Economic integration in North America – NAFTA Essay
Economic integration in North America – NAFTA
States undergo a lot of challenges and face dilemma in the current globalization era. Globalization has led to the integration of various world economies and this requires openness to the economy of the world, serving the interests of the nations, and competition for relative advantages at national level as international capitalism demands.
The evolution of the global economy in the west in the late 1980s and 1990 aroused the desire for competitive advantage among regional trading blocs in the area of trade, finance, manufacturing and technology and this also led to the birth of the North America Free Trade Agreement (NAFTA) (Ciccantell, 2001). NAFTA was formed in 1994 as part of the economic integrationist revival of the period and it marked a significant shift of the U. S. trade policy (Pastor, 2004). NAFTA incorporates the economies of three countries-the U.
S. , and Canada in the north and Mexico in the south. According to Cavanagh and Anderson (2002) NAFTA is a complex set made up of trade and non-trade bargain issues which advance North America towards closer ties of economy. This essay gathers information from various economic literatures that discuss the NAFTA formation and implementation process. The central idea is the paradox in which a least developed country, Mexico forms a treaty with the world’s most advanced economies in North America.
This relationship is of tremendous interest to economic scholars and observers. Circumstances that led to the formation of NAFTA in the 1994 are evaluated in this essay as well as factors that almost hindered the implementation of the treaty. The essay further evaluates the benefits that NAFTA has on the participating economies. This will be followed by a discussion of the challenges that the implementation of the treaty faces. Possible solutions to overcome the challenges are recommended. An Economic Integration Perspective
International economics involves the integration of the economic practices of various countries within a global scale. Economists have described various dimensions of international economic integration and these include trade liberalization in goods, direct foreign investment, trade in services, liberalization of capital flows, free labor movement, environmental protection rules, a World Trade Organization’s (WTO) -managed rule-based system for trade in goods and services, and established intellectual property and patent rules (Ciccantell, 2001).
Theoretically, countries can meet these dimensions without resorting to a regionalism model. However, in practical sense, countries meet to regionalize more for political than economic reasons as a way of dealing with the globalization challenge (Fox, 2004). Contrary to this, some scholars recommend that market-orientation factors should be the main drivers of economic integration in the current globalization era (Funk, Elder, Yao & Vibhakar, 2006). Although already established, some economists view NAFTA as an on-going process in which the end product is not yet confirmed.
The future of regionalization is mostly determined by domestic and regional factors as opposed to globalization although regional and global forces are responsible for driving North America into closer economic ties. Carranza (2002) asserts that the future of NAFTA depends on the policy makers’ deliberate act as this will determine whether NAFTA will resolve into an institutional deficit or develop into a deeper integration. Circumstances that could have hindered the formation of NAFTA
Mexico, which was to be part of the North American economic integration, had first opposed an allied relationship with the northern colossus because of a negative historical experience (Skonieczny, 2006). Mexico had lost almost half of its territory in the 1846 to 1848 Mexican-American war (De la Balze, 2001; Skonieczny, 2006). Secondly, Mexico strived to maintain an independent foreign policy, which sought closer alliances with the South and Central America and the Caribbean (Skonieczny, 2006).
According to Carranza (2002), it is still a puzzle as to why Mexico later decided to form an economic partnership with the North America countries from a very weak position. The country also paid a very high domestic political price by agreeing to join the NAFTA. However, the economic situation in Mexico and the labor market was deteriorating, and the political situation was unstable after a negative eventful election in the 1988 (Philip, 2008). The government also featured corrupt and authoritarian episodes. Inflation was hitting the country at a high rate, economic growth was stagnant and living standards were poor.
Additionally, Mexico had a significant amount of national debt that was un-payable. Trade liberalization seemed the most political consequential (Faber, 2007). On the other and, there was a looming fear in the US that the economic integration would lead to loss of jobs in the US while in the South there were cries for revolution (Pastor, 2004). Nevertheless, Mexico was eager to access the larger U. S. market despite the observers’ opinion that the U. S. is unlikely to abide by the trade accord (Castaneda, 2008). U. S.
had been known of having a poor record in international treaties implementation and its previous treatment towards Mexico in issues like immigration policies left a doubt on Mexico as to whether the country would be left out of the agreement implementation despite their being one (King, 2005). The Central America and Caribbean countries that were allied to Mexico feared that there could be an erosion of the already existing trade preferences if the NAFTA was formed (Baker, 2008). The countries faced the dilemma between free trade in the open regionalism and protectionism.
Furthermore critics viewed the formation of NAFTA as a state-led project although the members denounced the classical state intervention mechanisms in bid to soften the globalization effect. The Founding of NAFTA The formation of NAFTA was considered inevitable because of the market and trade conditions in the globalization period that necessitated an economic integration (Baker, 2008). However, the formation process was not smooth-sailing because of the various uncertainties that occurred in the wake of well developed countries wanting to merge their economies with the less developed ones.
This was evident in the negotiation process in which there was asymmetry of both political and economic powers and Mexico lacked a non-agreement alternative. The formation of NAFTA also lacked the accompaniment of institutionalization and there lacks a common governance unto which NAFTA can be identified. In Northern America, the Uruguay Round of multilateral trade negotiations in the 1990s was progressing slowly and thus this made the regional integration an attractive option (Carranza, 2002).
The formation of NAFTA started as a unique regional economic integration process between a less developed country, Mexico in this case; and two industrial powers- the U. S. and Canada (Davidson, 2008). This was the first economic agreement on a regional basis to include various forms of integration. Some of the integrated economic activities cited in most literatures include foreign investments, financial services, government procurement and intellectual property rights. On the contrary, the Uruguay Round global trade negotiations did not feature all of these revival strategies. The U.
S. presented NAFTA as a trade liberalization model in the western hemisphere in the early 1990s as a way of continental regionalism. On the other hand, the Latin American countries were not ready to embrace this model because of the doubt they had on the U. S. intention of seeing the agreement through the future. It was easier for the U. S. to control the agenda if the negotiation was on a regional rather than a multilateral level (Hufbauer& Yee, 2003). This would enhance more of the country’s economic, political and institutional perspectives in comparison to the rest of the world.
It was paradoxical that the economically successful U. S wanted a free trade agreement with the less developed Mexico. Carranza (2002) asserts that the U. S agreed to negotiate with Mexico about the free trade on condition that Mexico did not invoke any exclusion of key areas such as the area of oil that is sovereign sensitive. On the other hand, Mexico did not have any vital concession to base its negotiations in the status of a developing country. Nevertheless, despite this unequal negotiation ability, Philip (2008) highlights the irony by showing that the process was presented as a negotiation of the equals.
NAFTA’s goals, objectives and economic models NAFTA is a trade treaty which aims to eliminate custom duties on transaction between the U. S, Canada and Mexico. NAFTA has formed the world’s largest free trade zone whereby around 406 million people produce more than 11 billion U. S dollars worth of products (Page, 2002). The agreement which establishes NAFTA entails that the U. S, Canada, and Mexico pursue certain common objectives. Trade in services has been liberalized and government procurement markets including construction and services procurement markets have been opened through the NAFTA.
Therefore, through the agreement it is illegal for the parties to discriminate between the domestic and foreign producers in the government markets, investments and trading of services (Adikson, Zimmerman, 2004; Diep, 2008). NAFTA’s objectives therefore include eliminating custom barriers and enhancing cross-border trade in products and services (Vaughan, 2004). The treaty is also to guarantee conditions of equitable competition in the free trade area. The treaty strives to improve trilateral cooperation so as to extend the benefits of the agreement.
One of the main goals of NAFTA was the need to increase the flows of trade and investment in North America. Consequently, the agreement has succeeded in increasing Mexico’s and Canada’s trade dependence on the U. S. NAFTA also incorporated the less developed Mexico, in order to give the country a chance to prosper by joining the North America economies (Flores & Lankshear, 2000). NAFTA is a widely researched economic phenomenon that occurs as economists try to understand the three NAFTA’s economies models.
The gravity model has been used to explain the trade flows as the function of the importer and exporter market size a well as the distance between the two. Funk, et al. (2006) asserts that any extraordinary flows can be accredited to free trade agreements only after the market size and importer-exporter distances have been accounted for in the trade flow process. This has led to some economists showing that NAFTA generally does not have a significant effect on bilateral trade flows although it has the impact on the net trade creating.
Benefits of NAFTA to the US, Mexico and Canada The implementation of NAFTA inspired the economists to measure the treaty’s effect on the three NAFTA economies-U. S, Mexico and Canada (Funk et al. , 2006). The North America economic integration was seen as one that would be of benefit to the participating countries. Mexico would have a chance to gain access to the larger U. S. market while the U. S. also searched for new foreign investment opportunities in the country (Carranza, 2002).
Proponents of NAFTA view the agreement as detailed and comprehensive and have constantly given the accord praise for showing that less developed countries like Mexico can accept new rules in international politics in this globalization era and thus improve their situation. On the other hand, critics assert that NAFTA lacks basic safeguards to protect the people who are excluded from liberalized trade and investment benefits considering that almost over half of the Mexican population lives below the poverty line (Baker, 2008; Serra, & Espinosa, 2002).
The critics further argue that NAFTA is just a mere element of a larger problem; that is, globalization has a disintegrating effect on a mixed economy and the people’s social contract. On a moderate view, critics agree that formation of NAFTA was not a bad idea at all but without regional governance and regional institutions, the agreement remains unfulfilled (Pastor, 2004). Hufbauer and Yee (2003) cites NAFTA as an exemplary agreement for a new or an open regionalism that opens a whole range of novel issues which are designed to prepare the less developed countries of Latin America and Caribbean for the globalization challenge.
The issue of why the U. S pulled Mexico into the North integration is very controversial although the positivists assert that the U. S government has a very strong interest in the political and economic stability of Mexico (Skonieczny, 2001). Mexico was able to attract a considerable ratio of foreign direct investment in the 1990s as a result of NAFTA’s negotiations. The predicted economic breakdown of Mexico in the early 1990s never lived to happen as the country underwent economic transformation. Philip (2008) asserts that NAFTA is responsible for the economic and political stability in Mexico.
NAFTA has given this chance to Mexico through encouraging trade and investment opportunities. The social progress of the country is also underway and NAFTA aims to eradicate the high poverty levels in most of Mexico’s dwellings. NAFTA also provided the hope for Mexico to transform its worsening economic condition and urban challenges in the City of Mexico (Stracke, 2003). The Mexican government adopted the policies of democratization and free trade policies amidst controversies with the aim of preventing the country from an economic breakdown. Currently, Mexico could not be as developed as the U.
S. and Canada for that matter but looking way back in the 1990s to early 200s, it can be said that the country has become macro-economically stable (Philips, 2008). Mexico is among the richest Latin America countries in terms of per capita and has more than twice export per head as compared to Brazil. Exports of manufactured goods from Mexico to the U. S contribute to around 25 percent of Mexico’s gross domestic product and the market is even more liberalized than it was in the years ago. Another benefit of NAFTA to the Mexican economy includes the checking of inflation (Stern, 2007).
Although inflation occurs at some instances it does not reach three digits as in the 1990s but securely maintained at single digits. Other areas of the economy that have improved with the economic integration include the education system. The number of Mexicans with degrees from influential world universities has increased and expected to rise. The condition in the Mexican universities has also improved as better preparation of lectures takes place and a fairer democratic environment ensures that there is a stable learning environment.
Mexico’s rapturous population growth also slowed down with the implementation of NAFTA as most of the population started migrating North in search for better living conditions. A slower population growth enhances strategic planning and development of the country. However, as much as the evidence of economic transformation is noticeable in Mexico, the economic growth rate is disappointingly low. Philip (2008) and Stern (2007) states that the measurement of economy is determined by oligopolies and specifically Pemex, the state-owned petroleum company in Mexico’s case.
Mexico continues to suffer from severe social and urban problems such as high poverty rates, organized crime, drug trafficking, and corruption among others (Stern, 2007). As much as these are domestic problems, it is impossible to separate them from Mexico’s membership to NAFTA because domestic institutions also influence the direction of negotiations in the association (Carranza, 2002). Philip (2008) argues that the U. S is also benefiting from NAFTA because the treaty has enabled the existence of a politically and economically conducive environment that Mexico now offers as compared to the times before the treaty.
Flores and Lankshear (2000) assert that the developed North America countries in the treaty could benefit from Mexico’s low wage cuts in the labor force. Mexico large population of semi-skilled workers would provide cheaper and abundant labor for the national and transnational companies that seek low wage work. However, Flores & Lankshear (2000) argue that this dependence on a low wage economy undermines the development of a well educated, Challenges in NAFTA
The major challenges facing the NAFTA involve the lack of regional governance, asymmetry negotiations, lack of a stabilized relationship between the North and South American countries and lack of common market policies and common currency. Forces of market and trade integration pushed the economies of the U. S and Mexico together but there was little institutional change that took place to reflect the real degree of economic integration among the countries (Adikson, & Zimmerman, 2004). Economic integration in the north occurred without an established regional institution or governance.
It is believed that it will be difficult for the North America decision makers to effectively respond to fluidity, competitiveness, and complexity of the world economy without a form of regional convergence. Lack of regional governance also indicates a lack of a permanent mechanism for consultation among the three governments (Heron, 2002). This proves difficult especially in cases which the countries have to deal with other common challenges like drug peddling and immigration and this sometimes push for a bilateral involvement, for instance between the U. S and Mexico.
The lack of common or institutionalized NAFTA governance has led to the in dependent pursuance of other third party treaties by Mexico and Canada (Heron, 2002). NAFTA also promised to create regional barriers to the outsiders so that the insiders would receive relative gains as far as trade and other economic gains are concerned (Flores & Lankshear, 2000). However, Cavanagh and Anderson (2002) argue that NAFTA simply assumed that this would take place magically enabling the people to benefit from the free market policies, and that the three governments-U. S.
, Canada, and Mexico-would resolve older and newer problems naturally. However, through the condition in Mexico, it is certain that the agreement has not brought much change to the living standards of the individuals. The country’s record is extremely mixed concerning the free trade policy and the country is yet to unanimously agree on the agreement (Carlsen, 2006). Mexico has not gained the privileges that were promised if the country joined the North America relationship. Mexico did not gain a greater place in the Northern-dominated international institutions such as the International Monetary fund (IMF) or the World Bank.
Mexico remains poor and less developed despite being part of the supposedly economic rejuvenator-NAFTA. NAFTA’s negotiations did not consider the economic and development asymmetries between Mexico and the U. S and this also contributed to the exclusion of majority of Mexican population from the free trade benefits (Cox, 2008). NAFTA was supposed to give Mexico a chance to prosper through joining the Northern club. However, the moment Mexico decided to start negotiations with the U. S for a free trade agreement, it was found that Mexico still needed to make other sweeping concessions in order to gain access to the U.
S market. Mexico presented an overstaffed and underperforming institutions, an opposite of the North America countries which have the most performing institutions (Flores & Lankshear, 2000). Mexico was forced to make the bigger compromises and adjustments because after all, it was the weaker party. This also shows that majority of the decisions were made by the tremendous powers in the agreement-the U. S, and Canada. This can be proved from an economic angle in which the GDP of the U.
S alone forms 90 percent of the total North America economy (Carranza, 2004). It is unrealistic that during negotiations, Mexico would be expected to steer the decision-making process into finality. How does Mexico and Canada establish strategies on how to access the U. S’ over 8 trillion dollar market when all the 2 countries can offer is 250 and 500 billion dollars markets respectively? The Mexican experience has proved that the Southern countries cannot necessarily experience economic development with social justice through seeking alliances with the U.
S even in this globalization era. Mexico also undergoes a painful adjustment process because being part of NAFTA; it is forced to compete openly with the far more advanced economies of the North America countries (Cavanagh & Anderson, 2002). NAFTA if implemented strategically can have a voice in the global trade talks. However, the lack of a common governing in institution hinders this representation because it would appear as though one country or the other is representing its own views rather than that of NAFTA.
Cavanagh and Anderson (2002) argue that the failure of NAFTA to meet its alleged expectations can be blamed on the current economic conditions. The marketplace is globalized and thus highly mobile employers gain more power to suppress workers who fight for a fair gain of their benefits. However, this remains unchallenged because such firms ally with governments who in turn are desperate for foreign investment. This leads to the suppression of the hoist’s nation’s labor force through low wages and poor working conditions.
The unfortunate side is that the agency that is set up under the labor side agreement of NAFTA has proved incapable of holding governments and corporations accountable for violating the rights of workers (Cavanagh & Anderson, 2002). There have been alleged complaints of worker’s rights violations in all of the three NAFTA economies but other than a bit of public exposure, not much justice has been yielded. Lack of common governance is to blame for the loose policy of ensuring that all the parties in the agreement benefit positively.
There is also a looming fear that a future Mexican leadership could decide to pull out of the NAFTA’s agreement because of the country’s inconsistent views on NAFTA and the lack of institutionalized rules for the agreement. Recommendations NAFTA took place amidst controversies especially from part of Mexico’s population and the South and Central America countries. Moreover, a supranational institution and an ideal NAFTA identity are lacking. This poses a danger to the stability of the economic integration of the North American countries.
North America needs to tackle the gaps in the North-South relationships and also increase aggregate wealth. One way of doing this is through enhancing regional governance through the use of common currency for the member states. However Cavanagh and Anderson (2002) assert that the issue of establishing a common currency can lead to further controversies. First of all, the U. S. and Mexico are not in the same currency zones as compared to the likeability of the U. S. and Canada. This will negatively alienate Mexico further. Still on the issue of a common currency, Carranza (2002) argues that it is certain that the U.
S public opinion would not support a monetary union between U. S. and the two countries. The U. S needs to come to terms with having neighboring countries with difficulties in tackling money integration issues and the de facto dollarization of the economy of Mexico. This should also be accompanied with the building of appropriate institutions that would realistically introduce North America as a community of nations. The NAFTA countries need to establish a regional governance system that would ensure that all the member population is fairly treated without prejudice (Carlsen, 2006).
Social justice should be enhanced within the NAFTA economies and the established policies should fairly uplift the standards of all the countries (Anderson, 2003). Rather than using the large semi-skilled Mexico’s labor force for cheap, low-wage labor, there should be policies or strategies in which NAFTA can contribute to the establishment of better education and vocational training systems (Ma del Rosio, Camen, & Humberto, 2007). The criticism directed at the treaty will subside if it is observed that the member states are striving to raise the standards and conditions of one another rather than using each other for selfish gains.
Conclusion This essay has comprehensively discussed the factors pertaining to the formation and implementation of NAFTA. The North America economic integration awakened the interest of many economic researchers and observers because of the coming together of powerful North America economies and a southern least developed economy. Although the reason for such a relationship was met with criticism and a lot of controversies, proponents viewed it as an opportunity for Mexico to improve its political, economical and social environment. The U.
S the most developed North America country viewed the relationship as an opportunity to expand its globalization boundaries as well as create a stable economic and political condition for trade in the region. However, critics believe that it is for the best interest of the U. S while Mexico risks the chance of being sidelined. Nevertheless, Mexico has recorded an economic transformation and it is believed that if policy makers implement some strategic measures in the treaty, then Mexico stands a greater chance of becoming a developed nation.
This has provided the U. S with a stable political and economic environment without which the security of the U. S may have been at stake. NAFTA faces various challenges but the lack of regional governance is seen as the source of most of the challenges. NAFTA lacks international identity in contribution of international trade discussions. Additionally, treaty are known to be created where all the participants have an almost equal bargaining power even though they will not be dealing with exchange of similar products or services.
However, in this case, the negotiations take an asymmetry approach because Mexico is in a compromised state in which its position does not allow it to challenge the decisions of the U. S. , the most developed economy. As a result, the negotiations are based, on an unequal level. NAFTA leaders especially from the North need to understand the gap between the north and south populations and provide democratic decisions that will be best appreciated by both sides. Economic integration is significant in this global era in which market and trade forces have pushed for market liberalization conditions.
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