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North American Free Trade Agreement (NAFTA) was a trade agreement reached between the United States, Canada and Mexico in 1994 to create a large free trading area between these countries. The main aim was to increase their competitiveness in the global market, reduce the cost of doing business by eliminating the trade barriers, increase the investments and provide a safer market for the goods and services produced in the region. The Chiapas revolt and the assassination of a presidential candidate was a blow to the regional trade agreement, the Chiapas of Mexico feared NAFTA would threaten their low technology agricultural economy by importing cheap grains from the U.S. And Canada. The subsequent result to the Mexican economy was failure to put a fixed exchange rate between the peso and the dollar at three pesos per dollar which could have saved the currency from devaluation during the crisis (Direct Selling Education Foundation, 1998).
The fixed exchange rates are attractive for emerging economies such as Mexico for many reasons, pegging the exchange rate against a hard currency cushions the weaker economy from the risks that come with the uncertainty in the high exchange rate variability. For the emerging markets, fixed exchange rate attracts investments and...
It benefits the traders in the sense that the goods and services will not be subjected to price variability due to the exchange rate volatility which can affect their imports and exports in the foreign market.
Fixed exchange rates are attractive for emerging economies since it reduces Competitive depreciation or competitive appreciation. This is realized when the economies create a less competitive atmosphere for the members within the region whereby no country has a competitive advantage over the other or tries to win a trade advantage over the others.
Fixed exchange rate helps in reducing the speculative bubbles whereby the exchange rates are pegged to a certain amount of the domestic currency to the dollar or any stable currency eliminating the exchange rate fluctuations which could adversely affect other economies. The effects of devaluation of the hard currency would therefore not be felt by the neighboring countries since the rate is fixed attracting more investments.
The fixed exchange rate regimes however are unstable due to a number of factors; those economies are vulnerable to the currency crisis. For a country to…
References
Direct Selling Education Foundation, (1998). The North American Free Trade Agreement. Retrieved May 8, 2012 from http://www.library.unt.edu/gpo/oca/nafta.htm
Jeffrey A. Frankel, (2003). Experience of and Lessons From Exchange Rate Regimes in Emerging Economies. Retrieved May 8, 2012 from http://www.nber.org/papers/w10032.pdf
M. Angeles Villarreal, (2010). NAFTA and the Mexican Economy. Retrieved May 8, 2012 http://www.fas.org/sgp/crs/row/RL34733.pdf
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