Regional Analysis: North American Free Trade Agreement

Regional Analysis: North American Free Trade Agreement

In today’s globalized economies, virtually every country in the world belongs to some form of regional integrated trade organization whether by direct membership, bilateral or multilateral agreement. Regional integration is a process by which sovereign states in a particular region enter into an agreement to promote economic growth through the reduction of barriers to trade restrictions and safeguard common interests such as the environment. The removal of trade barriers results in a free trade zone thus creating a single market. Sovereign nations have many differences, some may be more economically sound and others may have a greater labor force or better technology. In the end, all regional nations must find a method to work together for the common good of all parties. The development of the North American Free Trade Agreement (NAFTA) was to solidify the nations occupying the North American continent, Canada, the United States (U.S.) and Mexico. Many proponents question the success of NAFTA for these nations. This essay will examine the advantages and disadvantages of regional integration and the regional economic development of these nations as members of NAFTA.

NAFTA is trade agreement implemented January 1, 1994 between the U.S., Canada and Mexico which removes restrictions on trade between the three countries to encourage free competition, improve investment opportunities and increase market access “for small and medium-sized enterprises (SMEs)” (Tomasetti, H., 2004). Some of the advantages NAFTA has afforded its members are the eradication of tariffs, product price reductions and increased profit margins. NAFTA has eliminated tariffs on all goods traded between the U.S. and Canada and Mexico as of January 1, 2008. By reducing the tariff rate on goods or final products allows SMEs to reduce their selling price thus keeping them competitive with non-NAFTA goods sold at a higher price due to imposed tariffs and allows the SMEs to compete with larger organizations within the region. For example, a wool area carpet from Mexico sells at $60 and a wool carpet from Thailand sells at $50, both countries must pay a tariff of $15. Removing the tariff rate on Mexican goods will encourage consumers to purchase the Mexican goods versus the Thailand goods.

Another advantage of regional integration is the increase in sales. According to reports from the U.S. Department of Commerce, trade between the NAFTA countries has increased 200% and members of NAFTA have purchased a greater number of U.S. products and exports than was purchased in Europe. In addition, since the implementation of NAFTA the number of SMEs has tripled due to the increased demand for products within the region. An increase in supply demand means an increase in sales thus requiring an increase in production or manufacturing and an increase in wages for workers. For the NAFTA region, U.S. manufacturing rose 44%, wages more than doubled and employment increased by nearly 20 million from 1993 to 2000 (Tomasetti). Over the last decade, trade has more than doubled among the three NAFTA countries “growing from $306 billion in 1993 to $621 billion in 2002” according to calculations from the International Monetary Fund (Senate Committee of Foreign Relations, 2004).

Other benefits of regional integration are in the form of business investment protections through the standardization of procedures in relation to operations. NAFTA provides its members with protection regulations, which protects the rights of the investors to equal treatment and guarantees the investor receives fair market value for confiscated goods or property and other intellectual property protections in the areas of patents, trademarks, copyrights, registrations and test data (Tomasetti). Regional integration makes it permissible for enterprises in member states to bid on government projects of other member states. For example, under the government procurement provisions of NAFTA, contractors from Canada and Mexico can competitively bid on U.S. government projects. Beyond business, regional integration encourages the reduction of conflicts or hostilities among members and outside nations as each sovereign nation has an interest to protect its neighboring nation. However, not all aspects of regional integration are positive and some disadvantages associated with the practice exist as well.

One area of concern regarding regional integration are that it will lead to the relocation of economic activity causing industries to increase in some countries and decrease in others. A good example of this is in Mexico as U.S. manufacturing operations relocated to Mexico due to the lower cost of production and less stringent labor regulations. In addition, Mexico experienced an increase of other foreign direct investments (FDI) from firms outside