To Trade or Not to

Trade : NAFTAMBA 780 : Managing in Global Environment

Prof. Sokol Celo

Presented by

David Kolapudi

Pranav Patil

Praveen Baghel

NAFTA: What is it?

North American Free Trade Agreement

- Signed by United States, Canada and Mexico

- NAFTA was signed in 1993 and was in effect from January 1st, 1994.

- NAFTA was written to create a free trade area in North America.

- “Free trade” means countries can freely trade goods with each

other without paying tariff (tax) on these goods.

Purpose of the Agreement:

1. Allow free movement of goods and services between

countries.

2. Encourage competition in free trade areas.

3. Protect property rights of people and businesses in

each participating country.

4. To be able to solve problems that arise among

countries.

5. Encourage cooperation among countries.

● Free trade (removal of trade barriers: tariffs) on goods

and services between NAFTA countries (Canada, US,

Mexico).

● Removes restrictions on Cross-Border flow of services.

● Reduces/Removes FDI restrictions

● Rises in Overall GDP

Economic Motivations

Political Motivations

● Setting standards and implications for violations

● Increasing political stability in Mexico.

● Rises in Overall GDP (increased bargaining power)

Benefits of NAFTA● Mexico

○ Increased jobs as low cost production moves south

○ Rapid economic growth as a result

○ Increased Exports

○ Encourages Inflow of FDI

● U.S. and Canada

○ Access to a large and increasingly prosperous market

○ Lower consumer prices from Mexican-produced goods

○ Low cost labor → Ability to be more competitive on world stage

● Other LA (Latin American) countries are interested in these benefits and wish

to join.

Comparative AdvantageIndustries United States Mexico Comparative

Advantage (U.S)

Comparative Advantage

(Mexico)

Agriculture,Hunting,Forestry and

Fishing6219.79 401.91 0.058446654 0.015151687

Mining and Quarrying 22135.62 4372.32 0.244585973 0.193848466

Manufacturing 14835.25 4442.57 0.151685361 0.197578396

Electricity,Gas and Water supply 31047.66 5354.12 0.380530938 0.248179831

Construction 6445.32 996.31 0.060694562 0.038421047

Wholesale & Retail trade;Restaurants

& Hotels4949.3 1527.98 0.045959313 0.060157427

Transport,Storage & Communications 10525.62 2498.43 0.103078754 0.102272113

Finance,Insurance,Real Estate &

Business services12305.43 6402.7 0.122646378 0.311946863

Community,Social & personal

services4174.04 931.33 0.038483187 0.035825428

Comparative Advantage

Comparative advantage exists when a country has a margin of superiority in the

production of a good or service i.e. where the opportunity cost of production is

lower.

Result : A country is able to produce a good or service at a lower cost than

another country

Determining factors of

Comparative advantage○ Quantity and Quality of Factors of Production Available

Size and Efficiency of Available Labor Force, Stock of Capital Inputs

○ Mobility of Factors of Production

Resources can be switched between industries without loss of efficiency

○ Straight-line Returns to Scale

Proportional increases in inputs equals proportional increases in output

Determining factors of

Comparative advantage○ No Externalities

Externalities include environmental (air, water, noise, overharvesting)

and systemic risk (risk to the overall economy arising from risks the

banking system takes).

○ Import Controls, such as tariffs and quotas

Creation of an artificial Comparative Advantage for Domestic

Producers

○ Transportation Costs, Exchange Rates, Long-Term Inflation are

not considered

Q3: US & The FTAA

● FTAA: Free Trade Area of the Americas

● The FTAA creates free trade between more LAC (Latin America and

Caribbean) Countries other than Mexico, providing more opportunity for

FDI along with cheaper, higher quality imports.

● FTAA was not signed by the 2005 Deadline due to the increased blowback

from a lack of negotiation success from L.A. countries, and the increase

political pressure for protectors and protesters

Q3: US & The FTAA

● The US still pushed forward and signed bilateral and multilateral trade

agreements with several LAC countries

● The US should cease to encourage the formation of the FTAA, present-

day.

o Chile

o Colombia

o Costa Rica

o Dominican Republic

o El Salvador

o Guatemala

o Honduras

o Morocco

o Nicaragua

o Panama

o Peru

Q3: US & The FTAA

Pros:

Cons:

● Increase in productivity and growth is not very high

● Many Canadian and Mexican people migrated to US under temporary

status(TS) & Treaty National Dependent Status(TDS)

Political Benefits of the FTAA

● Collaboration of Trade Ministers to address issues (market access, rule-

making, negotiations)

● Increased market access for all involved nations

o Improved access to L.A. countries that currently have high tariffs

o Reduction/removal of tariffs on products in which L.A. have a

competitive advantage.

● Standardize Accounting Procedures

● Improve Judiciary Proceedings (establishing a legal structure to settle

disputes)

● Human Rights monitoring

● Anchoring the Americas to compete more efficiently with China and the EU

for FDI.

● Increase in productivity as a result of improve efficiency → striving for

competitive advantage

● Macroeconomic Stabilization Efforts, Infrastructure Development, Methods

to manage labor and migration issues.

● “Strong correlation between high levels of economic development and low

corruption,” (Alex Chafuen, President & CEO of the Atlas Economic

Research Foundation;)

Political Benefits of the FTAA