NAFTA was designed for benefiting business houses of U.S, Canada and Mexico.

It
is intelligent extension of already flourishing trade between U.S.A and Canada under
U.S-Canada Free Trade Agreement that went into effect in year 1989. Mexico joined
W.T.O in 1987, so very next year it started privatizing its state owned companies and
soon initiated talks for membership with U.S and Canada. In January, 1994, NAFTA
came into effect, with addition of Mexico. Daniels and Radebaugh (1998:241).

By forming new powerful North American Trading block its integration motives are
purely economical and have no constituencies for political integration. Provisions
under NAFTA are firstly, to safeguard, subsidise, countervailing and anti dumping
duties also improving health and safety standards in services (consulting,
engineering, software, etc.) that exist for trade on goods. Secondly, to regulate tariff
and nontariff barriers, rules of origin and governmental procurements.

Thirdly, by establishing investment rules governing minority interests, portfolio

investment, real property and majority-owned or controlled investments from NAFTA
countries. NAFTA coverage extends to investments made by any company
incorporated in a NAFTA country, regardless of country of origin. Lastly, pledging to
provide adequate and effective protection and enforcement of intellectual property
rights, while ensuring that enforcement measures do not themselves become
barriers to legitimate trade moreover setting dispute settlement process that will be
followed instead of countries taking unilateral action against offending party. Daniels
and Radebaugh (1998:249).

The need to form this trading block arises, after considering benefits of trade enjoyed
by Europe’s economic integration called E.U. Thereafter increasing desire to have
similar own trading block was felt. The urgency felt more, when Latin American
countries also began to form their own regional trading agreements in early 1960’s.
Under NAFTA formation all countries benefited but with cost.

Firstly in case of Canada, its demography conditions had forced 80% of its
population to live within 100 miles of 3,000 mile long U.S – Canada border, i.e. a
large pool of potential customers, readily approachable. Together U.S and Canada
consist of approximately 345 million potential customers and massive scope of
revenue generation exists after integrating neighbouring economy. Moreover, by
adding Mexico under NAFTA, customer base grand total reached 457 million with
GDP flourishing above $ 12 trillions.

Now NAFTA consumers and industrial buyers have more opportunities of selecting
desired goods & service. For example, U.S has many popular brands of bottled
water, including Coke’s Dasani and Pepsi’s Aquafina. But grocery & convenience
stores inside U.S stocks a wide variety of less known bottled water brands imported
from Canada, including Stonepoint’s classic selection spring water. It is because of
NAFTA, these export opportunities are enjoyed by Canadian brands.

Including spring water, Canadian exports to U.S doubled from $117 billion to $ 242
billion, and to Mexico it grew 114%, from $640 million to $ 1.4 billion. For example a
Canadian supplier to Volkswagen establishes metal-stamping plant in Puebla,
Mexico for supply to Volkswagen’s revitalized Beetle, targeted for U.S market.

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 Meanwhile Canada has invested $105.2 billion in U.S, for example Bombardier Inc
has bought Learjet corporation of Wichita, Kansas and Canadian Pacific bought
Delaware & Hudson Railway. With open skies agreement, Air Canada’s flights are
doubled to U.S and since then number of routes increased three times. Now it
operate for 40% air passenger traffic of U.S Canada combined. But under national
treatment principle a number of Canadian sectors are exempted like transportation,
social services, education, health care and cultural industries etc. Canada imports
more from U.S then European Union. Rugman and Collinson (2009: 560).

Moreover in NAFTA, each country sets its own tariffs for rest of world, so products
entering U.S from Canada must have commercial or customs invoice that identify
product’s origin. Otherwise third country exporter can ship product to NAFTA country
with low tariffs and re-export to other two countries duty-free.

According to local content rules, at least 50% net costs of most products must come
from NAFTA region. The exceptions are 55% for footwear, 62.5 % for passenger
automobiles, light truck, engines and its transmissions, and 60% for other vehicles
and automotive parts. For example, a Ford car assembly in Mexico, can use its own
labour and other factors, may use parts from Canada, U.S. For that manufactured
car to enter U.S and Canada, it must at least have 62.5% of its value from Northern
America.

Secondly in case of U.S.A, in year 2002 its prosperity blossomed with F.D.I
accounted for $ 1.5 trillion out of world total of $ 7.1 trillions. U.S possesses 1/20 of
world oil reserves, and well stocked minerals such as sulphur, phosphates, lead &
aluminium. But iron ore deposits of U.S depleted soon due to massive exploitation in
twentieth century, thanks to neighbouring Canada, now its steel industry largely
depends on Canadian & imported ores. Its exports to Mexico grew by 170% reaching
over $ 111 billion from $ 41 billion, more than Britain, France, Germany, Italy
combined. Similarly U.S exports to Canada grew 76%, from $ 100 billion to $ 176
billion. According to U.S trade representative office, exports to Canada and Mexico
supports 2.9 million jobs ( 900,000 more than in 1993), which pay 13 to 18 % more
than national average for production workers.

For example, U.S computer part manufacturing company IBM, shifted production
facility from Singapore to Mexico. Utilizing low wages of Mexico & keeping research
facilities in U.S. Such initiatives boosted exports to U.S from $ 350 million to $ 2
billion. Moreover Mexican contractors are providing good prices of garments and fast
delivery to Gap Inc. and Liz Claiborne, than Asian rivals. Exports increase had
created high skilled better paying jobs in U.S because firms pay 10 to 15 % more
then the jobs they replace.

Meanwhile NAFTA is not a pure free trade agreement because many sectors are
exempted. For example U.S has protected its textile and apparel sector by system of
rules of origin. It excluded garments assembled in Mexico from using textile fibres
produced in Asia. Same way, U.S protects its agriculture sector from Mexican
competition. In services sector (i.e. 80% of all jobs in U.S and Canada), half of this
sector is exempted from principle of national treatment. For example excluded
sectors include all aspects of health care, education, public administration,
transportation, public utilities. Each country can enact discriminatory regulations to

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foster its indigenous firms and exclude foreign nationals from working in these
exempted sectors. ( Book International Business 5th edition by Alan M. Rugman &
Simon Collinson, page 555)

In contrast, Canada and Mexico provide more secure access of their natural
resources to U.S than far Gulf countries. Now U.S has option to invest in Alberta Tar
Sands and achieve energy independence within North America. Moreover Canada
has given surety to provide uninterrupted oil & gas supply export to U.S even in
times of economic disruptions (under legal terms). Now U.S imports more oil from
Canada & Mexico (27%), than it does from Gulf countries (24%). Rugman and
Collinson (2009: 556)

But Costs, in form of U.S job losses occurred from low skilled manufacturing sector
of auto parts, furniture, household glass and sugar, peanut, seafood, vegetable
producers and citrus growers. Competing with Mexican cheap labour, poor working
conditions and lax environment enforcement. Forcing labour lobby of U.S to include
labour standards, like right to unionize and environment lobby pushing for
upgradation of environmental standards in Mexico. This made losses politically
charged. In 2008 campaigning for democratic presidential candidate both Hilary
Clinton & Barack Obama pledged to re-negotiate NAFTA, by including environmental
policies and to help labour adjustments. But complication increased when President
Obama signed legislation suspending Pilot program of Mexican trucking firms to
operate within designated U.S areas on the basis that Mexican truck and their
drivers endanger motorists, threaten national security, destroy the environment and
contribute to the loss of thousands of American jobs. Mexico retaliated by imposing
90 tariffs ranging between 10 and 45 percent on U.S.-produced goods costing $2.4
billion. Alexander and Soukup (2010).

Lastly for the case of Mexico, it magnetically attracted companies of Asia, North
America & Europe to enjoy benefits & money making strategies and leverages under
NAFTA, such as by producing in Mexico with cheap input costs & selling products to
rich U.S, Canada and other countries. This resulted in Mexico becoming world’s
major automotive manufacturing country, employing 500,000 Mexicans for making
parts & assembly vehicles. Benefits to Mexico include exports to U.S jumping 240%,
from $ 40 billion to $ 136 billion. The benefiting companies are,

Delphi Automotive systems, that manufacture steering, electric and lighting

assemblies and had opened Tech centre in Cuidad Juarez. Due to its 45 Mexican
facilities near U.S border with 70,000 employees, company had considerably
reduced start-up costs & lead times, thus strategically benefiting from NAFTA. And
Diamler-Chrysler, that is using only one plant in Toluca, Mexico to produce new PT
Cruiser model for exporting in North America and Europe. Presently exporting 90%
vehicles (200,000 trucks & 45,000 cars) to North America.

Also, U.S firms like Ford, GE and DuPont are joint Venturing Mexican firms, to avoid
setting expensive wholly owned subsidiaries, like GE had joint ventured with largest
Mexican appliance manufacturer, MABE. Together they had opened gas range plant,
serving annually 800,000 units to markets of NAFTA countries. In its other
businesses, its suppliers are now flocking to Mexico, after G.E warned them of being
dropped out as supplier, if not moved to Mexico, as precautionary cost cutting

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measure. In this regard, job cuts in domestic U.S market by G.E, since 1986,
reached 163,000 workers. On other hand company doubled foreign employment to
130,000 by globalizing its production systems, now company loves its 30,000 low
salaried Mexican workers, committed to G.E, un-aware of conditions faced by old
discharged U.S workers, before NAFTA existed.

But new Mexican workers are considered productive by senior executives of M.N.E’s
like Ford, G.E, Proctor & Gamble, Caterpillar and IBM etc. The head of I.B.M Mexico
said “for every dollar you pay to Mexican engineer, you get more from him, than
other world societies.” We don’t know whether this statement is to boost moral of
Mexicans or just a valid reason for North American workers who lost their jobs.
Rougman and Collinson (2009:574).

Meanwhile, profiting heavily on labour wages, some Mexican firms are accused of
first installing sophisticated operations, that require skilled professionals to operate,
then leapfrogging with technology by employing un-educated, un skilled employees.

Fig:- Rise in GDP of Mexico since start of NAFTA (Alvarado 2008:85)

Mexican GDP rose 2.84% per year from 1994 to 2005 higher than past performance
as provided in graph and economic benefits to Mexico flourished under NAFTA by
witnessing jump in its home market Alvarado (2008:85) .For example, in 2005
Toyota came to Mexico to produce Vans for U.S market, but surprisingly after one
year found itself, satisfying local demand for Vans. On other hand, cost to Mexico
include damage to environment along U.S-Mexico border. Regardless of
environment protection provisions in NAFTA, Mexico is finding hard to cope with it.
Therefore its Instituto Nacional De Ecologia had developed waste management
program, including encouraging recycle and waste reduction program by incentives.

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To conclude, re-negotiation of NAFTA by U.S president may prove fatal for many
U.S & Canadian companies who had already set up production plants in Mexico. So
governments may harm their own companies and spoil relations with partner
countries in form of trade retaliations as performed by Mexico on issue of U.S
suspending Mexican truck firms to operate inside U.S. Countries should look at the
benefit that had made under NAFTA. Trade among members trippled at $ 946.1
Billion in year 2008 with members exchanging $ 2.6 Billion in merchandise each day
i.e. $ 108 Million per hour. And employment in North America has increased to 40
million jobs beside low skill job cuts Governments of NAFTA (2011). So forming
NAFTA on side lines of E.U’s economic model as vissioned by the countries during
its birth is paying back benefits much larger than E.U. With this success rate many
other countries are now thinking to become an extended member of NAFTA or to link
NAFTA with Latin American countries of the south forming a massive much bigger
trade block.

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