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NAFTA.
Term Paper ID:25697
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Essay Subject:
Examines trade creation & diversion theory, barriers, impact of NAFTA & consideration of including Chile in Mexico-U.S.-Canada pact.... More...
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10 Pages / 2250 Words
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Paper Abstract:
Examines trade creation & diversion theory, barriers, impact of NAFTA & consideration of including Chile in Mexico-U.S.-Canada pact.
Paper Introduction:
EXPANDING THE NAFTA TO INCLUDE CHILE AS A MEMBER
Introduction
This research examines proposals to expand the North American Free Trade Agreement (NAFTA) from its present membership base of Canada, Mexico, and the United States to include Chile as a member. The findings of this examination are presented within the contexts of (1) trade creation and diversion, (2) likely effects on the economies involved, and (3) the probable effect on the position of the United States toward further tariff reductions through the World Trade Organization (WTO).
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The next year, this figure slid to $1 1 million; last year, it dropped toabout $94 million" (Ostroff 11). The NAFTA provides for the eventualelimination all tariffs, reduction of many non-tariff barriers, liberalizedinvestment requirements, and a new framework for trade in services betweenthe member countries. In the 199 s, tariffs and quotas are used extensively by bothindependent countries and by free-trade associations. A Look At the Impact of Various Trade Pacts Throughout the Western Hemisphere. Within months ofthe summit, though, the euphoria began to evaporate. Several Latin American countries require companies to share profitswith employees on "a set, pre-tax percentage of profits" (Lazo M24). This barrier is used extensivelyby the Japanese to restrict the entry of foreign goods into that country(Czinkota, Rivoli, and Ronkainen 94). Efforts togive Clinton fast-track authority to begin talks with Chile are stalled,and the specter of an Americas free-trade area is but a flicker" (Ostroff11). World Development Report, 1997. Greater development ofthe country's manufacturing base is required to reduce the dependence onimported goods. During the two years from April 1995 to April 1997, its shipmentshere rose by more than 115 percent on both a volume and dollar basis.Canada's aggregate textile and apparel exports to the U.S. On a broader scale, the Asia-Pacific Economic Cooperation (APEC)forum, which held its first meeting in Seattle, Washington in November1993, represents an attempt to extend freer trade throughout a wider area-the Pacific Basin-than either the EC or the NAFTA (Awanohara and Chanda16). Inthe mid-198 s, the free-trade Reagan Administration imposed direct quotason steel products for all countries (Czinkota, Rivoli, and Ronkainen 86). Canada has benefited from the NAFTA. Instead, however, the United States threatensJapan with the imposition of a 1 percent tariff on luxury automobiles,Japan increases tariffs on American beef, the United States imposespunitive tariffs on Chinese imports, China retaliates against the UnitedStates, and so on and so forth (Sanger A1). This outcome has causedsome dislocations among workers in the United States; however, overallemployment growth has muted these effects. The large and growing Mexican population,however, continues to keep unemployment high in the economy. A. "New Players to Join NAFTA? import trade data shows this shift dramatically. InChile, current law requires the per employee bonus amount be limited to4.75 times the minimum wage. The Canadian fear is that theUnited States would, if it were possible, negotiate bilateral free tradeagreements with all of the countries in the Western Hemisphere, so that theUnited States would be in a position to virtually dictate trade policy inthe Hemisphere, by playing one country off against another. Free-tradeassociations, such as the European Community (EC) and the NAFTA, reduce therestrictions to free trade among member countries. Somebenefits have accrued to Mexico within the context of employment under theNAFTA; however, the unemployment picture in the country remains grim formillions. In some instances (steel,textiles, and apparel), NAFTA rules are more stringent when third countrymaterials are involved (Green 3A). "Trade analysts say it's not surprising that the expected boom in theAndean nations' industry-particularly apparel and textile manufacturing-hasfailed to materialize. This debt stands at67 percent of the country's gross domestic product, and servicing the debtremains a serious problem for the country (World Bank 217). WWD 174 (19 August 1997), 11-12.Sanger, D. A quota also seeks to restrict the flow of goods into a country. High levels of external debt have plagued most developing countriesover the past 2 years, and Chile has not been an exception. "Mexico's and Canada'smakers have had explosive growth since NAFTA went into effect. "The Triad, Reciprocity, and Alliances." Business Quarterly, 55 (199 ), 25-29.World Bank. Labor and compensation laws such as those in Chile will require someadjustment to allow the economy to join the NAFTA. In the absence of a Western Hemispherefree trade agreement, the United States fears that tying arrangementsbetween the EC and Latin American countries will condemn the United Statesto some degree of economic isolation in the twenty-first century. Another type of trade barrier is the orderly marketingagreement. On a Customs basis,these shipments jumped 222.3 percent in the same span to more than $4.7billion. Thus, a small army of unemployed (some) andunderemployed (many) American workers have been created, and the Americaneconomy has been saddled with increased welfare and dislocation costs. "A Precious Commodity." LatinFinance (63), (December 1994), M24- M25.Magnusson, P. Expanding the NAFTA to include Chile as a member Introduction This research examines proposals to expand the North American FreeTrade Agreement (NAFTA) from its present membership base of Canada, Mexico,and the United States to include Chile as a member. E. Likely Effects on the Economies Involved The NAFTA became effective on 1 January 1994. Barriers to trade are obstacles that prevent goods andservices from moving freely between countries. rose 55.7percent between 1994 and April 1997 to about 1.9 billion, and on a dollarvalue these shipments were up 95.7 percent to $2.1 billion in the sameperiod. "The future seemed to be absolutelybrilliant by December 1994, when President Clinton, at the Miami Summit ofthe Americas, pledged to expand the North American Free Trade Agreement,thereby creating a hemispheric free-trade area by 2 5. The big story has to be that Mexico and Canada arethe big winners under NAFTA and have become a magnet, shifting productionthere not so much from the Far East as from South and Central Americancountries. Mexico'stextile and apparel shipments to the U.S. L. Mexico's current economic environment cannot be considered outside ofthe framework of the country's enormous external debt. Mexicolooked to the NAFTA to reduce the country's unemployment rate. There are yet other types of formal trade barriers. This bonus, referred to as the "thirteenth salary," while notmandated legally in Chile, is observed by many (Lazo M25). Socialservices for the unemployed are virtually nonexistent in Mexico. As an example, the mean Canadian tariff on dutiableimports from the United States was 9.9 percent prior to implementation ofNAFTA, while the mean American tariff on dutiable imports from Canada wasonly 3.3 percent (Magnusson 24). "Economic Indicators," Review of the Economic Situation of Mexico 9 (February 1997), 41.Cottrill, K. Economists urge countries to rely on the World Trade Organization tosettle disputes, as opposed to the imposition of trade and tariffrestrictions through law. Corporations may choose to meet the bonusrequirement either through distribution of 3 percent of liquid profits or25 percent of monthly compensation which is deposited into the workers'individual account. The United States has been a strong advocate of free trade(international trade without government erected barriers) since the end ofthe Second World War. New York: oxford University Press, 1997. "Short-Term Paid for Long-Term Gain." Global Trade & Transportation 114 (June 1994), 8.Czinkota, M. Chicago: The Dryden Press.Green, P. Countries resortto the use of trade barriers in an attempt to gain advantages over othercountries, or in an attempt to preclude the gaining of an advantage byother countries over them (Czinkota, Rivoli, and Ronkainen 1 1). Trade Creation and Trade Diversion International trade occurs because of differences in costs ofproduction between countries, and because it increases the economic welfareof trading partners by widening the range of goods and services availablefor consumption. NAFTA membership forChile, however, is no sure thing. "Uncommon Bonds." Far Eastern Economic Review 156 (18 November 1993), 16-17.Banco Nacional de Mexico. Canada had viewed with alarmthe loss of companies, production facilities, and jobs to the United Statesin the wake of the Canada-United States Free Trade Agreement ("Stop NAFTA"3). In addition to profit-sharing distributions, law and custom in mostLatin American countries dictate the payment of bonuses to employees whichare the equivalent of one month's compensation at the end of each year(Lazo M24). Under the Reagan Administration, the United Stateswas possibly the strongest advocate of free trade in the world.Nevertheless, industrial and labor interests in the United States wereconcerned about imports in several industries, and in the early-198 s, thefree-trade Reagan Administration responded to these concerns by negotiatingvoluntary import quotas with the Japanese with respect to automobiles. InNAFTA's first year, 1994, the Andean nations in aggregate shipped $12 .7million worth of women's and girls' cotton and manmade fiber nonknit suits. R., Rivoli, P., and Ronkainen, I. Chile,however, has acted with greater effectiveness than have most otherdeveloping countries to moderate the potentially devastating relationshipbetween external debt and gross domestic product. "In Trade Dispute with Japan, Both Sides See Misjudgments." New York Times (7 June 1995), A1."Stop NAFTA." Canadian Dimension (June 1992), 3.Thompson, D. It is designed to restrict the flow of goods into a country bycausing them to be too expensive to compete with domestically producedgoods. ShouldChile be brought into the NAFTA, however, Chile will make some gains inthis area at the expense of Mexico and Canada. Further, Chile is ready to join Mercosur. "Free Trade? Freer trade on such a broad scale, however, may be difficult toattain if the General Agreement on Tariffs and Trade (GATT) is consideredas an example. The application of technical standards to foreign manufacturedproducts which are not also applied to domestic products, however, is anexample of this type of barrier to trade. Overall, Mexico has benefited from its membership in the NAFTA.Hundreds of production operations and thousands of jobs have migrated fromthe United States to Mexico. The United States was counting on a stronger Mexican industrial sectorto increase its demand for American high-tech data processing equipment,capital goods, and capital. The major formalbarriers to international trade are tariffs and quotas. "Rules of Origin Debate Moves to Capitol Hill." Journal of Commerce and Commercial 4 5 (19 July 1995), 3A.Lazo, L. Such an increased demand has benefited theAmerican economy, and is resulting in employment growth in high-tech dataprocessing equipment and capital goods production. The loss of companies and theloss of jobs to the United States has slowed to a trickle under the NAFTA,and company and jobs losses to Mexico have been minimal. A tariff is animport tax. New tradingblocs already are in the works in Latin America, and the EC and theMercosur countries (Argentina, Brazil, and Uruguay) are negotiating anagreement. Orderly marketing agreements, in effect, impose voluntaryquotas. In the two-year span from April 1995 to April 1997, Canadiantextile and apparel shipments rose 38.1 percent and by 48.8 percent indollar volume" (Ostroff 11). Congress and pressure by organized labor,Chile's expected quick accession to NAFTA never materialized. U.S. Chile's structure ofproduction is approaching that for the industrialized countries (World Bank237). The jobs lost in othersectors of the American economy, however, generally are not transferable tothe new demand areas. As much as Canada generally had trepidations about a free tradeagreement with Mexico (if Canadian jobs were lost to a lower wage areaUnited States, the Canadian imagination ran wild at the number of jobswhich might be lost to cheap Mexican labor), however, Canada worried evenmore about additional free trade agreements in the Western Hemisphere ofwhich they are not a party (Thompson 25). The daily minimum wage in1993 was 12 new pesos, or approximately US$3.87. The NAFTA has proved beneficial to those American firms that haverelocated their production facilities in Mexico to take advantage of lowercosts of production-primarily lower labor costs. (1994). Works Cited"AmCham in Washington Talking Free Trade." Business Mexico, (September 199 ), 7 -71.Awanohara, S., and Chanda, N. With respect to long-term participation in the international economy,the United States looks on the NAFTA as a forerunner to a WesternHemisphere free trading agreement encompassing all of North American, SouthAmerica, and the Caribbean nations. While efforts at increased regional economic integrationcontinues, the member countries of GATT remained unable to settle theirdifferences for years and disputes continue in the successor WTO.Primarily, the United States and the European Community continue to accuseone another of maintaining unfair subsidies and enforcing artificialbarriers to trade, while, at the same time, remaining committed to theirown subsidies and artificial trade barriers. Further, a failure to continueto seek tariff reductions and trading growth through the WTO likely willspur increased developments in the area of new trading blocs. The Canadiangovernment thought that the only way to preclude such an outcome is to be apart of any North American free trade agreement, and to negotiate the bestdeal possible for Canada. International Business 2nd ed. soared 216.6 percent between 1994and the year ending in April to nearly 2.5 billion. For affected workers, however,wages in the new jobs tend to be lower than those in the jobs that migratedto Mexico. Unemployment isexceptionally high in Mexico (Banco Nacional de Mexico 41). When inputs from a non-NAFTA country are used in the production ofgoods traded between the United States, Canada, and Mexico, the NAFTA"Rules of Origin" require substantial processing which is both physicallyand commercially significant within the NAFTA countries before such goodsmay benefit from a NAFTA tariff preference. Probable Effects on the Position of the United States Toward Further Tariff Reductions Through the WTO The United States is not likely to change its position towardcontinued tariff reductions through the WTO as a consequence of bringingChile into the NAFTA. The weakness in Chile's industrial structure lies in the continueddominance of the resource extraction industries. Still another type of barrier to free trade is the imposition throughtrade law of technical standards and specifications on foreign products.The application of environmental standards on products entering the UnitedStates is not an example of this type of barrier, because theseenvironmental standards also apply to products manufactured in the UnitedStates. While the addition of Chile and other Latin Americancountries to the NAFTA will increase market sizes, the United States willcontinue to seek growth on a global basis. The findings of thisexamination are presented within the contexts of (1) trade creation anddiversion, (2) likely effects on the economies involved, and (3) theprobable effect on the position of the United States toward further tariffreductions through the World Trade Organization (WTO). N. In the face of asuddenly more protectionist U.S. They Can Hardly Wait." Business Week (14 September 1992), 24-25.Ostroff, J. Low labor costs prevail throughout Mexico. Each of the three countries involved in the NAFTA negotiations came tothe table with differing national goals and differing perspectives on themeaning of an eventual free trade agreement. Through theNAFTA, Mexico is seeking massive infusions of foreign investment, as ameans of dealing effectively with the country's enormous international debt("AmCham in Washington Talking Free Trade" 71). At the same time,however, such international economic unions typically make it moredifficult for other countries to trade with the members of an association(Cottrill 8). Most trade barriers areimposed by national governments through the enactment of trade and tarifflaw, although such laws most often are imposed at the insistence of or withthe support of domestic industry and labor organizations. Under the NAFTA,virtually all trade barriers between the United States, Mexico, and Canadawill be eliminated by 2 3, creating a single, unified North Americanmarket of 36 million persons. In thiscontext, the EC already has established formal ties between itself andcountries in both Africa and Latin America through the Lomé Agreement. Canadian and Mexican tariffs will be reduced to amuch greater extent than will American tariffs because Canadian and Mexicantariffs were much higher at the beginning of the agreement than wereAmerican tariffs. Aquota does so through a direct restriction on the number of items that maybe imported, as opposed to an attempt to price the goods out of the market(Czinkota, Rivoli, and Ronkainen 77). Mexico and Canada have both benefited from the Andean loss.
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