Introduction
For any economy to survive in the competitive
world economy today, it is imperative that it
gains competitive advantage through efficient
resource allocation. Unlike the 19th and the 20th
century approach to resource allocation, today
economies rely on system integration and trade
agreements for making their manufacturing process
efficient for competition. Therefore it can be
said that competitive advantage by definition,
is relative to the nature of the production process
and the kind of consumers the economy is targeting.
In the case of the United States, the target market
is not only its huge domestic consumers but also
international markets.
On the one hand the US imports to satisfy its
local consumers while on the other hand it has
to produce enough for exports to cover the cost
of the same imports. For this reason the US trade
policy towards trading partners has always been
aimed at mutual gain. The tri-nation NAFTA (North
American Free Trade Agreement) has been the initiative
towards this direction. Over the years, it has
been presumed that while trade with Canada had
been bilaterally beneficial, Mexico has, as a
partner been detrimental to the US economy. This
is because Mexico being economically less developed
than both Canada and the US has not been able
to provide mutually beneficial advantage to the
US. There are many reasons for this including
the local regulations, tariffs policies, labor
laws and the Mexican trade policies towards America.
Apart from this the Mexican peso crises has also
brought about doubts as to its competency as a
trading partner and its impact on the US economy.
However, in the recent years with the proliferation
of the multilateral trade agreements among other
nations around the world such as the EU nations,
Asian-Pacific and Latin American countries, the
US states has to re-evaluate its relationship
with Mexico as a trading partner (Cooper, 2002,
p2). Some of the impacts of this relationship
are outlined as follows:
Discussion
Before one delve into the impact, it is necessary
to point out that FTAs two effects according to
economic theory. Firstly, trade creation which
means member country gain through trade opportunities
created as a result of trade partnership. However,
it must also be noted that opportunities refer
to market expansion and does not necessary result
in transactions. Secondly, trade diversion, which
means "the member country switch imports
of goods from an efficient non-member to a less
efficient member country" (Cooper, 2002,
p.10). As a result of trade diversion sometimes
member country stand at a loss because the cost
of country of imports.
Labor Issues
There is no doubt that Mexico provides cheap labor
to the US even before the signing of NAFTA. By
forming trade agreement with Mexico has legalized
this pool of cheap labor. US agricultural sector
especially has gained through this advantage and
been able to cut down on labor cost significantly.
However, over the years through NAFTA mandates,
Mexican workers have not only been forced to acquire
skills competitive to US own labor force but they
have also grown significantly in population.
As a result the US labor force has been significantly
affected by the influx of Mexican workers both
in the agricultural as well as industrial sector.
Hence the competitive advantage has been gained
at the cost of the local labor force. On the other
hand Mexico gains as many as 3.5 million new jobs
have been created in Mexico since 1995 due to
this same trade agreement (Reich, 2002).
System integration
System integration in terms of manufacturing process
is basically outsourcing some of the components
of the production process. The US huge industrial
sector relies on cost efficient production process
in order to gain competitive advantage in the
global economy. Through NAFTA the US not only
has been able to establish branches and firms
in Mexico for the production of parts and components
of goods at a cheaper price but also at lower
economies of scale. Hence, superficially the US
firms are integrating production process for labor
and cost intensive manufacturing goods but in
reality it is also cutting down on tariffs and
taxes.
At the same time products that are produced in
Mexico are also consumed at the local level thereby
cutting down the cost of production of those parts
as well. This not only increases firms' efficiency
but also its income. For example the automobile
industry has been known to establish subsidiaries
in Mexico. Although, this creates trade diversion
because Mexico is a relatively less efficient
producer than other nations like Japan or Europe
nevertheless it cuts down the cost of trade barriers
and tariffs. Yet at the same time, it also provides
opportunities for trade creations for automobile
markets as it is a growing economy.
The threat of elimination of local production
process however remains within the US industrial
sector (Macpherson and Pritchard, 2003, p.221).
Multilateral trade and bilateral trade
The recent proposal for FTAs negates trade favoritism.
Multilateral agreements that are under way among
many countries around the world today have three
forms: custom unions, common markets and economic
unions. In the case of US and Mexico, however,
through NAFTA both the countries have maintained
free trade areas whereby the member countries
eliminate tariffs and non-tariff barriers yet
maintain individual trade policies. They are free
to erect these barriers with non-members. Hence,
in the current economic environment where intense
trade competition means some kind of barriers
or the other with trading partners, Mexico would
prove to be a beneficial partner as it offers
no barriers and yet at the same time provide a
ready market for US manufactured products (Cooper
2002, p.50
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