A Study of Impact of Nafta and Lessons for Saarc
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A STUDY OF IMPACT OF NAFTA AND LESSONS FOR SAARC
The United States, Canada and Mexico started NAFTA and formed free trade agreement in Jan 1994. The express purpose of it was to liberalize trade in goods and services, remove barriers to investment, strengthen the protection of intellectual property rights; and establish a framework for further trilateral cooperation. The agreement is based on principals of non-discriminatory treatment and transparency. It consists of 24 chapters and about1000 pages covering various sectors of economy. The provisions are to eliminate all trade barriers by 2008. There has been significant achievement with elimination of more than 99% trade barriers. The over all impact when comparing with the stated objectives has been extremely positive. The trade has been doubled from $302 billion in1993 to $652 billion in 2003 between the countries. U.S. Exports to Canada & Mexico increased from $142 billion to $267 billion in NAFTAs first decade, significantly higher than average increase of trade with other countries, which stands at 41%.
It has proven to be a boon for all the three economies in this decade. American Economy grew by 38%, Canadian Economy by 41%, Mexican Economy by 33%. GDP of US grew at 22%, Canada at 33% and Mexico at 12%. U.S. Exports to Canada grew 63%, its largest trading partner. U.S. trade to Mexico also increased its share from 7.8% to 11.9% and replaced Japan as the second largest trading partner.
The real impact of the agreement has been the increase in productivity to the tune of 53% in U.S., 55% in Mexico and 23% in Canada. This has clear implication on improving the regions competitiveness in the global economy. This has also helped in reducing unemployment level in all the three countries, which has reduced in U.S. from 6.9% to 5.7% during the 10-year period starting from 1993 to 2003. Canadas unemployment in the corresponding period reduced from 11.4% to 7.6% and Mexico from 3.4% to 3.3%.
The main benefit has been NAFTA-related trade and investment liberalization that has allowed U.S. firms to find new markets in Canada and Mexico. It has also helped in maximizing efficiencies gained in terms of global competitiveness, and increased sales to other world markets as well.
In the automobile sector the U.S Exports of new passenger vehicles and light trucks totaled less than $95 million. They jumped by 500 percent to reach 584 million in 1994, the first year of the agreement. By the end of 2003, U.S. exports to Mexico totaled $3.2billion, a 3400 percent increase in shipments as compared to 1993.
Exports of agricultural equipment by U.S. increased 46 and 93 percent to Canada and Mexico, respectively, while exports to the rest of the world grew at 37%. Similarly, trade between countries in chemicals including plastics, solvents, thinners etc. has increased substantially.
U.S. firms exported a total of $53.6 billion in environmental technology products and services in 2002, including $11.2 billion to Canada and $7.7 billion to Mexico. Together, Canada and Mexico account for more than one-third of total U.S. exports of environmental technologies.
U.S. exports to Canada and Mexico of information and communication technology (ICT) account for 29 percent and they are the two largest export markets respectively. Exports to Mexico increased by 239 percent from 1992 to 2002. The packaged software market alone in Canada and Mexico was worth $4.5 billion in 2002, triple the before 1994 market size. Elimination of non-tariff barriers was also important for the ICT industry, which realized benefits through more transparent commercial dealings, removal of investment barriers, and the opening of Mexicos government procurement market for U.S. suppliers. There are also benefits from stronger intellectual property rights protection including increased protection of Hardware and Software designs. The other advantages have been duty- free raw materials, ease of logistics planning among border factories, and lower operating costs along the border-trading zone.
U.S. exports of medical equipment to Canada and Mexico have also increased. Exporters benefit from uniform customs procedures, greater transparency in standards and government procurement, and stronger protection for intellectual properties such as product processes and formulas.
U.S. combined pharmaceutical exports to Canada and Mexico increased 144 percent from 1992 to 2002 — greater than the 125 percent increase in exports to the rest of the world. Lower tariffs on pharmaceuticals have made available greater choices for the inputs needed for Pharmaceutical production. A well placed patent regime in Mexico and dramatically improved compliance at patent regime and has given Cos. a favorable environment to launch new compounds.
Food companies have increased options to meet the quick delivery requirements of customers, due to removal of tariff and non-tariff barriers. For example, U.S. direct investment in Mexicos processed food industry — largely in snack foods, vegetable oils, meat and poultry, and confectionery products — has quadrupled since 1987. U.S. malt beer exports since 1993 to Mexico have increased 185 percent. It has also regulated product testing, certification, and labeling of particularly of Mexico, which has helped in increase trade in this field.
In Scientific Equipment, U.S. has captured 66 percent of the import market of Mexico. NAFTA has led to standardized customs procedures and increased transparency in both standards and government procurement, which has significantly helped manufacturers in this sector.
It had a positive impact on the banking sector and permitted U.S. investors to participate in the Mexican banking system through the acquisition of existing banks or the establishment of U.S.-owned and -controlled subsidiaries. Similarly, it allowed U.S. investors to participate in the Mexican insurance market via acquisitions, joint ventures, or subsidiaries. Around 30 foreign-owned insurance companies now operate in Mexico, over half of which are owned by U.S. firms. It has also eliminated Mexicos restrictions on purchases made by its citizens with respect to U.S. life and health insurance during their stay in the United States.
Impact of NAFTA in the field of services is also significant. In 2002, U.S. professional services exports (e.g., accounting, legal and medical services) to Canada and Mexico reached $4 billion.
It eliminated several important barriers to trade in services. NAFTA established the principle of “national treatment” for service trade by which governments must treat NAFTA members services firms as favorably