International Business : Case Study : NAFTA (questions and answers)
International Business : Case Study : NAFTA
Questions :
. List the benefits that would accrue to all three members of the new common market.
NAFTA - North America Free Trade Agreement - incluides Canada, the United States and Mexico. Created in January 1994, the North American free trade area assure an important part of trade advantages round the world.
What are the benefits in the region due to the creation of the NAFTA?
The creation of the NAFTA has provided global benefits in the area :
* Abolishment of all tariffs & quotas in the trade area, creating at the same time a common external tariff / Nontariff barriers have been eliminated, expanding export opportunities in the three countries
* The free trade area could make these countries self-sufficient in energy
* Existance of an increasing volume of trades : changes in infractures
* Canada and Mexico can benefit from the development of the US technology
* Mobility of factors of production
* As manufacturers have unrestricted access to each other market's consumers have gained cheaper goods, and companies have benefited from being forced to exploit comparative advantage.
Become a member of the NAFTA provided more economic and political stability for the three countries.
* U.S.:
o Economy :
* Drop its dependence on OPEC by giving by giving free access to oil and gas in Canada and Mexico
* Increase in the U.S. largest bilateral relationship
* Agricultural market has increased since 1994
* Possibility to increase the U.S. employement - service market -
* Access to new customers : 100 Millions people
o International Policy
* Environnement
* Drug-trafficking
* Ilegal immigration
Table 1 : U.S. agricultural exports have increased by $4 Billion since 1994
Source : www.fas.usda.go
* Canada :
o Affirm the U.S. - Canadian free trade agreement signed in 1989
o Economies of scale : 20% cut cost
o Attract foreign investment : increase the rate of employment
o Opening of a new market : Mexican customers!!!!
* Mexico :
o Decrease of the investment risks : higher inflow of foreign investment in the future
* I.e.: manufacturing sites : maquilas have helped to alleviate the Mexican high unemployment
o Essential in view of strengthen the economic opening
o Opening of a new market : mexican customers!!!!
2. List the major economic problems that could arise from such a union
Nevertheless, the creation has not only provide benefits to its members. Several economic problems are arisen after signing the North American Free Trade Agreement.
Which economic problems can be arise from such a union?
For the NAFTA :
* Earning, amount of capital earned by companies and government would be less due to the end of the protectionist policy
* As law is not the same between the three countries there is a lack of fair competition dumping
* Regional prosperity could be slow down
By country :
* U.S. is worried about being swamped by Mexican goods through comparative advantage.
* U.S. and Canada are de-localizing their structures to Mexico trying to find a cheaper labour force.
* Canada and Mexico have a huge dependence on the regional market Therefore, NAFTA has made a little economic difference, neither a international policy.
3. Discuss the political and nationalistic ramifications of such union.
Such agreement like NAFTA requires efforts from governments of each member to fulfil gradually their aim, taking advantages. Despite, these organizations should cause a lost of country identity and other phenomenon as immigration.
Which are the political ramifications in NAFTA?
* Forfeit their independence in the area of foreign policy
* Abolishment of all tariffs and quotas: negative impact in fiscal concerns
* Creation of new intuitions will increase governmental dispense
Which are the nationalistic ramifications of NAFTA?
* The free trade agreement between Canada and the U.S. concerned Canadian people mainly due to the following three aspects :
o The fear of losing their cultural identity
o Integrate a violent society
o Be underestimate politically and economically ...
This is a preview of the whole essay
Which are the political ramifications in NAFTA?
* Forfeit their independence in the area of foreign policy
* Abolishment of all tariffs and quotas: negative impact in fiscal concerns
* Creation of new intuitions will increase governmental dispense
Which are the nationalistic ramifications of NAFTA?
* The free trade agreement between Canada and the U.S. concerned Canadian people mainly due to the following three aspects :
o The fear of losing their cultural identity
o Integrate a violent society
o Be underestimate politically and economically by the U.S.
* Immigrations issue
* Specialization of each country
o US will specialize in technology sector
o Mexico will be offer the cheaper in labour in the agreement
o Canada could be specialized in services
4. How would this union compare with some of the others that we discuss in this chapter?1
Before comparing the different trade blocs it is important to outline the different levels of integration an economic grouping can undertake.
The least form of integration is a preferential tariff, which is a simple agreement to lower trade barriers. Secondly and more integration provides a Free Trade Area, which consists basically of the removal of internal trade barriers and rules of origin. A further step would be a Customs Union, a Free Trade Area with a unified external tariff. Continuing on an increasing scale of Integration a Common Market may be created by removing non-tariff barriers and barriers against the movement of capital and labor. Finally the highest form of integration is an Economic and Monetary Union, which on top of the anterior requires harmonization economic policies.
NAFTA :
The North American Free Trade Area was established in 1994 by Canada, the US and Mexico, where certain goods can flow freely and without tariffs among these countries, others are being phased in. - i.e.: automobile sector, will eliminate its trades and restrictions over a ten-year period.-. The principle aims were to increase trade and investment, eliminate tariffs, reduce Non-Tariff Barriers, and also to create a mechanism for the resolution of trade disputes between participating countries. Unlike Europe, there has never been a vision of a united North America resulting in only very little accomplishments in terms of coordinating economic and social policies together with a minimalist approach to common institutions building. The launch of the Euro in 1999 encouraged discussion in Canada on dollarization and a customs union, with no success. In 2003, NAFTA was reported to be the world's largest trade bloc with a combined GDP of almost US$ 18 trillion (1/3 of worlds total), whereas the U.S. accounts for almost 90% of total GDP in the NAFTA. Additionally NAFTA compromises a population of 423 million.
EU :
The European Union carries a long history, rooting in the aftermath of World War 2 following an increasing integration process. Its impacts had the biggest effects from the 1980s when the Single European Act and Delors Report were created integrating new member states and increasing initiatives of further integration. In the 1990s the Maastricht Treaty was implemented, new members added and the EMU (1999- 2002) was created. In fact it is the biggest enlargement in European history growing constantly (10 new members in May 2004/ probably 2 more in 2007). This constant EU expansion increases heterogeneity, making it increasingly difficult to manage the EU economically and politically.
The E.U. has the following basic aspects :
* Free movement rights of workers and on-workers alike; free movement of goods services, and
capital/investments.
* Common external tariff and common international trade policy - there is no more internal
tariffs at the E.U. -. And elimination of nontariff trade barriers such as services and professional standards.
* Common policies : defense, foreign, internal affairs, regional development, interest rates and
economic stability and social policies. Member States: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, United Kingdom, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia. Out of these countries though only 12 countries are fully integrated and the remaining 13 will integrate in the future. The EU now has a combined population of 455 million a combined territory of 4 million square km and a combined GDP of 9,613bn.
ASEAN 2:
Association of Southeast Asian Nations also referred to as AFTA (Asian Free Trade Area) was founded on the 8th of August 1967. Today they consist of 10 members (Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar and Cambodia). The ASEAN region has a population of about 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US$737 billion, and a total trade of US$ 720 billion. AFTA covers, in principle, all industrial and agricultural goods. Cooperative peace and shared prosperity are the fundamental objectives of this agreement.
Mercosur 3:
The Southern Cone Common Market is a common market between four south-american countries - Argentina, Brazil, Paraguay and Uruguay -. Through this market an economic trade is open between those countries. That means that inside the area those countries do not have to pay any tariffs but outside tariffs that they have to pay to other countries can be different from each other. It is really useful for agricultural, energetic and automobiles firms.
Mercosur was created by Argentina, Brazil, Paraguay and Uruguay in March 1991. The original goal was to create a common market/customs union between the participating countries on the basis of various forms of economic co-operation that had been taking place between Argentina and Brazil since 1986 A population of 213 million, an area of 11.863.000 km2, GDP $1.175,5 millions
In the future, it would probably exist a free trade area along America called FTAA - Free Trade of the Americas -. Even if Mercosur countries' are convinced of the economic benefits being closer to NAFTA. The next step will be to assure that Canadian and U.S. citizens will accept to lose certain kind of jobs and their standard of living.
FTAA4:
Free Trade Area of the Americas has 34 countries (Antigua and Barbuda, Argentina, Bahamas, Barbados, Belice, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, United States of America, Uruguay, Venezuela)
In the future, it would probably exist a free trade area along America called FTAA - Free Trade of the Americas -. Even if Mercosur countries' are convinced of the economic benefits being closer to NAFTA. The next step will be to assure that Canadian and U.S. citizens will accept to lose certain kind of jobs and their standard of living. Overall the FTAA is similar to the North American Free Trade Agreement (NAFTA). Additionally they agreed on 4 official languages. On November 20th, 2003 the ministers reaffirmed their commitment to the successful conclusion of the FTAA negotiations by January 2005. The region's population is 800 million people. Their combined GDP is $20 trillion (40% world economic activity).5
Other regional agreements :
ANDEAN Comunidad Andina de Naciones, The Andean Community (Bolivia, Colombia, Ecuador, Perú, Venezuela)
CACM The Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua)
CARICOM The Caribbean Common Market (Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines Suriname, Trinidad and Tobago
A further creation of a tradeing block may develop under the name JACIK (Japan, Asean, China, India and Korea )
5. If you were a U.S. businessperson looking at this newly created market, what strategies might you employ to serve all three markets? What factors would you consider in making your choice?
From a political and economical point of view, globalization is the process of denationalization of markets, politics and legal systems. The consequences of the restructuration on local economies,
environment and human welfare are delicate topics among the international community.
Regarding business, globalization represents the moment when companies decided to take part of the global economy, establishing its own markets.
For our new launch we decided to implement the Uppsala strategy model. This model will give the possibility to deal with our expansion and the knowledge we acquire through it.
We decided to implement in our company the following location:
* As the Canadian and American market demand is satisfied and the cheaper Mexican labour cost, we decided to change our market industrial conditions and implant "maquiladoras" close to the American border. - important fact : the cheaper Mexican labour -
* Concerning technological industry - i.e.: R&D - will be implemented in the US.
* Regarding customers and financial services they will located in Canada due to its cheaper and equally qualified Human Resources. - compared to US -
Through this strategy model there are several key factors affecting the priority of international market entry :
* Market size
* Affluence : acceptance of products
Nevertheless, there are two negatives aspects :
* Geographical distance
* Cultural distance - border countries, but huge cultural differences especially concerning Mexico -.
The Upssala strategy can be summarized throughout the following stages :
* 1ST stage : sell the product in the US, bigger GDP
o Higher GNP
o Ten fold population of Canada and more than double the population of Mexico
* 2nd stage : introduce the project in Canada
o Close to the American GNP and way of live / little difference between the States and Canada
* 3rd stage : launch the product in Mexico
* Once the investment pays off. --> ROI
* Creation economies of scale and sale the product at cheaper price
Factors to take into consideration : GDP, population, level of development, labor to capital ratio, cultural-environment.
Our strategy is depicted in the following figure.
Source : own made by the group
6. Comparison between NAFTA & EU today. Which is more successful? FDI?
Where is economically NAFTA today?
* Volume of trade :
o Trade dependence is superior in NAFTA than in the EU 6
o They have 28.1% of worldwide trade commerce in 2000. In the same period the EU has 25.2%7
* Volume of business development 8 :
o Products
* In order to explain the level of business development in both areas we will try to observe the more significant type of products. EU exports more agricultural products, energy and textiles/clothes. NAFTA exports more machinery and chemical products. Based in this study we can say that the level of development is very closed. However NAFTA still have a little advantage in manufactured products which can be explained by the fact that the US has a bigger technology development.
o EU FDI in NAFTA :
* In 2000, EU invested 226,767 millions Euros in NAFTA which is double as much as NAFTA did in EU. However, trend in the last years shows than EU FDI in NAFTA is becoming stable. At the same period NAFTA's investments increased by 60,1%.9
Table 1 : EU FDI with NAFTA (M€ and %) 10
998
999
2000
Imports
86,571
06,371
25,198
Share of EU Total (%)
39.0
43.9
43.8
Exports
83,822
99,412
27,195
Share of EU Total (%)
36.4
40.2
43.7
Trade Balance
-2,749
-6,959
,997
Source : Eurostat 2002
What is the actual politic situation?
* UE institutions are more developed and better established :
o Never has a vision of united North America : No coordination in terms of economy and social policies...important fear : lost their political institutions and their identity
o Resolve problems through bilateral deals. Not so often as in the European meetings we do not see the presidents of
o Try to avoid actions where they'll have to sacrifice national sovereignty
* how many business are moving out of NAFTA
* Obstacles to trade and investment between NAFTA and the EU
o NAFTA
* For Canada and Mexico, the proximity of the US market make them trade dependant
* Hemispheric integration
o EU
* Has focus the last years on Eastern enlargement
* Go deeper into the internal social-policy cohesion
* What about EU today? : the successful European story
NAFTA and EU comparison will be done in question 6
2 http://www.aseansec.org, Free Trade Area Membership As a Stepping Stone to Development : The Case of ASEAN World Bank Discussion Papers ; 421, Fukase, Emiko.; Martin, Will., Washington, D.C. World Bank, 2001
3 www.mercosur.org.uy
4 http://www.ftaa-alca.org
5 www.dfait-maeci.gc.ca, Canadian Department of Foreign Affairs and International Trade, March 2004
6 Blank S., Coiteux M., " The State of North American Integration ", Management International, Vol.8 (1) 2003
7 Eurostat, in " Making globalization work for everyone. The European Union and World Trade", Euorpean Communities, 2003. p.10
8 Eurostat, Brussels, Nov. 2002
9 id.
0 Eurostat, Brussels, Nov. 2002
Master in International Management International Business
O. Ciudad - D. Rubio - P. Zierik
