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NAFTA: North Atlantic Free Trade Agreement

NAFTA is not an example of integration at par with either EU, ASEAN or SAARC. It has been just a free trade agreement. First free trade agreement between developed and developing countries. It was proposed by H. W. Bush, and implemented by Clinton administration. This shows that there was bipartisan support for NAFTA in USA. However Later on there was resentment against NAFTA. Even Obama administration wanted to revise it. Trump administration took aggressive posture, called it as worst trade deal ever.

US has forced NAFTA countries to revise the terms and conditions. The main reason being US-China rivalry.
After USA, Canada is the second largest trading partner of China. China has huge investments in Mexico and other Latin American countries. According to Robert D Kaplan, USA has been ignoring the challenge to its hegemony in its own backyard. 1] Porous border give opportunity to non state actors, to enter in USA.  2] Reduction of tariffs give opportunity to China to enter into US market where Mexico acts as a back channel route.

Motivations for Mexico to join agreements.
Source of investment form USA, Access to technology, More employment in manufacturing sector, increase in exports (farm exports).
Incentives for USA.
Cheap labour in Mexico will enhance the competitiveness of US products. 
It will also create jobs in Mexico and hence it will prevent legal and illegal immigration from Mexico.
Incentives for Canada.

A bigger market for products of Canada and a place for Canadian investment.

Nature of the agreement. One of the most ambitious trade agreement as it covered trade in goods, services, investment, IPR. It included labour laws and environmental standards.
Impact of NAFTA. In 1993, the total intra-regional trade was $290bn, which has grown into $1.1 trillion in 2017. Mexico was receiving US FDI of around $15bn before NAFTA, which became $100bn after NAFTA, at present.

What are US grievances?
Job loss in automobile sector to Mexico and Canada maintained protectionist regime in dairy sector.
Actual scenario.
NAFTA had created more number of jobs in export sector of USA. It provided cheaper goods to US consumers. It has increased USA’s farm exports (Corn to Mexico). It has increased competitiveness of USA’s automobile industry vis-a-vis Europe, Japan and even China. Job loss was concentrated in few sectors, benefits spread across the sector.  Job losses in USA has been for other reasons also i.e. automation & because US govt. has not invested in skill development at par with Nordic countries. (Nordic countries have not been adversely impacted by globalization, Switzerland has been the biggest winner of globalization).

Impact on Mexico Mixed impact.
More investment from both Canada and USA. More job in manufacturing sector. But negative impact on agriculture. USA’s exports have been heavily subsidized. It also led to regional disparity in Mexico. Northern belt benefitted (Manufacturing), southern belt suffered (agrarian). Mexico’s economy also became more vulnerable to global shocks since it is tied with US economy, it faced the burnt of recession of US economy.
It was expected that NAFTA will bring increased wages. It didn’t happened. NAFTA could not prevent illegal immigration into USA. There was no significant impact on poverty reduction. There were also job losses in Mexico, but not because of USA rather because of China.

Impact on Canada. No Adverse impact. Canadian export to USA increased. Canada gained significantly in cross border investment. Hence Canada has been more interested in continuation of deal in present form.

What has been USA’s demands?
1_Mexico should increase wages – accepted.
2_Tightning the rules of origin requirement – action against China – accepted.
3_Updating IPR norms and digital servicing norms – accepted.
4_Canada should reform its dairy sector – accepted. (Now US dairy sector will have greater access to Canada).
5_New environmental rules – accepted.

What Canada gained?
Canada could force USA to retain Ch 19 and Ch 20, dealing with dispute settlement mechanism. The advantage being, that Canada can use the platform against USA if USA imposes high tariffs, anti dumping duties and counter veiling duties.

Biggest gain for USA.
Canada and Mexico will have no freedom to conclude free trade agreement with China – the new agreement suggests that the partner countries will have veto power over the free trade agreement, concluded with non market economy. Though China is a WTO member since 2001, China has not been given the status of market economy. What China will gain? If treated as market economy, as per WTO norms, it will weaken the ability of developed countries to impose sanctions against China.
Another advantage for USA in the new deal also includes that tariff free exports to Mexico’s automobile sector only when the product utilizes 75% of the parts manufactured in USA.

The impact of new deal on global economy.
USA will impose similar terms and conditions for other trading partners (right to be informed about the trade deals and right to veto). This will contain China economically. However there is a huge interdependence among countries with China. The slowdown of Chinese economy will ultimately slow down the global growth. Slowdown in global demand will adversely impact India also.

Posted in PSIR 2A

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