North American Free Trade Agreement

North American Free Trade Agreement is one of the most important and influential international relationship formed between the U.S., Canada and Mexico, creating the largest free trade region in the world. The following pages analyze NAFTA's influence on member countries while focusing on the trade relationship between the U.S. And Mexico. The most important facts about U.S. -- Mexico trade are presented, with details on the imports, exports, and trade balance situation. In addition to this, the paper identifies and analyzes the advantages and disadvantages of this free trade agreement, revealing how benefits for one country can become negative effects for another. This refers to effects on national economy, companies, and individuals in these countries.

Contents

Introduction

NAFTA Historical Background

NAFTA Results

U.S. -- Mexico Trade Relationships

U.S. Exports to Mexico

U.S. Imports from Mexico

U.S. -- Mexico Trade Balance

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Investments between the U.S. And Mexico

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8. NAFTA Advantages

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9. NAFTA Disadvantages

Conclusions

Reference list

Introduction

The evolution of modern society has determined countries to collaborate in their attempt to improve develop national economies and to protect themselves from foreign attacks. Their lack of certain resources and abundance of other resources needed by other countries represents the basis on international trade. The international trade activity started at a reduced scale between neighboring countries, and developed into a worldwide network of international relationships.

Among the most powerful international trade agreements we can find free trade agreements between the U.S. And Australia, Bahrain, Chile, Colombia, Israel, Jordan, Korea, Morocco, Oman, Panama, Peru, and Singapore. The Dominican Republic -- Central America -- United States Free Trade Agreement is a rather new trade agreement formed in 2006 between the U.S., El Salvador, Guatemala, Honduras, and Nicaragua. It seems that this region is U.S.' 14th largest exports market in the world, providing $29.5 billion. The most exported products within this free trade agreement are petroleum products, machinery, electrical and electronic products, textile fabrics, cotton yarns, cereals, plastics, motor vehicles, paper products, and medical instruments. In addition to significantly liberalizing trade, the member countries of this agreement also focus on improving customs administration, trade facilitation, technical barriers to trade, government procurement, investments, telecommunications, electronic commerce, intellectual property rights, transparency, but also manifest great interest in labor and environmental protection (ITA, 2014). The advantage of such a complex agreement is that it influences regional stability, economic integration and development of the member countries.

Another important trade agreement is represented by the North American Free Trade Agreement. This agreement is formed between the U.S., Canada and Mexico. NAFTA is the world's largest free trade area, and it involves 454 million people that have produced $17.2 trillion worth of products in 2010. The total merchandise trade between the U.S., Canada, and Mexico has significantly increased since the agreement's establishment in 1994, determining economic growth and prosperity.

Free trade agreements with numerous countries strategically located have allowed the U.S. To address foreign markets by its companies developing their business on international level. The reduced barriers to exports from U.S. companies and the protection of the country's interests has developed a trading and investment environment from which the U.S. And trade partner countries can benefit while reducing costs.

1. NAFTA Historical Background

The North American Free Trade Agreement is a comprehensive trade agreement that was established in 1994 between the U.S., Canada, and Mexico. The basis of this agreement relies on reducing and eliminating most tariff and non-tariff barriers to free trade and investments between the member countries. The complexity of this agreement is also reflected by the institutions that monitor and control its application. The Free Trade Commission involves ministerial representatives from all NAFTA countries. The objective of this commission is to supervise the implementation of the agreement and to help resolve disputes.

NAFTA coordinators are represented by senior trade department officials designated by each country. NAFTA working groups and committees focus on ensuring trade and investments regarding goods, rules of origin, customs, agricultural trade and subsidies, standards, government procurement, investments and services, the labor market, and others. In addition to this, the agreement is monitored by a Secretariat, Commission for labor Cooperation, and Commission for Environmental Cooperation.

NAFTA is based on negotiations on free trade agreement between the U.S. And Canada. The most important points of this agreement are represented by reducing many tariff and non-tariffs barriers to trade, and included a dispute settlement mechanism in order to resolve trade disagreements. The categories of products affected by this agreement are mostly represented by meats, fruits, vegetables, beverages, processed foods, textiles, fuels, electrical goods, machinery, and others.

2. NAFTA Results

The statistics on trade and other economic indicators provided by the U.S. Department of Commerce reveal some interesting facts about how NAFTA has affected the country's economy. In addition to this, they reflect the evolution of trade, investments and employment due to NAFTA establishment. These indicators reveal the fact that trade and investments liberalization has allowed companies in the U.S. To improve their efficiency and competitiveness, and to increase the level of exports while addressing the international business environment.

The effects that NAFTA has on the economy of the U.S., Canada and Mexico are significant. The most important effect of this agreement is that it is stimulating trade and investments between the U.S., Canada, and Mexico. The interesting fact in this case is that U.S. exports towards NAFTA partners have increased 279% since its establishment, while U.S. exports towards the rest of the world have increased 260%. Economic indicators reveal the fact that U.S. companies have attracted 50% of Mexican imported products, and 51% of Canadian imports.

Another important effect of NAFTA's establishment is that the agreement determined surplus markets of partner countries for U.S. products. This can be observed in the $20.9 billion trade surplus in manufactured goods, and in the $43.7 billion trade surplus in services, while agricultural products reported a $3 billion surplus. These values refer to exports to Canada and Mexico.

Combined NAFTA markets also represent the largest foreign crude oil suppliers to the U.S. The crude oil imports -- exports balance within NAFTA registered a deficit. However, this deficit can be attributed to the U.S. that imported $72 billion worth of crude oil from Canada and $37 billion worth of crude oil from Mexico. This represents one third of total U.S. crude oil imports.

Canadian and Mexican markets represent the most important exports regions for U.S. companies (ITF, 2014). This mostly refers to small and medium sized companies. It seems that 96% of companies that export their products to NAFA partners are small and medium sized. These types of companies are strongly advantaged by a free trade partnership with Canada and Mexico. This is because the short distance between companies in the U.S. And their markets in these countries determine reduced transportation costs, which also reduces their investments level while increasing profits. In addition to this, the reduced tariff and non-tariff barriers to these countries allow U.S. companies to expand their business on international level.

This free trade agreement has also determined Mexico to relax investment restrictions. This refers to local content, trade balancing, market share, and market access requirements. Therefore, such measures have increased U.S. investments in Mexico by 495% since the trade agreement was established. This situation can be considered reciprocal, since U.S. investments by Mexico have increased 819%, while investments by non-NAFTA countries have increased by 448% in the U.S.

The North American Free Trade Agreement has also affected patent provisions. These provisions are intended to support Mexico's high class patent regime and to increase U.S., competitiveness in the region. The business sectors that benefit the most from this situation are represented by pharmaceuticals, scientific equipment, and information communication technology. These strengthened patent provisions are also important for Canada and Mexico.

Another important benefit of NAFTA is that it has significantly reduced numerous market entry barriers. These barriers mostly influence goods markets. The advantage of this situation on U.S. companies is that they have greater market access in order to export their products, and they can also offer smaller prices in comparison with companies in South Korea and China.

The importance of NAFTA can also be observed in U.S. companies' relationship with their competitors in Europe and Mexico. This is because the Mexico-European Free Trade Agreement and other of Mexico's free trade agreements allow companies in these countries to receive duty free access for numerous products. In addition to this, the agreement ensures preferential market access for certain business sectors. This represents a problem for U.S. companies that must develop complex strategies in order to counteract the effects of free trade agreements between Mexico and other countries. The Mexican market is very important to U.S. companies because of several advantages it provides, and it must be carefully addressed by these companies. Therefore, NAFTA represents an important factor that can help U.S. companies improve their competitiveness on the Mexican market.

The automotive sector is one of the most important industries that contribute to the U.S. economy. This is one of the reasons for which NAFTA ensures important provisions for this sector. These provisions help automotive producers in the U.S. To address member countries as a unitary market. This allows them to increase their efficiency while competitively addressing the international environment.

Other provisions ensured by NAFTA are applied to the textile and apparel sectors. This is the case of yarn forward rules of origin, and others. These provisions are intended to increase exports opportunities for textiles and apparel producers in the U.S.

3. U.S. -- Mexico Trade Relationships

The North American Free Trade Agreement has significantly influenced relationships between the U.S. And Mexico, and it also provides important opportunities for economic development on public and private level. The trade and investments activities between these countries have been improved due to the agreement. The set of trade rules created by NAFTA have reduced the barriers between Mexico and the U.S., strengthening markets in these countries.

In order to understand the effects that NAFTA has on the U.S. And Mexico, it is important to analyze some of the facts regarding their trade relationship. The products exported and imported between the U.S. And Mexico totaled $500 billion in 2011. The value of exports reached $224 billion. The value of imports reached $277 billion. The U.S. trade deficit with Mexico was $53 billion in 2011.

Mexico is U.S.'s 3rd largest trade partner with $494 billion in total trade during 2012. The value of exports reached $216 billion (USTR, 2014). The value of imports reached $278 billion. The U.S. trade deficit with Mexico was $61 billion in 2012.

Some interesting facts about the U.S. -- Mexican trade relationship also apply to services. Traded services between the U.S. And Mexico reached $39 billion in 2011. Of these, exported services reached $25 billion. Imported services reached $14 billion. The U.S. services trade surplus with Mexico was $11 billion in 2011.

4. U.S. Exports to Mexico

Regarding exports, Mexico represents an important partner for the United States, and it ranks 2nd largest goods export market in 2012. This situation can be attributed to NAFTA. In addition to this, other market opportunities have determined this situation.

The U.S. exports to Mexico in 2012 reached $216.3 billion, a 9.1% ($18.0 billion) increase from 2011, and a 121.9% from 2002. It has increased 420% since before establishing NAFTA. U.S. exports to Mexico represented 14.0% of all U.S. exports in 2012.

The most exported products in 2012 were: machinery ($36.0 billion), electrical machinery ($34.0 billion), mineral fuel and oil ($23.8 billion), vehicles ($20.4 billion), and plastic ($13.9 billion). In the case of agricultural products, U.S. exports to Mexico reached $18.9 billion in 2012, making Mexico the 3rd largest U.S. agricultural products exports market. The most exported categories of agricultural products are: coarse grains ($3.0 billion), red meats, fresh/chilled/frozen ($1.9 billion), and soybeans ($1.9 billion), dairy products ($1.2 billion), and wheat ($1.1 billion).

Regarding the U.S. exports of private commercial services to Mexico, these reached $25.2 billion in 2011, a 4.6% ($1.1 billion) increase from 2010 and 62% greater than 2000. It has increased 142% from before NAFTA was established. The other private services (business, professional, and technical services and financial services), and the travel categories represented most of U.S. services exports to Mexico.

5. U.S. Imports from Mexico

Mexico is United States 3rd largest supplier of imported products in 2012. The products imported by the U.S. from Mexico reached $277.7 billion in 2012, a 5.6% ($14.8 billion) increase from 2011, and a 106.3% increase from 2002. It has increased 596% since before NAFTA was established. U.S. imports from Mexico represented 12.2% of all U.S. imports in 2012.

The most imported categories of products in 2012 were: electrical machinery ($56.8 billion), vehicles (cars, trucks and parts) ($53.5 billion), machinery ($42.3 billion), mineral fuel and oil (crude) ($39.9 billion), and optic and medical instruments ($10.4 billion).

The imported agricultural products from Mexico by the U.S. reached $16.4 billion in 2012, making Mexico the 2nd largest U.S. supplier. The most imported categories of agricultural products are: fresh vegetables ($4.0 billion), fresh fruit (excluding bananas) ($2.7 billion), wine and beer ($1.8 billion), and snack foods (including chocolate) ($1.5 billion).

The U.S. imports of private commercial services from Mexico reached $13.7 billion in 2011, a 1.5% ($202 million) increase from 2010, and a 28% increase from 2000. It has increased 85% since before NAFTA was established. Travel and other private services (business, professional and technical services) accounted for most of U.S. services imports from Mexico in 2011.

6. U.S. -- Mexico Trade Balance

Another important indicator of the trade relationship between the U.S. And Mexico is represented by their trade deficit. The U.S. trade deficit with Mexico reached $61.3 billion in 2012, a 4.9% reduction ($3.2 billion) since 2012. The U.S. trade deficit with Mexico represented 8.4% of the total U.S. trade deficit in 2012. The United States had a services trade surplus of $11.5 billion with Mexico in 2011, an 8.6% increase from 2010.

7. Investments between the U.S. And Mexico

U.S. foreign direct investment (FDI) in Mexico reached $91.4 billion in 2011 an 8.4% increase from 2010. U.S. FDI in Mexico is mostly represented by the manufacturing, nonbank holding companies, and finance/insurance sectors. Mexican FDI in the United States reached $13.8 billion in 2011, a 22.2% increase from 2010. Mexican direct investment in the U.S. mostly refers to the manufacturing and wholesale trade sectors. Sales of services in Mexico by U.S. companies reached $34.4 billion in 2010, and sales of services in the United States by Mexican companies reached $4.8 billion.

8. NAFTA Advantages

The North American Free Trade Agreement has significantly influenced the economies of the U.S., Canada, and Mexico, companies in these countries, but also relationships between them. The reduction of most barriers between these countries has allowed their companies to successfully address the important market opportunities they provided. In addition to economic development, the free trade agreement has also developed the labor market in these countries.

There are numerous advantages that the North American Free Trade Agreement has produced. Some of the most important benefits refer to increasing trade in most products and services, increased the U.S. agricultural products exports, and created trade surplus in services. In addition to this, it helped reduce oil and grocery prices, and it increased foreign direct investments.

The most important effect that NAFTA has on the U.S., Canada, and Mexico is that it reduced tariffs between these countries. This means that the cost of products imported between these countries is reduced. Therefore, reduced costs of products determine reduced inflation, which is one of the most important advantages of NAFTA. This is a benefit that produces effects on several levels. The national economies of these countries benefit because of increase imports and exports in the region, companies in these countries benefit because they can expand their business on international level, and individuals benefit from reduced prices of products.

Another important benefit produced by NAFTA is represented by the fact that it creates agreements on international rights for business investors. In other words, business investors benefit from an environment that allows them to invest in markets they are interested in. This objective can be reached by reducing the cost of trade associated with agreements on international rights of these investors (Amadeo, 2012). This allows them to increase their level of investments and develop their business. This is mostly the case of smaller businesses that require governmental support.

NAFTA also allows companies in member countries to bid on government contracts. This is an important issue because government contracts can present numerous benefits to the companies that they are attributed to. These contracts are very expensive and they can represent an important business for bidding companies. In addition to this, bidding on these contracts means serious advertising. Such contract bids are under press scrutiny, so companies that bid on them are brought to the public space. In the companies that win government contracts, this means that they also receive great credibility. This is because the conditions established by governments that must be met by these companies are very strict.

Another important issue associated with NAFTA benefits is represented by the fact that this trade agreement protects intellectual properties. This is a very important factor that influences trade relationships between countries. In addition to this, it ensures a business environment that favors technology advancement and innovation.

One of the benefits of NAFTA that is reflected on national, company, and individual level is represented by the fact that it has increased trade levels in most products industries. Trade between the NAFTA member countries has more than quadrupled, from $297 billion in 1993 to $1.6 trillion in 2009. Exported products levels from the U.S. To Canada and Mexico grew from $142 billion to $452 billion in 2007, and reduced to $397 billion in 2009, because of the financial crisis. Exports from Canada and Mexico to the U.S. increased from $151 billion to $568 billion in 2007, and reduced to $438 billion in 2009.

The North American Free Trade Agreement has also helped the U.S. significantly increase their agricultural products exports. Before the establishment of NAFTA, the U.S. had difficulties in exporting most of the goods produced by farms. This situation can be attributed to the market entry barriers in most countries, and to the high costs associated with agricultural products' needs. But the reduction of these barriers has allowed U.S. To address the agricultural products demand in Canada and Mexico with products from its numerous farms.

Therefore, the establishment of NAFTA has determined U.S. agricultural exports to Canada and Mexico to increase from 22% of total U.S. farm exports in 1993 to 30% in 2007. It seems that the U.S. exported more agricultural products to Canada and Mexico combined in comparison with the agricultural products exports to the next six largest markets combined. Exports to the two countries have almost doubled, from 156% in comparison to a 65% growth to the rest of the world.

Much of the U.S. agricultural exports are received by the Mexican market. Mexico is the most important exports destination for U.S. The most frequently exported agricultural products to the Mexican market are represented by grown beef, rice, soybean meal, corn sweeteners, apples and beans. It is also the second largest export destination for corn, soybeans and oils.

Another important benefit of the North American Free Trade Agreement is revealed by its influence on the trade surplus in services. The importance of the services sector in the U.S. relies on the fact that it represents more than 40% of the country's GDP. Most of these services are financial services and health care. The issue in such cases is that they are difficult to transport, and in order for them to increase their productivity, it is necessary to export them to nearby countries.

NAFTA helped the U.S. To export such services to Canada and Mexico. The country's services exports have increased from $25 billion in 1993 to $106.8 billion in 2007, and reduced to $63.5 billion in 2009. Imports of services from the two countries were only $35 billion. The great advantage of NAFTA is that it has eliminated trade barriers in most service sectors, which are usually strictly regulated. NAFTA has determined these countries' governments to increase transparency by publishing regulations, and reducing hidden costs associated with these business sectors.

NAFTA produces great benefits to individuals in the U.S., Canada, and Mexico. Most of these benefits are represented by reduced oil and grocery prices. The U.S. imported $116.2 billion in oil from Mexico and Canada. The importance of this issue is that these imports helped the U.S. reduce its dependence on oil imports from the Middle East and Venezuela. It also helps the U.S. reduce its imports oil from Iran. The importance of this reduced dependence should not only be attributed to international political relationships, but also to economic factors. This is because Venezuela and Iran have started selling oil in currencies other than the dollar. This determines the dollar's value to reduce.

The benefits of NAFTA on reducing tariffs have also determined lower oil prices. This is also the case of food imports, which reached $29.8 billion in 2010 (increasing from $28.9 billion in 2009). These benefits can be observed in the reduced prices of fresh vegetables, chocolate, fresh fruit and beef, the most frequently imported grocery products from Mexico and Canada.

Another important benefit of the North American Free Trade Agreement is represented by the increased foreign direct investments determined by the trade agreement. The establishment of the North American Free Trade Agreement has determined foreign direct investment (FDI) in Canada and Mexico to reach $357 billion in 2009, increasing from $348.7 billion in 2007. Canadian and Mexican FDI in the U.S. increased to $237.2 billion from $219.2 billion in 2007. Most of these investments were made in industry sectors like manufacturing, finance and insurance, and banking companies.

This is because NAFTA is able to significantly reduce risks associated with these investments by guaranteeing that foreign investors they have the same legal rights as local investors. This ensures that investors can take action against the government in case certain industries in which they invest are nationalized. These issues are important for ensuring investors that they have a business environment that is regulated by the free trade agreement.

9. NAFTA Disadvantages

NAFTA produces significant benefits on member countries, but it also has certain disadvantages. Specialists in the field have analyzed the influence of NAFTA in the region and have revealed some of them. The most important disadvantages of NAFTA are represented by outsourcing, U.S. unemployment rate increase, U.S. wages have reduced, and others. The trade agreement produced disadvantages for all member countries. It is difficult to determine which country is the most disadvantaged.

One of the most important disadvantages for the U.S. is represented by the increased unemployment rate. The benefits of the Mexican labor market have determined numerous U.S. companies to outsource some of their processes and activities to Mexico because of its cheaper skilled workforce. In other words, U.S. companies started to manufacture much of their products in Mexico because this allowed them to reduce production costs.

It seems that between 1994 and 2010, the trade deficit between the U.S. And Mexico reached $97.2 billion, and reduced U.S. jobs with 682,900 jobs. Most of these jobs were in manufacturing. The most affected areas are represented by California, New York, Michigan and Texas. This is because the large numbers of companies in these regions moved production plants to Mexico. The industries they addressed included motor vehicles, textiles, computers, and electrical appliances.

Another important disadvantage determined by NAFTA is that U.S. workers' wages did not increase in accordance with workers' needs. This is because workers in the companies that did not outsource their production process to Mexico had them choose between joining unions and the factory, chose the factory. But with the lack of union support workers did not have the power to strongly negotiate with the company. Therefore, they were not able to determine companies to increase their salaries. This made it difficult for U.S. workers.

But U.S. workers were not the only workers disadvantaged by the North American Free Trade Agreement. Mexican farmers were in the same situation. Mexico lost 1.3 million jobs in the farming business (Amadeo, 2012). Because NAFTA reduced tariffs, this allowed many U.S. farms to export corn and other grains to Mexico at very low costs. This made Mexican farming products uncompetitive. Mexico had to reduce subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001.