NAFTA: International Business

Table of contents

NAFTA is an agreement signed by Canada, Mexico, and the United States to create a North American trilateral trade bloc. It was established on January 1, 1994 (Twenty-Five years ago). It consists of two highly industrialized countries – the United States and Canada, and a developing country, Mexico.

The goal was to advance free evolution of goods, services, and capital across the general boundaries of the three countries. The implementation of the NAFTA on January 1st,1994 which resulted in the immediate elimination of tariffs on more than half of Mexico’s exports to the United States and more than a third of US exports to Mexico. It also included the protection of intellectual property and implementing labor and environmental safeguards between the member nations.

Strengths

One obvious advantage that Mexico had when it joined into a free trade agreement with the United States was that, as a developing country, its wages were much lower than the United States and had a competitive advantage in the production of goods requiring relatively more labor intensive inputs. NAFTA has profited largely from large US firms that now have access to a massive and cheaper range of inputs in the form of Mexican workers. NAFTA has also been credited with the rise of the Mexican middle class.

Foreign direct investment (FDI) more than tripled. Since the implementation of NAFTA, U.S. foreign direct investment has more than tripled in Canada and Mexico. U.S. oil imports from Mexico cost less because tariffs have been removed from NAFTA. That reduces America’s dependence on Middle East oil. Low-cost oil lowers gas prices, which lowers the cost of transport. In 2003, NAFTA produced a significant net benefit for Canada, with long-term productivity rising by up to 15% in industries with the deepest cuts in tariffs.

Unemployment in Canada has fallen. The agreement helped with government spending. Manufacturers in all three member countries had access to government contracts for each nation, increasing competition and reducing costs. The trade area of NAFTA produces more than 28 EU countries. NAFTA advanced all three countries’ economic growth, advantage, and jobs. It also lowered consumers’ cost.

Weaknesses

NAFTA’s disadvantages are significant. The negative impact of NAFTA has been greater on the U.S manufacturing sector compared to U.S service and agriculture sectors. In other significant ways, US workers have also suffered from NAFTA. Most of the jobs displaced because of trade were high – wage jobs that enabled U.S. workers to attain middle – class status. This has also had the effect of increasing income inequality in the United States, as labor has lost and investors have gained because of the large profits earned by the companies in which they have invested.

Farmers from rural Mexico could not compete. At the same time, Mexico reduced farmers’ subsidies. Another NAFTA agreement has never been implemented. NAFTA would have allowed trucks from Mexico to travel beyond the current 20-mile commercial zone within the United States.

High levels of industries moving plants to Mexico, including motor vehicles, textiles, computers and electrical appliances in these industries. Yet, not all companies moved to Mexico in these sectors. When workers chose to join the union and lose the factory, workers opted to the option of planting. The workers had little bargaining power without the union’s support to them as members.

Opportunities

NAFTA was renegotiated by the United States, Mexico, and Canada on 30th of September 2018. The new deal is called the United States-Mexico-Canada Agreement. It still has to be ratified by the legislature of each country. As a result, it would not actually be implemented until 2020.

The Mexican constitution has been amended to allow foreign investments in the exploration of oil and natural gas. Renewables are an absorbing opportunity. If NAFTA countries could reduce regional energy costs for industry and consumers, the region could have a significant economic advantage over Asia, Europe and other parts of the world. The discovery of San Oil in Western Canada enabled U.S. and Canadian companies to participate in desired results. Pipe and tubular manufacturers in Mexico will be able to export their products to the United States and Canada faster.

Threats

Environmental degradation in Mexico is a massive threat to the nation. Mexican agricultural industry used more fertilizers and other polluting chemicals in response to NAFTA’s competitive pressure. Rural farmers have expanded into marginal land and deforestation has led to an increase.

Canadian fears that manufacturing jobs will be lost to the United States did not materialize with “steady” manufacturing jobs. Canada has strict requirements or quality indicators and language demands. For example, recently U.S. cosmetic exporters are facing stricter rules for sale in Canada. US President Trump wants to withdraw the United States from NAFTA. If the United States were simply to withdraw from NAFTA without a replacement agreement, the result would be higher duties, but US exports to Canada and Mexico would have the highest duties.

Conclusion

NAFTA has created winners and losers in Mexico in the United States. NAFTA’s winners were U.S. agricultural industries, which used cheap labor in Mexico and American consumers. The biggest losers of NAFTA have been poor Mexican farmers.

Because of NAFTA from small businesses to large companies, from a farmer to a manufacturer of heavy machinery, trade has never been so successful before. Companies are now able to sell goods across borders using eliminated or reduced tariffs. But on the other hand, the new replacement agreement should fix or lessen the threats that the member states may face.er

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