1. NAFTA – North American Free Trade
Agreement
By,
K.K. Srinivas (PGDM-B 118)
Nishant Jaiswal (PGDM-B 134)
V. Sathwik Mohan (PGDM-B 145)

2. NAFTA – North American Free Trade Agreement
• Established/ Formation – January 1st 1994.
• Member Countries – 3 (United States of America, Canada, Mexico)
• Languages spoken – English, French and Spanish
http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement 2

3. Tracing the History of formation of the Free Trade
Agreement:
• Free Trade between US and Canada dates back to 1855, under the Reciprocity treaty.
(During this time, Canada was under the British rule)
• US nationalist opposition: US cancelled treaty in 1866, because of strong opposition
from the country’s (US’s) national protectionist elements.
• Canadian opposition: The critics of those Canadians, who encouraged closer
economic ties with the US, termed it as ‘encouraging political annexation’.
• Bilateral agreements: 1935-1980 saw a number of bilateral trade agreements, one of
which is the Auto Pact (Automotive Parts Trade Agreement, 1960).
• FIR – Foreign Investment review agency in Canada
• 1985 – Murloney’s government abolished FIR
• On October 4th 1988, US and Canada signed a Free Trade Agreement finally. This
was called the Canada-US-FTA.
• Later in 1994, Mexico was added to this Trade Agreement and this created the birth
of a trilateral agreement, what we now know as NAFTA.
http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement 3

4. Reasons for formation of a Free Trade Agreement:
The objectives of this Agreement, mentioned in NAFTA’s Part one, Chapter
one, Article 102, as elaborated more specifically through its principles and
rules, including national treatment, most-favoured-nation treatment and
transparency, are to:
• 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 the territories of the Parties;
• 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, for its joint administration and for the resolution of disputes;
• establish a framework for further trilateral, regional and multilateral cooperation
to expand and enhance the benefits of this Agreement;
http://www.nafta-sec-alena.org/en/view.aspx?x=343&mtpiID=122 4

5. NAFTA in 2008
NAFTA Canada U.S. Mexico Combined
Partners
Languages English, French English Spanish
Trade with 570.8 billion 919.9 billion 393.5 billion 946.1 billion
NAFTA partners
(current US $)
Inbound FDI 240.0 billion 229.8 billion 156.0 billion
(current US $)
Jobs created 4.3 million 25.1 million 9.3 million 39.7 million
1993-2008
National 17.1 million 145.4 million 43.2 million 205.7 million
Employment
Level
http://www.naftanow.org/facts/default_en.asp 5

6. Similarities & Differences
Similarities:
Canada U.S. Mexico
Inflation rate (2011) 2.90% 3.40% 3.50%
Growth rate (2011) 3.40% 1.50% 4.50%
Unemployment rate (2011) 7.40% 8.60% 5.16%
Interest rate (2011) 1.00% 0.25% 4.50%
Industrial production(2011) 0.70% 3.70% 3.30%
Differences:
Canada U.S. Mexico
GDP (absolute, in million
US$, 2011) 1574.05 14582.4 1039.66
Population (millions, 2011) 34.28 311 112.34
Exports (million US$, 2011) 38030 179168 31017
Imports (million US$, 2011) 38910 222635 31249
Balance of trade
(million US$, 2011) -880 -43466 -232
6
http://www.tradingeconomics.com/

7. Similarities & Differences
• Similarities
– History
• Differences
– Defence
7

8. Impact on member countries
• Agriculture
– Benefits for US
– Mexico’s import licensing system
– Protection for import sensitive products
– Sanitary and Phytosanitary measures (SPS)
– Export subsidies
– Grade and quality standards
– Rules of origin – NAFTA Certificate of Origin
http://www.fas.usda.gov/info/factsheets/NAFTA.asp 8

9. Impact on member countries
• Maquiladoras
• OECD Transfer Pricing Guidelines – Arm’s
length
• Increase in jobs
• Increase in manufacturing output
• Increase in wages
• Steps to improve environment
http://www.ustr.gov/sites/default/files/NAFTA-Myth-versus-Fact.pdf 9

10. NAFTA – milestones
• North America: The World’s Largest Free Trade
Area
– NAFTA created the world’s largest free trade area, which
today has 457.6 million people and a combined gross
domestic product of USD 17.2 trillion.
• Expanding Trade
– From 1993 to 2006, trade among the NAFTA countries
almost tripled, from USD 304 billion to USD 903 billion
– Canada’s exports to its NAFTA partners increased by 173
percent in 2006
– U.S. exports to Mexico and Canada grew by 157 percent in
2006
– Mexican exports to the U.S. grew by 392 percent in 2006
http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf 10

11. NAFTA – milestones(Contd..)
• Attracting Investment
– By establishing a strong, certain, and transparent
framework for investment, the NAFTA creates an
environment of confidence and stability required to
make long-term investments.
– In 2006, FDI by each of the NAFTA partners in the
other countries reached USD 533 billion, more
than triple the USD 138 billion figure registered in
1993.
– NAFTA has also stimulated increased investment
from countries outside of NAFTA.
http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf 11

12. NAFTA – milestones(Contd..)
• Expanding Prosperity While Enhancing Security
– To mutually reinforce economic prosperity and
security , NAFTA members launched the Security and
Prosperity Partnership (SPP) in 2005
– It was meant to enhance cooperation on issues that
affect the security and prosperity of North America,
and the quality of life of its citizens
• Protecting the Environment
– green technologies to environmental problems
– With Commission for Environmental Cooperation
(CEC), promoted policies and actions that provide
mutual benefits for the environment, trade, and the
economy
http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf 12

13. NAFTA – milestones(Contd..)
• Respecting Labor Rights
– NAALC
• creates mechanisms for cooperative activities
• intergovernmental consultations
• independent evaluations
• dispute settlement
– Through NAALC, NAFTA partners seek
• to improve working conditions
• living standards
• to promote a broad set of labor principles
• effectively enforce their labor laws.
http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf 13

14. NAFTA – milestones (Contd..)
• Trade with non-member countries
– Since 1994:
• Canada has free trade agreements with Israel, Chile, Costa
Rica and Jordan
• The United States has free trade agreements with Jordan,
Chile, Singapore, Australia, Morocco, Bahrain, the
Dominican Republic and five countries in Central America
• The United States has recently signed free trade agreements
with Peru, Colombia, Panama, and Korea, and is currently
negotiating a free trade agreement with Malaysia
• Mexico has free trade agreements with Chile, the European
Union, EFTA, Israel, Bolivia, Colombia, Nicaragua, Costa
Rica, Uruguay and Japan
http://www.ustr.gov/sites/default/files/NAFTA-The-Road-Ahead.pdf 14

15. US trade with non member countries
US trade for 2011 (million US dollars)
Export Import Balance
Europe 273,444.0 369,829.5 -96,385.6
China 84,235.4 329,685.1 -245,449.8
India 17,704.9 30,826.6 -13,121.6
Colombia 11,736.4 18,750.1 -7,013.8
Peru 6,822.2 5,096.7 1,725.5
Panama 6,786.2 335.8 6,450.4
http://www.census.gov/foreign-trade/balance/c5330.html 15

16. NAFTA vs EU
NAFTA EU
Population (2008) 0.5 billion 0.5 billion
GNI (US $) (2008) 16 trillion 15.5 trillion
Number of 3 27
member countries
Common external NAFTA does not have a EU has a common external
tariff common external tariff tariff
Currency All the three member nations Most of the member countries
have different currencies have a common currency i.e.
Euro (Exception being UK)
Work permit Inhabitants from one member People can live in the member
country cannot go and work in countries as long as they want
other member country and also work as much as they
without passing several want to without passing any
bureaucracy barriers criterions
http://romyeconomics.blogspot.com/2008/08/nafta-vs-eu.html 16

17. NAFTA vs EU
NAFTA EU
Location North America is close to South It is next to Asia and Russia as
advantage America and East Asia. Thus well close to Africa and
the ways for trading products transfers to America are well
and services are much longer developed too
than for the EU
Theory of Absolute These theories cannot be In the European Union, some
Advantage and applied in the NAFTA because countries are more specialized
Comparative Mexico depends almost %100 in on product and some aren’t
Advantage in the US their imports are 90% even if they are very close in
from the US and their exports production they will specialized
are 90% to the US and make more of the product
http://eugenioram3.blogspot.com 17

18. NAFTA and further stages of economic integration:
NAFTA is currently in the first stage of economic integration, i.e. it is
a Free Trade Area.
NAFTA faces the following challenges in transcending to higher stages
of economic integration:
• NAFTA doesn’t have a common external tariff
• Barriers and regulations in terms of different currencies, restrictions
for migration/transfer of labor/capital
• The illegal immigration of nationals from Mexico into US has
drawn strong opposition and disapproval from US protectionist
elements
• Lack of trust between Canada-US and Mexico-US, as Canada and
Mexico feel that US dominates them and restricts their trade.
18

19. Challenges for NAFTA
• Address the issue of 10 million illegal Mexican
immigrants in the US
• Resolve trade deficit of US with Canada and Mexico
• Trade diversion (Especially for Mexico) from non-
member countries to member countries
• Resolve current trade disputes – Sugar trade between
Mexico & US (Mexican Export Quota dispute), Cross-
Border trucking (Mexico to US) etc.
http://www.economywatch.com/international-organizations/north-american-free-trade-agreement.html 19

20. Implications for MNEs
• Rules of origin
• High economic risk in US because of the trade deficit
• Low growth rates in US, Canada and Mexico
• MNEs strategy recommended – Pan American
Source: Free trade in the Americas: economic and political issues for governments By Sidney
20
Weintraub, Alan M. Rugman, Gavin Boyd

21. Open to Feedback