This document discusses the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. NAFTA aims to create a free trade area without tariffs between the countries. It was signed in 1993 and took effect in 1994. The goals of NAFTA include allowing free movement of goods and services, encouraging competition, and protecting property rights. NAFTA has led to economic benefits like job creation and economic growth for Mexico as well as access to new markets and lower consumer prices for the US and Canada.

1. To Trade or Not to
Trade : NAFTA
MBA 780 : Managing in Global Environment
Prof. Sokol Celo
Presented by
David Kolapudi
Pranav Patil
Praveen Baghel

2. NAFTA: What is it?
North American Free Trade Agreement
- Signed by United States, Canada and Mexico
- NAFTA was signed in 1993 and was in effect from January 1st, 1994.
- NAFTA was written to create a free trade area in North America.
- “Free trade” means countries can freely trade goods with each
other without paying tariff (tax) on these goods.

3. Purpose of the Agreement:
1. Allow free movement of goods and services between
countries.
2. Encourage competition in free trade areas.
3. Protect property rights of people and businesses in
each participating country.
4. To be able to solve problems that arise among
countries.
5. Encourage cooperation among countries.

4. Economic Motivations
● Free trade (removal of trade barriers: tariffs) on goods
and services between NAFTA countries (Canada, US,
Mexico).
● Removes restrictions on Cross-Border flow of services.
● Reduces/Removes FDI restrictions
● Rises in Overall GDP

5. Political Motivations
● Setting standards and implications for violations
● Increasing political stability in Mexico.
● Rises in Overall GDP (increased bargaining power)

6. Benefits of NAFTA
● Mexico
○ Increased jobs as low cost production moves south
○ Rapid economic growth as a result
○ Increased Exports
○ Encourages Inflow of FDI
● U.S. and Canada
○ Access to a large and increasingly prosperous market
○ Lower consumer prices from Mexican-produced goods
○ Low cost labor → Ability to be more competitive on world stage
● Other LA (Latin American) countries are interested in these benefits and wish

7. Comparative Advantage
Industries United States Mexico Comparative
Advantage (U.S)
Comparative Advantage
(Mexico)
Agriculture,Hunting,Forestry and
Fishing
6219.79 401.91 0.058446654 0.015151687
Mining and Quarrying 22135.62 4372.32 0.244585973 0.193848466
Manufacturing 14835.25 4442.57 0.151685361 0.197578396
Electricity,Gas and Water supply 31047.66 5354.12 0.380530938 0.248179831
Construction 6445.32 996.31 0.060694562 0.038421047
Wholesale & Retail trade;Restaurants
& Hotels
4949.3 1527.98 0.045959313 0.060157427
Transport,Storage & Communications 10525.62 2498.43 0.103078754 0.102272113
Finance,Insurance,Real Estate &
Business services
12305.43 6402.7 0.122646378 0.311946863
Community,Social & personal
services
4174.04 931.33 0.038483187 0.035825428

8. Comparative Advantage
Comparative advantage exists when a country has a margin of superiority in the
production of a good or service i.e. where the opportunity cost of production is
lower.
Result : A country is able to produce a good or service at a lower cost than
another country

9. Determining factors of
Comparative advantage
○ Quantity and Quality of Factors of Production Available
Size and Efficiency of Available Labor Force, Stock of Capital Inputs
○ Mobility of Factors of Production
Resources can be switched between industries without loss of efficiency
○ Straight-line Returns to Scale
Proportional increases in inputs equals proportional increases in output

10. Determining factors of
Comparative advantage
○ No Externalities
Externalities include environmental (air, water, noise, overharvesting)
and systemic risk (risk to the overall economy arising from risks the
banking system takes).
○ Import Controls, such as tariffs and quotas
Creation of an artificial Comparative Advantage for Domestic
Producers
○ Transportation Costs, Exchange Rates, Long-Term Inflation are
not considered

11. Q3: US & The FTAA
● FTAA: Free Trade Area of the Americas
● The FTAA creates free trade between more LAC (Latin America and
Caribbean) Countries other than Mexico, providing more opportunity for
FDI along with cheaper, higher quality imports.
● FTAA was not signed by the 2005 Deadline due to the increased blowback
from a lack of negotiation success from L.A. countries, and the increase
political pressure for protectors and protesters

12. Q3: US & The FTAA
● The US still pushed forward and signed bilateral and multilateral trade
agreements with several LAC countries
o Chile
o Colombia
o Costa Rica
o Dominican Republic
o El Salvador
o Guatemala
o Honduras
o Morocco
o Nicaragua
o Panama
o Peru
● The US should cease to encourage the formation of the FTAA, present-day.

13. Q3: US & The FTAA
Pros:
Cons:
● Increase in productivity and growth is not very high
● Many Canadian and Mexican people migrated to US under temporary
status(TS) & Treaty National Dependent Status(TDS)

14. Political Benefits of the FTAA
● Collaboration of Trade Ministers to address issues (market access, rule-making,
negotiations)
● Increased market access for all involved nations
o Improved access to L.A. countries that currently have high tariffs
o Reduction/removal of tariffs on products in which L.A. have a
competitive advantage.
● Standardize Accounting Procedures
● Improve Judiciary Proceedings (establishing a legal structure to settle
disputes)
● Human Rights monitoring

15. Political Benefits of the FTAA
● Anchoring the Americas to compete more efficiently with China and the EU
for FDI.
● Increase in productivity as a result of improve efficiency → striving for
competitive advantage
● Macroeconomic Stabilization Efforts, Infrastructure Development, Methods
to manage labor and migration issues.
● “Strong correlation between high levels of economic development and low
corruption,” (Alex Chafuen, President & CEO of the Atlas Economic
Research Foundation;)