to eliminate obstacles to the flow of goods, services, and investment, provide for intellectual property rights protection, and establish a fair and expeditious dispute settlement mechanism. While the proposed NAFTA addressed these three major areas, much of the debate centered on workers and environment, which constituted the “fallout” of the trade sanctions. Critics claim that U.S., Mexican, and Canadian workers were thrown into competition with each other to attract investment by offering the lowest wages and the least restrictive regulations. Overall standards declined as competitive pressures induced companies to move to lower-wage, lower-standard areas, driving down wages and funding available for higher-standard areas. In this scenario, the United States and Canada would have to lower standards, taking two steps back.

The NAFTA negotiations have become a vehicle for reopening the bilateral FTA, enabling the United States to extract concessions that it did not achieve in the original round of negotiations. High on the U.S. hit list are restrictions on Canadian farm marketing boards such as the Canadian Wheat Board, which gives Canadian farmers some protection against price gouging by the giant private conglomerates that dominate the international grain trade; further concessions from the already beleaguered film, recording, publishing, and broadcast industries; and perhaps most important, inclusion in NAFTA of an intellectual property code to entrench the monopoly protection for corporate property such as patents and copyrights. If knowledge-based production is the key to competitiveness and this knowledge can be privately appropriated and monopolized for long periods of time, this is an important advantage for U.S. corporations that now hold the vast majority of patents in North America. Moreover, a NAFTA code serves as the model for the intellectual property regime that the United States wanted to have inserted in GATT. In the first round Canada made a number of concessions in this area but balked at the last moment at going all the way with U.S. demands for a code that completely prohibited the compulsory licensing of patents.

Martin concludes that by participating in the process Canadians protect their own interests within the NAFTA while exploring the possibility of gaining preferred access to the potentially dynamic Mexican market (Trigueros 1994). Their involvement also permits them to reevaluate issues that were not fully negotiated in the U.S.-Canada FTA and permits them to diversify their trade relations, positioning them for global competitiveness.

According to Cavitt, the gains from NAFTA included greater market access, more secure market access, and freedom for market forces to work (Dent 1995). The United States attained elimination of Canadian tariffs, which averaged 9.9 percent and were among the highest in the industrialized world. The United States also attained a 10 percent growth in the size of its domestic market, increasing from $250 million to $276 million. Canada also achieved greater market access; however, U.S. tariffs averaged only a 3.3 percent on dutiable imports from Canada (Harris 2001).

Despite the glowing reports, NAFTA has met with harsh criticism in Canada. Sentiment is running 2 to 1 against the broader NAFTA agreement. While the business community was almost unanimous in its support for the Canada-U.S. deal, opponents built a broad-based coalition among trade unions, political parties, nationalists, the artistic community, and intellectuals. Both the Liberal party and the other main opposition party, the New Democratic party, were against the treaty as it now stands. Many of these critics are using NAFTA as a vehicle for attacking the existing U.S.-Canada Free Trade Agreement.

According to Bruce Campbell, research fellow at the Canadian Center for Policy Alternatives, the Canadian labor movement’s position on NAFTA is that an economically integrated North American economy based on the model already in place, the NAFTA, is undesirable (Sampson & Woolcock 2003). Canadian workers envision NAFTA with low-wage maquiladora factories with their lack of effective unions, workplace health and safety regulations, and other labor and environmental standards – as an unfair economic playing field that can only have a negative effect on jobs and living standards. They see it exacerbating a process, entrenched in the NAFTA, of lowest common denominator competition or competitive poverty among workers and communities.

Campbell claims that the Canadian labor movement opposition to NAFTA is based on the following expectations: (1) that the essential terms and conditions of the NAFTA remain in place in a trilateral accord; (2) that the U.S. government extracts further adverse concessions from Canada; (3) that the free trade-driven restructuring of the Canadian economy, most visibly in manufacturing, and the resulting job losses are exacerbated; (4) that the harmonization effect of free trade or downward pull on Canadian wages, labor, social, and environmental standards quicken; and (5) that NAFTA reinforces the process of economic and political disintegration currently underway in Canada (Sampson & Woolcock 2003).

Canadian labor critics see NAFTA as prolonging a very destructive and painful economic restructuring process that has accelerated dramatically. Throughout the 1980s employment in Canadian manufacturing remained constant. There was drop of 270,000 jobs during the 1981-82 recession but those jobs eventually came back. Beginning in 1989 the Canadian manufacturing sector shrank by 435,000 jobs net, or 22 percent of the total workforce (Wallace & Alasdair 2000). Manufacturing employment has dropped to just 15 percent of total Canadian employment, the lowest level of any industrialized country. To compare this hollowing out of Canadian manufacturing with what has been happening in the United States, the U.S. manufacturing workforce fell by only 4.6 percent during the same period. Those who say that this is only a cyclical downturn should examine the figures on plant closings in Ontario, the manufacturing heartland of Canada. In 1981-82 percent of workers who lost their jobs did so as a result of permanent plant closings. In the free trade era 65 percent of the lost jobs have been due to permanent plant closings.

Thousands of Canadian manufacturing jobs have been lost as corporations have relocated plants in the U.S. Sun Belt states and the maquiladora to take advantage of low wages, weak labor and inadequate environmental laws (Arndt 2003). James Stanford, in a study published in January 1992 by the Canadian Centre for Policy Alternatives entitled Going South, Cheap Labor as an UnFair Subsidy in North American Free Trade, shows that the right-to-work laws in the Deep South are deliberate government restrictions on labor practices that have had the effect of suppressing or subsidizing the wage costs of manufacturers there (involuntarily paid for by the workers) by 15 percent of their total wage costs. Stanford concludes that this constitutes an unfair subsidy and that the Canadian government should retaliate by imposing a countervailing duty on all manufactured imports from states with right-to-work laws.

The question of jobs is important because during the free trade debate the Conservative government and proponents claimed that hundreds of thousands of jobs would be created under the NAFTA. Econometric models predicted increases in employment and income with great certainty and precision. They greatly oversimplified a complex economic reality, narrowly defined the NAFTA as being essentially about tariffs, and made unrealistic assumptions about what would happen to such variables as productivity and exchange rates under free trade. Nevertheless, these models carried an air of authority that convinced many people to ignore the naysayers and doomsdayers and support free trade as a creator of jobs and prosperity for Canadians. Ironically, as the destructive impact on jobs became increasingly apparent, proponents reversed themselves, saying that one could not say with any degree of certainty what role the FTA was playing, or that it was too early to determine its role.

Labor critics claim that NAFTA exacerbated the so-called harmonization effect. The Conservative government and its corporate backers came into power with an agenda to dismantle the Canadian social contract (Medicare, unemployment insurance, education, labor legislation, etc.) and the supporting tax structure, and remake it in the image of the leaner, meaner neighbor to the south. But Canadians generally supported their social contract and did not want it to meet the same fate as the weaker U.S. social contract, which had taken an enormous beating under Nixon and Reagan. The Conservative government therefore had no political mandate to change it.

The final lens, through which labor critics view the desirability of NAFTA, is the economic and political disintegration of Canada that is moving with great speed in the wake of free trade. The Canadian economy was created largely in defiance of the north-south market forces. With most of Canada’s small population spread in clusters along the southern border, the creation of a distinct national economy integrated along an east-west axis was a major accomplishment. Canada accomplished this by building a transportation/ communication infrastructure; ribbons first of steel, then asphalt, then air and fiber optics. It created a national market through tariff and other policy tools. It created a system of agricultural supply management to achieve relative food security. It built a national public broadcasting network and other pathways of cultural expression as a counterweight to cultural onslaught from the south. It built a network of shared values embodied in a system of financial transfers to the poorer regions, and a social safety net comprising basic rights of citizenship. In all this, government as economic regulator and as a direct player in the economy has played a critical role.

We see increasing competition from U.S. firms, as the FTA gradually took effect. But NAFTA is just a part of a much more complex situation. It must be kept in mind that NAFTA was implemented in the context of the increasing globalization of markets, and it is difficult to disentangle the relative effects of each. The NAFTA acted as a facilitating mechanism in this process of globalization. In the short run, therefore, it had an effect similar to that of an “accelerator.”

Morley Gunderson and Anil Verma conclude that little systematic analyses of the impact of free trade on the broader area of labor relations in general or on the collective bargaining agreement in particular has been conducted (Arndt 2003). They maintain that the legislative and regulatory mechanisms for dealing with the adjustment consequences of free trade were affected in an indeterminate fashion. On the one hand, the adjustment consequences increased the need for legislation and programs in such areas as advance notice, severance pay, seniority for layoffs and recalls, subcontracting, successor rights, wage claims under bankruptcy, retraining and relocation, and income support programs like unemployment insurance. As well, there was pressure to downsize through such mechanisms as early retirement, attrition, worksharing, and leaves of absence. There was continued pressure for wage concessions and breaks in traditional pattern bargains to gear settlements to the affected organization’s ability to pay in a particular situation. The upside adjustment consequences put pressure on adaptability and flexibility to meet the rapidly changing needs and skill shortages. This implied fewer and broader job categories, multiskilling for a variety of tasks, retraining provisions, and a deemphasis on seniority as the main criterion for promotion.

On the other hand, free trade made it more difficult to institute or expand programs like these because it is more difficult to pass their cost on to employers who can more easily relocate to areas where there are minimal regulations, and export to areas where there is more costly regulation. This is part of the idea that competitive pressures on the product market side lead to a “forced harmonization” of laws and regulations in the labor market. This occurs because under free trade, businesses can more easily invest and locate in areas of minimal regulatory cost and export to the areas of more costly regulation. Jurisdictions increasingly competed to attract and retain business by offering a regulatory climate that is conducive to business. In the policy debate over these issues, the relative power of employers increases because of the enhanced “threat effect” that greater investment and location decisions carry.

Automobiles and automobile parts are key economic sectors in Canada, with a high percentage of Canadian manufacturing jobs linked directly or indirectly. The auto industry in Canada constitutes a significant volume of trade with the United States. U.S. automotive exports to Canada and Mexico totaled $28.5 billion in 1991(Wallace & Alasdair 2000). Similarly, automobiles and automotive parts are the largest component of manufactured trade between the United States and Mexico. The United States exported $5.7 billion in autos and parts to Canada in 1991 out of a total $33 billion in exports. NAFTA lowered Canadian tariffs on autos from 20 percent to 10 percent immediately, and then to zero over ten years. Tariffs on most auto parts were lowered to zero within five years. NAFTA mandates tough rules of origin, specifying that vehicles must contain 62.5 percent North American content to qualify for NAFTA tariff preferences. This increased percentage aided in preventing “screwdriver” assembly plants using insufficient North American content from benefiting from NAFTA tariff cuts. The 62.5 percent North American content requirement is considerably more than the 50 percent required by the U. S.Canada Free Trade Agreement.

NAFTA contains tracing requirements so that individual parts can be identified to determine the North American content of major components and subassemblies (e.g., engines). This strict rule of origin is important in ensuring that the benefits of NAFTA flow to firms that produce in North America.  NAFTA eliminated over ten years requirements that automakers supplying the Canadian market produce the cars in Canada and buy Canadian parts. It eliminated mandatory export quotas and other performance requirements previously imposed on foreign-owned automotive manufacturing facilities in Canada and eliminated Canadian import restrictions on buses and trucks within five years. These provisions resulted in increased demand in Canada for U.S. autos and auto parts.

U.S. and Canadian firms with existing joint ventures were permitted to obtain 100 percent ownership by 1996; new entrants to the market could obtain a majority stake in Canadian firms by 1998 and 100 percent ownership by the year 2000. New entrants started their own wholly owned firms in Canada immediately, subject to certain size limitations in effect until January 1, 2000. U.S. insurance companies sell cargo insurance, and reinsurance on a cross-border basis in Canada. They may also sell life, health, and travel insurance to Mexican residents who come to the United States.

NAFTA eliminates discriminatory restrictions on U.S. and Canadian sales to and investments in the $6 billion Mexican market for telecommunications equipment and services. It improved opportunities for U.S. and Canadian exports of enhanced services to Mexico, a market expected to grown from $22 million in 1991 to over $100 million by 1995 (Wallace & Alasdair 2000). NAFTA also improved prospects for exports of cross-border enhanced services, which totaled $27 million in 1990. NAFTA eliminated investment restrictions in most enhanced services immediately, and eliminated all investment and other restrictions on packet-switched services in 1995. NAFTA enabled U.S. and Canadian firms to operate state-of-the-art, private intracorporate communications systems throughout North America with guaranteed access to public communications facilities while doing business in and with Mexico. NAFTA eliminated product standards as a barrier to telecommunications trade by providing for mutual recognition of test data from all competent test facilities in NAFTA countries.

While the debate concerning NAFTA has been waged during the past decade, the critical debate is only just beginning. During the early stages, the debate focused on if negotiations should take place and if so was fast tracking the preferred mode. The debate has moved much further with the realization that increased trade among the three countries is a reality. Today the debate focuses on the rules that the three countries want to play by. Strict proponents would have NAFTA address only trade issues, whereas other groups (environmentalists and labor groups) want to see the inclusion of more regulatory mechanisms for the parties and environment to be affected. The NAFTA agreement affirms the goal of all three nations to promote sustainable development and strengthen the development and enforcement of environmental laws and regulations. Historically investment liberalization has resulted in increased investments and increased exports. Integrated production resulted in Canadian firms being more competitive against European and Japanese producers. Proponents conclude that NAFTA both increased exports and expanded the number of jobs in Canada as Mexico became increasingly reliant on exports. The United States, Canada, and Mexico took “three steps forward” in establishing a trading bloc that became economically competitive in a global society. It is difficult to make any final assessment of the overall effects of NAFTA on the entire Canadian economy. The agreement is still relatively recent and attempts to make an assessment are complicated by the severe recession.

References

Arndt, Sven W. (2003).  “The Pros and Cons of North American Monetary Integration”, North American Linkages: Opportunities and Challenges for Canada, Richard G. Harris, Calgary: University of Calgary Press.

Dent, David W. (1995). U.S.-Latin American Policymaking: A Reference Handbook. Greenwood Press: Westport.

Harris, Richard. (2001). “North American Economic Integration: Issues and Research Agenda,” Industry Canada Discussion Paper, 10, Ottawa: Industry Canada.

Konrad, Herman W. (1995). NAFTA in Transition. University of Calgary Press: Calgary, Alta.

Sampson, Gary P. and Woolcock, Stephen. (2003). Regionalism, Multilateralism, and Economic Integration: The Recent Experience. United Nations University Press: New York.

Trigueros, Ignacio. (1994). “The Mexican Financial System and the North American Free Trade Agreement”, in Victor Bulmer-Thomas, Nikki Craske and Monica Serrano (eds.), Mexico and the North American Free Trade Agreement: Who Will Benefit?, London: Macmillan.

Wallace, Helen, and Alasdair Young. (2000). “The Single Market: A New Approach to Policy”, in William Wallace and Helen Wallace (eds.), Policymaking in the European Union, Oxford: Oxford University Press.

Roberts, Karen and Wilson, Mark I. (1996). Policy Choices: Free Trade among NAFTA Nations. Michigan State University Press: East Lansing.

 

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