North American Free Trade Agreement (NAFTA) Essay Example
North American Free Trade Agreement (NAFTA) Essay Example

North American Free Trade Agreement (NAFTA) Essay Example

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  • Pages: 11 (3013 words)
  • Published: August 3, 2018
  • Type: Essay
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The ongoing debate over NAFTA, the largest free trade area globally, presents different perspectives. Critics argue for its abandonment, calling it a failure and a "trade agreement from hell." Supporters view NAFTA as successful and suggest expanding it to Latin America. Mickey Kantor sees it as a win-win situation. Before NAFTA, the US and Canada had been engaged in the Canada-US Free Trade Agreement. For these developed nations, NAFTA largely maintained provisions with minimal changes. Mexico faced unique challenges as a developing country, including lower labor costs, illegal immigration concerns, and environmental issues that made it a target of critics opposing NAFTA. Some analysts believe it's premature to evaluate NAFTA's impact on US-Mexico trade due to gradual phasing out of certain provisions until 2008. However, some tariffs and nontariff barriers were immediately eliminated upon implementation. When assessing factors lik

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e income levels and exchange rates on trade agreements, considering macroeconomic changes within individual countries and globally is crucial.The devaluation of the peso in 1994 caused a recession and trade flow changes in Mexico during the early stages of NAFTA. Evaluating NAFTA accurately is difficult because many of Mexico's trade liberalization policies were already implemented before due to GATT membership and domestic reforms. Jonathan Heath, a Mexico City economist, emphasizes that NAFTA did not open up Mexico as that had already happened prior to the agreement. Instead, NAFTA consolidates this opening up and solidifies trade liberalization for Mexico. Some analysts argue that evaluating NAFTA should consider what would have occurred without the trade agreement. Despite ongoing trade disputes, NAFTA provides a platform for hearings and resolutions. Currently, neither the worst fears nor idealized expectations regarding NAFTA hav

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materialized. However, analysts agree that NAFTA has made an impact as U.S.-Mexico trade continues to grow with its help, mitigating the effects of the Mexican recession and expediting recovery. Experts anticipate that Mexico's recovery and economic liberalization will fuel healthy bilateral trade trends crucial for strong economies.NAFTA is a comprehensive agreement aiming to enhance trade among three partners by gradually eliminating tariffs while addressing non-tariff barriers like quotas.The implementation of NAFTA has resulted in the removal of many tariffs on US exports to Mexico, impacting various sectors such as semiconductors, computers, telecommunications, electronic equipment, and medical devices. Although tariff reductions for some products occur gradually over time, there has been a 75 percent reduction in duties on US automotive parts entering Mexico within the first five years of NAFTA, with a gradual elimination over ten years. Approximately half of agricultural products traded between the two countries have experienced immediate tariff cuts. However, certain items like corn (for Mexico), beans (for Mexico), orange juice (for the United States), and sugar (for the United States) are phased out over a period of fifteen years.

Critics argue that since its establishment, NAFTA has favored Mexico at the expense of US interests by causing job relocation from the US to Mexico with lower wages and increased industrial pollution in border towns. Chris McGinn, deputy director of global trade for Public Citizen – a consumer group based in Washington D.C., acknowledges that NAFTA has failed to fulfill its promises. Specifically, McGinn highlights the lack of improvement in environmental and public health conditions along the Mexican border and notes that it has also failed to create jobs while resulting in a significant

trade deficit for the United States.The AFL-CIO, Teamsters Union, and the American Coalition for Competitive Trade are also against NAFTA and want to declare NAFTA dispute panels as unconstitutional. Representative Marcy Kaptur from Ohio, along with 40 cosponsors, has reintroduced the NAFTA Accountability Act. This act calls for an assessment of NAFTA's performance and argues that it was intended to improve living standards in Mexico and the United States, reduce illegal immigration, enhance environmental and health conditions at the border, and combat drug trade. If these goals are not achieved, the bill suggests renegotiation or withdrawal from NAFTA. Supporters of NAFTA point out that increased U.S.-Mexico trade, job creation, and Mexico's growing economy serve as proof of its success. According to a publication by the U.S. Department of Agriculture titled "NAFTA: Year Two and Beyond," any delays in U.S. exports to Mexico due to factors beyond NAFTAs control (especially agricultural products) are only temporary. The publication explains that while long-term benefits for the United States are expected from NAFTA, it may take several years for these benefits to materialize because of economic conditions and other factors. One major factor that impacted NAFTA was Mexico's devaluation of their currency less than a year after the trade agreement came into effect. This unexpected devaluation surprised international financial markets and plunged Mexico into a severe recession.
The Mexican peso devaluation in 1994 caused a decrease in its value from 3.5 per dollar to around 6.5, with an average exchange rate of about 7.5 pesos per dollar that year. In early March, the peso weakened further to approximately 8 pesos per dollar. While some critics attribute Mexico's economic crisis to

NAFTA, others argue that various complex financial, economic, and political factors in 1994 forced the devaluation and triggered the recession.

To prevent Mexico from defaulting on its debts, the Clinton administration provided a $50-billion credit package consisting of $20 billion from the United States and additional funds from sources like the World Bank and International Monetary Fund. Economist David Gould from the Federal Reserve Bank of Dallas stated that the peso devaluation significantly impacted Mexico's economy, foreign investment, and overall trade with the United States.

Despite fluctuations in Mexico's economy, bilateral trade between Mexico and the United States has consistently increased over the past two decades. In 1993, annual trade amounted to $81.5 billion and is projected to reach $128.1 billion in 1996.The United States primarily exports intermediate goods used for manufacturing finished products, heavy machinery, tools,and chemicals to Mexico.Onthe other hand,Mexico's primary exports totheUnitedStates include petrochemicals,
steel apparel,and farm produceAccording to a study funded by the U.S. government and conducted by UCLA's North American Integration Development Center, Mexican exports to the United States have remained strong during economic crises in Mexico. However, U.S. exports to Mexico have been vulnerable during these periods, resulting in cyclical trade deficits for the United States in certain years (1976, 1982, 1986, 1994). The recent recession following the peso crisis in 1995 showed a similar pattern.

Data from the U.S. Commerce Department reveals that there were trade surpluses with Mexico amounting to $1.7 billion in 1993 and $1.3 billion in 1994. However, this surplus turned into a deficit of $15.4 billion for the United States in 1995 and is projected to reach $16.2 billion in 1996.

The devaluation of the peso also had an

impact on agricultural trade. In 1994, there was a surplus of $1.6 billion, but it shifted to a deficit of $260 million in 1995 due to relative cost differences between Mexican and U.S. products.

This shift caused Mexican products to become cheaper for U.S residents while making U.S products more expensive for Mexican residents.This economic recession affected consumer income in Mexico and resulted in negative consequences for U.S exports by about11 percent according to Gould's studyCritics argue that the Mexican economic crisis was significantly influenced by NAFTA, as it led to poor lending decisions and unsustainable consumer spending. Excessive optimism about the agreement contributed to these issues. Furthermore, concerns over NAFTA's approval caused President Ernesto Zedillo's administration to delay the devaluation, which would have been less severe if implemented earlier. However, some experts disagree and point to the decrease in U.S. corn imports before and after the peso crisis as evidence against NAFTA's direct responsibility. The decline in corn imports can be attributed to both the economic recession and tariffs imposed under NAFTA on corn over 15 years, negatively impacting Mexico's corn stocks. Despite these arguments, USDA analysts believe that NAFTA acted as a stabilizing factor during Mexico's economic crisis by preventing new import barriers from being implemented. This prevented further worsening of the drop in U.S. exports to Mexico. According to USDA officials, in 1995 NAFTA gave an advantage to the United States and Canada in the Mexican market, resulting in increased U.S. market share despite declining exports overall. A report from the National Foreign Trade Council supports this claim by revealing that while U.S. exports to Mexico decreased by nearly 9 percent in 1995

compared to 1994, European and Japanese exports fell by larger percentages of 24 percent and 21 percent respectively.
Analysts suggest that the trade agreement between the United States and Mexico had a positive impact on reducing capital flight from Mexico and promoting foreign investment. This was in contrast to the debt crisis faced by Mexico in 1982, where the absence of such an agreement resulted in slower recovery and weakened investor confidence. Unlike their successful approach of cutting imports in 1983, Mexico resolved its deficit through increased exports due to NAFTA policies.

The effect of NAFTA on employment remains a contentious issue, with economists having different opinions. Some argue that it led to job losses in the United States, while others claim it resulted in job gains for the country. There is ongoing debate about the relationship between employment and trade, as well as specific effects of NAFTA on jobs.

Lance Compa from the North American Commission for Labor Cooperation acknowledges the challenge of determining how NAFTA impacted jobs because perspectives and workplaces can vary greatly. The Economic Policy Institute in Washington, D.C. asserts that since NAFTA's inception, there has been a rise in net export deficits resulting in 263,000 U.S. jobs being lost to Mexico. However, according to data from the U.S. Labor Department, only 90,000 workers have qualified for retraining programs due to displacement caused by NAFTA.

Conversely, the National Foreign Trade Council argues that exports to Mexico and Canada "support" 2.4 million jobs within the United States.
A study conducted by UCLA titled "North American Integration After NAFTA" reveals that the impact of NAFTA on U.S. jobs has been minimal. The study shows that an increase in

imports resulted in a loss of 28,168 jobs over the past three years. However, an increase in exports led to the creation of 31,158 jobs, resulting in a net gain of 2,990 jobs. Furthermore, the study suggests that over time, the United States will gain more jobs compared to those lost through this agreement because positions supporting exports to Mexico offer higher wages than those transferred to Mexico.

Both the U.S. and Mexican governments report a decrease in unemployment during the first three years following NAFTA's implementation. The main focus of the debate surrounding NAFTA revolves around Mexico's foreign-owned assembly plants called "maquiladoras." These plants have the ability to import components and raw materials without paying duties for exporting goods. This exemption from U.S. tariffs also applies to goods exported back to the United States with U.S.-made content.

Despite receiving criticism, a study conducted by the National Bureau of Economic Research found that maquiladoras create job opportunities on both sides of the border. However, many concerns and promises made during the NAFTA debate did not materialize as expected. For instance, according to the Commerce Department, fears about relocation of the U.S. auto industry to Mexico have not come true.
Additionally, despite an initial increase, corporate investment in Mexican manufacturing facilities declined due to the repercussions of the peso crisis. Meanwhile, business investment in the United States exceeded $700 billion that year. Environmentalists argue that although NAFTA was presented as an environmentally-friendly trade agreement, there has been little improvement observed along Mexico's industrializing northern border. Dan Seligman from the Sierra Club conducted studies for three years and found minimal progress made by the NAFTA environmental commission in addressing environmental

concerns. According to Seligman, no toxic waste sites or polluting smokestacks have been cleaned up as a result of these studies. To address cross-border pollution concerns raised by U.S. environmental groups during final negotiations, two agreements were added to NAFTA. One is the North American Agreement on Environmental Cooperation, which establishes a commission responsible for enforcing environmental laws; however, this commission faced staffing delays and had a slow start. The other agreement led to the establishment of the Border Environment Cooperation Commission and the North American Development Bank with the goal of addressing pollution issues along the U.S.-Mexican border. By mid-1996, Gerald Nelson reported that the development bank had an $80 million budget and was considering loans for eight projects aimed at reducing water pollution in border communities.
Mexico took action by closing 72 maquiladoras and suspending operations at 219 others due to environmental problems. Critics and advocates agree that NAFTA has allowed special interests to protect themselves from competition, leading to numerous disputes. Since 1994, there have been seven cases presented under NAFTA's dispute resolution process, but only one between the U.S. and Canada has been resolved so far. This text focuses on various trade disputes between the United States and Mexico within the framework of NAFTA regulations. One specific dispute involves tariff rate quotas on dairy, poultry, barley, and margarine. There were also complaints from the U.S. regarding small package deliveries to Mexico, as well as complaints from Canada and Mexico concerning the U.S. Helms-Burton Act and an upcoming conflict over straw brooms. NAFTA includes provisions for resolving issues related to antidumping and countervailing duties. Twelve cases have been resolved through this process thus

far, while five others are still pending. In response to a U.S.-imposed tariff hike on Mexican straw brooms in December of the previous year, Mexico increased import tariffs on nine U.S. products.The United States argued that safeguard tariffs were necessary to protect its domestic industry against competition.
There is an ongoing dispute regarding whether Mexican truckers should be allowed past a specific point within the U.S border. Mexico argues that this contradicts NAFTA regulations. In 1995, President Clinton delayed a NAFTA rule that would have permitted Mexican trucks to operate in border states due to opposition from the Teamsters Union coalition. The coalition claims that Mexican trucks do not meet safety and insurance requirements set for U.S. trucks.

Trade disputes between the United States and Mexico extend beyond NAFTA. Currently, Mexico is investigating whether U.S. high fructose corn syrup is being sold at lower prices than in the U.S., which could potentially harm Mexico's sugar industry. Additionally, last year, Mexican tomato growers agreed to stop exporting low-priced winter tomatoes to the U.S. after facing an antidumping complaint from U.S. tomato growers.

Observers of NAFTA suspect that these disputes are influenced by politics. Last year, the U.S. had presidential and congressional elections, while this summer's congressional elections in Mexico are expected to challenge the Institutional Revolutionary Party's control over the Mexican government, as explained by NAFTA expert George Grayson.

Grayson also noted that although NAFTA provides mechanisms for resolving trade disputes, it may take time to reach a resolution due to its comprehensive nature.
Certain actions taken by either country can have an impact on their partnership under NAFTA and affect Mexico's role as a customer for U.S products. This includes

changes in rules regarding Mexican tomatoes or restrictions on Mexican 18-wheelers. A UCLA study, led by Hinojosa, emphasizes that it is important to prioritize supporting Mexican stability and growth rather than solely focusing on the reduced tariffs provided by NAFTA. Fortunately, there have been positive developments in Mexico's economy. These include the early repayment of a U.S loan and improvements in inflation rates and interest rates. Experts predict that the peso will remain stable at around 8.5 to the dollar for most of this year. Additionally, Mexico's Gross Domestic Product (GDP) grew by 5.1 percent last year, indicating a rebound in all economic activities. Notably, there has been an increase in direct foreign investment influenced by optimism surrounding NAFTA. According to the Central Bank of Mexico, direct foreign investment in Mexico increased from $4.3 billion in 1993 to $10.9 billion in 1994; although it declined to $6.3 billion in recent years, it is expected to reach similar levels this year.This rapid return of foreign investment has contributed to Mexico's faster economic recovery compared to the recession experienced between 1982-83.Nora Lustig, a senior fellow at the Brookings Institution explains that after the crisis during this period there was no recovery until late '80s due to Mexico's debt burden and limited access to capital marketsDespite facing opposition in the U.S. Congress due to Mexico's financial crisis, Chile has expressed interest in joining NAFTA since its establishment. Now, with Mexico's economy recovering and access to capital markets quickened, the Clinton administration is seeking fast track authority to expand NAFTA and create a Free Trade Area of the Americas (FTAA) agreement starting with Chile.

Chile has become an attractive candidate

for investment due to its efforts in privatizing state enterprises, reducing tariffs, promoting investment liberalization, and welcoming foreign capital. As Europe and Asia increase their competition in Latin American markets, analysts speculate that Congress may grant fast track authority to allow a vote on a trade agreement without amendments.

During congressional hearings, concerns and opposition towards NAFTA have been voiced. Public Citizens' McGinn argues against expanding NAFTA based on its performance while the AFL-CIO claims it leads to outsourcing of factories and jobs to Mexico and vows to continue advocating for labor standards, human rights, and environmental protection. The Teamsters Union strongly opposes any expansion of NAFTA.

However, regardless of what happens with NAFTA, many believe that global trade liberalization will occur anyway.According to Mexican writer Carlos Fuentes in his book "A New Time for Mexico," NAFTA has formalized the increasing connection between North American economies. Fuentes acknowledges that this relationship would have developed even without NAFTA, but he believes that NAFTA brought attention to opportunities, rights, and responsibilities that may have otherwise been disregarded or not properly stimulated. The subsequent information is sourced from Cargill Incorporated: News & Info Products & Businesses Cargill Sites About Cargill Community Careers Site Map Contact Us Home Copyright 2002 Cargill Incorporated. All rights reserved.

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