Sourcing Implications of the North American Free Trade Agreement

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INTRODUCTION

Multinational firms whose supply chains transcend national borders incur additional costs as a result of tariff and nontariff barriers. The North American Free Trade Agreement (NAFTA), which became effective on January 1, 1994, will result in the eventual removal of tariff and the reduction of nontariff barriers to trade between Canada, Mexico, and the United States. These changes in the economic environment will affect the total cost of conducting business across North America.

This article reports selected results of an ongoing research project that examines the effects of the NAFTA from an integrated supply chain perspective. This phase of the research address the NAFTA's potential effects on suppliers utilized and the associated cost impact from the perspective of a hypothetical firm operating in the household appliance industry.

TARIFF AND NONTARIFF BARRIERS TO TRADE

Tariffs are taxes levied on a commodity when it crosses a national boundary. The most common form of tariff is the import duty that is levied on the commodity upon entry into the importing country.

A nontariff barrier is "any law, regulation, or requirement that prevents or impedes the importation of goods without good cause."[1] Nontariff barriers may not be as visible as tariffs, but they can be extremely effective trade restraints. Common nontariff barriers include such things as:

1. Government participation in trade (discrimination in government procurement, state trading, subsidies, countervailing duties)

2. Customs and entry procedures (regulations covering valuation methods, classification, documentation, health, and safety)

3. Standards (standards for products, packaging, labeling, marking)

4. Specific limitations (quotas, import restraints, licensing, exchange controls)

5. Import charges (prior import deposits, credit restrictions for imports, special duties, variable levies)

6. Restrictions on foreign direct investment (investment regulations that alter investment and trade patterns in such a manner that they provide unfair advantage to domestic investment)

7. Inadequate infrastructure (lack of adequate roads, bridges, and customs facilities)

Nontariff barriers effectively raise the cost associated with conducting business across international borders.[2]

THE NORTH AMERICAN FREE TRADE AGREEMENT

Free trade agreements eliminate or reduce tariff and nontariff barriers among the member countries. However, under a free trade agreement, member countries can establish their own tariffs and other trade regulations that apply to trade with nonmember countries.[3]

The NAFTA is a comprehensive agreement that includes Canada, Mexico, and the United States. The primary objective of the NAFTA is to establish an economic environment in which businesses from each country can compete on the basis of their competitive market advantages, rather than tariff and nontariff barriers.[4] Major features of the NAFTA include:

1. Time-phased tariff reduction and eventual elimination over a period of fifteen years

2. Elimination of import limits or quotas

3. Reduction in selected customs regulations, including elimination of most import licensing requirements

4. Implementation of trade dispute resolution procedures

5. Environmental protection principles

6. Provision for equal opportunities for firms to compete for government contracts

7. Protection of intellectual property rights

8. Provision for equal investment opportunities (with the exception of ownership of Mexican oil deposits)

9. Provision for equal opportunities for service providing firms to operate throughout North America (includes removal of most economic restrictions on trucking operations between countries)

10. Development of harmonized health, safety, and industrial standards on a par with the highest standards in effect in any of the member countries. …