Project for Final Year

1. By Thompson Kerua
Bachelor of Commerce in Business Economics
2014 Finalist – DBS UNITECH

3. Outline of the Presentation
 General Background: What is a Free Trade?
 Nature and Function of NAFTA
 Discussion
 Research Methodology
 Conclusion

4. General Background of Free Trade
 What is a Free Trade?
 Absence of Trade Barriers
 Tariffs – tax on imported goods
 Subsidies – gov’t grants to local producers
 Tax Breaks – lower taxes for domestic products lower cost
 Labeling and Packaging – expensive for foreign products
 Import Quotas – impose on certain goods to enter other country
 In absence of these protectionist policies trade is freely
facilitated in concept of developed and developing countries.
 In a free trade zone, free market mechanism plays a greater
role – allocation of resources are done by market mechanism
 Countries benefit from comparative advantage – countries can
produce what they can produce efficiently at lowest cost and import from
other countries what those countries can produce better or cheaper

5. General Background of Free Trade
 Free Trade and Globalization
 Movement of countries away from protectionist policies
and towards free trade policies allow freely movements
of factor endowments between countries.
 Modern economic prosperity lies beyond the
boundaries – finding suppliers and customers
 Free trade policies exist makes it possible and exist at
 Bilateral (Country to country)
 Regional Level where trade blocs are created
 E.g. NAFTA, European Union, etc.
 The WTO promotes worldwide free trade policies

6. The North American
Free Trade Agreement – NAFTA
 NAFTA in Brief
 NAFTA stands for North America Free Trade Agreement
 Year of Formation: 1994
 Head Quarters: Mexico City (Mexico), Ottawa (Canada) and
Washington D.C. (USA)
 Description: The North American Free Trade Agreement
(NAFTA) is an agreement signed by Canada, Mexico, and the
United States and entered into force on 1 January 1994 in
order to establish a trilateral trade bloc in North America.

7. Main Objectives Behind NAFTA
 The objective of NAFTA as outlined in chapter 1 of NAFTA’s Article 102 are:
 eliminate barriers to trade in, and facilitate the cross border movement
of, goods and services between the territories of the Parties
 promote conditions of fair competition in the free trade area
 increase substantially investment opportunities in their territories
 provide adequate and effective protection and enforcement of
intellectual property rights in each Party's territory
 create effective procedures for the implementation and application of
this Agreement, and for its joint administration and the resolution of
disputes
 establish a framework for further trilateral, regional and multilateral
cooperation to expand and enhance the benefits of this Agreement

8. Member States inside NAFTA
 Membership
 NAFTA has three member States, namely Canada,
Mexico and United States.

9. Main Events Leading to NAFTA
 Prior to NAFTA, Canada and U.S are developed countries with strong
traditions of liberal political and economic policies while Mexico had
neither.
 After WW2 Mexico engaged in protectionism and import-substitution
policies, as opposed to export-led growth.
 This policies backfired – in 1980’s Mexico had triple-digit inflation,
backward industries and extensive international debt.
 In 1985 Mexico began to liberalize
 Regional integration in North America – The first move was made by
Ronald Reagan in U.S, who proposed a “North American Agreement”
 Early 1980s Mexico remain aloof, Canada and US grow closer and signed
series of agreements that cumulated in the Canada-US Free Trade
Agreement in 1988. At this crucial juncture, Mexico signaled it was ready
to join the negotiation and NAFTA talks were started.

10. Main Events Leading to NAFTA
 To get NAFTA passed Bill Clinton insisted on environment and
labour protections that Mexico is a large poor country unlike
Spain and Portugal in the European Community (income
difference is ½ and population is 13% of the total). Mexico’s
income was 1/7 of the US and 24% population of the North
America.
North American
Population Distribution …
USA
Canada
Mexico
 However, the big North American trilateral regional integration
come into force in January 1st of 1994.
 Signed by presidents at that time: US president Bill Clinton,
Mexican president Carlos Salinas and Canadian Prime Minister
Brian Mulroney

11. NAFTA Structure and
Decision Making Procedure
 NAFTA's governance structure is minimal and
cantered on two institutions, the Free Trade
Commission (FTC) and the Secretariat.

12. The Free Trade Commission (FTC)
 FTC is the principal body of NAFTA – it oversees
NAFTA’s performance and evaluation
 It is responsible for dispute settlement
 It is composed of US trade representatives, the
Canadian Minister for International Trade , and the
Mexican Secretary of Commerce and Industrial
Development.
 Expert working groups and committees carry out the
day-to-day work of the FTC which is powered by
Article 2001 (1) of NAFTA

13. The Secretariat of NAFTA
 The Secretariat serves as an administrator for the FTC and is
organized on a national basis, with each member responsible for
supporting its own staff.
 Assists FTC – along with dispute panels, committees and working
groups
 The NAFTA Secretariat is located in separate national offices
 Mexico City, Ottawa and Washington D.C.
 The national secretariat is complemented by a NAFTA
Coordinating Secretariat (NAFTACS)
 Located in Mexico
 Created on January 14, 1995
 Purposely to administer labor and environment issues inside NAFTA
 The Secretariat has no real power over the FTC

14. Benefits of NAFTA
 NAFTA created the world’s largest free trade area. It
allows the 450 million people in the U.S., Canada and
Mexico to export to each other at a lower cost.
 As a result, it is responsible for $1.2 trillion in goods and
services annually. Estimates are that NAFTA increases
the U.S. economy, as measured by GDP, by as much as
0.5% a year. (Source: USTR, Quantification of NAFTA Benefits)

15. Enhancement of Trade
 NAFTA’s main objective is to ease trade barriers and
enhance trade between involved nations.
 It eliminates tariffs – freely movement of goods and
services within NAFTA countries without import and
export tax
 There are also absence of quotas, tax brakes, subsidies
 NAFTA creates agreements on international rights for
business investors – bids on gov’t contracts.

16. Enhancement of Trade
Source: Data retrieved from U.S. International Trade Commission’s Interactive Tariff and Trade Data
Web: http://dataweb.usitc.gov

17. Increases Foreign Direct Investment (FDI)
inside NAFTA
 Another major benefit of NAFTA for its member countries is that it
enhances investment, especially foreign investment. This is attributed to
the protection offered by NAFTA and the reduced risks as well. Foreign
investors are basically granted similar protection as domestic or local
investors. Like, Canadian firms benefit from the opportunity of bidding
on government contracts in Mexico and America, creating more
opportunities.
 Low or not tariffs gives opportunity for countries to invest
in other countries
 With low/no tariffs translates to lower operational cost leads
small business growth and compete with larger corporations

18. Foreign Direct Investment inside NAFTA
 Since NAFTA was enacted, U.S. foreign direct
investment (FDI) in Canada and Mexico more than
tripled to $452 billion in 2012. Canadian and Mexican
FDI in the U.S. grew to $240.2 billion, up from $219.2
billion in 2007. That means this much investment
poured into U.S. manufacturing, finance/insurance,
and banking companies

19. Foreign Direct Investment
Foreign Direct Investment in Mexico and US since 1994 in Millions $UD
Source: retrieved from U.S. Department of Commerce, Bureau of Economic Analysis
website, http://www.breauofeconomicanalysis.gov/commerce

20. NAFTA Enhance Economic Growth
 By fostering opportunities for businesses and industries in
the NAFTA region, free trade rewards risk-taking by
increasing sales, profit margins, and market share.
 Companies can choose to build on those profits by
expanding their operations, entering new market sectors,
and creating better-paying jobs.

21. NAFTA Generates More Jobs
 NAFTA has created a vibrant employment marketplace that
allows each country to use the strength of the agreement to
bolster existing talent and set the stage for future job growth.
 As Mexico economy grows due to an increase in
manufacturing and assembly positions, the country requires
skilled laborers, high-tech equipment and training that the U.S.
and Canada can supply. This sharing of knowledge increases
employment opportunities across the continent
 According to U.S. Trade Representative Barshefsky, U.S.
exports support over 12 million jobs in America, and trade-related
jobs pay an average of 13 percent to 16 percent higher
wages than do non-trade-related jobs

22. NAFTA Increases Agriculture Trade
 Agriculture has seen tremendous gains for all parties under
NAFTA.
 The two-way agricultural trade between the United States and
Mexico increased by 10.9% from 2003 to 2004.
 Similarly, the agricultural trade agreement between the United
States and Canada increased 8% from 2003 to 2004. In 2004, the
export of various vital commodities from US to both the
countries set records.

23. NAFTA Increases Agriculture Trade
Source: Global Agriculture Trading System, FAS/USDA,
http://www.fasusla.gov/gats/defaults.aspx

24. NAFTA Encourages Manufacture
 NAFTA has allowed the three countries to take
advantage of niches and specialize in those areas.
 In practical terms, Canada may produce nickel at a
mine in Ontario and export the raw metal to
California, where engineers need the element for new
battery technologies. The high-tech components are
built in California and sent to Mexico for assembly
into a finished product.
 From raw materials to finished product, NAFTA opens
doors and allows the three nations to remain
competitive on the world market.

25. Less Expensive Goods and
Reduction of Inflation
 A number of NAFTA benefits drive the cost of consumer
goods down in all three countries.
 The creation of a single trade area allows companies to
achieve much better economies of scale.
 With the elimination of taxes and tariffs on goods that are
shipped between the US, Canada, and Mexico, the cost of
goods the involved automatically decreases.
 Lower price of goods in turn will decrease inflation which
refers to a period of increased prices for all basic goods and
services for a particular country.
 With lower prices, the economy of the country involved is
stimulated by means of increased spending by the people
involved.

26. Some Disadvantage of NAFTA
 When a regulation changes, it can be difficult to determine which
changes in the economy were directly caused by the regulatory change,
and which were caused indirectly or by unrelated factors. NAFTA is
clearly responsible for some, but others have a less clear cause.
 Mexican Worker have benefited less than expected
 NAFTA encouraged significant U.S. investment in Mexico near the
boarder with middle class labour, but the Asian cheap labour
discourage the arrangement.
 NAFTA lifted tariffs but no regulations
 NAFTA may have eliminated tariffs between the U.S., Canada and
Mexico, but it didn't do away with the numerous customs regulation
that can stifle trade.
 Unemployment in US and Canada due to cheap labour from Mexico
 Due to limited trade barriers foreign products outcompete domestic
products

27. Some Disadvantage of NAFTA
US Unemployment rate since 1990 - 2000
Source: www.fao.org

28. NAFTA with GATT and WTO Rules
 Main principles
 National treatment is the main principle in NAFTA. A NAFTA
member cannot treat its own goods or services differently to
goods or services imported from another member. There are
obligations in limited circumstances that apply among the
three parties.
 Exception to general principles
 NAFTA incorporates GATT Article XX. It also includes an
amended GATT Article XXI, which allows members to
discriminate according to their essential security
requirements.

29. NAFTA with GATT and WTO Rules
 Rules of origin
 Only goods that “originate” from NAFTA countries receive
preferential treatment under the Agreement.
 Tariff reductions
 There is a general obligation for NAFTA members to eliminate
all tariffs on goods that meet the rules of origin test. Tariffs
are to be phased out over a period of time according to one
of four categories, either immediate, over 5 annual steps,
over 10 annual steps or 15 annual steps.

30. NAFTA with GATT and WTO Rules
 Non-tariff measures
 NAFTA prohibits use of non-tariff measures and incorporates
the full terms of GATT Article XI obligations for import and
export restrictions. Members must eliminate existing
quantitative restrictions unless they are specifically permitted

31. NAFTA with GATT and WTO Rules
 Investment
 NAFTA lays down rules on investment. It accords national treatment
and MFN for investors and their investments with respect to
establishment, acquisition, expansion, management, conduct
operation and sale.
 They must accord each other a minimum standard of treatment in
accordance with international law.

32. NAFTA with GATT and WTO Rules
 Intellectual Property
 NAFTA is patterned on the TRIPs Agreement. It commits
each member to provide protection and enforcement of
intellectual property rights
 All countries agree to comply with the Geneva, Berne and
Paris Conventions and the Convention for the Protection of
New Varieties of Plants.

33. NAFTA with GATT and WTO Rules
 Labor and Environment
 NAFTA has no specific provisions on labor and the
environment. NAFTA expressly affirms the rights of the
parties under the WTO Agreement and other multilateral and
bilateral agreements. NAFTA will prevail where there is any
inconsistency with nominated environment agreements.
There are separate side agreements to NAFTA on the
environment and on labor.

34. Research Methodology Used
 Study Design
 The study was done qualitatively
 The study was mainly based on available information on
the web and books in the library
 The information gathered are paraphrased, edited and
organized for the purpose of this study.

35. Research Methodology Used
 Methods of Data Analysis and Presentation
 This study used the above method of data analysis and
presentation

36. Conclusion
 The North American Free Trade Agreement (NAFTA)
is nearly two decades old and it’s unclear to many
whether the Member countries has been benefiting
or loosing from the deal. The answer is: a bit of both.
 The U.S., Canadian, and Mexican economies have all
benefited from NAFTA. Not as much as they should
have, because—even after 20 years—the three
countries still haven’t properly integrated their
economies, which makes them competitive in many
areas where they should be cooperative.

37. Conclusion
 The U.S., Canada, and Mexico have unique strengths
that perfectly complement each other. Canada has
abundant natural resources and energy supplies.
Mexico has a significant, comparatively young, low-cost
labor force in close proximity to the United
States. The U.S. has one of the world’s top higher-education
systems and is the global leader in
technology and innovation. For these economies to
benefit fully from NAFTA, these strengths need to be
integrated.

38. Thank You!
Eh Pora! Apa Kana Ketch!