NAFTAs Effects on the Auto Industry
NAFTA stands for North America Free Trade Agreement. It was signed in the year 1992 by the president George Bush, and came to be effective in the year 1994. There are several indicators that shows that NAFTA has made some achievements on the United States economic benefits claimed by proponents that it were to bring despite that there has been costs adjustments. There have been positive overall effects from the agreement on United States economy.
Based on NAFTA, the member countries such as Canada, United States and Mexico have decided to cut down or eliminated the investment and the trade barriers in auto industries. The provision of NAFTA to the auto industry involves the elimination phases of tariffs, removal of several trade non-tariff barriers, intellectual property rights enhanced protection and the provision of the rules of origin. Elsewhere, it has pursued the investors’ requirement performance elimination from other countries that are NAFTA members as well as creating less government restrictive procurement practices.
Since the Canada and the United States were more integrated following the Canada- united state Free Trade Agreement and the Canada-United States 1965 Auto Pact, many of the effects of NAFTA related liberalization of trade with Mexico. From 1962 to
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In the year 1989, there was significant restriction relaxation by decree on the foreign auto operating producers in Mexico, but a number of restrictive measures were still maintained on auto trade by Mexicans and the Mexico foreign trade production (Wise, 2003, pp. 101). The automotive products in United States- Canada trade has been virtually for long as barrier-free, where the united states majority exports of motor vehicles to Mexico has encountered trade balancing restrictions and local requirements contents as well as 20% tariff before the NAFTA establishment.
By contrast, the exports of Mexico enjoyed open access, which was largely made for the United States market. The imbalance is redressed by NAFTA and offers an opportunity to establish the United States robust even more in their industry competitive context globally in North America industry of automotive (Woolcock & Sampson, 2003, pp. 120). In early 1980s, the United States auto parts and the motor vehicles producers established operations of maquiladora parts in Mexico to cut down the United States cost of manufacturing, in the face of Japan stiff competition.
The auto parts from United States to Mexico were shipped duty free and that were into components assembled, reentering the America for final assembly use of the motor vehicles. The assessment of duties was only value added on the Mexican (Kaplan, 1996, pp. 130). Before the establishment of NAFTA, the majority of the automotives parts manufactured in Mexico under the generalized preference program system entered the United States of America in a state of duty free. In addition, most of the vehicles that were made in Mexico found their way to the United States with only a portion of the vehicles’ total value having duty applied on it.
This could work because the customs rules in the United States gave room for the collection of duties on labor and non-United States materials’ value. It is approximated that more than half percent parts’ value in these vehicles were from United States. Moreover, with light trucks exempted from payment of duties which applied tariffs on United States, several vehicles which were built in Mexico and the parts of automotive were non-existence or very low prior to establishment of NAFTA (Clement & Gerber, 1999, pp. 170).
The Mexican last pre-NAFTA automotive decrees which were implemented in the year 1990, were designed to raise the levels of investment and the suppliers of independent parts. The decrees offered limitations for imports of vehicle through trade balancing complications, which had to maintain that United States and other vehicles assemblers of foreign ownership would export a lot of vehicles parts more than they imported. The elimination of the automotive decrees on investment and trade distortion effects in Mexican was a major goal for the negotiators in the United States NAFTA (Cowie, 1999, pp. 33).
The removal of the investment and trade restrictions in Mexico were implemented through the establishment of NAFTA. All parts and motor vehicles tariffs by the Mexicans which were so high for particular goods were cut down by half in the year 1999, and were tabled to be phased out completely by the year 2003. In addition, the restrictions on investment by the Mexicans in the sector of automotive were removed or lowered entirely which offered incentives to raise the investment of United States in Mexico (Ready & Bognanno, 1993, pp 72). The establishment and implementation of NAFTA had the following effects on the auto industry.
The motor vehicles imports from Mexico to United States went up from $3. 7 billion to $11. 3 billion in 1993 to 1996 respectively. Over 50% on average of the vehicle content exported from Mexico to United States is made in U. S. according to the analysts of the industry. The increased demand in United States for models of pick up trucks and popular utility sport vehicles that is manufactured in both United States and the Mexico led to the import surge during this period of the increased United States imports. The high demand for these products contributed to capacity constraint in the U.
S. that through the high imports were relieved. The imports of automotive parts to United States from Mexico rose from $7. 4 billion to $11. 6 billion in 1993 to 1996 respectively, which is equivalent to 58. 4 percent increase. The trade flows between the Canada and the United States do not depict discerning change although there has been a rise in the automotive exports to Canada from United States (Rosen, 2002, pp. 98). The establishment of NAFTA has had great effects on the United States investment within itself and outside in the member countries.
The investment in the major three manufacturing plants from 1993 to 1996 in United States amounted to $39. 1 billion. During the same time in Mexican facilities, investment of the big three automotive plants totaled $3 billion. The United States remains to be an investment alternative market in the automotive sector. There is an increasing flow of foreign investment in United States of America in the sector of automotive. Following and prior to implementation of NAFTA, some manufacturers of automotive from the U. S. invested in Mexico. A number of factors were reflected from the investment in Mexico.
The Nissan and VW expanded investments in Mexico which was geared towards accommodation of raising Mexico sales together with the new production model (Mommen & Jilberto, 1998, pp. 102). In North America market for automotive, there has been a creation of synergies by NAFTA that will assist in maintaining United States globally competitive industry of automotive. To rationalize production, the manufacturers of vehicle parts in the United States have carried out investment restructuring. In the three NAFTA member countries, the key producers of the parts have plants established in these countries.
By reducing the local content of Mexico and requirements of trade balancing during the period, the provisions of the NAFTA automotive have stimulated investment in the market of United States that otherwise might have moved to Mexico (Bacon, 2004, pp. 32). The NAFTA implementation has really contributed to increases in productivity, high employment and earnings to the signatory countries. During the period 1994 to 1996 in the United States, the overall level of employment in the industry of automotive increased by 14. 1%. During the same period in U. S.
, there was an increase of 16. 1% in employment levels in the sector of automotive and in the sector of motor vehicle, employment went up by 10. 6 percent. The productivity in United States automotive, motor vehicle and the automotive parts sector grew by 7 percent as a result of implementation of NAFTA in the years 1993 and 1995. In addition, the production workers hourly earnings increased by 5. 6 percent in the years 1993 and 1996. On contrast to this, the automotive industry employment level in Mexico went down by 8. 4 percent as from 1993 to 1995.
This showed a steep decline in demand of Mexican as a result of recession in Mexicans economy, together with restructuring to the auto decrees liberalization. As a result of NAFTA implementation, the level of employment in Canada has also gone up by 5 percent. In the same country, the employment in the sector of automotive parts has gone up by 5. 2 percent and by 4. 8 percent in the sector of vehicle assembly from 1993 to 1996 (Stder-Noquez, 2002, pp. 71). References Bacon David, 2004. The Child of NAFTA: Labor Wars on the U. S. /Mexico Border, University of California Press, Los Angefes.
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