The North American Free Trade Agreement and the Banking Industry

By Katter, Andrea | Journal of Commercial Lending, December 1992 | Go to article overview

The North American Free Trade Agreement and the Banking Industry


Katter, Andrea, Journal of Commercial Lending


The U.S., Canada, and Mexico began negotiating the North American Free Trade Agreement (NAFTA) in mid-1991 as an extension of the Free Trade Agreement (FTA) concluded between the U.S. and Canada in 1987. The FTA's objectives are to eliminate barriers to trade, promote conditions of fair competition, increase investment opportunities, and establish effective procedures for the implementation of the agreement and the resolution of disputes.

NAFTA improves on the FTA by strengthening the rules of origin guidelines, which define what goods qualify as North American and are, therefore, subject to the agreement. NAFTA also strengthens the dispute settlement mechanism and expands the scope to include intellectual property such as copyrights, patents, and trademarks.

NAFTA's objectives include the advancement of trilateral, regional, and multilateral cooperation. Since its enactment, Chile and Colombia have expressed an interest in joining the agreement, and many other Central and Latin American countries are hoping that it will be extended to create a hemispheric trading bloc.

NAFTA gradually eliminates all tariffs on goods defined as North American. It also eliminates most import and export restrictions and other nontariff barriers and uses the tariff phase-out schedule set in the FTA.

For almost all Mexican products, tariffs will be reduced immediately when the agreement takes effect (January 1,1994, if approved by all parties) and eliminated on most materials during a 5- to 10-year transition period. For a few sensitive agricultural products, the transition period will be 15 years.

What NAFTA Covers

NAFTA covers automobiles, textiles and apparel, energy, agriculture, telecommunications, financial services, and land transportation industries, as well as regulations governing investments, dispute settlement, government procurement, and intellectual property. The agreement also includes an accession clause that will allow other countries to join, with the approval of the NAFTA partners.

Benefits, Problems, and the Approval Process

NAFTA has met with widespread approval in Mexico but remains controversial in the U.S. and Canada, as well as the rest of the world. Mexicans generally praise the long-term potential that the deal offers, including greater access to foreign investment and capital and freer access to large consumer markets. These improvements should translate into more economic prosperity and improved living standards. The short-term price will be increased competition with U.S. and Canadian companies, which will, no doubt, create some dislocation.

In the U.S. and Canada, the benefits, although well defined, are clouded by issues raised by government opponents. Business lobbies tend to support the agreement, citing increased investment and export opportunities that will create jobs.

Organized labor generally opposes NAFTA, fearing that jobs will migrate to Mexico because of the country's lower wage structure. Opponents also argue that companies will move to take advantage of Mexico's less stringent enforcement of environmental standards, which will result in increased pollution problems.

Many European and Japanese trade and business officials oppose NAFTA because they fear it will solidify the division of the global economy into regional trading blocs. These officials also fear that NAFTA will retard the progress of multilateral trade talks under the auspices of the General Agreement on Tariffs and Trade.

Underlying their protests is the fear that goods produced outside NAFTA countries will be subject to discrimination in the North American market once the agreement is implemented.

Approval Process in Mexico and Canada

Given the controversy surrounding the issue of free trade and the strength of the lobbies working against NAFTA, the approval process for the agreement may not be an easy done.

In Mexico, approval requires a majority vote in the Senate. …

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