ECON-2220 Lecture Notes - Lecture 5: North American Free Trade Agreement, Johan Rudolph Thorbecke, National Treatment

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rubywoodchuck938

15 May 2018

School

Vanderbilt University

Department

Economics

Course

ECON-2220

Professor

De Andrade

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NOTE: The Professor has yet to go over the answers for this in class but these are what I got

from reading the article so they *should* be right :)

Did NAFTA Cause a “Giant Sucking Sound”? Thorbecke and Eigen-Zucchi

1. What is NAFTA and what did it promote?

North American Free Trade Agreement. It is an agreement between the U.S.,

Mexico (and Canada) that greatly reduced trade restrictions. Tariffs on half of the

import categories were eliminated immediately and other tariffs and non-tariff

barriers were to be phased out. It promoted free trade mainly by:

1. Reducing tariffs

2. Establishing guaranteed national treatment where a partner country could not

have their goods that they exported to other partner countries have to pass tougher

standards than their partner country’s domestic goods had to pass.

3. Having the ability for people to freely convert local currency to the currency of

a NAFTA member country

4. Strengthening intellectual property rights

5. Binational judicial review boards (I think less important)

**Red is for what was said in class**:N. American Free Trade Agreement-

reduced quotas and trade barriers and increase overall success by focusing on

comparative advantage. Started in 1994 and took 10-15 years to fully implement.

Advantages for the U.S.: increase of imports and exports betweeen Mexico and the

U.S., liberalization of grains and corn (cuz the U.S. had comparative advantage)

and overall prices are better for consumers. & strengthening intellectual property

rights is hella important.

2. In the USA, which groups were in against NAFTA and what were their

main arguments?

Labor Unions and Populist politicians because they claimed NAFTA would result

in a huge loss of jobs (millions) within the U.S.

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Note: the professor has yet to go over the answers for this in class but these are what i got from reading the article so they *should* be right :) Mexico (and canada) that greatly reduced trade restrictions. Tariffs on half of the import categories were eliminated immediately and other tariffs and non-tariff barriers were to be phased out. **red is for what was said in class**:n. american free trade agreement- reduced quotas and trade barriers and increase overall success by focusing on comparative advantage. Started in 1994 and took 10-15 years to fully implement. Advantages for the u. s. : increase of imports and exports betweeen mexico and the. U. s. , liberalization of grains and corn (cuz the u. s. had comparative advantage) and overall prices are better for consumers. & strengthening intellectual property rights is hella important. Labor unions and populist politicians because they claimed nafta would result in a huge loss of jobs (millions) within the u. s.

Related Questions

The difference between a free trade area and a customs union is, in brief, that the first is politically straightforward but an administrative headache, while the second is just the opposite.

Consider first the case of a customs union. Once such a union is established, tariff administration is relatively easy: Goods must pay tariffs when they cross the border of the union, but from then on can be shipped freely between countries. A cargo that is unloaded at Marseilles or Rotterdam must pay duties there, but will not face any additional charges if it then goes by truck to Munich.

To make this simple system work, however, the countries must agree on tariff rates: The duty must be the same whether the cargo is unloaded at Marseilles, Rotterdam, or for that matter Hamburg because otherwise, importers would choose the point of entry that minimized their fees. So a customs union requires that Germany, France, the Netherlands, and all the other countries agree to charge the same tariffs. This is not easily done: Countries are, in effect, ceding part of their sovereignty to a supranational entity, the European Union.

This has been possible in Europe for a variety of reasons, including the belief that economic unity would help cement the post-war political alliance between European democracies.

But elsewhere these conditions are lacking. The three nations that formed NAFTA would find it very difficult to cede control over tariffs to any supranational body; if nothing else, it would be hard to devise an arrangement that would give due weight to U.S. interests without effectively allowing the United States to dictate trade policy to Canada and Mexico. NAFTA, therefore, while it permits Mexican goods to enter the United States without tariffs and vice versa, does not require that Mexico and the United States adopt a common external tariff on goods they import from other countries.

This, however, raises a different problem. Under NAFTA, a shirt made by Mexican workers can be brought into the United States freely. But suppose that the United States wants to maintain high tariffs on shirts imported from other countries, while Mexico does not impose similar tariffs. What is to prevent someone from shipping a shirt from, say, Bangladesh to Mexico, then putting it on a truck bound for Chicago?

The answer is that even though the United States and Mexico may have free trade, goods shipped from Mexico to the United States must still pass through a customs inspection. And they can enter the United States without duty only if they have documents providing that they are in fact Mexican goods, not trans-shipped imports from third countries.

But what is a Mexican shirt? If a shirt comes from Bangladesh, but Mexicans sew on the buttons, does that make it Mexican? Probably not. But if everything except the button were made in Mexico, it probably should be considered Mexican. The point is that administering a free trade area that is not a customs union requires not only that the countries continue to check goods at the border, but that they specify an elaborate set of ârules of originâ that determine whether a good is eligible to cross the border without paying a tariff.

As a result, free trade agreements like NAFTA impose a large burden of paperwork, which may be a significant obstacle to trade even when such trade is in principle free.

Question:

1. From this case, what is the main difference between a free-trade area and a customs union?

2. Why are rules of origin needed for a free-trade area? How might they be protectionist?

pearbuffalo387

The largest corporation based in the United States is:

A) General Motors.
B) ExxonMobil.
C) General Electric.
D) Microsoft.

Service exports from the United States equal _____ per year.

A) less than $100 billion
B) approximately $250 billion
C) less than $350 billion
D) approximately $500 billion

In addition to agricultural products and manufactured goods, the United States is also the world's largest exporter of:

A) processed and packaged foods.
B) pharmaceuticals.
C) electronics.
D) business services and retailing.

Before entering a country, marketers need to determine if the country has the required _____ to support their marketing efforts.

A) moral code
B) legal system
C) infrastructure
D) trade bodies

In order for a marketer to operate efficiently in a foreign country, it is crucial that a stable _____ be in place to facilitate trade.

A) free trade agreement
B) tariff
C) infrastructure
D) labor force

Which of the following is not a trade barrier to an exporter?

A) Tariffs
B) Import quotas
C) Subsidies
D) Related party trade

A complete ban on the import of a product is known as a(n):

A) import quota.
B) embargo.
C) revenue tariff.
D) protective tariff.

Exchange control is an administrative barrier to international trade that:

A) requires companies that export to sell foreign currencies to the central bank or other foreign agency, and importers to buy foreign currencies from the same organization.
B) supports domestic industry through grants of money or research support.
C) completely bans the importation of a product.
D) sells products in a foreign market cheaper than they are sold domestically.

When a group of nations agree to the free trade of goods among themselves by abolishing tariffs and trade restrictions, the nations have created a:

A) common market.
B) customs union.
C) trading block.
D) free-trade area.

10.

Which of the following is not an objective of the European Union(EU)?

A) eventually remove all trade barriers to free trade among its members.
B) standardize currencies and regulations between member nations.
C) promote the basic tenets of the WTO and GATT treaty.
D) eventually evolve into an independent political entity.

11.

An organization that provides first-time exporters with expertise in locating foreign buyers, handling paperwork, and conforming to local labeling and testing laws is called a(n):

A) export facilitator.
B) export title company.
C) trade assistance corporation.
D) export management company.

12.

McDonald

ivoryturtle973

Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico, Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,â The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,â Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

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ECON-2220 Lecture Notes - Lecture 5: North American Free Trade Agreement, Johan Rudolph Thorbecke, National Treatment

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