Global Groupings Case Study - NAFTA

History, Development and Aims:

- Set up in 1994
- Made up of USA, Canada and Mexico
- Goal was to eliminate trade barriers and provide investment between all 3 member countries
- After establishment, half the tariffs on trade between Mexico and the USA were eliminated and those remaining are being phased out over a 15-year period
- 1965 - Mexican government set up 'Border Industrialisation Programme' which created favourable export platforms for US companies - encouraged international connections
- Relative decline in USA international competitiveness was a major factor leading to the formation of NAFTA, and due to:

• rise of Japan and recovery of Europe
• multilateralism --> free trade - so USA faced competition from revitalised economies of Western Europe and Japan
• lost out on its traditional industries such as cars, consumer electronics, textiles

- Employment grew largely in service sector through the 90s, but average wages were 77% that of manufacturing industry
- Established ease of transport between Canada and Mexico, e.g. CANAMEX corridor - series of highways

Pros of being part of NAFTA:

Social -

• mix of culture
• more jobs available means better quality of life for especially Mexican citizens

Economic -

• North American employment levels up 23% since 1993 - net gain of 39.7 million jobs
• merch trade among NAFTA partners > tripled - $946.1 billion in 2008
• trade between USA-Mexico > quadrupled ($1 trillion)
• USA service employment up >10 million
• since initiation the North American economy has doubled in size
• combined GDP surpassed $17 trillion in 2008, up from $7.6 trillion in 1993
• Mexico became one of the largest recipients of FDI among emerging markets, receiving $156 billion from NAFTA partners between 1993-2008
• an extra 10 million employed in services

Environmental -

• introduced $9 million annual budget for improvement schemes and protection towards the environment
• development on decreasing toxic products

Political -

• allows countries to maintain independence
• political 'voices' louder for Canada and Mexico due to being part of the trade bloc

Cons of being part of NAFTA:

Social -

• the migration rate from Mexico to the USA doubled since NAFTA establishment

Economic -

• Mexico saw a net loss of employment under NAFTA - around 600,000 gained in manufacturing, but at least 2 million lost in agriculture
• 1/2 population can't find formal employment in Mexico
• poverty and inequality rates only decreased slightly (mainly due to increased remittances)
• Mexico's wage gap with the USA got 6x bigger
• average wages in services 71% of that in manufacturing
• manufacturing companies leave USA for Mexico due to cheaper land and workforce
• most of the profits go back to US owned companies - 'maquiladoras' are US owned assembly plants set up in Mexico which employ Mexicans but export products mostly back to USA
• 1.5 million jobs lost in manufacturing in USA

Environmental -

• US companies clearing land in Mexico for factories
• industrial processes = more pollution
• Mexico has a poor record of  enforcing environmental laws - fears that Mexico may become a dumping ground for hazardous material
• Mexico's rivers and air are already being polluted

Political -

• USA has the most political control in NAFTA
• untrustworthy policies in Mexico due to US dominance in Mexican markets