Magazine article Risk Management

North American Free Trade Agreement

Magazine article Risk Management

North American Free Trade Agreement

Article excerpt

ONCE SIMPLY A MATTER OF MERCHANTS BARTERING WITH ONE another, trade has become a global affair. Trading in a world economy involves more than a Kansas City company selling bottle caps to a soda manufacturer in Brussels; transactions in the world today include overcoming a complex array of hurdles from language barriers to tariffs to some heavily controlled regulatory systems. While this monumental international effort continues groups of countries all over the world are working to establish "free trade" regions or trading blocs. In these free trade zones, members agree to eliminate border and customs controls and to unify tax and regulatory practices. Ultimately, the outcome may be a world in which there are three or four trading regions corresponding roughly to the areas of Europe, Asia, Africa and the Americas.

CURRENTLY, these trading blocs are in varying stages of development, with the European zone the only concrete reality so far. Following closely behind Europe is North America, under the North American Free Trade Agreement (NAFTA). Signed bilaterally by Canada and the United States in 1988 and proposed to include Mexico only last year, this pact has far to go before the continent is a truly free trade zone.

Although NAFTA negotiations are only in the preliminary stages, representatives from all three countries are sitting down to negotiate the terms of the agreement. It's impossible to visualize what form such an agreement will take. Will there ever be a North American currency? What are the implications for the insurance industry? While Mexico struggles to stabilize its economy - and to catch up with its two northern neighbors - the answers to these questions are still pending. Competition from other parts of the world will certainly demand that North American countries combine resources and open up economic opportunities to one another.

The North American Agreement

WHEN NAFTA IS SIGNED, sealed and delivered, and North America becomes a formal free trading bloc, it will surpass the European Community in both population and market size. The NAFTA bloc, extending from the Yukon to the Yucatan Peninsula, boasts 362 million consumers and a gross national product of $6 trillion.

The movement toward eliminating trade barriers on this continent has already been occurring for a number of years, particularly between Canada and the United States. These two countries, which exchange about $200 billion in goods and services each year - the largest bilateral trading relationship in the world - signed a bilateral agreement that went into effect in 1989.

With fairly free access to each other's markets, there are few current trade barriers of any significance between the two countries. One issue that recently brought negotiators back to the bargaining table concerned the supply of natural gas which Canada makes available to the United States. However, insurance issues have generally been ironed out between the two countries.

"There are no insurance issues with Canada as a major concern," says Gordon Cloney, president of the International Insurance Council. "The situation was addressed several years ago during the Canada-United States agreement. Now the two markets have mutual levels of access across the border either way." The issue of severe limitations that Canada placed on U.S. investment in Canadian life insurance companies was resolved when the limitations were eliminated.

Although negotiations began in 1990 with Mexico as well, that country is a different ball of wax. Until very recently, Mexico was a tightly regulated market. "Virtually everything was controlled by regulatory authority," Mr. Cloney says. The kinds of contracts insurers could write, the prices they could charge and the way foreign establishments could own Mexican companies were among the myriad strands of red tape that had to be cut through before foreigners could do business in Mexico. …

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