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International Management

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The economic and social consequences of trade agreements have become a major area of research in recent years. Much of this has to do with regional economic integration, where countries in a geographic region, reduce and remove tariff and non-tariff barriers to the free flow of goods, services and production between each other (Hill, 2005).

On the 1 January, 1994, such a trade agreement came into affect between America, Mexico and Canada. This was known as the North American Free Trade Agreement (NAFTA). This removed all barriers to the trade of goods and services within the member countries, the protection of intellectual property rights, application of national environmental standards and the establishment of two commissions with power to impose fines and remove trade privileges when such standards are ignored involving the environment, health and safety, wages and child labour (Hill, 2005).

There is a belief that agreements designed to promote free trade within regions will benefit trade for all the countries involved, and also the rest of the world (Abbott and Moran, 2002).

While regional economic integration, or foreign direct investment, is seen as a good thing, some observers worry that it could lead to a world in which regional trade blocs compete against each other. We are seeing the formation of many trading blocs continuing today as the need for it has become essential for countries and their firms to compete in the global market place (Seid, 2002).

Although this is the case, each bloc will also protect its market from outside competition with high tariffs, with each member determining its own trade policies to non-members (Gereffi et. al, 2002).

With all this in mind the following will address the NAFTA agreement with issues arising about job gains and job losses in different areas, whether regional economic integration is a good thing or a bad thing for member countries and their firms, whether the trade agreement will help close the economic gap between the poor and wealthy partners and the national sovereignty of poor countries in relation to their wealthier counterparts.

Regional economic integration, or foreign direct investment, can transfer technological, marketing, managerial know-how, to host countries like Mexico. With knowledge comes economic growth, and by linking neighbouring countries, it makes them more dependant on each other while creating incentives for political co-operation, and reduces the potential for violent conflict (Hill, 2005).

Markets that were formerly protected from foreign competition are now opened with the lower cost of doing business in a single market. For example, the free movement of goods across borders and the harmonisation of products. Some might see this as a form of globalisation with more competition being produced from it (Dallmeyer, 1997).

By enlarging their trade environments, countries like America, Canada and Mexico can reap the joint benefits of comparative advantage and the economies of scale. For example America is energy short while both Canada and Mexico seek energy markets. Canada has more fresh water than any other country in the world, and while Mexico’s capital is poor, America and Canada are capital rich. Mexico’s cheap labour and low environmental standards (McPhail, 1995).

Mexico benefits the most in this agreement from much needed inward investment and employment, while also helping regain, stability in its political activities. This also allows America and Canada to better compete with Asian and European markets (Abbott and Moran, 2002).

With Mexico having reduced water costs, labour and transportation, clothing prices have fallen, leaving consumers with more money to spend on other items. This can be shown with the data that between 1993 and 2002 exports of garments from Mexico to America increased from $1.6 billion to $8.95 billion (Hill, 2005, p. 272).

On the downside to this, employment in the American textile industry between 1993 and 2002, fell from 1 million to 432,000, a 57% reduction (Hill, 2005, p. 272). Also many factories are closing in America and moving to Mexico as it is much cheaper and viable to do so. For example companies like Fruit of the Loom, underwear makers, denim producers Cone Mills and Burlington industries. Many other are following in the footsteps (Hill, 2005).

The low cost labour areas are also very risky for companies who want to build factories in Mexico with unstable political condition, poor infrastructure, poor services, unstable currency, taxation and low skilled labour. This can be seen a problem for businesses and could be a bad thing for integration (McPhail, 1995).

Even though a loss in jobs can be seen in America, the reverse is also happening. Jobs are being created by NAFTA in Canada and America. Mexico needs earth moving equipment, telecommunications equipment, computers, and machine tools, all of which will be purchased from American and Canadian manufacturers, therefore creating jobs (Dallmeyer, 1997).

As Mexico’s standard of living improves, there will also be fewer illegal immigrants crossing over to the American border as NAFTA promotes significant economic growth. However the American labour movement strongly opposes the revival of a guest worker program for the Mexicans which they fear would undermine the wages and working conditions of union members. Experts on Mexican migration to America also note that guest-worker programs have actually promoted further unauthorised moves by the Mexicans across to America. So even if the standard of living improves in Mexico the lure of working in America is still apparent with higher wages in America (Gereffi et al, 2002).

Before the NAFTA agreement took place environmentalists pointed out key facts like the sludge in the Rio Grande River and the smog in the air over Mexico City. More chemical waste and sewage would increase along the Rio Grande from El Paso, Texas to the Gulf of Mexico (Uimonen and Whalley, 1997).

Mexican laws are lax and problems of enforcement exist. Also the fact that lower cost of pollution abatement in Mexico, will also add the incentives for “dirty industries” to relocate there (Uimonen and Whalley, 1997).

For these reasons the environmental side agreement ensured that each party would line up to its domestic commitments to protect its environment with yearly meetings from officials of each country to set the annual agenda. Each country can be fined and suspended trade concessions to be enforced if there is no compliance with the agreement (Uimonen and Whalley, 1997).

However, even though these rules are in place the North American Council on Environmental Co-operation (NACEC), declined to proceed with a complaint, regarding an alleged failure by Canada, to enforce environmental laws which resulted in the pollution of wetlands and harm to fish and migrating birds (Dallmeyer, 1997).

The NACEC however did respond to a petition regarding an environmental incident in Mexico where 20, 000 to 40, 000 waterfowl, like ducks, died due to the fact of industrial run off and untreated sewage. This not only harmed the birds but presented danger to humans. The NACEC also battled the construction of a cruise ship dock adjacent to coral reefs at Cozumel, Mexico (Dallmeyer, 1997).

Even though the NACEC chooses to pursue only a few of the submissions made to them, they involve the public in its decision making. This is, however to say, that the problem is conjured up by the public and not the companies in NAFTA. If the public is not aware of what is happening or do not say anything in regards to the environment, who is to say that it will be raised by the business? More so, it would probably be overlooked (Dallmeyer, 1997).

We must take into account for trading blocs to work and be all “high and dandy” trade creation must be greater then trade diversion. That is high-cost producers within a domestic area are replaced by low-cost producers within the free trade area, or high-cost external producers are replaced by low-cost external producers. Not the opposite occurring where low-cost workers are replaced by high-cost workers. Not only will this be a positive, but would also start to close the economic gap between the poor and the wealthy (Hill, 2005).

Mexican critics argued that Mexico would be dominated by American firms that would not really contribute to Mexico’s economic growth, but instead would use Mexico as a low-cost assembly unit, while keeping their high paying, highly skilled jobs north of America (Blau, 1999).

But if investment is going to Mexico, surely then, at least for the workers in Mexico, we could make the case that NAFTA might improve their people. The new investment could raise their wages and standards of living (Blau, 1999).

However with the hourly rate different between America and Mexico, Magnatek a producer of light ballast, used for ships and roads, moved from Michigan to Mexico. The workers were paid $50 for 45-48 hours a week. If we compare the hours to the American hourly rate the economic gap does not look like getting closed (McPhail, 1995).

Another example of this is the previous Maquila program that ran in Mexico with over 500,000 workers in about 2,000 plants, with a previous free trade and investment zone along the US-Mexican border. Manufacturing wages in the Maquiladora plants were lower then manufacturing wages in the rest of Mexico (McPhail, 1995).

These issues raise the ethical debate together with basic labour standards being ignored, workers rights to form or join unions is suppressed, union members are targeted with repression and union organising becomes a high risk activity, which could result in loss of jobs (Seid, 2002).
Traditional blue collar workers could have the chance to be trained into more skilled areas of expertise and work across the border in America or Canada, but also the opposite could happen with illegal immigrants working in sweatshops for low money, poor health and work conditions, all this due to a lack of education and language issues (Gereffi et al, 2002).

One way of really closing the economic gap might be the integration of a common market with harmony and co-operation on fiscal, monetary and employment policies to allow immigration or cross-border flows between the NAFTA countries. Another method could be to integrate an economic union where a common currency, harmonisation of tax rates, and a common monetary and fiscal policy are put in place like the European Union (EU) and the introduction of the euro. This however seems to be good in theory but it would impossible to put in place with such a difference between the economies of America and Mexico, yet alone outrage of the Americans (Hill, 2005).

Within the trade agreement it can be seen that the poorer nation of Mexico could become subordinate to the likes of America. It is argued that the entry of foreign direct investment to countries could be a threat to the sovereignty of the country, and the independent development of the social and cultural life. For example, the values and work ethics of the home country, to the host country, could be imposed on them, but also lecturing countries what is good or bad for them as well (Seid, 2002).

Sovereignty concerns come about because close economic integration demands that countries give up some degree of the control over key policy issues such as monetary, fiscal and trade. Mexico’s concern with sovereignty came about maintaining control of its oil interests when Canada and America exempted Mexico’s oil industry from any liberasition of foreign investment regulations (Hill, 2005).

This is a major concern for the like of Mexico with powerful businesses stepping into the culture of the Mexicans, spreading their own way of doing things and along the way could influence governmental decisions on proposal plans or ideas. Not only can there be a high chance of being told what to do, when to do it and how to do it, but also loss of independence as a country in the NAFTA agreement and seeming to the rest of the world as “puppets” of America and Canada.

In conclusion, it can be seen that the NAFTA agreement does have its good and bad points, like any other issue, in regards to labour, the environment and sovereignty, but if we look at the standards of Mexico before NAFTA to current day Mexico, one could argue that this agreement helped Mexico out immensely, as well as America and Canada. Surely the loss of jobs that was given such high concern doesn’t look that bad now with all parties losing and gaining in the long run. If the environmental, ethical and labour laws can be maintained, who is to say that this agreement is not a complete success. However, unless there are strict conditions and these conditions are adhered to, both internally and externally, the major problem with NAFTA could be the closure of its trading bloc to the outside.

List of References

Abbott, J., Moran, R. (2002) Uniting North American Business: NAFTA Best Practices, Butterworth – Heinemann: Unites States of America.

Blau, J. (1999) Illusions of Prosperity: America’s Working Families in an Age of Economic Insecurity, Oxford University Press: New York.

Dallmeyer, D. (1997) Joining Together, Standing Apart: National Identities after NAFTA, Kluwer Law International: London.

Gereffi, G., Spener, D., Bair, J. (2002) Free Trade and Uneven Development: The North American Apparel Industry after NAFTA, Temple University Press: Philadelphia.

Hill, C. (2005) International Business: Competing in the Global Marketplace (5th Ed.), McGraw-Hill/Irwin: New York.

McPhail, B. (1995) NAFTA NOW!: The Changing Political Economy of North America, University Press of America: Maryland

Seid, S. (2002) Global Regulation and Foreign direct Investment, Ashgate Publishing Limited: Hampshire: England.

Uimonen, P., Whalley, J. (1997) Environmental Issues in the New World Trading System, MacMillan Press Ltd: Great Britain.

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International Management Homework

...HOMEWORK 1-INTERNATIONAL TRADE THEORY & POLITICAL ECONOMY OF INTERNATIONAL TRADE 1. Read the Samuelson critique from Chapter 5. Explain briefly what you understand from this critique. Do you agree or disagree with this critique? 2. The world’s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interests of such nations! Do you agree or disagree, discuss. 3. Read the section on “Evidence for the Link Between trade and Growth” in Chapter 5 from your text book. With the help of this information as well as other sources (internet, books, magazines) identify and explain the channels through which trade positively affects economic growth in a nation. 4. Read the case on “Agricultural Subsidies and Development” (page 308 in the 7th edition; page 300 in the 8th edition) and answer the 4 questions that follow the case. 1. According to Samuelson Critique, rich countries, USA in particular, might not gain from free trade, but loose, because some jobs are being relocated to poorer countries (such as India and China). I agree that USA economy suffers in some way because of this, but on the other hand I am sure that this is only short term loses, and in general economy will benefit in a long run. Indeed, I guess it......

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