NAFTA

RUNNINGHEADER: MEXICAN CURRENCY CRISIS
Case Assignment: NAFTA
A Case Study of the North American Free Trade Agreement (NAFTA)
Stacey Troup
Global Finance/MBA-603
November 16, 2019
Professor Dr. Jacqueline Gilliard
Touro University Worldwide

RUNNING HEADER: NAFTA
Abstract
Trade relations are the foundations of international trade. These blocs of international
trade help products come into the country at lower costs and across boarders embargoed by the
countries under a same accord at little to no tax/tariff charge. However, when a barrier to trade
such as NAFTA drives jobs and businesses overseas in favor of lower wages and cost of
production and supply chain cost reduction, the countries under the NAFTA agreement will
suffer overall. The bankruptcy of businesses, the relocation of sustained, long-term businesses
such as the Automotive Industry, and innovation driving jobs out of existence will be huge
factors in determining which countries free-trade agreements should be negotiated and agreed
up with. Constantly reviewing same for accuracy of trade deals is also imperative for success.
Keywords:
Trade Blocs, international relations, GDP, debt, Import, Export, Economic Health,
Economic Policy, international trade relations, EU, WTO, International Investments, Foreign
Direct Investments, Currency loss, economic hardship, inflation, economic depression.

The North American Free Trade Agreement (NAFTA)
As countries strive for economic power and stability, trade relations comes to the
forefront of their concerns. The GDP (Gross Domestic Product) of any country is an indicator of
their currency strength as well as the ability of the specified country to export more than they
import so as to keep their balance of payments low (as well their GDP). The North American
Free Trade Agreement (NAFTA) was an agreement designed to foster trade relations between
Canada, The United States, and Mexico and enacted in the 1990’s. By reviewing this Trade
Agreement as it impacts the overall economy of the U.S. throughout several years (and changes)
as well as its impact on the global economy, we are able to see how such agreements impact not
only the economy of the U.S. but international business dealings as a whole. This review will
encompass the specifics of the Agreement, the implications of trade within the agreement,
international investment decisions and opportunities available to international businesses who are
part of these trade relations (blocks).
NAFTA, the Accord
The NAFTA (North American Free Trade Agreement) was enacted January 1, 1994,
following years of bilateral trade agreements between the U.S. and Canada and the U.S./Canada
Free Trade Agreement of 1989. At its core, NAFTA was designed to foster fair trade relations
between the border nations of the U.S., Canada, and Mexico (respectively) while eliminating
barriers in trade, promoting fair trade, increasing investment opportunities for territories within
the Agreement, protecting and promoting intellectual property rights, and both implementation
measures as well as cooperation establishment for the regulations within the Agreement,
collectively. These goals all boil down to helping the three countries become stronger together
both financially and competitively on a global basis (NAFTA's Purpose and Its History, N.D.).

Throughout various regimes, the basis of NAFTA has changed in various ways. The
most recent changes came under the Trump administration in August of 2018 when the
administration tried to remove Canada from the NAFTA agreement whereby they renegotiated
the trade agreement in a bilateral move against Canada in an effort to reduce the trade deficit by
imposing a tariff on the products coming in from Canada to the U.S. (NAFTA's Purpose and Its
History, N.D.), including crude oil and automobiles which top the list of the most exported items
from Canada to the U.S. (Wilson, 2019).
While the administration believed that this move was a positive one to drive jobs to the
U.S. and away from other countries, it was met with great hesitation and resistance from all sides
of the trade deal. Trump believed that the U.S. should move auto manufacturing jobs back into
the U.S. and that this threat would resolve that issue. However, economically speaking, as the
inflation in the U.S. rises (salaries, costs, etc), the likelihood of truly U.S. made products will
decrease as they become too expensive to manufacture within the country in order to be sold on
the diverse international marketplaces, thus increasing our GDP and balance of payments to
other countries which will cause our competitive advantage to drop while other countries who
can produce such goods to grow in value (NAFTA’s Economic Impact, N.D.) (Bondarenko,
N.D.).
Implications of NAFTA for International Trade
The original idea behind NAFTA was to create a global marketplace between the U.S.,
Canada, and Mexico which would allow for a unified trade partner to the world markets.
However, China has been far surpassing the goals of NAFTA through their masterful economic
presence in the world.

As China was welcomed into the WTO (World Trade Organization), they have
established themselves as the primary global exporter of a variety of goods to the global
marketplace through greater innovation, lower costs, and a strengthened economy (and GDP)
through their strategic alliances with WTO and aligning countries (Boden, 2012).
While China grew in power through their international trade, the negative implications of
their prowess are felt across the globe. As indicated in

Appendix “A”, we can see how the trade wars continued as China continued to dominate their
competitive advantage against the global marketplace, all the while, driving down their GDP as
they continued to export more than they imported, creating an economic superpower out of their
country Appendix “B” (Flowers, 2016).
As other trade blocs are forging alliances with countries, the war becomes prevalent
within the realm of retail trade. As the U.S. has an alliance through NAFTA (renamed in 2019 to
USMCA) (Long, 2018) with Mexico and Canada, it limits the powers to import products from
China and other countries (but only minimally) through imposed tariffs

Appendix “A”. We can see from

Appendix “A” that China has had a fairly stable GDP and growth rate vs Export and growth rates
of a global market. Their competitive advantage as a country who exports more than they import
is showcased in Appendix “B”. Finally, their exports vs. other countries under NAFTA
agreements Appendix “C” and the U.S. import rates (for comparison) Appendix“D”.
What is interesting is a review of the UK on a global scale as their exports have been
minimal under the EU Agreement Appendix“D”. Even more surprising was the decision of the
UK to leave the EU and its European trade partners which have kept their economy stable
through minimized imports from non-embargoed countries within the EU (Mueller, 2019).
For NAFTA (or USMCA), a study of the impact of a 30% imposed tariff as suggested for
the 2020 year on things like consumer electronics, showcases how (through estimates), this VAT
charge can significantly reduce our GDP in one year and strengthen the overall economy while
simultaneously continuing to import goods from China. With this example, we took a flat value
of goods and compared the differentials of cost and taxation given the old and new rates (17%
and 30%, respectively) to determine mock costs and the impact of these tariffs on the overall
economy.
What became prevalent through this review is the implication of increased tariffs on the
overall cost of goods for both manufacturer as well as the end consumer, who will likely take the
brunt of the cost, is that it only reflects a retail differential of between 11% and 13% on goods
selling between $250.00 and $1,300.00 as reviewed in the cost analysis. Even more, the impact
that this 30% imposed tariff on things like consumer electronics alone (with the 3 mock price
points) would have on the balance of payments as well as the GDP compared to the larger
picture of reducing the deficit (through a mock analysis) Appendix “G” Appendix “H”. When

applied to all products under the tariff (including automobiles) one can see how the trade deficit
can be reduced through these tariffs.
The “Yay” and “Nay” Sayers of New Economy
When Trump announced these imposed tariff’s as well as changed the overall structure of
NAFTA (in more than just a name), he believed it would strengthen the economy and bring jobs
back to the U.S. However, there are arguments (non-partisan) on both sides of this argument.
Those in favor of the changes see it as a way to pay down the GDP while driving greater
imports from our trade partners while driving the original ideals of the Agreement, which
encourage a free trade and greater employment rate within the embargoed countries. However,
when the NAFTA agreement was originally signed, minimum wage was only $5.15 per hour
which allowed for U.S. manufacturing to take place and remain competitive in a global market.
By 1995, minimum wage rose to $7.25 an hour (national average) (State Minimum Wages,
N.D.), continuing the competitive advantage of NAFTA’s presence of free trade and competitive
marketplace without imposed tariffs of this three-country trade agreement (Amadeo, 2019).
This positive flow of products from the U.S. was, however, short-lived. Following the
“Tequila Crisis” in Mexico and the bailout of their economy that followed through the assistance
of the WBO as well as US and global banking, the U.S. fell on an equity markets crash in 2008
(span 2007-2009) that nearly collapsed a global economy. Inflation was climbing,
unemployment was prevalent, foreclosures on homes were certain, and the U.S. was slipping into
a recession to rival the Great Depression. With the help of Tarp funds and Bailouts from
governments, the U.S. began to rebuilt its financial pieces.
By 2010, Federal minimum wage was $7.25 per hour. However, inflation from the
economic collapse caused the cost of living to rise at levels never expected. Mexican farmers

were experiencing failed businesses as the U.S. grew in its ability to sustain its own farming and
export to foreign lands, and the U.S. saw a surge of illegal aliens flooding through its borders
with the hopes of obtaining assistance (State Minimum Wages, N.D.) (Faux, 2013).
Fast forward to 2019 where nearly half the U.S. states had a minimum wage higher than
the national standard, including Manhattan who imposed a $15.00 per hour minimum in 2019.
Manufacturing was all but dead in the states with higher minimum wage causing a surge of
Chinese products to flood into the country for price preference (competitive advantage) (State
Minimum Wages, N.D.) (NAFTA’s Economic Impact, N.D.).
Those against the agreement saw it as a deterrent to U.S. jobs, a drawback to positive
economic recovery, and an overall crutch that would cause greater harm to the country than
good. The anti-NAFTA politicians saw this Agreement as a way to lower wages, hurt
employees, and drive unions away from most businesses (particularly the auto industry). In
retrospect, both parties were right in partial terms as the auto workers were threatened to lose
their jobs if they voted for the unions, as the company would move jobs to Mexico as a
retaliatory measure of maintaining high wages within the U.S. In addition, businesses could
easily demand tax incentives from their local governments as a way to keep their businesses
local rather than moving away and doing away with their staff (Faux, 2013).
The U.S. Sends Automotive Abroad
Now to the greatest negative impact to the U.S. economy, the loss of the auto industry.
As these labor costs rose, the U.S. stammered to find a way to continue to produce cars that kept
their profit margins high. They turned to foreign markets with lower wages and costs (similar to
China) where they could produce their goods and import them back to the U.S. with minimal
cost. Establishing their plants in Mexico to start, was the first hit. Jobs were lost en mass as

these factories were sent out of the country and greater innovation was adapted to reduce the
human interaction to the overall production workforce (through AI). This was a driving force
behind Trump’s campaign of more jobs, as he wanted to bring the auto industry back to the U.S.
and penalize them through high tariff’s if they refused to bring their factories back to the U.S.
(Faux, 2013) (Amadeo, 2019).
Even after the rebuilding of NAFTA by the administration, the auto industry still refuses
to return fully to the U.S. amid rising costs of both labor and supply chain that are seemingly
better served abroad for assembly sake as well as for the sake of their overall bottom line.
Although the administration has threatened a 25%-33% surcharge (tariff) on vehicles produced
out of the country (even if part of the NAFTA), automakers seem unconcerned by the nearly
$800-$900 per vehicle they would be charged and continue to drive plants overseas, along with
foreign automakers who are following suit in favor of their bottom line (NAFTA’s Economic
Impact, N.D.).
Foreign Companies Amidst Economic Strife
As the markets of commerce change, companies like Amazon and Alibaba are finding
favor through foreign company influence and influx into their countries (respectively). Amazon
is a driving force behind more foreign sales and start-up companies such as Instant-Pot™
(Canadian), consumer electronics (TVs, headphones, streaming sticks, Smart Home™ devices,
etc.). A review of the top-selling items on Amazon for 2019 reveal that the thirst for foreign
products due to innovation and cost are a driving force behind the success of Amazon. The top
30 products sold on the site for 2019 stem from overseas production and import from China,
even the blessed IRobot™ which came from the innovations at MIT College but is also produced
overseas (Leightonp & Chen, 2019) (Valera, 2018).

To say that opportunity is knocking for low-cost innovations from places like China is an
understatement. American’s are making smarter decisions about their purchases and are driving
their spending habits toward what has the best innovation or reputation, rather than what
manufacturers within the home country believe that they should be buying.
Also finding favor in economic hardships are financial institutions who choose to open
foreign locations abroad as a means to secure a presence on a global market while dominating
their respective industries through foreign placement of offices (and subsequent stimulation of
those economies, internationally)
Conclusion
As with any trade relation agreements that a country may forge in the interest of their
overall financial health as a country, these agreements need to be continually amended in order
to adapt to the changing financial conditions and circumstances of the host country as well the
partner countries to ensure maintenance of appropriateness of original agreements.
Economies change, inflation and currency change on a daily basis (conservatively) and
the world’s economy is dependent upon import and export on a more even keel across a global
marketplace. A country such as the U.S., cannot sustain itself if it exports more than it imports
as it will dig itself into a hole that would take eternity to crawl out from. By addressing the
tariffs of a specific high-import product such as electronics, we are able to satiate the public’s
need for the latest gadgets while collective VAT revenue that would assist us in reducing our
overall balance of payments as a country, finally taking the first steps out of the red and into the
green as we become a nation of sustenance rather than greed and debt.
To agree with the full regime of the current administration is a decision each person has
to make on their own. However, the validity of the tariff on the health of our country’s economic

balance is blatantly obvious. We would be able to continue our desires for these products with
only a minimal impact to the retail cost of these products on an overall scale, hardly felt through
the standard inflation and price increases that are normal throughout the country currently. The
decision to acquire these products needs to be weighed against our desire to have our children
and grandchildren (future generations) become employable, viable parts of the economy of this
country.
While jobs are being outsourced and artificial intelligence brought in to replace workers,
leading to entry-level and median job reduction in the workplace, while putting an overall focus
on the importance of education. The better prepared we are for the changing job markets, the
more productive parts of the overall economy we will be and also better able to not just
withstand changes in the workplace but to also give viable ideas for innovation and change that
can impact generations to come. The age of “stay-at-home” parent and single-income household
are gone as high inflation and cost of living have done away with the ability to live on a median
income in more than half of the country. Remembering that a basic principle of microeconomics
is that when wages rise, the cost of goods rise up to meet the curve. That is true for the demand
for $15/hr minimum wage and workers are being replaced by computers in drones.
We need to stress the importance of economic policy reform as a country to adapt to the
changing environments while simultaneously embracing the efforts to reduce our country’s debt.
Remembering that the education of future generations is what will drive innovation and
sustainability will serve generations well for centuries.
Perhaps Trump’s overall solution for the economy isn’t entirely right, or entirely wrong,
but it is a baby step to correcting a more widespread problem of the immense debt this country

shoulders. Much like private debt, it must be paid down or the economic stability of this country
will collapse under the incredible debt, leaving us to become the next third world country.

Appendix “A”
China’s Exports Compared to the Global Market
China’s country growth vs world growth vs GDP growth

Appendix “B”
Comparisons to US Markets

Appendix “C”
Exports compared to countries under NAFTA

Appendix “D”
U.S. Import Rates

Appendix “E”
GDP Reduction Example
Iphone™ 7 released in 2016
1. Average price of $769-$869 each to the consumer
2. Using example of 500,000 units at customs from China, breaking out 250,000
units per retail price point indicated
3. Estimate of 17% VAT at 2016
4. Cost of unit in 2016 $237.45/unit
 $118,725,000 value at U.S. customs in 2016 (first shipment)
 VAT value (tariff) of $20,183,250
 VAT value per unit (breakdown) $40.3665 (for quantity 500k)
 Units sold for $769 to $869 each
Cost of Goods:
$237.45 x 500,000 units = $118,725,000
VAT (tariff) 17% = $20,183,250
Total of goods (inclusive of VAT) = $138,908,250
Cost of Goods per unit ($138,908,250/500,000) = $277.8165
Sales (Retail)
Cost of goods $138,908,250.00
Retail breakdown of profits
250,000 units sold @ $769.00 = $192,250,000
250,000 units sold @ $869.00 = $217,250,000
Total: $409,500,000
Less Cost: ($138,908,250)
Profit: $487,841,750.00 (approximately $975.68 per phone), not inclusive of
shipping costs
VAT payments toward GDP = $20,183,250 on single shipment

Appendix “F”
2019 Example
IPhone 11 (2019)
1. Assuming costs to produce (mock) (taking into account inflation since 2016 release)
at $300.00 per unit
2. Quantity shipped 500,000 per shipment
3. Value at customs: $150M
4. Taxed at 30% (2020) (VAT) = $45M
5. Retail price between $1100 and $1200
Cost of Goods:
$300 x 500,000 units = $150M
VAT (tariff) 30% = $45M
Total of goods (inclusive of VAT) = $195M
Cost of Goods per unit ($195M/500,000) = $390.00
Sales (Retail)
Cost of goods $195M
Retail breakdown of profits
250,000 units sold @ $1100 = $275M
250,000 units sold @ $1200 = $300M
Total: $575,000,000 ($575M)
Less Cost: ($195,000,000)
Profit: $380,000,000 (approximately $760 per phone), not inclusive ofshipping costs
VAT payments toward GDP = $45,000,000 on single shipment

Appendix “G”
Profit Analysis & GDP Impact
2016 Profit: $975.68 per phone
2019 Profit: $760.00 per phone
2016 GDP Payment – 1 shipment = $20,183,250
2019 GDP Payment – 1 shipment = $45,000,000
GDP Example:
If there are (mock) 10 mobile producers importing at a rate of 2 shipments per year using
the figures above, we would see a significant reduction of our GDP as follows:
 10 companies paying $45M per shipment in VAT
 2 shipments per year, per company
10 companies paying $45M (each), twice per year
45M x 10 = $450,000,000
Twice per year = $900,000,000
If we apply this example to all consumer electronics using a flat pricing model for example
only (mock) we can see how the GDP would reduce greatly in a single year.
300 companies producing consumer electronics for import
500,000 units per shipment
1 shipment per company, per month @ 30% VAT base
 Price Tier 1 (cost): $50.00 (at 500,000 units) = $25M cost
o (100 companies producing)
o VAT: $7.5M (per company x 100 = $750,000,000)
o VAT per Year, 100 companies ($750M x 2): $1,500,000,000

o Total Cost: $32,500,000 (per unit: $65.00)
 Retail Price Old/New:
Old
 ($50 * 1.17 (VAT/old)) = $58.50 cost
 Wholesale Cost ($58.50 + 60%) = $93.60
 Retail Cost ($93.60 x 2.5 (avg markup)) = $234.00 each
New
 ($50 * 1.3 (VAT/new)) = $65.00 cost
 Wholesale Cost ($65.00 + 60%) = $104.00
 Retail Cost ($104.00 x 2.5 (avg markup)) = $260.00 New
(11.11% increase to consumer)
 Price Tier 2 (cost): $125.00 (at 500,000 units) = $62,500,000
 (100 companies producing)
 VAT: $18,750,000 (per company x 100 = $1,875,000,000)
 VAT per Year, 100 companies (x2): $3,750,000,000
 Total Cost: $82,250,000 (per unit: $162.50)
Old
 ($125.00* 1.17 (VAT/old)) = $146.25 cost
 Wholesale Cost ($146.25 + 60%) = $234.00
New
 ($125 * 1.3 (VAT/new)) = $166.40 cost
 Wholesale Cost ($166.40 + 60%) = $266.24

 Price Tier 3 (cost): $250.00 (at 500,000 units) = $125,000,000
 (100 companies producing)
 VAT: $37,500,000 (per company x 100 = $3,750,000,000)
 VAT per Year, 100 companies: $7,500,000,000
 Total Cost: $162,500,000 (per unit: $325.00)
Old
 ($250.00* 1.17 (VAT/old)) = $292.50 cost
 Wholesale Cost ($292.50 + 60%) = $468.00
New
 ($250 * 1.3 (VAT/new)) = $325.00 cost
 Wholesale Cost ($325.00 + 60%) = $520.00

Appendix “H”
Impact on GDP & Balance of Payments
With example from previous:
Tier 1 Payments: $1,500,000,000 per year
Tier 2 Payments: $3,750,000,000 per year
Tier 3 payments: $7,500,000,000 per year
Total year 1 payments reducing GDP: $12.75B
Current GDP 2019: $21,340,000,000,000 ($21.34T)
Year 1 payments (VAT) – Electronics only: $12,750,000,000
Total GDP after 1 year: $21,271,600,000,000 or $21.2716T
Impact of electronics after 5 years of new VAT (30%) on GDP:
$12,750,000,000 x 5 years (mock) = $63,750,000,000 or $63.75B
GDP After 5 years payments on select electronics:
$21.34T - $63.75B = $21,276,250,000,000 ($21.276T)

Appendix “I”
Pros and Cons of NAFTA
Chart of NAFTA Pros and Cons
List Pros Cons
Worth
It?
Trade Increased. Yes
Jobs Created5 millionU.S.jobs.
682,900 U.S.manufacturingjobslostin
some states.
Yes
Wages Average wagesincreased.
RemainingU.S.factoriessuppressed
wages.
Yes
Immigration
ForcedjoblessMexicanstocrossthe
borderillegally.
No
Workers
U.S. unionslostleverage.Mexican
workerswere exploited.
No
Environment
Canada exploitedshalefields.Mexican
environmentdeteriorated.
No
Oil Costslessinthe UnitedStates. ImprovedMexicaneconomy. Yes
Food U.S. costs lower Mexicanfarmerswentoutof business. No
Services
U.S. finance andhealthcare
exportsincreased.
Put Mexicancompaniesoutof business. Yes
FDI Increased. None. Yes
Government
Spending
More competitive biddingon
governmentcontracts.
Yes
(Amadeo, 2019)

References
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https://www.thebalance.com/nafta-pros-and-cons-3970481
Boden,G. (2012). China'sAscentiontothe WTO: EconomicBenefits. TheParkPlaceEconomist,20(8).
Retrievedfrom
https://digitalcommons.iwu.edu/cgi/viewcontent.cgi?article=1364&context=parkplace
Bondarenko,P.(N.D.). NorthAmerican FreeTradeAgreement.RetrievedfromEncyclopediaBritannica:
https://www.britannica.com/event/North-American-Free-Trade-Agreement
Faux,J. (2013, 12 09). NAFTA’sImpacton U.S.Workers.RetrievedfromEconomicPolicyInstitute:
https://www.epi.org/blog/naftas-impact-workers/
Flowers,A.(2016, 08 08). Why Critics Of Free Trade Are Talking China,NotNAFTA.RetrievedfromFive
ThirtyEight: https://fivethirtyeight.com/features/why-critics-of-free-trade-are-talking-china-
not-nafta/
Leightonp,M.,& Chen,C.(2019, 07 17). The 30 mostpopulardealsfromthis year's Amazon PrimeDay
among ourreaders — including theonesthat surprised us.RetrievedfromBusinessInsider:
https://www.businessinsider.com/amazon-prime-day-most-popular-products#14-dyson-v7-
animal-pro-vacuum-14
Long, H. (2018, 10 1). U.S.,Canada and Mexico justreached a sweeping new NAFTA deal.Here’swhat’s
in it. RetrievedfromThe WashingtonPOst:
https://www.washingtonpost.com/business/2018/10/01/us-canada-mexico-just-reached-
sweeping-new-nafta-deal-heres-whats-it/
Mueller,B.(2019, 10 29). What Is Brexit?A Simple Guide to Why It Mattersand WhatHappensNext.
RetrievedfromThe NewYorkTimes:
https://www.nytimes.com/interactive/2019/world/europe/what-is-brexit.html
NAFTA’sEconomicImpact.(N.D.).RetrievedfromCouncil onForeignRelations:
https://www.cfr.org/backgrounder/naftas-economic-impact
NAFTA'sPurposeand ItsHistory.(N.D.).RetrievedfromThe Balance:
https://www.thebalance.com/history-of-nafta-3306272
Reuters.(2018, 05 14). NAFTA mathmay notadd up to moreUS auto jobs.RetrievedfromCNBC:
https://www.cnbc.com/2018/05/14/nafta-math-may-not-add-up-to-more-us-auto-jobs.html
StateMinimumWages.(N.D.).RetrievedfromU.S.Departmentof Labor:
https://www.dol.gov/whd/state/stateMinWageHis.htm
Valera,S.(2018, 12 03). TheseAre the Best-Selling Amazon PrimeProductsof 2018. Retrievedfrom
Geek:https://www.geek.com/tech/these-are-the-best-selling-amazon-prime-products-of-2018-
1763963/

Wilson,L.(2019, 10 18). NAFTA:MajorImports&ExportsBetween theU.S.& Canada AreSurprising.
RetrievedfromMunKee:http://www.munknee.com/what-are-the-major-imports-exports-
between-the-u-s-and-canada-this-list-might-surprise-you/

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