The world's social, political and economic landscape is changing globalisation is affecting the way...
The world's social, political and economic landscape is changing globalisation is affecting the way we live and how we do business.
When discussing this major theme, many people focus on Europe. The continent has undergone fundamental changes, such as the lifting of barriers to trade across national borders, which allows companies to trade freely. However, many Europeans tend to forget that the US has been a member of a free trade zone for the past six years, along with Canada and Mexico.
Since the birth of the North American Free Trade Association (NAFTA) in 1994, there have been obvious economic benefits to the US economy. Today, the US exports nearly four times more to its two neighbours than to Japan and China and 40% more than to the 15-nation European Union.
Two recent studies have looked at the effects of NAFTA on aggregate trade between NAFTA countries, both using only national level data.
Krueger (1999) found that NAFTA has had no statistically significant effect on intra-North American trade, although she did find a statistically significant decrease in imports from Europe. Gould (1998), who only considered intra-North American trade, found that NAFTA has had a significant impact on trade between the US and Mexico, but not on trade between the US and Canada and Canada and Mexico.
When NAFTA was implemented, the US had already been involved in a free trade agreement with Canada, which was signed in 1988 and implemented in 1989. As a result, NAFTA would bring little change to US-Canada trading rules. Mexico had been unilaterally opening its economy in the years immediately prior to NAFTA, but the prospect of further opening US borders for trade with an obviously lower-wage and less developed economy caused concern to many in the US.
In 1992, a survey of the general attitude of Americans towards NAFTA indicated that respondents believed it would have a positive overall socio-economic impact on the US. The same survey revealed that Americans expected an overall loss of US jobs. These apparently conflicting views reflected the uncertainty surrounding NAFTA's expected outcome.
By 1999, NAFTA was responsible for an estimated 2.6 million jobs in the US, over 600,000 more than exports to Canada and Mexico supported in 1993.
These jobs also paid approximately 15% more than non-export jobs. Rather than decimating the US manufacturing sector, as many thought it would, with a flight of jobs to the lower environmental and labour standards of Mexico, NAFTA has helped to revitalise it. In the five years prior to NAFTA, US manufacturing employment declined by almost 1.3 million workers.
In the five years since, US manufacturing jobs have grown by 400,000, and over 100,000 in the auto sector. In contrast, by 1999, NAFTA is said to have cost 209,000 US jobs.
However, Federal administration officials argue that it is far easier to quantify jobs lost under NAFTA than calculate the number of jobs it created.
In addition, the 209,000 figure is said to be an inaccurate reflection of job losses, because although entire work forces are certified as NAFTA losses, many displaced workers immediately go to new jobs or choose to retire. It also has to be remembered that unemployment in the US is currently near a 40-year low. Furthermore, the majority of job losses that have occurred since 1994 have been down to technological change.
Although it can be argued that NAFTA has been a net employer for the US economy, some US companies have chosen to use Mexico as a base for new factories. Under NAFTA, Canadian and US firms that move to Mexico can do so without losing tariff-free access to their domestic markets. This affects intra-NAFTA trade by switching what has been exports, say, from Canada to the US and Mexico, into exports from Mexico to the US and Canada.
In light of the slowing US economy, and consequently the global economy, the location of a company's manufacturing capacity is of particular importance. Some economists argue that manufacturing will suffer in a US slowdown, because companies with factories in both Mexico and the US will move more of their production south of the border, where labour costs are lower. On the other hand, US trade unions wield more power than their Mexican peers do; therefore, Mexico's lower cost base will not necessarily save it.
The energy crisis in California has highlighted the positives that have been generated by NAFTA. Recently, Mexico began selling 50 megawatts of electricity, or enough to power 50,000 homes, to California, a routine neighbourly transaction, but one that once would have been out of the question.
In the 1980s, Mexico was still so paranoid about foreign meddling that it protected even its criminals in the name of national sovereignty. It has since begun extraditing them to the US, a measure that was upheld by Mexico's Supreme Court last month.
The importance of NAFTA to the US was recently emphasised by President Bush. When he assumed the Presidency, the first two foreign leaders he choose to meet with, before Tony Blair, were the Canadian Prime Minister Jean Chretien and the Mexican President Vicente Fox.
Going forward, there is still much work to be done with regards to NAFTA. The peso crisis of 1995, which reduced Mexico's economy by 6% and left the US disenchanted with NAFTA, occurred because there was no institutional capacity to anticipate problems or co-ordinate policy. Duplicating bureaucracies and weak infrastructure at all borders have raised the cost of doing business.
The three North American countries could learn from Europe's experiment in integration. Some economists argue that the European Union's mistake was to become overly bureaucratic.
In contrast, NAFTA has so far not established any large institutions. Possibly over the next few years, NAFTA institutions may develop to support the benefits that have already arisen out of the NAFTA agreement.
Again, looking towards the European Union, some have argued that it would benefit the UK if it joined NAFTA.
However, a study commissioned by the US Senate Finance Committee found that trade would increase between the member countries but the overall effects on their respective economies would be insignificant. In most cases, the new opportunities would simply replace trade already being carried out with other countries.
The study found that US imports from the UK, which are about $100bn, would increase by between 7% to 12%, while exports to the UK (about $65bn) would increase by between 11% to 16%.
In contrast, Canada and the US have approximately $300bn in annual bilateral trade. The study also raises questions about the costs which the UK would face by dropping its membership of the EU, something that the EU rules require if a member enters a free-trade agreement with another country or group.
Currently, the UK's trade with its European neighbours is about four times what it shares with the US.
In conclusion, the study suggested strongly that there was little real value to be gained for the US by the UK's formal inclusion in NAFTA. It pointed out that, in the vast majority of cases, tariffs and barriers between the two countries had already been eliminated or were extremely low.
Rupert Della-Porta is head of US Equities at Aberdeen Asset Managers
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