Mexico and the United States along with Canada have entered into a trilateral free trade agreement called the North American Free Trade Agreement otherwise known as NAFTA. NAFTA has got to be the largest trading agreement in history; the agreement creates a single market of 370 million consumers. The people of NAFTA talk about potential gains from increased free trade between Mexico and the U. S. as the two countries remove tariffs, other trade barriers and restrictions on investment so that businesses would have access for goods, service and investment.
They argue that the U. S. ands to gain from the agreement as Mexico offers trade potential in a growing market, more investment opportunities, low cost labor, abundant natural resources, and geographical prospects and growing markets for American goods. On the other hand, outsiders argue that the agreement would further encourage American businesses to move their production facilities to Mexico in search of low cost labor so that the U. S. would lose a lot of jobs along with money. They also claim that the pollution in the environment, which is already bad to begin with, will be worsened by the agreement.
These opposing arguments need to be sorted out so that the potential benefits and costs of the agreement can be identified. A free trade area is formed when countries remove tariffs and other barriers to trade among them while maintaining tariffs and other commercial policies against non-member nations. This selective trading arrangement would appear to be a movement toward freer trade and therefore, greater economic efficiency. The trade barriers among the member countries are removed while others remain. There are other potential benefits to members of a free trade area.
Successful usinesses within the trade agreement can take advantage of the economy as their market expands. Another source of benefits comes from increased competition. Competition increases managerial efficiency, worker productivity, and higher rate of investment by low-cost firms. The development of more efficient economies, in turn, creates more jobs and increases standards of living in the member countries. In addition, reduced tensions and an increased likelihood of peace may be another benefit from a trade agreement. There are several components in the agreement. One component deals with market access.
Issues such as tariffs, non-tariffs barriers, rules of origin and governemnt procurement are addressed under this category. Trade rule components deal with issues such as subsidies and health and safety standards. The agreement also deals with issues facing specific industries such as the automobile, textile, energy and agriculture. The financial and telecommunications industries are the two areas of conflict. The other components include investment, intellectual property, and dispute settlement. There are four major issues in NAFTA: rules of origin, labor, agriculture and environment. Rules of Origin.
Any regional free trade agreement is subject to a “transshipment problem. ” Without a Rules of Origin clause, a business from a non-member country could import unfinished products into the member country with the lowest tariff rates. The foreign company could then assemble its products in the member country and ship them to the remaining member countries, avoiding their higher tariffs. The Rules of Origin, also known as local content requirement, can be defined as the minimum percentage of a country’s exported product the must be produced or substantially transformed within the border of the exporting country” Aguilar 1993).
Labor. Among those who are strongly against NAFTA are labor unions who fear that American workers will suffer as U. S. businesses move their business to Mexico in search of lower labor cost. In 1991, the average manufacturing wage rate in the U. S. was $15. 45 per hour while that of Mexico was only $2. 17. Agriculture. Currently the majority of agricultural products traded between the U. S. and Mexico consist of grains, livestock and oilseeds. Mexico also exports sugar for refining and cattle for feed lots, which are re-exported for sale. The U. S. as tariffs on fruits and vegetables.
Overall, the average tariff on Mexican farm products to the U. S. is about 6 percent. Environment. The environmental issue has taken a backseat to many of the economic concerns Mexico has had to address in the past. In the 1980’s Mexico faced a debt crisis. In order to revitalize the Mexican economy the Mexican government allowed an increase in foreign investment within its borders. However, this investment also meant increased pollution. The pollution that has been allowed for so long has escalated into a serious problem that Mexico must address as they face ncreasing free trade with the U. S. and Canada .
NAFTA introduced a major breakthrough in the history of trade among the three North American countries. Supporters of the agreement argue that NAFTA will benefit all that are involved in terms of rising standard of living, as their production and consumption possibilities will be increased through specialization and exchange in line of comparative advantage. Opponents argue, however, that the costs of job relocation will be very heavy for the United States whose wage rates are much higher than those of Mexico.