January 1994, the United States, Mexico, and Canada implemented the North
American Free Trade Agreement (NAFTA). The goal of NAFTA is to create better
trading conditions through tariff reduction, removal of investment barriers, and
improvement of intellectual property protection. NAFTA continues to gradually
reduce tariffs on set dates and aims to eliminate all tariffs by the year 2004.
Before NAFTA was established, investing in Mexico was a difficult process.
Investors needed the Mexican Government's approval and were also required to
meet specific investment guidelines. These requirements necessitated investors
to export a set level of goods and services, utilize domestic goods and
services, and transfer technology to competitors. Under NAFTA, investors no
longer need government approval to invest and are treated as domestic investors.
NAFTA has also increased intellectual property rights and allowed companies to
obtain patents in Mexico and Canada. In the past, companies were hesitant to
export research and development intensive goods; with increased intellectual
property protection, however, exports of these goods has shown a definite
increase. As a result of better trading conditions, exports and imports of most
other goods have increased along with the research and development intensive
goods. In Mexico, the elimination of investment barriers has allowed investment
to expand. Increased trading and investment has then created many jobs, raised
the Gross Domestic Product, and lowered consumer prices. The macroeconomic
principles defined in Economics 103 relate to NAFTA's impact on aggregate supply
and demand, employment, investment, and their effects on national income. The
free trade established by MERCOSUR also involves countries within South America.
MERCOSUR, the Southern Common Market ( Mercado Common del Sur) was established
in 1991 after a series of other free trade treaties failed to meet the standards
of the countries involved. It is set up on the basis of free trade zones and
eventually to lead to a common market. Before MERCOSUR there was ALALC, the
Latin American Free Trade Association. It was formed in 1960 and set up free
trade zones through the periodic negotiations between the members of the
association. ALALC ended in the 1970's due to these negotiations because they
were left to the discretion of the countries involved and unfair practices
started to occur. After ALAC, came ALADI, the Latin American Integration
Association. Founded in 1980, it established economic preference zones instead
of free trade. This encouraged economic growth and increased actions and
agreements between countries that previously had no connections. In 1986
Argentina and Brazil signed a Treaty for Integration, Cooperation, and
Development which was originally set up to remove tariff barriers and tie
together the macroeconomic policies of the two countries. This Treaty is what
led to MERCOSUR. MERCOSUR is a process of integration to form a common market on
the foundations of open regionalism. In March of 1991 Paraguay and Uruguay
joined MERCOSUR and most recently Chile became a part of the market in 1996. The
goals set by the agreement are to create free transit of production goods and
lifting of non-tariff restrictions on transit goods. It was set up to adopt a
common trade policy with nations that are not a part of the market and to set up
a fixed common external tariff for all to follow. There are quite a few other
goals that was set by MERCOSUR including a clause that states that the countries
involved will be able to adjust their laws for the purpose of strengthening the
agreement. The main point of MERCOSUR is to set up free trade among South
American countries and to encourage new countries to join (americasnet.com).
Another related trade agreement conveying the benefits of international trade is
the General Agreement on Trade and Tariffs (GATT). A trade agreement that
conveys the positive outcomes of international trade is the General Agreement on
Trade and Tariffs (GATT). It was created in 1947 and like NAFTA promotes
international trade through the reduction of tariffs. Today, GATT encompasses
over one hundred countries and 90% of the world's trade goods (Sabir 1). There
have been eight different versions of GATT, each resulting in a new trade
agreement. The most recent is referred to as the Uruguay Round and is one of the
largest and most comprehensive trade pacts in history (Deng 1). The Uruguay
Round Agreement cuts tariffs by one-third, increases coverage for textiles,
clothing and agriculture and creates a new World Trade Organization
(Congressional Digest 258). The WTO settles dispute settlements, regulates the
policies agreed upon and reviews countries' trade practices and policies. In
addition, the Uruguay round proposes reductions in nontariff protective barriers
to trade (Gottheil 350). The Uruguay Round and WTO make up an important part of
GATT. GATT as a whole is based on principles that ensure all participating
countries receive benefits. These principles include nondiscrimination,
protection of domestic industries and provision of stable basis for trade
(Congressional Digest 258). With such a solid foundation, the policies of GATT
have taken force. Much like NAFTA, GATT proposes to increase trade through the
reduction of tariffs. However, GATT is more inclusive of the international
economy. As NAFTA, MERCOSUR, and GATT establish free trade throughout the
Americas and other parts of the world, the European Free Trade Agreement (EFTA)
represents countries throughout Western Europe. It was initially formed in 1960
by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the UK. The
overall objective of the EFTA and of these founding states was to remove trade
barriers throughout Western Europe, such as import tariffs and quotas, and to
uphold open practices in world trade (EFTA Page). The framework of the EFTA has
changed significantly since its initial founding as many member states have come
and gone along the way. In 1972, the existing EFTA countries signed free trade
agreements with the European Union, thus eliminating import tariffs on
industrial products. Since then the EFTA has worked to strengthen its
relationship with the European Community. The current constituents of the ever
changing EFTA include Iceland, Liechtenstein, Norway, and Switzerland (EFTA
Page). The free trade agreements established by the EFTA cover intra-EFTA trade,
trade with the European Union, and free trade outside of the EFTA or EU. The
EFTA is currently in the midst of procuring free trade agreements with countries
in Central and Eastern Europe and even with other countries around the world
(EFTA Page). These free trade agreements serve to promote unified movement
within the EFTA's economic relationships and to strengthen Europe's
international trade alliances. According to EFTA web page, free trade
established by the EFTA is an, "essential process in the continuous
building of economic, social, and political ties between the countries of Europe
and thus enhancing our common objective of closer European integration"
(EFTA Page). Agreements with the EFTA reduce tariffs between countries, enhance
and allow for more stable foreign investment, and support the removal of trade
barriers. In establishing all of these rights, the EFTA hopes to create an
environment that is supportive of entrepreneurship, competition, and economic
activity within its various market structures (EFTA Page). Analysis Free Trade
agreements are prevalent throughout the world, each representing trade within a
particular region. The success of free trade is unique to each individual trade
organization. NAFTA, MERCOSUR, GATT, and the EFTA, overall, have created founded
many positive aspects in international trade. The free trade that NAFTA has
established among the United States, Mexico, and Canada has greatly benefited
the U.S. economy. During the years from 1994 to 1997, U.S. trade with Mexico and
Canada rose 44 percent. This extensive growth is accredited primarily to the
reduction of tariffs. As tariffs were lowered, U.S. goods became cheaper and
more competitive in Mexican and Canadian markets, and at this lower price level
the quantity demanded of U.S. goods increased. On the attached graph, as the
price level drops from A to B, the quantity demanded increases from C to D; it
becomes less expensive for U.S. firms to supply goods to Canada and Mexico as
the supply curve shifts from AS to AS'. In order to meet the new demand, the
firms must hire new workers and increase investment. Between 1994 and 1997, 90
to 160 thousand jobs were created in the U.S. due to the increase of trade with
Mexico, and 2.4 million jobs were dependent upon trade with Mexico and Canada.
The increase in employment and investment then leads to increased national
income. The work of NAFTA has also served to benefit Mexico's economy; in
accordance with the United States' economy, Mexico's exports have increased,
more than doubling since 1993. The elimination of investment barriers has caused
a dramatic rise in foreign investment from four billion in 1993 to ten billion
dollars in 1998. NAFTA has enabled Volkswagen, IBM, and the textile industry to
seek labor and materials in Mexico. In 1994, a Canada-based entrepreneur
invested four million dollars in a metal-stamping plant. The plant is now a
major material suppler for Volkswagen although it was originally intended to
employ only 130 people. The plant currently employs 1,300 workers and generates
57 million dollars in sales each year. NAFTA has also allowed IBM to create
plants in Guadalajara that would otherwise have been built in Asia. As a result,
the exports of IBM de Mexico have increased from 350 million to 2 billion
dollars in five years and the increased exports have created over 270 jobs.
Mexico's textile industry, too, has grown as a result of NAFTA, in 1996
overtaking China to become the largest supplier of textiles to the United
States. U.S. mills invest hundreds of millions of dollars to build plants in
Mexico as an effect of the reduced tariffs and shipping time. It takes only
eighteen hours to ship goods to the Mexican border, while it takes twenty-one
hours to China. Increased investment and exports have created jobs and increased
GDP. In 1998, Mexico's economy grew 4.5 percent and economists predict that it
will grow an additional 2.5 percent in '99. Free trade under NAFTA has also
encouraged international specialization, the production of only the goods that a
particular economy can produce most efficiently. If the U.S. for example, is
efficiently manufacturing cars and Mexico, producing corn, then the U.S. should
produce only cars and Mexico, only corn. They are more efficient if they each
produce at their highest output, and trade for other goods. International
specialization increases efficiency, lowering consumer prices; consumers no
longer have to pay for inefficiently produced goods. The benefits of NAFTA are
therefore, increased employment, raised national income, and lower consumer
prices. MERCOSUR, again like NAFTA, has had an overall positive influence on
free trade throughout the Americas. The economic goal of MERCOSUR is to be able
to coordinate the macroeconomic and sectional policies of the countries involved
in relation to foreign trade and several other common markets. It also ensures
free trade competition among the nations with in the agreement. It was formed to
improve the economies by making them more competitive and efficient (Embassy of
Uruguay). The time line goal of MERCOSUR was to start with Argentina and Brazil
in 1995 to reduce tariffs some and in 1996 to reduce tariffs by 25 percent and
increase each year by another 25 percent until in 1999 tariffs were 100 percent
gone. Because Paraguay and Uruguay joined the Treaty later the dates for the
elimination of their tariffs are pushed back a whole year so that by the year
2000 they will have 100 percent eliminated tariffs. The downfall of this
elimination of tariffs is that some businesses will have to cut back and
restructure so some people will loose their jobs, but in the long run the
economy will grow stronger from it. However, the social security system for the
countries will be transformed such that a worker can work in any of the member
countries and accumulate years until retirement and still receive a pension (americasnet.com).
Each of the countries is using MERCOSUR in a different way to increase their
productivity. In Brazil through privatization they use MERCOSUR to attract
outside investors for industries and services to improve roads and railways and
other large industries like power. Argentina is also using privatization to
increase opportunities with their airports. Paraguay and Uruguay are taking more
advantage of the integration process. In Paraguay they are using it to increase
and improve waterways and in Uruguay the are using it to build a bridge and
distribute gas and electricity (americasnet.com). All of the countries have
increased their GDP since the induction of MERCOSUR and have become more
economically independent. Argentina has gone from a recession in 1988 through an
incredible recovery through to 1996. They have increased their exports by 13,000
form 1993 to 1997 and exports have increased by 15,000 in the same period of
time (Argentina Brief). Other MERCOSUR countries have experienced the same
results and are continually growing. The one exception to the benefits of
MERCSUR would be the economy of Paraguay. Before they joined the market, they
were the best performing country in the region, but now they have fallen behind
all the other members in MERCOSUR as a result of the political instability and
small domestic market (Sabkar, Maysoon). The effectiveness of GATT is that it
applies to a majority of the economy. In the market of major industrial goods,
tariffs have been eliminated and reduced in the developing markets of:
construction equipment, agricultural equipment, medical equipment, steel, beer,
distilled spirits, pharmaceuticals, paper, toys and furniture (Congressional
Digest). These are some of the most important industries in the United States
and are some of the most competitive in the world. As stated by the US report on
GATT, a key provision was that it "significantly lowered access to markets
that represent approximately 85% of world trade in terms of reduced tariffs on
specific items of key interest to US exporters". There have been tariff
reductions ranging from 50 to 100% on important electronics software (US report
on GATT 2). The most important sector to be included is agriculture. For the
first time, all agricultural tariffs are bound and reduced. GATT strengthens
long term rules for agricultural trade, reduces agricultural export subsidies
and opens new markets. Intellectual property such as patents, trademarks and
copyrights for movies, computer programs, books and music is also protected.
Many of the industries listed above deal with technology and are crucial to
everyday life. By promoting the reduction of tariffs in the sectors of the
economy important to the United States, industries will be able to expand and
grow. The way that industries will be able to grow is through the reduction of
tariffs. While barriers to trade come in many forms, the tariff has been used to
protect domestic industries from foreign competition. The negative aspect of
tariffs is that they reduce the amount of goods produced for export. Graph 1
exhibits the effects of a tariff on quantity supplied by United States. Let's
suppose the tariff is on imported French wine. At normal equilibrium, quantity
demanded of wine equals quantity supplied at one hundred billion and a price of
$2. That is the United States would supply 1 billion bottles of wine. However, a
tariff creates a situation similar to a price ceiling. The tariff causes the
price to decrease to $1 and the quantity supplied decreases to .5 billion while
quantity demanded increases to 1.5 billion. The effect of the tariff is to
decrease the quantity supplied by the United States. To producers in the United
States that means a decrease in the production of goods and services. The
reverse happens when the tariff is reduced. Quantity supplied will increase,
that is more goods will be produced for trade. This increase in exports has
other implications on the economy. Since exports will be increasing at a higher
rate than imports the net exports will be positive. Aggregate expenditure equals
spending by consumers, investors, government and net exports. An increase in the
net exports will increase the aggregate expenditure shifting it to the right.
This is seen in graph 2, where the aggregate expenditure curve (AE) shifts to
the right (AE'). As shown by the graph, the level of national income increases
from 250 billion to 300 billion. Therefore, increasing net exports will increase
the level of national income. "By eliminating import taxes, world income
will increase as much as $5 trillion in the next 10 years. Higher world incomes
mean more demand for our commodities" (Kleckner 1). With an increase in
national income, the standard of living in the United States and other
participating economies should increase. More jobs will be created for the
unemployed, helping the economy reach the full employment level. At this level,
all resources would be in use. Similar to other free trade agreements, the
purpose of those formed through the EFTA is to strengthen European as well as
international economies. In establishing a strong foundation for free trade, it
seems that the EFTA has done much good for economies within Europe. According to
the EFTA web page, "Ministers emphasize EFTA's strong credentials as a free
trade organization and underline that free trade and economic integration play
an increasingly important role in securing work, welfare, peace, and democracy
in Europe" (EFTA Page). Its visible effects on international trade provide
only a nominal indication of the many accomplishments of the EFTA; its work can
also be observed in terms of its underlying affect on the economy. In
establishing strong international relationships, it has expanded the level of
exporting and importing, increased employment, raised consumption, and in
effect, also enhanced the average GDP for countries active in the EFTA
(Fortune). Each part of this integration serves a beneficial purpose, and
positive aspects of the EFTA's work are evident in economies throughout Europe.
As the EFTA has worked to strengthen relationships not only within its member
countries, but all over Europe and the rest of the world, it has established
many alliances, thus creating a solid base for foreign trade. The level of
exporting and importing, particularly among European countries has shown a
definite increase. The expansion of foreign trade creates potential for more
employment opportunities; it can also be directly related to its aggregate
supply, and in effect, its level of GDP. The increase in exporting, being a
significant expenditure included in the calculation of GDP, is shown in its
effect on GDP growth. Within the free trade of the EFTA, the level of employment
in member countries also has been affected. As the degree of economic activity
increases due to free trade alliances, many areas, including that of employment
also begin to change direction. The expansion of exporting mentioned before
plays a role in the variable level of employment. Increased employment will add
to the level of human capital as rising imports and exports expand capital
resources, thus contributing to an outward shift in the aggregate supply curve.
Any increase in resource availability for land, labor, capital, or
entrepreneurship will allow for an outward shift in the production possibilities
curve, followed by a similar shift in the aggregate supply curve, eventually
increasing real GDP. Rising employment can also effectively create a rise in
consumption and in average national income, ultimately adding to real GDP.
Consumption can be affected not only by a rise in the employment level, but also
by the reduction in tariffs provided by the EFTA. When consumers have to pay
less for their goods, their level of real wealth has the effect of increasing.
Lower prices enable them to buy more goods with the same level of income; there
is the illusion of greater income. This feeling of increased wealth, along with
a rise in the actual level of employment, contributes to increased consumption.
The increasing degree of consumption will, again, lead to greater national
income, and to a higher level of real GDP. A rise in trade combined with
increasing levels of employment and consumption allows for potential growth in
the level of GDP. According to Fortune magazine, the average GDP of those
countries belonging to the EFTA rose an average of 2.1% each year (Fortune 7).
As trade, employment, and consumption increase together, GDP has a tendency to
do so as well. EFTA countries approaching a level of full employment due to
changes in trade, tariffs, and consumption will eventually experience its
beneficial effect on the economy. Conclusion In general, it seems that each of
the researched trade agreements has been successful in promoting overall
economic growth throughout the regions of the world. NAFTA MERCOSUR The positive
effects of GATT are numerous and widespread. GATT has proved to be highly
successful in removing barriers to trade in goods. In eight consecutive rounds,
GATT has lowered tariffs on manufactured products from more than 40% to below 4%
among developed nations. "In part as a result, world merchandise trade,
measured in the tens of billions of dollars at the inception of GATT, now stands
at $5 trillion" (Break down the barriers). This growth has brought
prosperity to developed countries as well as developing countries. Some of these
benefits are result of the larger scope of world trade rules and the large
proportion of the economy that is covered under GATT. The EFTA has been fairly
effective in following through with its one underlying goal, the removal of
trade barriers within and outside of the EFTA. It has also been proficient in
cultivating its relationships with third world countries. Its success in these
areas has allowed for the growth of its member countries in areas of trade,
employment, consumption, and eventually also national income and real GDP. It
seems, however, that it needs to do more in order to have a more influential
presence. Since its initial founding, the number of member-countries in the EFTA
has dwindled from seven to only four. The EFTA is clearly not the most prominent
free trade organization in Europe; it is apparent that the European Union holds
the position of dominance, as many EFTA countries have defected to the EU over
the years. The EFTA's minority power in Europe and the simple reality of its
size may cause many countries to brush it aside. While it has united with the
European to Union to accomplish many things such as the European Economic Area,
it might be more effective if it could handle more significant matters on its
own.
Bibliography
EFTA Page. EFTA Secretariat EFTA Surveillance Authority EFTA Court. 23 March
1999 *http://www.efta.int/structure/main/index.html*. "How They Add
Up." Fortune 126.13 (14 Dec. 1992): 152 - 153. http://www.americasnet.com/mauritz/mercosur/english
; MERCOSUR Sabkar, Maysoon; http://bmb.net/our_views/Reports/Country/paraguay_1.htm
, 1998 http://www.embassy.org/uruguay/econ/mercosur/merc-002.htm ; Embassy of
Uruguay, Washington D.C. 1996 http://www.heinlein.com.ar/eco.htm ; Argentina
Brief