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Jessica Medina
Charlene Bell
Shaikh Alamin-Khashoggi
Principles of Microeconomics
Dr. Okoye
The Role Interdependence and the gains from trade play in Economic Development. Why
is it important in the growth of economy of any nation?
November 20 2014

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Globalization has stimulated the world economy to be significantly integrated and
interdependent. Consequently has promoted a borderless market place. The shift towards a more
integrated and interdependent world economy is predicated by two major components of globalization
and includes the globalization of market and globalization Production. The main idea of the
globalization process is commercialization of products and services around the world. This process is
really interesting because when you want to sell a product in another country you need to take into
consideration the culture and the government regulations. Globalization has, in the past few years (2-4
years) several (more than 5), affected the economy of many countries around the world in a positive
way. (1)
Globalization has affected every one in the world. But this process has helped the developed
nations more than developing countries; one example of this is Colombia. Four years ago, Colombia
signed the U.S. - Colombia Trade Promotion Agreement (“TPA”). This agreement has not been helping
the economy of Colombia as promised. Although foreign companies and their products come to this
country, they bring higher quality at a lower price. However, most of the time, the local companies
cannot compete with the cheaper price. There has been a consensus that many Colombians do not like
when they go to the supermarket and see that most of the products are from others foreign companies.
As such, they always try to buy goods that are made in Colombia. This way they know that they are
helping their country's economy instead of growing the economy of another. The people of Colombia
seek interdependence, not dependence. The TPA requires the Colombian people to depend on the United
States. However, if the TPA was more akin to the North American Free Trade Agreement (“NAFTA”),
interdependence would be more commonplace.
The free market economy helps countries to grow the economy. A free market creates an

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environment in which companies or factories are free to pursue objectives without government
intervention but at the same time they should follow the government laws of the other countries. The
free market is good but you need to be careful when you are going to sell a product in another country.
(2)
Companies that want to succeed and increase revenues have to know about the country in which
they are going to invest. For example, they have to know their culture and religions; those are the most
important. Also the companies need to consider the protection of intellectual property rights like
copyrights and patented trade markets, because it is not legal if a company brings a product to another
country and the product already has a patent registered to another company.
On the other hand, unfortunately we have countries that are State-directed economies which
stifle economic growth. It is a system in which the government manages the economy. The government
makes all decisions on production and consumption of goods and services. These countries usually are
underdeveloped.
There are different levels of regional economic integration. The first one is free trade which is
the basic form of economic integration where all barriers to trade between countries are removed, but
each country is free to determine the trade policies. One example is the NAFTA partnership between the
United States, Canada and Mexico.
On December 17, 1992, immediately after being elected, President William (Bill) J. Clinton
signed on behalf of the United States of America the NAFTA which makes clear the establishment of a
free-trade area in accordance with Article XXIV of the General Agreement on Tariffs and Trade
(“GATT”). However, it took until January 1, 1994 for NAFTA to enter into force.
The role interdependence and the gains from trade play in the partners of the NAFTA’s
economic development are numerous. It is equally important in the growth of the economy of any

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nation. This is described by the relationship in which NAFTA partners are mutually dependent on the
others in a quantification of their interdependence in measuring the costs of severing the relationship (or
the benefits of developing it).1 Similar quantifications were taken into consideration on a model of
dynamic interdependence in cross-country economic growth processes by allowing it to vary in
accordance to democratic distance among economies by the contributing authors of Democracy and
Economic Growth in an Interdependent World. They found that the evidence of multimodal distribution
of democracy and its positive partial effect leads one to question if distance among countries’
democratic distribution determines the extent of cross-country economic growth interdependence
(Diebolt, C., Mishra, T., Ouattara, B., and Parhi, M.,).
In uniting endogenous growth and political geography literature to examine the extent to which
democracy has contributed to complementarity in cross-country economic growth processes, the authors
employed a dynamic spatio-temporal framework to shed light on the role of democracy and geography
in understanding growth interdependence. Based thereupon the authors have found that two crucial roles
of democracy have emerged from their investigation. First, from a spatial perspective democracy, it has
been found to play an “anchoring” role in promoting interdependence in economic growth. Second, from
a temporal perspective, they identified that a democratic poverty trap exists within economics (Diebolt,
C., Mishra, T., Ouattara, B., and Parhi, M.,). Similar references can be made with that of NAFTA.
1 U.S. goods and services trade with NAFTA totaled $1.2 trillion in 2012 (latest data available). Exports totaled
$597 billion; imports totaled $646 billion. The U.S. goods and services trade deficit with NAFTA was $49 billion in
2012.
The United States has $1.1 trillion in total (two ways) goods trade with NAFTA countries (Canada and
Mexico) during 2013. Goods exports totaled $527 billion; Goods imports totaled $613 billion. The U.S. goods trade
deficit with NAFTA was $86 billion in 2013.
Trade services with NAFTA (exports and imports) totaled $134 billion in 2012 (latest data available).
Services exports were $89 billion;Services imports were $45 billion. The U.S. services trade surplus with NAFTA was
$44 billion in 2012.

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The NAFTA created the world’s largest free trade area, which today has 442.4 million people
and a combined gross domestic product of $15.4 trillion. Since 1994, each of the NAFTA partners has
experienced strong economic growth, increased trade and investment flows, and rising prosperity.
Manufacturers, farmers, ranchers, and service providers have greater export opportunities, while
consumers have enjoyed lower prices and more choices (Suzuki, M).
The NAFTA has represented an important milestone in the trade and economic relationship
between the three countries where tariffs and quotas were eliminated, thus bolstering trade among the
three countries. Moreover, from 1993 (the year preceding the start of NAFTA implementation) to 2006,
trade among the NAFTA countries almost tripled, from $304 billion to $903 billion. Each day the
NAFA partners conducted nearly $2.5 billion in trade. The NAFTA has also bolstered and deepened
business integration in North America as a whole.2
By establishing a strong, certain, and transparent framework for investment, the NAFTA creates
an environment of confidence and stability required to make long-term investments. As a result,
investment has poured into each of the NAFTA countries since 1994. In 2006, foreign direct investment
(“FDI”) by each of the NAFTA partners in the other countries reached $533 billion, more than triple the
$138 billion figure registered in 1993. NAFTA has also stimulated increased investment from countries
outside NAFTA. In 2005, North America received $151.3 billion in new investment, or 17% of the
world’s total. In 2005, the current stock of FDI in North America was $2.2 trillion, or 21.6% of the
world’s total. (Suzuki, M.)
2 Canada’s exports to its NAFTA partners increased by 173% in value from pre-NAFTA levels. Exports to the
United States grew from $116.8 billionto $316.8 billion, while exports to Mexico reached $3.9 billion.
U.S. exports to Mexico and Canada grew by 157%, from$142 billion($41.6 billion to Mexico and $100.4 billion
to Canada) to $364.5 billion($143.2 and $230.3 billion, respectively).
Mexican exports to the U.S. grew by 392%, reaching $212.3 billion. Exports to Canada also grew substantially
from $1.5 to $5.2 billion, an increase of almost 237%.

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As interdependence grows, improvement occurs in the NAFTA partners balancing ability to
deter the other from obtaining a disproportionate gain. Especially under heightened interdependence
where such ability is maximized, the advantage of cooperation outweighs the merit of defection. Thus,
rising interdependence progressively reduces the inhibitory impact of relative gains on cooperation. This
result strengthens liberal institutionalism by indicating that international cooperation is possible between
interdependent states even if their preferences contain relative gains concerns (Suzuki M). This explains
the formation of the regional cooperative arrangements, including the European Union, the Association
of Southeast Asian Nations (ASEAN), and the North American Free Trade Agreement
(NAFTA)(Suzuki 493-94).
The NAFTA has demonstrated that trade liberalization plays an important role in stimulating
economic growth as identified through exports, imports, trade balances, and investment.3 Additionally,
in recognizing economic prosperity, there are multiple benefits that can be garnered by the role that
interdependence and the gains from economic trade play in economic development, and why it is
important in the growth of the economy of any nation (Suzuki, M.).
3 Exports: The NAFTA countries (Canada and Mexico), were the top two purchaser of U.S. exports in 2013.
(Canada $300.3 billionand Mexico $226.2 billion).
U.S. goods exports to NAFTA in 2013 were $526.5 billion, up 3.5% ($18 billion) from 2012, and up 97% from
2003. It was up 271% from 1993 (Pre-NAFTA). U.S. exports to NAFTA accounted for 33.3% of overall U.S. exports in
2013.
Imports: The NAFTA countries were the second and third largest suppliers of goods imports to the United
States in 2013 (Canada $332.1 billionand Mexico $280.5 billion).
U.S. goods imports from NAFTA totaled $612.5 billionin 2013, up 1.8% ($11 billion) from 2012, and up 70%
from 2003. It was up 305% from 1993 (Pre-NAFTA). U.S. imports from NAFTA accounted for 27% of over U.S. imports
in 2013.
Trade Balances: The U.S. goods trade deficit with NAFTA was $86 billionin 2013, a 7.5% decrease ($7
billion) over 2012. The U.S. goods trade deficit with NAFTA accounted for 12.5% of the overall U.S. goods trade deficit
in 2013.
The U.S. has a services trade surplus of $43.7 billion with NAFTA countries in 2012 (latest data available), up
4.6% from 2011.
Investment: U.S. foreign direct investment (“FDI”) in NAFTA countries (stock) was $452.5 billion in 2012
(latest data available), up 7.1% from 2011.
U.S. direct investment in NAFTA countries is led by the nonbank holding companies, manufacturing, and
finance/insurance sectors.

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The benefits of NAFTA are good because it increases the security, technology, gas and oil
industries that are really important for the United States, Canada, and Mexico. The U.S. has become the
exporter whereas Canada was the exporter in the times viewed before the recessions of the country after
NAFTA’s inception as reasons for the economic downward shift and not NAFTA as some critics of
NAFTA would voice. These are the economic realities that need to be observed in concluding the
productivity and efficiency of free trade. (North American Free Trade Agreement).
The energy markets shall also be increased as a result of Canada’s Keystone XL pipeline. There
is a Trans-Pacific Partnership (TPP) similar to NAFTA that is being negotiated and would establish new
provisions including twelve countries if implemented. NAFTA has caused other free trade agreements to
exist. From 1992 to 2004 Mexican and Canadian economic conditions have increased and the U.S.
conditions increased in the following years. Some of the problems in the U.S. are job losses in the textile
and apparel markets in the early days of NAFTA, but the change came in 2005. This shift in
employment from free trade would say that NAFTA is affecting employment positively. (North American
Free Trade Agreement).
There will be a continual shift to lower cost production countries, namely China and the
Association of Southeast Asian Nations (ASEAN) thereby increasing their share in the U.S. Critics
further argue that statistically, the manufacturing unemployment rate in the U.S. was not due to the
inception of NAFTA in 1992. Statements have shown that the highest were 1991 to 1993 and from the
last quarter of 2008 and 2009. Mexico shifted from total reliance on oil reserves and entered into
manufacturing and exporting goods as well as assembly plants. This created job opportunities during the
times of a recession like 2008 and allowed them to recover some of the revenue from the oil revenue.
(Meera)

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References
Diebolt, C., Mishra, T., Ouattara, B., and Parhi, M., “Democracy and Economic Growth in an
Interdependent World,” Review of International Economics, 21(4), 733-749 (2013). NC LIVE.
NC LIVE, 2013. Retrieved November 11, 2014.
http://eds.a.ebscohost.com/ehost/detail/detail?vid=3&sid=e9183359-98e1-465c-aa2d-
e84ada442b4d%40sessionmgr4004&hid=4102&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%
3d#db=bth&AN=89719737
Meera,Fickling. 1 Jan. 2011. Retrieved November 11, 2014.
<http://eds.a.ebscohost.com/eds/ebookviewer/ebook/bmxlYmtfXzM5OTcwM19fQU41?sid=e6f21eaf-
eefe-4482-a966-4808530dc8ff@sessionmgr4002&vid=3&format=EB&ppid=pp_5>
“North American Free Trade Agreement (NAFTA) Is Adopted."NC LIVE. NC LIVE,1 Sept. 2013.
Retrieved November 11, 2014. <http://eds.a.ebscohost.com/eds/detail/detail?sid=e6f21eaf-eefe-4482-
a966-
4808530dc8ff@sessionmgr4002&vid=1&hid=4202&bdata=JnNpdGU9ZWRzLWxpdmU=#db=ers&AN
=89315608>.
Suzuki, M., “Economic Interdependence, Relative Gains, and International Cooperation: The Case
of Monetary Policy Coordination,” International Studies Quarterly, 38, 475-498 (2001). NC LIVE.
NC LIVE, 2001. Retrieved November 11, 2014.
http://eds.a.ebscohost.com/ehost/detail/detail?vid=25&sid=e9183359-98e1-465c-aa2d-
e84ada442b4d%40sessionmgr4004&hid=4102&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#d
b=hlh&AN=9411070269