Trade increases the economic growth and GDP of a country and also fosters great relationships between countries. Over the years there has been the formation of regional trading blocs to enhance trade among neighboring countries. They have been successful however there are challenges that have to be continually addressed.
North America Free Trade Area (NAFTA)
NAFTA refers to the North America Free Trade Area that brings together the countries of Canada, Mexico and the United States. The trilateral trade area came into force in 1994 when President Bill Clinton signed on the agreement. The agreement called for the phasing out of the tarriffs that existed among the three countries. The terms of the agreement on tariffs was finally implemented in 2008. The focus initially was on agricultural products however right now it also includes automobile and textile products.
NAFTA has had a positive economic impact when it comes to growth of competition and efficiency in North American firms. It promoted investment from both local and foreign firms. These companies have restructured to take advantage of the economies of scale in the region. Trade relations between the three countries have substantially increased over the years due to the NAFTA agreement. In fact, the Office of the U.S Trade Representative (USTR) reported that the intra-North America trade has tripled in volume since the agreement came into force (Burfisher, Robinson & Thierfelder, 2001, P. 12). The office is the chief negotiator in America in foreign trade and encourages regional trade integration efforts like NAFTA.
The impact is even more substantial for Canada and Mexico since NAFTA related trade accounts for 80% of their overall trade. The trade agreement has also affected the U.S labor markets in terms of employment and wages. The USTR data figures show that employment in the US rose by 24% since the agreement came into force. Over the same period, there has also been a decline in the unemployment figures.
The figures show that the wage rates in the US rose by 19.3% between 1994 and 2007 compared to the increase of only 11% in the years prior to the trade agreements. The economists however have clearly stated that these gains in employment and wages have come at a certain cost to the United States. These trade agreements can divert trade and even cause significant labour market disruptions to certain workers in the market.
The US workers have been exposed to higher competition from the Canadian and Mexican workers yet they are being offered fewer rights and protections. It would be advisable for the American corporations to enter into agreements with the signatory companies where they require them to raise their labor and environmental standards.
The NAFTA agreement has also been blamed for contributing to the rising trade deficits and causing certain workers to enter into the low paying job brackets. During the 2008 general election, the economists pressed the leading democratic leaders, Clinton and Obama to push for renegotiations of the NAFTA agreement to include labor and environmental standards (Teslik, 2009, P. 4).
In Mexico, the gains accrued from joining NAFTA have been quite substantial. The Mexican Exports to the United States has increased by four times since NAFTA implementation. The American exports into Mexico have tripled over the same period. The Mexican people have also gained from the Trade agreement. Economists have noted that the prices of goods in the country have reduced by half since the trade agreement was implemented. Canada has also gained a lot from the agreement.
It is however important to note that prior to NAFTA, Canada and the United States had a free trade agreement. The country's GDP has grown at a faster rate than the US and Mexico. Canada's GDP rose by 3.6% compared to the increases of 3.3% in the US and 2.7% in Mexico. Overall employment in the region has also risen from 15 million to 16 million over the trade agreement period. The agricultural trade flows between the US and Canada increased significantly. Canada is the highest or leading importer of US agricultural products and after the NAFTA agreement, the exports doubled for the period 1993 to 2002.
Dispute Resolution
There are times when there are disagreements between different countries and the WTO. This is caused by the overlap of the treaty agreements of a country under the regional trade association and the World Trade Organization. There have been several instances where when a country starts to implement WTO recommendations; it finds itself breaking the rules of the regional trade agreements.
In 1995, when Canada began to implement WTO tariffs on agriculture, it caused the quotas to convert into high tariffs for the United States which called for consultations with Canada. Despite the actions being acceptable under the WTO, it was not complying to the NAFTA trade agreements. NAFTA was an agreement among North American countries that aimed at tariff elimination or reduction progressively.
There have been instances where the countries in the NAFTA have not been able to resolve their disputes through the mechanisms in the regional body and have therefore sought the assistance of the World Trade organization. In 1996, there was the Split-Run Periodicals case between the United States and Canada. United States called Canada into consultations over its prohibition of periodicals into the country that had targeted advertising towards the Canadian market that was not in the issues of the periodicals distributed in the countries of origin. There was also an 80% excise tax imposed on these split-run periodicals. Thirdly, there were special postal rates applicable to the Canadian owned and controlled periodicals. Imported periodicals would not gain from these special postal rates (Gantz, 2000, P. 5).
The consultations failed and the US filed the case under the WTO resolution forum. The US had a better case in filing under the WTO dispute resolution compared to the NAFTA resolution forum. Under NAFTA, the discrimination against the foreign periodicals is allowed however under the GATT, the United States can argue that Canada's action went against the National Treatment requirement and the provisions in place that prohibited quantitative restraints.
Canada maintained that the excise tax was really a service charge rather than a tax on imported goods. However, in this particular case, the United States won the day since it was determined that the import ban, excise tax and the preferential postal rates were in contravention of the Article III of the GATT. Canada agreed to the settlement measures and promised to reform its rules in the periodicals sector within fifteen months. Conflicts will therefore arise between the members of trade integration bodies and it is up to the countries to decide how they want the issue resolved, either regionally or by the overall international trade organization.
Association of Southeast Asian Nations (ASEAN)
The ASEAN refers to the Association of Southeast Asian Nations. The regional trade agreement includes the countries of Cambodia, Indonesia, Thailand, Malaysia, Philippines, Singapore, Vietnam and Myanmar. The ASEAN was established in 1967 through the Bangkok declaration. The focus of the initiative was to pursue economic development and socio-cultural development. At first, the trade agreement faced a lot of challenges in implementing trade cooperation due to the protectionist trade and industrial policies of certain countries such as Thailand, Philippines and Indonesia.
There was a tendency to include high untraded products in the zero tariff list and the lengthy bureaucratic processes of applying for margin of tariff preferences for participating firms highly discouraged the private sector. However in the 1980s the different countries in the trade area started gaining from the free trade area. Indonesia, the ASEAN's largest country changed its trade policies from being protectionist based to an outward-looking orientation. Philippines and Thailand followed suit and focused on exportation. The other countries in the ASEAN such as Malaysia and Singapore already had open economies causing regional integration to be successful.
The international environment also increased the level of trade in the area. The economic restructuring of the Northeast Asia area caused the ASEAN countries to gain substantially through direct foreign investments and technology transfers. The greater FDI caused the members to open up in terms of trade and there were more linkages with the rest of the Asia Pacific (Ponciano, 1997, P. 14).
There was therefore an increase of trade between the ASEAN countries with the rest of the world. In 1989, the ASEAN countries met in 1989 and decided to form the ASEAN free trade area, an enhancement from the ASEAN preferential trade agreement (Guerrero, 2008). The countries came together to establish the free trade area within 10 years. In addition to the enhancement of economic integration in the region, the ASEAN also assisted the countries to achieve political stability and security.
When the ASEAN was formed in 1967, there was a lot of political tension in the region. There was territorial confrontation between Philippines and Malaysia over the region of Sabah. Singapore had just separated from Malaysia causing another area of contention. There was the Vietnam War that threatened to affect other Southeast Asia countries. There were external and internal communist threats. The formation of the ASEAN brought political stability as all these countries had the same political and colonial backgrounds which they wanted to deal with.
Conclusion
Regional trade blocs increase the level of trade globally as countries open up to each other reducing tariffs and other taxes. It speeds up globalization increasing the level of competition and efficiency in the country. America is the super power in the world and considered an international influential party when it comes to trade and political negotiations. It has been assisting countries in dire political crisis regain stability and in the process experience economic development since there can be trade where there is no peace.
References
Burfisher, M., Robinson, S. & Thierfelder, K. (2001). The Impact of NAFTA on the United
States. The Journal of Economic Perspectives, 15, 1, 125-144.
Gantz, D. (2000). Dispute settlement under the NAFTA and the WTO: Choice of forum
opportunities and risks for the NAFTA parties. International Law Review, 14: 1026-
1106.
Guerrero, S. (2008). Regional integration: the ASEAN vision in 2020. IFC Bulletin, 32: 52-
58.
Ponciano, S. (1997). ASEAN and the Challenge of Closer Economic Integration, Discussion
Paper Series, 97-14, 1-25.
Teslik, L. (2009). Nafta Economic Impact. Retrieved from:
http://www.cfr.org/economics/naftas-economic-impact/p15790
