Question

EMERGING MARKETS/ETHICAL DILEMMA

Closing Case: What If NAFTA Goes Away?

In effect since 1994, the
North American Free Trade Agreement (NAFTA) has no shortage of controversies. As Trump has assumed power, the criticisms against NAFTA, potentially culminating in its repeal, force us to entertain a previously unthinkable scenario: What happens if NAFTA goes away? The answer to this question obviously boils down to what NAFTA has brought to the United States.

In two decades, trilateral merchandise trade among three member countries grew from $290 billion in 1993 to $1.1 trillion in 2016—a nearly fourfold increase. Approximately $3 billion goods and services cross the border every day—an astonishing $2 million every minute. US trade with Canada tripled and US trade with Mexico increased by five times—while US trade
with the rest of the world grew 280%. Canada and Mexico are, respectively, the second and third largest exporters to the United States (China is the first). Canada and Mexico are, respectively, the first and second largest importers of US goods. Mexico alone imports more US goods than China, and absorbs more US imports than Britain, France, and Germany combined. Canada imports even more "Made in USA" goods.

What about jobs? In brief, no “giant sucking sound” has been heard. Approximately 300,000 US jobs—an average
of 15,000 per year—were lost due to NAFTA in its first two decades, but about 100,000 jobs were added. The net loss was small, as the US economy generated at least 25 million new jobs during the same period. In 2015, the Congressional Research Service acknowledged some worker and firm adjustment costs brought by NAFTA. But overall, it reported conclusively that “NAFTA did not cause the huge job losses feared by the critics.” At present some eight million US jobs depend on trade with Canada and another six million on trade with Mexico. Even for every job lost, the economy gains $450,000 in the form of higher productivity and lower consumer prices, which benefit all.

But a hard count on jobs misses another subtle but important benefit. NAFTA has allowed US firms to preserve more US jobs, because 40% of the value of US imports from Mexico and 25% from Canada is actually made in USA—in comparison, only 10% of the value of US imports from
China is made in USA. In 1994, US imports from Mexico only contained 5% of the value made in USA. Clearly NAFTA has facilitated seamless supply chain integration, with goods, components, and parts crossing the border multiple times
to be eventually assembled in one member country. Without NAFTA, entire industries may be lost rather than just the labor- intensive portions.

So what if NAFTA goes away? First, relax: not all the benefits discussed above will be lost. As an institutional framework, NAFTA merely represents some relatively new rules of the game that are man-made and artificial. Given their natural geographic proximity and historical links, the three North American neighbors had been trading for ages before 1994. Their tightly knit economies cannot and will not immediately stop trading.

In a hypothetical post-NAFTA era, these three economies will still gain by trading, but the gains will be smaller. Americans
and Canadians can still enjoy plenty of yummy avocados from Mexico (the world’s top avocado producer), but they will have to cough up more money for their beloved guacamole.

Second, if the Trump administration unilaterally imposes high import tariffs, Canada and Mexico will certainly respond in kind. Given the reality of NAFTA supply chain, a tariff is like erecting a wall in the middle of a factory. Hard-fought export market share in Canada and Mexico will shrink. Thousands
of jobs in manufacturing, logistics, and other services will disappear. For example, the Center for Automotive Research estimated that a 35% tariff on vehicles imported from Mexico, which would contain 40% “Made in USA” parts, would result in the loss of 31,000 US jobs.

Third, because both Canada and Mexico have free trade agreements (FTAs) with the EU, the US withdrawal from NAFTA will significantly help increase EU firms’ market share there.
In other words, EU firms, propelled by their own FTAs with Canada and Mexico, will be delighted to take over the market share vacated by US firms. Beyond those from the EU, strong competitors from China, Japan, and Korea, despite having no help from FTAs, will be elbowing their way into Canada and Mexico. In other words, reducing the preferential treatments (especially low or zero tariffs) enjoyed by US firms under NAFTA will clip their wings in the competition for export markets in Canada and Mexico. Ironically, gutting NAFTA will help enhance the competitiveness of America’s global rivals.

Finally, shutting down NAFTA does not bring back a large number of manufacturing jobs to the United States. The recent crises facing US manufacturing jobs, falling from 17 million
to 11 million between 2000 and 2010, have little to do with NAFTA. Instead, competition with China and technological changes have largely contributed to such a decline. Therefore, blaming Mexico and dismantling a beneficial FTA do not solve the problems associated with manufacturing job losses.

There is widespread belief that Trump’s nasty rhetoric on NAFTA is just “talk.” Procedurally, Trump is required to seek congressional approval if he merely wants to renegotiate NAFTA. Congress is unlikely to support a policy to throw away so many benefits and to spark retaliatory trade sanctions in America’s top two export markets—with so little gains. While NAFTA is not a panacea and has its problems, dismantling it would be “lunacy,” according to Texas Monthly. In summary, NAFTA is unlikely to be gone completely. But renegotiation is certainly possible.

Case Discussion Questions

1. Because the three NAFTA member countries had been trading for ages before NAFTA, what are the benefits of an FTA such as NAFTA?

2. ON ETHICS: Pick your role as (1) a consumer, (2) a manufacturing worker, or (3) a banker in one member country. What has NAFTA done to help or hurt you and your community?

3. Pick a firm from your state or country that is active in at
least two (preferably three) member countries via trade and investment. How does it prepare for the scenario that NAFTA benefits are curtailed?

Answer 1

1.. NAFTA has helped in reshaping the financial relations between Mexico, Canada and the United States. It did as such by empowering exchange between the nations just as cross-fringe speculation. This makes obtaining things from each other more affordable than if they somehow happened to do as such with different nations. It has demonstrated to be valuable to the economies of all North American nations. This FTA has likewise opened ways to institute FTAs with different nations around the globe. "NAFTA started another age of exchange understanding the Western Hemisphere and different pieces of the world, affecting dealings in regions, for example, showcase get to, guidelines of inception, licensed innovation rights, outside venture, question goals, specialist rights, and natural insurance". The way that Canada and the United States, two developed countries, went into a FTA with Mexico, a creating nation, was a success win for North America. As indicated by the Government of Canada site, one out of six Canadian occupations are identified with NAFTA trades The United States had the option to extend its developing fare market toward the southern nation while attempting to deal with strains between its fringe.

Advantages:-

•             one of significant preferred position of FTA, is that it energizes and encourages outside direct interest in nation.

•             FTAs expels exchange boundaries.

•             it advances local reconciliation.

•             improve exchange and speculation openings in developing nations.

•             FTA make nation increasingly unique.

•             As neighbourhood economy develops and become dynamic, it improves the innovation of nation.

•             free exchange approaches open up new territories to rivalry henceforth advancement.

•             it underpins the development of economy, as the generation increments.

•             Free exchange improves allotment of assets.

2.. NAFTA has brought down costs for customer merchandise, which has been the fundamental advantages on US residents while bringing down duties. It has benefitted the normal by bringing down costs, which has been useful for Americans' financial limits and has expanded the obtaining intensity of buyer. Along these lines it very well may be said that NAFTA has helped customer network. Buy of enormous amount of fabricated merchandise made in the United States by the other two nations is a major ordeal for assembling laborers. Those business supported employments in US and consequently prompted the prosperity of laborers and their families. It has upheld the occupations of in excess of 2 million assembling laborers, in this way being great and valuable for assembling specialist's locale. The NAFTA has harmed the investor network on the off chance that we take the case of effect of late changes in the peso's purchasing power. There has been defaults on residential credits and have forcefully crushed the income of Mexico's as of late privatized banks due the fall of the peso and soaring loan fees. As the vast majority of the household credits are attached to touchy currency market loan fees bank benefits have fallen. Along these lines it tends to be reasoned that NAFTA has not been useful for Mexico investor network.

3.. As an energetic espresso consumer, the American firm I am picking is Starbucks. Starbucks can be found wherever in the United States. It has encountered unprecedented promoting achievement, empowering it to turn into a standard customer great. Its logo can be effectively perceived around the world. "Starbucks' model of bistro cool has demonstrated promptly exportable on a worldwide scale, clearing through Canada, China, Japan, Taiwan, Britain, and quite a bit of mainland Europe, with striking intends to enter espresso mecca".. In September of 2002, Starbucks opened its first store in Mexico, and it presently has more than 500 stores in Mexico. It has additionally assumed a huge job in the development and benefit of Mexican espresso producers consistently (news.Starbucks.com). Shockingly, with the debate encompassing President Trump's danger of closing down NAFTA, both Canada and Mexico have communicated their need to blacklist American items, Starbucks being one of them. Taking into account that Mexico and Canada are our greatest exchange accomplices, this can conceivably have obliterating impacts.