Module 7: Trade Liberalization & NAFTA

LAC Development Stratgey Before The Debt Crisis

-ISI resulted in trade protections meant to protect local industry from competition

-resulted in monopolies

-ISI implemented resulted in a debt crisis

-UC started in 1983 with the export led growth model

Main Expectations of Trade Liberalization

-Undo ISI trade protectism

-Foster competition

-Promote trade integration with the world

Key Components of Trade Liberalization

-removal of international trade barriers

-lower import tariffs

-promoting the entry of foregin manufactured goods

Expected Gains of Trade Liberalization

-foregin competition would force local industries to improve competitive levels

- to do so they had to keep local market share, improve production, reduce prices to world levels

-LAC would be able to export its goods to international markets

-Agricultural Exports were diversified from tradition exports (coffee, sugar, bananas, cotton, copper) to

Non-Traditional Exports (soy, salmon, roses, wine, organic agricultural products)

Benefits for Consumers From Trade Liberalization

-higher qualitly goods

-lower prices

-better production qualitly

New Strategy of Development After LAC Debt Crisis

-main source of growth was trading with global markets

-market based as private compaines became the drivers of economic devlopment

How To Implement Trade Reform

-Gradual Reform

-Quick Shock

Gradual Reform

-slowly and occurs over two stages

-First Stage: 2-3 years long; import tariffs are lowered to 50%

-Second Stage: 3-10 years long; import tariffs are lowered to 10%

Extent of Trade Reform

-average LAC tariff has delcined from 50% in 1985 to 8% in 2014

Implementation Across Differnet Countries

-Brazil used a gradually approach lowering tariffs from 80% to 30% over 4 years and then to 14% over 8 years

-Paraguay used a shock approach by lowering tariffs from 72% to 19% in one year

LAC Trade Liberalization

-in the mid-1980s the trade barriers for manufactured goods were lowered

-imports accounted for more goods than exports

-changed when China entered the WTO

LAC Exports of Goods and Services

-on average LAC exports more goods than the US

-exports as a share of goods and services have grown since the implementation of trade liberalization

LAC Top Trade Partners

-US is LACs main trade partner with 40% of all exports

-other LAC countries accont for 15-20% of exports

-China accounts for 20% and is growing quickly

Trade Integration

-internal agreements that foster trade between two countries

Free Trade Agreement (FTA)

-elminates barriers to trade and investment on selected goods and services

-creates new markets and reduces prices

-each country maintaing an independent trade policy and seperate tariff rates with other countries

Customs Unions

-countries create a common external tariff with the rest of the world

Common Market

-cordination of macroeconomic policies in sectors such as agricultural or social

Economic Integration

-common monetary policy and common currency

Advantages of Economic Integration

-stepping away from global isolation by opening up access to new markets

-acces to large markets improves economies of scale

-promotes credibiltily due to higher investor confidence

LAC Stratgey of Economic Devlopment Since 2000

-Washington Dissent

LAC Pink Tide

-a wave of left-wing governments that rose to power across LAC in the 1990s and 2000s such as in Venezuela

Critique of Washington Conseues

-simplistic liberalization policies

-desgined by outside technocratic governments

-was a one size fits all approach

2000-2019 Development Drivers

-global markets

-pro-active development state

-democratic socities

New LAC Long Term Devlopment Goals

-sought a better qualitly of life

-more equal socitites

-preservation of human resources

-healthly environment

-democratic

Proactive Devlopment State

-the process of devloping policies for public and private sector by promoting opportunitites that are people centered

Economics and Social Policy

-aims to create a cycle were econ growth lowers poverty and promotes equalitly

-done by investing in healthcare, education, social programs, etc

Great Challenges

-social inclusion

-improvements in infastrcuture and the distribution of social services

Desirable Improvments

-generating more jobs

-public transportation

-improving education, healthcare, social services

-flighting corruption and violence

-electricity

What is a Free Trade Agreement

-an agreement between two or more countries where they agree on certain obligations impacting trade

Mains Goals of FTAs

1.) Reduce Barriers To Trade

2.) Promote fair competition

3.) Increase investment opportunitites

4.) Protect Intellcual Property Rights

5.) Estbalish A Framework for Future Trade Agreements

US FTA Agreements

-11 Agreements in LAC

-9 Agreements with other countries

Mexico FTA Agreements

-has 20 FTAs with 58 countries

-bilateral agreements with Argentina, Brazil, Chile, Columbia, Bolivia, Cuba, Panama, Paraguay, Peru, Israel, and Japan

Why Mexico Wants To Negitate FTAs

-to stablize their economy

-promote economic devlopment

North American Free Trade Agreement (NAFTA)

-negoitated in 1991

-was signed and ratified in January 1994

-1st regional FTA among developed and devloping countries

-integration 400 million people and $7 trillion worth of goods and services

Why Mexico was Interested In NAFTA

-an FTA between Mexico and two developed nations would increase international investors confidence in Mexico

NAFTA Centerpiece

-the gradual elimination of import tariffs and barriers to trade over 14 years

Sensitive US Inudstries

-textiles and apperals

Sensitive Mexican Industries

-corn

Rules of Origin (ROOs)

-meant to prevent abuses

-proportion of production should be added locally in member countries

-inputs must be domestically sourced

Names of US-Mexican-Canadian Free Trade Agreements

-1994-2020: NAFTA

-July 1st 2020: USMCA

Automakers ROOS

-under NAFTA cars had 0% tariffs if 67.5% of components were made in the US, Mexico or Canada

-under USMCA cars must have 75% of parts made in the US, Mexico or Canada

Pre-NAFTA Import Tariffs

-US import tariff on Mexican goods: 4%

-Mexican import tariff on US goods: 11%

Maquilla

-foregin owened factories where raw materials are imported from abroad and the goods are exported

-do not qualify to be exempted from taxes

NAFTA Contraversies in The US

-US opposition was due to the potential loss of US jobs

-compaines get away from stricter US regulations

-Ameican could earn 8x as much as Mexicans

NAFTA Conteversey In Mexico

-feared US and Canadian compaines would take advantage of Mexican labor

-put Mexican compaines out of business

Was NAFTA Accomplished In 2008

-yes

-US-Mexican restrictions on agricultural were removed

Trade Between US and Mexico

-USA trade with Mexico from 11.5 Billion in 2011 to 21 Billion in 2021

-Mexican trade with the US increased from 15.4 Billion in 2011 to 31.8 Billion in 2021

NAFTA Impact On International Trade

1.)Trade between NAFTA members expanded from 280 billion in 1993 to over 11 trillion in 2017

2.) Expanded economic linkages between countries

3.) created more efficent production processes

4.) consumers had a greater choice of goods

5.) improved living standards

Impact of NAFTA On Mexicos Export

-foregin investment increased increased and Mexico increased protections for foregin investors

-exports to the US increased from $4.5 billion a year to $13 billion a year in 2022

-Mexican auto industry was heavily impacted

Impact of NAFTA On US Jobs

-from 1994 to 2008 1.2 million US workers were impacted

-0.79% of the US population

NAFTA Transitional Adjustment Assistance Program

-created to assist workers impacted by factory closures or lower wages due to NAFTA

-included upw ot 104 weeks of retraining

-included 26 weeks of unemployment and 52 weeks of trade adjustment allowances

NAFTA & Mexicos Corn Trade

-US provides subsidies to corn producers

-US corn is 15-20% cheaper

-corn imports from the US dropped Mexican prices and caused 12 million Mexican small farmers to be priced out of the market

-farmers became day laborers and contributed to the unemployed population in major citites

Overall Impact of NAFTA In Mexico

-trade heavily increased

-soldification of neo-liberal government policies

-decreased investor uncertainity regarding Mexico

-NAFTA downfall was due to the inabiltily to distribute wealth throughout the economy

Winners In All Countries of NAFTA

-consumers due to enhanced product choices

US Winners

-investors who invested in Mexico

US Losers

-1.2 million workers who lost there jobs

-textile and appearl industry

Winners In Mexico

-textile, automobile indsutry

Losers In Mexico

-corn industry, the south which did not get any direct investment

Trans-Pacific Trade Partnership

-between 12 countries and 800 million people

-represents 40% of global GDP and 38% of global trade

-signed by 11 members in 2016 but not ratified by the US

Comprehensive and Progressive Agreement for Trans-Pacific Trade

-also known as TPT

-3rd largest FTA in the world with $13.5 trillion in combined GDP

-signed March 2018 and went into effect December 30, 2018