Agreements of Free trade

Free Trade Agreements

Free trade agreements are accords signed by multiple countries to establish a free trade zone. The countries that signed the free trade agreement can freely interchange products and services within the borders of the accord without having to pay taxes or higher tariffs. Such agreements are primarily intended to lower import quotas that would be associated when traders and business people from the signatory countries exchange goods and services. In order to cover for the costs that may be involved in the process of clearing for the goods as they cross borders, they sometimes charge an external tariff that is common and usually affordable within all the member states of the agreement. Nevertheless, such economic blocs do not usually facilitate transfer of labor or capital freely across the member states. Taking a case study of NAFTA, a discussion of the advantages and disadvantages of the free trade agreements is discussed subsequently.

NAFTA

NAFTA (North American Free Trade Agreement) refers to a free trade agreement signed between the three countries in North America, for instance, United States, Mexico and Canada to create a trilateral free trade bloc in North America. NAFTA came into effect in 1994 superseding the previously signed Canada-United States Free Trade Agreement by Canada and the US as the name suggests. The main goals of NFTA as is for most free trade agreements was to eliminate and minimize major barriers to investment and trade across the three signatory countries (Glick, 2010). It sought to eliminate all the trade barriers as well as providing protection to intellectual property and other products to be traded. Economic analysts have suggested that this free trade agreement has been insignificant to Canada, more positive to the Mexican economy and a very small net positive to the US economy.

Pros of Free Trade Agreements: A Case Study of NAFTA

Increase in Trade

Free trade agreements can lead to an increase in trade between the organizations, for instance the member states, that are involved in the agreement. Economic analysts indicate that as a result of the NAFTA agreement, the trade between US, Canada and Mexico, the main countries involved in the agreement increased four times its initial level. For instance, the trade in dollars increased to $1.14 trillion up from $297 billion. That increase in trade was associated with a substantial increase jobs, profits for business people and an overall economic growth (Kepaptsoglou, Karlaftis & Tsamboulas, 2010). Furthermore, the prices of goods, mainly consumer goods were lowered due to the decrease in the trade tariffs. Thus, NAFTA led to a boost in trade and its costs by eliminating tariffs between the member countries. As a result, investment was bolstered, new businesses were opened and new jobs were created.

Decreased in the Overall Price of Goods

Free trade agreements lead to an overall reduction in the prices of goods due to cuts on the trade tariffs. As a result, there will be a marked decrease in the rate of inflation in the stakeholder economies (Lustig, Bosworth and Lawrence, 2010). Due to the low risks associated with anticipated increase in inflation, the central banks in the member countries will keep interest rates low, further stimulating investment.

For instance, following the adoption of NAFTA, the amount of dollars spent by the US on importing oil reduced from $157 to $144. It also America’s reliance on oil from Venezuela and other Asian countries (Schott, 2004). Besides oil, NAFTA led to a reduction in overall food prices and as a result, the food imports increased from 28.9 billion in 2009 to $39.5 by 2013 following the adoption of NAFTA.

Prices of other food stuffs like fresh vegetable, beef, chocolate and other fruits besides bananas also decreased significantly thereby leading to an increase in overall consumption.

Creation of Jobs

Free trade agreements can lead to creation of new jobs in the member states involved in the bloc. These jobs are created due to an increase in trade, economic activity and consumption. For instance, following the NAFTA agreement, more than five million jobs were created in the US (MacDermott, 2007). Despite the fact that most of these jobs were concentrated in 17 states, there was a general increase in the number of Jobs in the US. The manufactures in the US alone were able to create 800,000 more jobs between the years 1997 and 1993 due an increase in their export sales following a reduction in the tariffs. More American companies outsourced their production to Canada and Mexico thereby creating more jobs in these countries as well.

Increase in Foreign Direct Investments

When trade agreements are signed, there will be an increase in foreign direct investments. For instance, when tariffs are removed, more investors will be attracted to a given country due to less limitations on trade. As such companies come into the country, there will be changes in that country’s balance of payments and investment as more foreign currency will be brought in (Shiells, 2008). As a result, there will be an increase in the foreign direct investments in the recipient country. For instance, following the adoption of the NAFTA, America’s investments to Mexico and Canada increased to more than $452 in 2012 up by three times its initial rate. That boosted the US based businesses at the same time creating jobs in both Mexico and Canada.

Cons of Free Trade Agreements: A Case Study Of NAFTA

May lead to loss of jobs

Despite the fact that free trade agreements are essential in creation of jobs in the member organizations, it can as well lead to a loss of jobs amongst some stake holders. That will arise because the manufactures will look for that country within the bloc with the least labor and production costs and will concentrated their production in that country or economy.

For instance, following the creation of NAFTA, more than half a million US jobs were lost in the years that followed. That arose because most of the companies involved in manufacturing in the states of Texas, New York, California and Michigan moved to Mexico because it had relatively low labor costs compared to the US.

Reduction In The Overall Wages

One of the other effects of free trade agreements is that they can lead to a reduction in the wages of some workers in the member states. For instance, as the creation of NAFTA led to migration of American industries to Mexico, it left behind so many workers in the US but few companies to employ them (Baier & Bergstrand, 2007). Due to that reason, the labor market supply increased compared to the demand in the US. Consequently, the few companies that could employ the few remaining workers could offer very little salaries. The workers had to lower their expectations and accept such little salaries because they had no other alternative.

Decline And Death Of Small Scale Industries

Free trade agreements create trade zones that are so competitive for the scale industries to cope up. Only those companies and business with a command of resources can foster in such environments. For instance, since there were so many government subsidized businesses especially agricultural enterprises, there excess production flooded the Mexican markets (Michie, 2011). The Mexican small holder farmers could not compete with the artificial prices from the American products. As a result, most of these farmers were thrown out of business as a result of the NFTA free trade agreement.

Thus, free trade agreements have got a mix of advantages and disadvantages that seem to balance with each other at some point. They increase the range of doing business but present some challenges in so doing thus making a call for protectionism policies in order to protect the local interests. In the case of NAFTA, it was a success to all the countries and organizations involved in several aspects. To the Americans, they got unlimited access to foreign markets for their excess production, to the Mexicans, more jobs were created as more companies were set it. To the Canadians, the free exchange of technologies led to an increase in the skills level. All the countries in trilateral agreement benefited greatly. Thus, the pros of the free trade agreements seem to be outweighing the cons for all the organizations and stakeholders involved in such business agreements. Implying that free trade agreements are beneficial to the organizations involved.

References

Baier, S. L. and Bergstrand, J. H. (2007). Do Free Trade Agreements Actually Increase Members’ International Trade? Journal of International Economics, 71(1), pp.72-95. [online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwjR98GCtOPTAhWjC8AKHcWQBmYQFgg1MAM&url=https%3A%2F%2Fideas.repec.org%2Fa%2Feee%2Finecon%2Fv71y2007i1p72-95.html&usg=AFQjCNG7UVjTthNDCOu4SSEy6HBCrSHwQw&sig2=xmzBEuzsz9PYhGo863g7sQ [Accessed 9 May 2017]

Glick, L. A. (2010). Understanding the North American free trade agreement: Legal and business consequences of NAFTA. New York: Kluwer Law International. [online] Available at: https://books.google.co.tz/books/about/Understanding_the_North_American_Free_Tr.html?id=0G7ZRmi6f3UC&printsec=frontcover&source=kp_read_button&redir_esc=y#v=onepage&q&f=false [Accessed 9 May 2017]

Kepaptsoglou, K., Karlaftis, M. G. and Tsamboulas, D. (2010). The Gravity Model Specification for Modeling International Trade Flows and Free Trade Agreement Effects: A 10-Year Review Of Empirical Studies. The Open Economics Journal, 3(1), pp. 1-13. [online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwi83-3DtOPTAhXnJMAKHT3mAPUQFggiMAA&url=https%3A%2F%2Fwww.econstor.eu%2Fbitstream%2F10419%2F67427%2F1%2F716972018.pdf&usg=AFQjCNG3q4lOBHNGX7sqJLs91ibBSpXxRw&sig2=Ian0UrmbO6vugFuRa04tJA [Accessed 9 May 2017]

Lustig, N. C., Bosworth, B. P. and Lawrence, R. Z. (2010). North American free trade: Assessing the impact. New York: Brookings Institution Press. [online] Available at https://scholar.google.com/citations?view_op=view_citation&hl=en&user=K9zB2YEAAAAJ&citation_for_view=K9zB2YEAAAAJ:IjCSPb-OGe4C [Accessed 9 May 2017]

MacDermott, R. (2007). Regional trade agreement and foreign direct investment. The North American Journal of Economics and Finance, 18(1), pp.107-116. [online] Available at: http://econpapers.repec.org/article/eeeecofin/ [Accessed 9 May 2017]

Michie, J. (2011). The handbook of globalization. New York: Edward Elgar Publishing. [online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0ahUKEwjnzNXAtePTAhWHLsAKHX-BAXgQFgg4MAQ&url=http%3A%2F%2Fwww.gbv.de%2Fdms%2Fzbw%2F625780507.pdf&usg=AFQjCNGcE5g0NN28TuzRh_i9atrT6GDUGw&sig2=uOblAYVu1Y2vwZiCacdYmg [Accessed 9 May 2017]

Schott, J. ed. (2004). Free trade agreements: US strategies and priorities. Columbia University Press. [online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwjXv7z6tePTAhVpAsAKHenpBewQFggsMAI&url=https%3A%2F%2Fideas.repec.org%2Fb%2Fiie%2Fppress%2F375.html&usg=AFQjCNEGkPMia5LBPksPZRzniMxcAGLLaA&sig2=7dr6B23UJowTC5ZfKOWYpA [Accessed 9 May 2017]

Shiells, C. R. (2008). Modeling trade policy: Applied general equilibrium assessments of North American free trade. Cambridge: Cambridge University Press. [online] Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjZrpqZtuPTAhVEKMAKHWEWBJkQFggnMAE&url=https%3A%2F%2Fphilpapers.org%2Frec%2FFRAMTP-2&usg=AFQjCNGArll5FDsFyHsjceVCIB1gXmj9Qg&sig2=S-kGOlZPGWTIpB9EBDZOwQ [Accessed 9 May 2017]