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North American Free Trade Agreement (Nafta) Essay

I. Brief Overview:

NAFTA, The North American Free Trade Agreement, came into existence on January 1, 1994. NAFTA is basically a free-trade agreement between the three North American countries of the Unites States, Canada, and Mexico. The main idea behind this treaty was to provide the people and the businesses of the North American countries many incentives to trade amongst each other. The duties on U.S goods shipped to Mexico were reduced by 50 percent, and other restrictions were to be removed from many categories, such as motor vehicles, computers, automotive parts, and agricultural goods.

NAFTA was also put into action in order to protect the intellectual property rights of the businesses, such as patents, copyrights, and trademarks. Other supplemental agreements were also signed in later years, which allowed for worker and environmental protection. Although many people might think that the NAFTA is like the EU (European Union), it is quite different. NAFTA, unlike EU, does not set up a collection of supranational governmental bodies, nor creates any law that is superior to the national law of each of the member countries (Wikipedia; International Trade Canada).

II. NAFTA in the last 12 Years:

The signing of the NAFTA was a controversial issue, even before it came into existence. Many people still debate whether this was a good move and many have contemplated on the treaty’s effects on human rights, the environment, as well as the culture of the three countries

a.Impact on U.S. Economy

Perhaps the one sector of the U.S. economy that has been affected the most by the NAFTA is the labor union. Almost all of the labor unions in the US have opposed NAFTA because they fear that they would lose their jobs to the Mexicans because of lower wage rates there. The income of the workers has also been affected as the businesses have had to lower their wage rates in order to remain in competition with those which are producing in Mexico. The agricultural sector of USA, however, has seen an overall positive effect as it has worked towards greater integration of markets in North America.

This has further worked to enhance the competitiveness of the U.S. agricultural products. “From implementation of NAFTA through 1996, total U.S. agricultural trade ha(d) grown rapidly, rising from nearly $68 billion (exports $43 billion, imports $25 billion) to about $94 billion (exports $60 billion, imports $34 billion). In relative terms, the share of trade with NAFTA partners ha(d) held steady at about 24 percent of total U.S. agricultural trade” (Raney and Shagam 1996).

b.Impact on Canadian Economy

Much of the impact on the Canadian economy has been the same as it has been for the US. The workers have complained that their wage rates are going down as the businesses in Canada are now looking to have their production plants etc in Mexico. In addition, other opposition has been presented to NAFTA since some of the clauses mentioned in the treaty disallow the Canadian government to stop the sale of any commodity in the future if it has been sold once as a commodity. “This of course applies to the water from Canada’s Great Lakes and rivers, fueling fears over the possible destruction of Canadian ecosystems and Canada’s water supply. Other fears come from the effects NAFTA has had on Canadian law making” (Wikipedia).

c.Impact on Mexican Economy

In the beginning, Mexico had hoped to gain from the agreement by a growth in the national output, falling unemployment rates, and increasing trade with the U.S. The NAFTA has, perhaps, benefited Mexico the most out of all the other two countries. This can perhaps be best reflected in the rapid growth of the Mexican maquiladora industry. “A maquiladora is a labor-intensive organization that imports inputs, often from the United States, and then processes and exports them. Because maquiladoras often link the border economies of U.S. and Mexican cities, these plants have been some of the major beneficiaries of NAFTA. In 1993, Maquiladoras numbered only 2,143. Just six years later, the number of maquiladoras had increased 73% to 3,703” (Fugate 2005). This shows that NAFTA has positively affected the Mexican economy, more than it has any other country.

III. NAFTA: The Good, the Bad, and the Ugly:

As mentioned earlier, NAFTA has remained controversial, even before its birth. The main argument that many politicians have given against NAFTA is that they fear it would turn countries such as Canada into permanent branch plant economies. The farmers in Mexico have been opposing NAFTA because they believe that all the subsidies that the US farmers get from their government undermines the Mexican agricultural prices, which in turn is forcing many of the Mexican farmers out of business. Many sectors in Mexico have shown a steady decline in the wages. Many uprisings have taken place in Mexico, e.g. the Zapatista revolutionaries, and this has caused many social and political problems for the Mexicans. “Furthermore, NAFTA was accompanied by dramatic reduction of the influence of trade unions in Mexico’s urban areas. NAFTA has been accompanied by a dramatic increase of illegal immigration from Mexico to the United States; presumably, a significant fraction of these people are farmers forced off their land by bankruptcy.

Opposition to NAFTA also comes from environmental, social justice, and other advocacy organizations that believe NAFTA has detrimental non-economic impacts to public health, the environment, etc” (Wikipedia). Yet, there are those that argue that NAFTA has done much to help the citizens of all three countries. The standard of living in Mexico, and to some extent in Canada, has also gone up as compared to the United States. Many economists and socialists argue that NAFTA has done nothing but to help integrate the three economies and has given the people a better chance. They argue that “Canada and Mexico have reaped gains from free trade with the largest economy in the world, while the United States has benefited from unhindered access to their markets and products as well” (Wikipedia). A fact, that NAFTA still continues to pay its dividends, is a constant reminder to the controversialists and those who oppose it that NAFTA is a success and is helping all three countries make their profits (Griswold 2004).

IV. NAFTA’s Role Forward:

One of the things that NAFTA should look forward to and try to implement in the North American continent is the process of dollarization. It is believed by many leading economists and theorists that the process of dollarization is very important and that it would greatly further the cause of NAFTA. “Dollarization occurs when residents of a country extensively use the U.S. dollar or another foreign currency alongside or instead of the domestic currency. Unofficial dollarization occurs when individuals hold foreign-currency bank deposits or notes (paper money) to protect against high inflation in the domestic currency. Official dollarization occurs when a government adopts foreign currency as the predominant or exclusive legal tender” (Mack 1999). This is proposing that the NAFTA becomes more like the EU, and has a single currency. Many have used the term dollarization, but they fail to close in on the real context of the situation.

‘Dollarization’ has been quite often very loosely used in many of the literature and references, where it is said that the foreign money would completely take over the local currency. This is hardly true. What many people fail to understand is the great benefit that this can have on behalf of and for the cause of NAFTA. It is extremely important to keep three useful concepts to keep in mind when considering the incorporation of it via NAFTA: “Asset Dollarization – The term Asset Dollarization refers to the use of foreign currency in any of the three functions of money: unit of account, means of exchange and store of value. Currency Substitution refers to the use of foreign money only as means of exchange. Thus, an economy can be highly dollarized, but not subject to currency substitution. Domestic currency may still be used for transactions. Liability Dollarization – A key point that has emerged in the recent literature of currency and banking crises in emerging markets is that either the domestic banking system or the government can have relatively large foreign currency debt obligations.

This concept is called liability dollarization. Therefore, a country can be scarcely dollarized in the asset side, but the loans made by the banking system can be mostly in foreign currency. Partial and Full Dollarization – Full Dollarization is a situation in which a country abandons its own currency and adopts another country’s currency as a means of payment and unit of account e.g. Panama. Few countries in the world has dollarized completely” (The World Bank Group). One of the greatest advantages of dollarization would be that it would make Dollarization would make Mexico a home market replica of the process of discovering comparative advantage in the very large dollar market.

NAFTA has also been trying to incorporate Argentina into the member states and for Argentina, dollarization would remove all doubt about the supremacy of Argentine consumers with their dollars. NAFTA has considered the prospects that if a country was to convert to dollarization, it would automatically be extended an invitation to enter NAFTA. This is an incentive that has been given to many countries to dollarize. This is why many have theorized that bringing in Argentina would be a good choice for NAFTA. “Although unilateral dollarization by Argentina and Mexico is exactly the right initial step; a United States partnership with dollarized neighbor countries is too good an opportunity to be missed” (Angell 1999).

Even though there are some set backs that might take place in the event of dollarization in various nations, it would still have a very beneficial impact on NAFTA and its member countries of course. If each country was to conduct its transactions only in dollars, it would remove the limited flexibility of the central banks. This would make all the member countries as more attractive to FDI (Foreign Direct Investments) as there would be no exchange rates problems. In addition, dealing with the same currency would mean that the NAFTA can keep a tighter control over the inflation and the monetary supply of the member countries. Going ‘dollar’ would be beneficial for all the parties involved and it would help NAFTA in achieving much of what it actually set out to do when it was first conceived.

“It should be pointed out, however, that a sovereign nation’s ability to promise not to pursue actions which it might in the future deem to be in its own interest are limited even under a completely dollarized regime. Take the case of a liquidity crisis in a dollarized nation’s banking sector. If that nation believed that its banking sector was threatened, it could impose restrictions on international capital movements to keep foreign assets in the country. Holders of these assets could well end up experiencing capital losses due to default. To some extent, then, under dollarization country risk would be substituted for currency risk. The net reduction in interest rates from such a move would therefore be reduced” (Spiegal 1999).

Conclusion

It has been very difficult to actually analyze the exact macroeconomic effects that have taken place over the member countries since the signing of NAFTA, and this has been because of the large number of external variables that occur in this lavish environment of our global economy. However, the general trend that has been observed after viewing the various economic studies that have been conducted, have shown that instead of increasing the volume of trade, NAFTA has led to trade diversion, where the NAFTA members are now importing more from each other at the expense of other countries worldwide. As mentioned above, dollarization is one of the solutions to this problem and it can greatly reduce many of the qualms that many different and various organizations and people have against NAFTA.

Work Cited:

1.Angell, Wayne, Dr. “Dollarization: What a Wonderful Opportunity,” Hearing on Official Dollarization in Emerging-Market Countries, April 22, 1999. http://www.economiaysociedad.com/dollarization.htm (Accessed February 9, 2006)

2.Fugate, Jeff, “A Recipe for Success,” Yale Economic Review, Spring 2005: Online at: http://www.yaleeconomicreview.com/spring2005/nafta.php (Accessed February 9, 2006)

3.Griswold, Daniel T., “After 10 Years, NAFTA Continue to Pay Dividends,” CATO Institute, January 8, 2004. http://www.cato.org/dailys/01-08-04.html (Accessed February 9, 2006)

4.International Trade Canada, “Canada and the North American Trade Alliance,” Online, http://www.dfait-maeci.gc.ca/nafta-alena/menu-en.asp (Accessed February 9, 2006)

5.Mack, Connie, “Basic of Dollarization,” Joint Economic Committee Staff Report, January 2000. http://users.erols.com/kurrency/basicsup.htm (Accessed February 9, 2006)

6.Raney, Terri, and Shayle Shagam, “NAFTA’s Impact on U.S Agriculture: The First 3 Years,” Agricultural Outlook, Economic Research Service/USDA, September 1996.

7.Spiegal, Mark M, “Dollarizaion,” Federal Reserve Bank of San Francisco Economic Letter, September 24, 1999 http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-29.html (Accessed February 9, 2006)

8.Wikipedia, “North American Free Trade Alliance,” Online,
http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement (Accessed February 9, 2006)

9.The World Bank Group, “On the Definition of Dollarization,” Online, http://lnweb18.worldbank.org/External/lac/lac.nsf/bc67c81027cc470e852567d6006c2776/b8099e91bf7df8f5852568ce005cf400?OpenDocument (Accessed February 9, 2006)


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