Essay/Term paper: Nafta

Essay, term paper, research paper:  Economics

NAFTA

The North America market is one of the richest in the world. Measured in terms
of GDP, it is the equivalent of Western Europe. But with a somewhat smaller
population, GDP per capita in North America, Canada, Mexico and the U.S., is
around 12 percent higher than in Western Europe. The North American Free Trade
Agreement (NAFTA), which came into effect January 1, 1994, sets out the schedule
for tariff elimination for members.. As a small country, Canada has always been
careful in it's dealings it's large neighbor, the U.S., however, compliance to
this agreement threatens our very existence. Canada was unfairly taken advantage
of in the singing of this agreement, our identity of a sovereign nation is at
risk.

The North American market is also one of the most sophisticated and demanding.
It is an excellent base from which to develop and launch new products. From a
Canadian base, companies can establish a solid market position throughout North
America and then reach out to serve global markets. This agreement, which and
contains many key provisions to facilitate the conduct of business among the
three countries, has been a benefit to Canada-U.S.-Mexico trade. The continent-
wide transportation system that binds this market together is efficient and
cost-effective. Carriers of all modes are investing in more sophisticated
technology and entering into strategic alliances to improve service. Border
crossings are becoming easier.

Canada provides an ideal location for serving the entire North American market.
Companies based in Canada have preferred access to a market of 380 million
people, with a combined Gross Domestic Product (GDP) of more than $10 trillion
(Canadian dollars). However, our participation in the agreement allows the U.S.
unobstructed to our market. This poses a serious problem when looking at pure
numbers. Canada is a country of approximately 28,000,000 people and the U.S. a
country of about 280,000,000. The extra "0" means the U.S. in ten times greater
then Canada in population size. The implications of this are enormous.

Because of the difference in size it is logical to assume that the average
Canadian firm is about ten times smaller then its U.S. counterpart. As an
example, Bell Canada (Canada's major telecommunications company) is worth an
estimated 9 billion dollars. AT&T (U.S. major telecommunications company) is
worth approximately 108 billion. These numbers should speak for them selves.
Although it hasn't happened yet, AT&T could attempt a competition war on Bell
Canada

There are many ways to view North American markets. Initially, they can be
viewed as three national markets, with certain differentiating characteristics
in terms of tastes, preferences, disposable incomes and spending patterns.
Because national accounts are the source of much of the general information on
domestic markets, this is often how North American markets are portrayed.

In fact, though, North America is increasingly a collection of regional markets
that cut across national boundaries. Companies based in east-central Canada view
the north-eastern U.S. states as their proximate market area, and companies in
Vancouver, for example, look southward to the U.S. states of Washington, Oregon
and California for market opportunities. Although east-west transportation
routes are well developed and national characteristics of markets are still
important, there is no escaping the geographic pull of the north-south axis.

Increasingly, North America will be viewed as a single market. The market
opportunities for products and services produced by a Canadian-based company are
as likely to be in Chicago, Houston, and Mexico City, as in Canadian cities.

Thus, although some general characteristics of the three national markets are
highlighted here, potential investors should also be attuned to the many cross-
border regional markets that constitute the North American market, and to the
fact that North America is in many ways a single market.

Canada

Although many investors see Canada as an excellent base from which to export to
North American and other global markets, the rich domestic market holds numerous
growth opportunities as well.

Canada's population, which is increasing at a little over 1 percent annually, is
fast approaching 30 million. The two central provinces of Ontario and Quebec
account for over 60 percent of the total, but the western provinces of British
Columbia and Alberta, with 22 percent, have the highest population growth.

The majority of Canadians live in urban centres located within 100 kilometres of
the U.S. border. This creates a string of regional market clusters along the
Canada-U.S. border that can be served from a Canadian location. Even on their
own, though, several Canadian cities located close to the Canada-U.S. border are
large markets. The Toronto metropolitan area has a population of 4 million,
Montreal has more than 3 million, and Vancouver has just under 2 million.

The average family income in Canada is about $54,000. With the sharp increase in
the proportion of working-age women who have entered the labour market since the
mid-1970s, the typical family tends to have two income-earners. In the first
half of the 1990s, growth in personal incomes has been 2-3 percent annually, a
rate which has been affected by the recession and smaller increases in wage
settlements.

There are regional income differentials, with Ontario,British Columbia, Alberta
and Quebec having the highest levels of per capita income. But income
redistribution programs limit the variations between the richer and poorer parts
of the country.

Canadians spend some $450 billion on consumer goods and services each year. The
amount of discretionary income that is available for purchases of "non-
essential" goods such as electronic products, and services such as travel,
sports and recreation has been increasing. The market for consumer products
related to information technologies has been especially buoyant. Between 1981
and 1994, computers and audio/visual electronics enjoyed the fastest growth in
sales. In the service sector, an ageing and increasingly affluent population is
increasing demand for home maintenance, health services, financial services,
travel and leisure activities.

Among the trends shaping the Canadian consumer marketplace of the future are
increasing ethnic diversity and multiculturalism; continued expansion of the
service sector; greater public awareness of environmental issues and values;
increasing consumer demands for convenience; and a trend toward differentiating,
segmenting and customising consumer markets.

The United States

There is no other national market for consumer and industrial products and
services that is near the size of the U.S. In terms of GDP, Japan comes closest,
with a GDP that is two thirds that of the U.S., which in 1994 stood at US $6,738
billion. The demand for imports in the U.S., at US $669 billion in 1994, was
about double that of Germany, the second largest market for imports. Simply put,
the U.S. market is a magnet for companies around the world.

What is less appreciated about the U.S. market is that it is all easily
accessible from Canada. There are more than 110 million consumers within a day's
drive of southern Ontario. Montreal, Halifax and Moncton are within a day's
drive of New York, Boston and Philadelphia. Winnipeg is just 17 hours by road
from Chicago and eight hours from Minneapolis. From Vancouver, markets all along
the Pacific coast of the U.S. can be easily served. It takes about 48 hours to
ship by truck from Vancouver to Los Angeles. With increasingly efficient
transportation routes, even the southern U.S. states are considered to be close
to major Canadian cities.

In 1994, the population of the U.S. reached 261.5 million. This is dispersed
across four large regional markets: the Northeast has 19.9 percent of the total,
the Midwest 23.6 percent, the West 21.7 percent, and the largest, the South, has
34.7 percent.

The GDP of each of these regions is larger than individual countries of Western
Europe, with the single exception of Germany. As a share of total U.S. GDP, the
Northeast, Midwest and West each has roughly 23 percent. The South's share is
around 31 percent.

In 1994, per capita GDP in the U.S. was US $25,820, second to Japan among the G7
countries. Median household income was about US $32,200, with married-couple
households having a significantly higher US $45,041. Generally speaking,
consumer markets in the U.S. are similar to those in Canada, and spending
patterns do not vary considerably. For companies offering consumer products and
services, these similarities provide an opportunity to test products in the
Canadian market before making an entry into the U.S.

If a foreign company is considering an investment in North America to, among
other things, tap the rich U.S. market, a Canadian location is eminently
attractive. When cost-effective access to the U.S. market is combined with the
range of other business advantages -- generally lower corporate tax rates, the
most advantageous investment tax credits for R&D activity, and a quality of life
that is recognised as one of the best in the world -- the foreign investor has
the best of all worlds.

Mexico

In contrast to the advanced economies of Canada and the U.S., Mexico is an
emerging market. Mexico's GDP per capita is 15 percent that of the U.S. and 20
percent of Canada's, and in terms of income levels and income distribution,
Mexico resembles a developing country. On the other hand, with a population of
about 92 million, most of which is young, a growing middle class of educated
Mexicans, and programs of political and economic reform, there is a dynamism in
Mexico that is inviting.

With dynamism comes volatility, and Mexico is no stranger to this. The plunge of
the peso that began at the end of 1994 and continued through the first quarter
of 1995 created a financial crisis that has led to a significant decline in
economic activity and real incomes. But the economy is recovering and investor
confidence is being restored.

In the coming years, there will probably be more vacillations as the economy
goes through periods of rapid growth and then slows to keep inflation under
control. Throughout these cycles, Mexico will undoubtedly be relying more on
international trade and investment as engines of growth. In 1994, total trade
was the equivalent of almost 40 percent of the country's GDP. Mexico will remain
a significant import market in the years ahead. A potential foreign investor in
North America should therefore consider the advantages of locating in Canada,
and supplying the Mexican market from a Canadian location.

In approaching the Mexican market, companies should be aware of its diversity.
There are large disparities in incomes, regional markets vary considerably, and
there is demand for basic infrastructural needs as well as more sophisticated
consumer and industrial products.

The largest regional markets are those of metropolitan Mexico City, with a
population of almost 20 million; Guadalajara, the capital of the central-western
state of Jalisco; and Monterrey, the capital of the north-eastern state of Nuevo
León. Mexico City is the country's economic, financial and industrial centre.
With upper and middle-income groups numbering in the vicinity of five to six
million, it offers the largest consumer market in the country. Guadalajara, with
a population of around 3.5 million, is an important commercial and financial
centre. Monterrey, of roughly the same size as Guadalajara, is one of the
country's most important industrial centres, with 53 percent of Mexico's top 500
businesses.

Despite Mexico's current economic difficulties, there are many business
opportunities in the Mexican market. Perhaps most enticing, though, is Mexico's
potential.

Since the end of World War II, Canada-U.S. trade grew steadily into the largest
bilateral trading relationship in the world. One of the more significant
developments in the history of the two countries' trading relationship came in
1965 with the signing of the Canada-U.S. Auto Pact, which governed duty-free
trade in automobiles and parts. Largely as the result of this agreement, trade
in this sector has remained a central part of the two countries' overall trade.

The Free Trade Agreement

The Canada-U.S. Free Trade Agreement (FTA) took economic co-operation between
the two countries to a new level. Effective January 1, 1989, under the terms of
the FTA, tariffs on goods manufactured in Canada and the U.S. would be gradually
eliminated over a ten-year period, provided the goods met "rules-of-origin"
requirements. Many of the tariffs would be eliminated before the end of the ten-
year time frame, and the initial phase-out schedule for products could be
accelerated if the two sides agreed.

The FTA also provided Canadian products with "national treatment" on most sales
to U.S. government departments and gave equal access to potential suppliers on
tendering and bidding information. A number of other sectoral and institutional
issues were included in the Agreement to facilitate trade, identify exceptions
and clarify other aspects of the trading relationship.

In addition to the trade-creating provisions of the FTA, Canada and the U.S.
have been working on the harmonisation of standards, testing and certification
procedures.

Prior to signing the FTA, most of Canada-U.S. trade was duty-free under GATT
rules. Nevertheless, the FTA had a dramatic effect on the volume of two-way
trade. Between 1988 and 1993, trade between the two countries increased by 40
percent, to $257 billion, with a strong 46 percent growth in Canadian exports to
the U.S. These gains were registered despite an economic recession in the middle
of this period. Specific sectors, such as office, telecommunications and
precision equipment; chemical products; pharmaceuticals; and textiles showed
particularly strong growth in trade.

The North American Free Trade Agreement (NAFTA)

Effective January 1, 1994, the NAFTA improved the FTA and added Mexico to the
free trade zone. By this time, Canada-U.S. trade was overwhelmingly duty-free.

Under NAFTA, a tariff-reduction schedule was worked out for trade with Mexico
whereby tariffs would be reduced over a ten-year period from the implementation
date. Most of Mexico's non-tariff barriers, such as import licences, will also
be eliminated during this period.

The key provisions of the NAFTA are:

Elimination of Tariffs: Tariffs on Canadian exports to Mexico will be phased out
over 10 years. Mexico has provided immediate duty-free access for many of
Canada's key export interests.

National Treatment: Canada, the U.S. and Mexico treat each others' goods,
services, and investors as they treat their own. International investors with
investments in Canada are covered by the NAFTA if they use Canada as a "home
base" to make investments in the U.S. or Mexico.

Secure Market Access: The NAFTA provides secure access for Canadian exports to
the U.S. and Mexico.

Dispute Settlement: Settlement or determination of remedies regarding anti-
-dumping and countervailing disputes is by bi-national panels, not domestic
courts. Disagreements between investors and NAFTA governments may be settled
through international arbitration.

Government Procurement: All three countries have agreed to provide substantially
increased access to government procurement opportunities not only in goods, but
also in services, including construction services.

Business Travel: Simplified procedures expedite business travel. Eligible
business people can be granted temporary entry without prior approval procedures.


Intellectual Property: The NAFTA includes comprehensive coverage of intellectual
property rights to encompass standards of rules and enforcement.

Under the NAFTA, many Mexican tariffs were eliminated immediately, including
those on a range of Canada's key exports: agricultural and fish products, many
metals and minerals, most telecommunications equipment, many types of machinery,
and certain wood and paper items. (For more information on NAFTA, see the
FaxLink document 60170.)

The first year of NAFTA saw a large jump in Canada's trade with the U.S. and
Mexico. Canada's two-way trade with the U.S. rose by 21 percent, to reach $311
billion, while that with Mexico grew at a similar rate, to total $5.5 billion.
These growth rates were higher than the increase in Canada's overall trade,
meaning that North America is becoming even more important for Canadian
exporters and importers. In 1994, 82 percent of Canadian exports went to the U.S.
and Mexico, and 70 percent of imports were from these countries.

North-south Transportation Links

North-South linkages by road, rail, marine, air, pipeline, and intermodal
services permit easy access to North American markets, especially the U.S. Since
transborder business is a vital part of their operations, Canadian carriers get
goods to the U.S. quickly and inexpensively.

"The continent has shrunk to overnight delivery by air and three days by truck
from all of the major industrial centres. We look at North America as one big
country." Max Persaud, Manager Corporate Logistics, Customs and Traffic Philips
Electronics Ltd.

Road

Road transport is dominant, a fact which reflects the large flow of manufactured
goods and the integration of regional markets. The trucking industry has adapted
well to the demands of just-in-time (JIT) manufacturing. The Canadian for-hire
trucking industry earns about one fifth of its intercity revenues from
transborder business. Several trucking companies specialise in this increasingly
competitive area.

Rail

In preparation for expanded traffic throughout North America, rail networks are
expanding on a continental scale. Strategic alliances between Canadian and U.S.
railways speed the flow of goods to market, expedite border crossings, and
provide quality intermodal services. Canadian rail carriers have co-ordinated
Canada-Mexico freight services through agreements with the Mexican state railway
and with U.S. railways and barge lines.

Marine

Several of Canada's deep-water ports are strategically located near large U.S.
markets. Many of these facilities are open year-round. Marine travel is
concentrated in the Great Lakes/St. Lawrence Seaway system and on the east and
west coasts of North America. The St. Lawrence Seaway serves an area containing
some 61 million people in much of the industrial heartland of North America.

Air

Flights from Canadian airports serve all major North American centres, allowing
for overnight delivery by air cargo. Following the signing of the 1994 "Open
Skies" agreement, Canadian carriers have unlimited rights to fly from anywhere
in Canada to any point in the United States. U.S. airlines enjoy similar rights
to destinations other than Toronto, Montreal and Vancouver. Equal access for U.S.
carriers will be phased in over three years. The arrangement will mean better
connections and more competitive pricing for both passengers and cargo.

Complementing the agreement is the "Border Management Accord," a planned
expansion of pre-clearing facilities to allow travellers to the U.S. to clear
customs before leaving Canada.

Intermodal

Intermodal transportation combines the attributes of more than one mode.
Increasingly, intermodal services are competing with trucking companies for
transborder traffic. Railways are making important investments in intermodal
terminals and equipment to ensure their competitiveness. Specialised container
trains provide timely, high-quality service to Canadian and U.S. cities. CP Rail
has direct access to the port of Philadelphia via one of its U.S. subsidiaries.
Access to other U.S. ports is available through interchanges with U.S. carriers.

Strong Support Services

Massive North American trade flows have spawned extensive support services for
Canadian companies that ship to the U.S. and Mexico. Customs brokers are
familiar with all aspects of international shipping, from packaging and
labelling requirements to the relative cost-effectiveness of different routings
to and from Canada. Freight forwarders consolidate shipments from several
sources to take advantage of volume discounts and design efficient and cost-
effective distribution systems.

Companies doing business in Canada also benefit from a nation-wide system of 142
privately-owned warehouses licensed and bonded by the federal government.
Warehouses in all large metropolitan centres offer on-site customs inspection,
bar-coded storage and handling, and after-hours clearance.

Efficient Border Crossing

The Canadian and U.S. governments are actively co-operating to streamline the
border crossing process. Programs that use electronic data interchange, bar-
coding technology and pre-clearance of goods are speeding up the release of
shipments. These innovations make it even easier for companies located in Canada
to export to the U.S.

"Pratt & Whitney has a world-wide distribution network. Customs operations have
been streamlined to the point that the Canada-U.S. border plays no role in our
distribution system..." Brian McGill, Director of Transportation Pratt & Whitney
Canada Inc.

Future Directions

With the NAFTA and the modernised, efficient transportation links throughout the
continent, the entire North American market is easily served from a Canadian-
based company. Foreign investors from outside North America should therefore
look upon a Canadian location as an entry into all regional markets of the NAFTA
countries.

A number of U.S. multinational enterprises -- 3M, Dow, DEC, IBM, Bell
Helicopter-Textron, and Procter and Gamble -- have already made moves toward
serving the North American market from Canadian subsidiaries. To create
economies of scale in manufacturing, these subsidiaries are being given North
American or global mandates. There will undoubtedly be more examples of this
trend in the near future.

As the number of NAFTA signatory countries expands, the market will become even
more attractive. Negotiations are currently under way for Chilean accession to
the NAFTA, and other South American countries have expressed interest.

The North American Free Trade Agreement--An Overview

Background

The North American Free Trade Agreement, (NAFTA) has, since it became effective
on January 1, 1994, created a free trade area comprised the United States,
Mexico and Canada. The agreement's major objectives are to eliminate tariffs, to
improve market access to the goods and services among NAFTA countries, to
eliminate barriers to manufacturing, agricultural and services trade, to remove
investments restrictions, and to protect intellectual property rights. It also
addresses labor and environmental concerns.

The U.S.-Canada Free Trade Agreement (CFTA) has been effective since January 1,
1989, and the NAFTA expands this agreement within services, investment, land
transport, intellectual property and government procurement, but keeps the
status quo in agriculture and energy.

NAFTA negotiations represented an opportunity for the U.S. to achieve its
economic objectives: expanding sales opportunities in Mexico for U.S. companies;
formalizing recent Mexican market liberalization initiatives; and enhancing
North American international competitiveness by permitting companies to
establish operations anywhere in North America without facing the obstacles
caused by trade or investments barriers.

For Mexico, the agreement represented a turning point in its relations with the
U.S. By entering NAFTA, Mexico turned its back on decades of nationalism and
economic protectionism and culminated its move from a nationalized, protected
economy to one governed by market-oriented principles.

Canada's participation in the Agreement can be seen as a defensive maneuver to
ensure that NAFTA would not dilute the Canadian benefits of origin of goods so
that free trade status is effective among the NAFTA countries. Generally, 50 %
of the tariffs between the U.S. and Mexico has been eliminated immediately, 65 %
will be by 1999. Most U.S.-Canada tariffs will be phased out by 1998.