NAFTA: Canada’s ; Mexico’s ViewpointsWhen the Canada/U. S. free trade agreement came into effect, theMexican’s were very impressed by the provision and opportunities that opened forboth sides. Mexico then approached the U.
S. , seeking to form a similaragreement with them. This brought forth a new issue in Canada, should they letMexico and the U. S. form an agreement without them? Or should they participate,thus transforming their deal with the U. S.
into a trilateral agreement includingMexico. On June 12, 1991, the trade ministers of Canada, the United States andMexico met in Toronto to open negotiations for a North American Free TradeAgreement (NAFTA). This was an historic occasion. For the first time ever, adeveloping country agreed to sit down with two industrial countries to craft anagreement that would open its economy to full competition with the other twocountries. If successful, the agreement promised to make the whole NorthAmerican continent into one economic zone and set an important precedent fortrade and economic cooperation between the wealthy countries of the North andless developed countries of the South.
The challenge before them was bothexciting and daunting. A little more than a year later, the three trade ministers met again inWashington, to put the finishing touches on a new North American Free TradeAgreement. In just over a year the negotiators from the three countries hadsuccessfully met the challenge and put together a new trading frame work forNorth America. The North American Free Trade Agreement (NAFTA) was set to beimplied. The North American Free Trade Agreement often raises questions regardingthe new economic trading blocs around the world. The twelve-nation EuropeanCommunity (EC), a Central American free trade zone, and a four-nation SouthAmerican group, as well as preliminary discussions regarding an Asian tradingbloc, all point to the fact that new economic realities already exist.
NAFTApromises to have a major impact on the people in all three nations. There willobviously be short-term costs of adjustment, which will certainly hit someindustries, regions, and workers harder than others. There will be definitewinners in the agreement, and definite losers in the agreement. There evenmight be disputes. Whether as workers, investors, consumers, or ordinarycitizens in all three countries they may be affected.
The final verdict on theNorth American Free Trade Agreement, may in fact not fully be realized for manyweeks, months, or even years. However, in the following essay, the advantagesto both Mexico and Canada will be analyzed, as well as the disadvantages toMexico. It is safe to say that the advantages clearly outweigh thedisadvantages, and that it will in fact be beneficial for both countries to beinvolved in this unique deal. *** Benefits to CanadaCanada’s goals in the negotiation of NAFTA were very simple. They wanted toimprove their access for their goods and services to Mexico and the UnitedStates. Canada wanted to guarantee their position as a prime location forinvestors seeking to serve all of North America.
The NAFTA deal has realizedthese objectives set by Canada and will supply Canada with a new and sharperedge to their international competitiveness. The agreement has set a path forCanada widening their trade horizons, while also giving them a bigger stage onwhich to demonstrate their economic expertise and leadership. An advantage for Canada is that the reduction of Mexican barriers will providenew markets and opportunities for Canadian goods and services. Canadian firmswill be able to participate in, and expand sales in, sectors that werepreviously highly restricted, such as autos, financial services, trucking,energy and fisheries. Mexican tariffs and import licensing requirements will beeliminated, some immediately and others over 5 to 10 years, providing barrierfree access to 85 million consumers.
The North American Free Trade Agreement covers virtually every field of businessin Canada. NAFTA provides many provisions as well as both real and potentialadvantages to Canadians in all most all places in the work place. Agriculture products play a significant role in Canada’s exports to othercountries. Canada’s excellent and fertile farming land has produced many greatresults. A very superior livestock and excellent crops have contributed to aproductive and prosperous trade of their agricultural products and servicesaround the world. Canada’s total exports surpasses $13 billion a year.
UnderNAFTA Canada and Mexico have worked out a separate agreement between themselves. Over all Canadian exports will enjoy immediate access to the Mexican marketunder the deal. Mexican import licenses on wheat, barley and table potatoeswill be eliminated over a period of time. Also tariffs on lentils, honey, driedpeas, millet, raspberries, rye and buckwheat will be dropped. All these itemsare important crops to Canadian farmers and with these costs cut they will enjoya greater profit and more trade. NAFTA also opens up great opportunities forlivestock farmers.
Because Mexico lacks an adequate fresh water supply theirlivestock operations aren’t very big. Therefore Mexico must rely on importsfrom Canada. NAFTA helps Canadian farmers and farm related businesses to a muchgreater ease to an ever growing market that will benefit them in the future. There are well over 140 000 Canadians employed in the auto manufacturingindustry. As well, approximately 32 per cent of Canada’s manufacturing exportsis directly related to the auto industry.
The Mexican market however, is highlyrestricted, while 95 per cent of Mexican automotive imports enter Canadacompletely duty free. NAFTA addresses this imbalance, and more importantlycorrects it. By the year 2003, Canada will have open access to the fastestgrowing automotive market in North America. Canada’s service industry is the fastest growing sector of its economy. Morethan nine million Canadians, which is about two thirds of their work force areemployed by the service sector.
Cross border trade in services was dealt withfor the first time in the Canada-U. S. Free Trade Agreement. The NAFTA deal hasincluded provisions for this type of trade and spells out procedures aimed atencouraging the recognition of licenses and certificates through the developmentof mutually acceptable professional standards and criteria such as education,experience and professional development. Under NAFTA a temporary entry acrossthe border will be available for about 60 professions.
Oceanographers,geographers and statisticians are three groups who can benefit from the NAFTAagreement. When Canada was negotiating NAFTA one of their key objectives was to maintainthe Free Trade Agreement rules with the U. S. with respect to energy trade. “Canada wanted to ensure that rules for investment, service and procurementaffecting the energy and petrochemical sectors in Mexico provided the sameopportunities for Canadian business as previously enjoyed in the U. S.
“NAFTAcontributed to the removal of many investment and trade restrictions onpetrochemicals. New opportunities will open up for Canadian business in privatepower generation. Also, Canadian businesses will be able to bid for service anddrilling contracts with the Mexican state – owned company Petroleos Mexicanos(PEMEX). The manufacturers of equipment that relates to the industry will alsohave easier access to the Mexican market. More than 500 000 Canadians are employed in the “four pillars” of the financialindustry.
These pillars consist of banking, insurance, securities firms andtrust companies. Mexico’s financial markets have opened up for Canada due tothe NAFTA deal. “Canadian banking, insurance, and security firms will be ableto operate wholly owned subsidies that will allow Canadian businesses to servicetheir clients throughout the NAFTA region. “Canada’s financial sector, whichis already strong and hearty, will realize new opportunities under NAFTA thatwill allow it to further expand and flourish.
Canada’s financial institutionshave a lot to offer Mexico. Canada’s strength, such as its technological know-how and it’s experience in operating large, integrated banking networks, areareas in which Mexico needs immediate and consistent strategic advice. Foreign investment has played an important role in Canada’s development as anation. Investment is an important tool for Canada’s growth and prosperity. Itwill continue to aid Canada’s goal of maintaining and enhancing theircompetitiveness in the world marketplace. Under the free trade agreement withthe U.
S. , Canada agreed to raise the thresholds for the review of foreigntakeovers by U. S. investors.
With NAFTA Mexico will enjoy the same access asthe U. S. investors. Canada has reserved its right to review large foreigntakeovers. In addition, the NAFTA allows Canada to continue safeguarding keyfactors like culture, social services, basic telecommunications and some modesof transportation by permitting Canada to maintain restrictions on foreignparticipation. Telecommunications is definitely going to play a crucial role in integrating theNorth American economy under NAFTA.
A smooth transfer of data and theinstantaneous electronic exchange of information via telecommunicationsnetworks are an essential tool of international trade. This will benefit Canada,fore they are a recognized world leader in the telecommunications field. Thiswill directly provide a market for Canadian developers in services such aselectronic messaging, advanced data networks, and electronic mail. Mexico is inthe process of modernizing its services so that they are compatible withCanadian and U. S. networks.
By the year 2000, Mexico’s demand for importedtelecommunications products is expected to grow by 42 per cent. Anyone canplainly see the potential opportunities here for Canada. 1n 1991, more than one hundred and thirty five thousand Canadians were employedby the textiles and apparel industry, mostly in Montreal, Toronto and Winnipeg. The NAFTA sets out strict rules of origin for most yarns, fabric and clothing. These new levels will help Canadian textile and apparel manufacturers expandtheir exports of products to the profitable U.
S. market. With the NAFTA,Canadian and Mexican tariffs on apparel will be eliminated within 10 years. Many might worry in Canada and query if this is really an advantage for Canada.
Arguably it really doesn’t affect Canada because Mexican apparel is geared tocheaper, lower quality products. While the Canadian industry is moving towardproducing higher value textiles and quality designer fashions. The North American Free Trade Agreement has “streamlined” transportation betweenthe three countries involved. Within six years, trucks and buses can crisscrossthe North American continent with virtually no border restrictions. Under NAFTA,for instance, a Canadian driver can take a load from Calgary, to Mexico city,with a stop in Texas for more goods. And on the way home, the same driver candeliver Mexican goods to both Canadian and U.
S. destinations. This freedom ofmovement will increase the efficiency of our land carriers and will also enhancethe competitiveness of our goods. *** Disadvantages to Canada:The implementation of the North American Free Trade Agreement may have manynegative connotations towards social and environmental issues involving thetrading nations. “One effect from the enactment of NAFTA is the loss ofmanufacturing jobs which would occur from the shift of multinationalcorporations to Mexico.
“This will cause many corporations to move theirplants over the border. By doing this, it will let them produce goods at lowercosts. This is because Mexico has cheaper, unskilled labor due to non-existentminimum wage rates. In almost every case money usually leads the way. InNAFTA’s case this is down to Mexico.
With this movement of multinationalcorporation over to Mexico, the rate of unemployment will fall in Mexico butwill rise in Canada. A rise in unemployment for Canada is not a good thingespecially with the situation that already has plagued them. From a Canadianbusiness point of view, it makes sense for them to produce there good or servicewhere labor is cheaper and their total costs are lower. Still, this short termloss of jobs will be a tremendous strain to the Canadian economy. This mightcause a short term problem and still is yet to be seen if they Canada canovercome it. There are many advocates of free trade.
Since NAFTA was introduced, aplethora of companies have left Canada and relocated in Mexico. This loss ofjobs in Canada might force Canadians to become more innovative andentrepreneurial. These new ventures will require new technology, new investment,new capital and new infrastructure. These new innovations could only improveCanada’s global competitiveness.
In comparison to other industrializedcountries, Canada spends considerably less on research and development. *** Benefits to Mexico:The movement of companies to Mexico has some positive long term effectson environmental and human rights. Under NAFTA, North American countries willbe working together. With all the new expansion to Mexico this will help tostabilize the Mexican economy. A lot of Canadian and American businesses willrelocate across the Mexican border. Employment and environmental regulationsare lacking in Mexico, but with a rapid expansion over the Mexican border willhelp stabilize and develop regulations.
A result of this Mexico’s future laborand environmental problems will decrease. There are five important conditions stemming from the NAFTA deal. Theseconditions are intended to increase the degree of Mexico’s competitiveness. These five conditions are, “certainty of rule, economies of scale, economies ofscope, wide choice of technologies, and finally, availability of a wide rangeof services at reasonable cost” . The first condition mentioned was certainty of rule. The reason thatthis makes Mexico a more competitive nation is due to the fact that theirbusiness people are able to operate in a stable environment.
They know the”rules of the game”, and do not have to worry about them changing in the future. This is the only way that they can make wise and proper decisions on how to bestallocate their resources. They must know that the rules are permanent, and thatthere will be permanence, stability, and continuity in economic policies. The second condition that is important for Mexican competitiveness iseconomies of scale. This gives Mexico the ability to lower average costs byserving a extremely larger market. In fact, NAFTA will create the largestregional market in North America.
360 million people and more than $7 trillionin regional production will therefore allow North American firms to grasp theadvantages of lower average production costs. It is also important for thecompetitiveness of everyone involved in the deal to know exactly when tariffswill be eliminated, so particular firms will know when they are able to enterthe larger market. For example, since day one of the deal, over forty per centof Canadian exports entering Mexico were duty free. Tariffs on the remainingsixty per cent will be phased out over the next ten years or so, with themajority of them being eliminated within the first five years of the deal. These timetables will not change, so individual firms will know exactly when aparticular market will be fully open.
This is a very important competitiveelement. The third element is directed towards Mexico’s smaller, and medium-sizedfirms, that do not have the resources to take advantage of economies of scale. NAFTA offers these smaller businesses something called economies of scope. Economies of scope is the ability of these “smaller” firms to become verycompetitive by specializing in a given segment of the market, and knowing thatsegment “inside-out”.
The best example of this area is the market niche Mexicohas created selling refrigerators to the United States. It may be hard tocomprehend but Mexico is the largest supplier of refrigerators in the UnitedStates. One may query why and how did this happened, and think that the U. S. would be the number one supplier, however Mexico is very proud of what theyaccomplished. They selected a niche in the American market and acted upon it.
They started supplying smaller refrigerators to offices, businesses and collegesof dorms. By specializing in this one niche, a small Mexican firm can reactquickly and efficiently to changing tastes, technologies, and trends. Allowingthe firms to stay competitive in a ever growing market. Surprisingly, with NAFTA in place a lot of niches like the one mentionedabove will open up around North America. The typical Mexican consumer is a lotdifferent than the Canadian consumer in a lot of respects.
In Canada there arenumerous niches based on income levels, taste, and culture. NAFTA will givefirms in Mexico a greater margin of competitiveness than they are alreadyenjoying. The fourth element, and arguably the most important one, is the abilityto have a wide choice of technologies. It is for this element that the lessonslearned from Japan come into effect.
People often believe that the reason forJapans great competitiveness is the quality of Japan’s work force, and theattitude of Japanese management. Although this is all true, what is oftenoverlooked is that 35 per cent of Japan’s exports are made through productionsharing. In other words, Japan is taking advantage of a wide range oftechnologies. The whole concept to this is very simple.
If a job is labor-intensive, a firm should have access to adequate labor. If, on the other hand,a job is capital-intensive, a firm should have access to capital. Finally, the fifth condition for competitiveness is to have available arange of services at a reasonable cost. In a modern economy we have torecognize the importance of services, like transportation, telecommunications,and financial services. In a second world country like Mexico, these servicesstill carry a very high cost, which puts Mexico at a competitive disadvantage.
But NAFTA will have to play a dramatic role in lowering the cost of servicesbecause it achieves the most comprehensive opening of the services market of anytrade agreement. One example of the availability of services as a result ofNAFTA is, that it opens land transportation throughout the entire region. Priorto the deal if certain cargo had to go from Mexico to Canada, it would have totravel to the border, then sit there while the cargo was re-loaded onto aCanadian or American truck, then shipped to Canada. The Mexican merchant whohad to ship the cargo is thus placed at a competitive disadvantage. Now, undernew NAFTA rules, that truck is able to go directly from the Mexican plant,straight to it’s final destination, thus saving both money and time. A second example is in the area of telecommunications, such as phones,faxes, and other information services.
This is most definitely becoming moreand more important in the production process of modern society, and NAFTA opensthe North American market in this area as well. This will make industries morecompetitive by providing reasonable priced and reliable communications. A very important issue that is always featured in the NAFTA debate isthe environment. Developed countries like Canada often take for granted, thatenvironmental protection requires considerable economic resources. A PrincetonUniversity study confirmed that, “When a country is very poor, there is nopollution because there is no industry.
As a country’s industry grows and it’sper capita income begins to rise, environmental degradation comes into effect. “True, this has been the recent history in Mexico, However, a country ultimatelyreaches the turning point, where it has grown to the level where it has theresources to devote to environmental protection. As well, the agreement itselfcontains many environmental provisions. It is often called the “Greenest”multilateral trade agreement ever negotiated. NAFTA specifically prohibits anyof the three countries involved from loosening environmental rules in order toattract new investments. *** Mexico’s Disadvantages:”NAFTA will simply compound the ills created by the administrationspolicy of monopolistic free trade.
“In the short run the U. S. and Canada wouldhardly feel any effect, while Mexico would face great disruptions as a result ofopening its borders. This is because of the small size of the Mexican economywould barely create a crease in the economies of its northern neighbours. Theproblem is that unemployment may soar in Mexico because of the large inflow ofmanufacturers from its new trading partners.
Indeed, Mexico’s economy couldcollapse. In fact, in the last two years the number of unemployed in Mexico hasincreased by more than 1. 1 million, while salaries have lost more than 41. 6% oftheir dollar value. In 1993, 8. 5% of the economically active population ofMexico earned less than the minimum salary; today 11.
9 percent find themselvesin the very same position. Much like East Germany, Mexico suffers from “backward technology andinefficient, bloated state monopolies. The trauma of exposure to giant northernfirms could be fatal to Mexican manufacturing. “NAFTA proposes to open Mexicanmarkets to Canada and the U. S.
gradually, thus constraining the “foreignonslaught,” however, the short run suffering that Mexico would endure would bemassive. Especially since Mexico which has been buried in a deep slump since1982, will not, unlike East Germany, receive huge financial aid. The biggest disadvantage incurred on Mexico as a direct result of thedeal is the amount of money and capitol needed to be spent on up grading theirtelecommunications, equipment in the workplace, as well as their transportationroutes. This needs to be do done in order to become competitive in the NorthAmerican Market.
This however, may not be viewed upon as a benefit, fore it isgoing to increase it’s productivity in the global market. What ever short termdisadvantages are induce due to the deal, will eventually be nullified over thelong run. ***Mexico’s role in the North American Free Trade Agreement, looks to be agreat step in their country’s potentially great future. For Mexico to stay withNAFTA they have to continue the dramatic turnaround their country hasexperienced in the past decade. The economy in Mexico is growing faster thantheir population, and with NAFTA they could only expect better things to cometheir way. Inflation is under control, foreign debt has been reduced, more than1,000 state owned industries have been privatized.
Mexico is finally showing afiscal surplus for the first time in a quarter of a century. With NAFTA it willhelp Mexico consolidate these economic reforms, secure the confidence of theworld’s investors and allow Mexico’s economic turnaround to continue for manymore years. Economic integration initiatives like NAFTA offer positive benefits toCanada and to other trade partners. They promote efficiency of scale, eliminateexpensive and time consuming trade restrictions between nations, and discouragegovernment intervention. “NAFTA in particular is in tune with the twinimperatives of globalization and global development.
It embodies the historicallogic of earlier movements toward Canada/U. S. economic alliances.”True, thedeal is not perfect, but to retreat from it now would be a step backwards.In conclusion, we feel that when all the pros and cons have been weighed,and all has been said and done, NAFTA will eventually become a positive step inNorth America’s future.Business