Examine two (2) areas of the North America Free Trade Agreement (NAFTA) that have room for improvement. Next, recommend two (2) methods NAFTA can utilize these areas.
North Atlantic Free Trade Agreement is such agreement that creates a trilateral trade bloc, constituted by the United States, Canada, and Mexico. The reason, behind the creation of trade bloc, is a tariff-free trade, which presumes to facilitate governments in realizing their political-economic objectives. In liberal economies, trade is considered an instrument to realize various kinds of economic objectives, which include optimal allocation of resources based on the principle of comparative advantage (Ricardian concept). Other benefits include an increase in consumer surplus, a decrease in prices, innovation, etc.
The above-mentioned factors motivated the United States, Mexico and Canada form a tariff-free trade bloc. The agreement was drafted with great care, and it aimed to benefit all trading countries; however, with the time, it became apparent that some countries benefited more than the other countries.
According to the statistics, the trade deficit of the United States, in goods, with Mexico is around $64.35 in the year 2016. Similarly, US had a trade deficit of $14.6 billion in 2016, which suggests that the United States has been adversely affected by NAFTA.
There are various factors that have contributed to the United States’ trade deficit. One of these factors is a flight of capital to the labor-intensive economy (Mexico). As the cost of production in Mexico is lower and environmental regulations do not affect business operations; therefore, many United States’ companies shifted their industrial operations to Mexico, where these companies produce goods and then sold in the lucrative markets of the United States. It is causing deindustrialization in the United States (Sheppard, 2015).
There is plenty of room for improvement in NAFTA, which can make this agreement more workable and efficient.
1-Labor and Environmental Standards and Regulations
It is apparent that in Mexico, labor and environmental standards are quite low in comparison to the United States and Canada. As institutions, in Mexico, do not enforce labor and environment pertaining regulations and standards robustly; therefore, the cost of production is low. NAFTA focuses on the implementation of agreed labor and environmental standards; however, it does not provide any mechanism to evaluate the implementation and its results, which is why as per independent estimations, Mexico usually falls short in enforcing these standards.
NAFTA must ensure that agreed standards and regulations, related to labor and the environment, are implemented effectively and a country that fails to do so, punitive action should be taken against it (Sheppard, 2015).
2-Origin of Product and Policy regarding it
As trade between Mexico and the United States is free of any tariff; therefore, many countries use Mexico (and even Canada) to penetrate US markets. There are many products, which only assemble in Mexico so that they could be sold in lucrative Canadian and Mexican markets. It does not only make trade unfair and tilted, but also it causes deindustrialization because of a decrease in producer surplus. Also, innovation process, at the industrial level, also slows down, as companies or firms have the option to shift their operations to Mexico, where they can produce at low cost. An introduction of regulation related to the origin of a product can address this dichotomy effectively.
Determine two (2) elements are specific to the nature and operation of currency arbitrage. Evaluate the importance of these two (2) elements of currency arbitrage.
Currency Arbitrage is the fact a process, where an individual or firm simultaneously buys and sells monetary assets (currency) to earn a profit. This simultaneous buying and selling of currencies is an informed decision and pace of this transaction or process is quite rapid. From the study of this financial market phenomenon, it is apparent that this business thrives on the inefficiencies of financial markets. Also, information plays a vital part in currency arbitrage. Therefore, two elements that are specific to the nature and operations of currency arbitrage are 1) Financial Market Inefficiencies and 2) Information (Akram, 2009).
Other than identifying elements, trade plays a significant role in currency arbitrage, as trade directly impacts the value of the currency. For instance, when exports are greater than imports, the currency of a country appreciates, as the demand for that currency to buy goods and services is higher. However, it does not immediately profoundly affect the value of a currency. Also, exchange rates are also affected by projections regarding trade. For instance, British Pound depreciated after Brexit, as it was projected that trade would be affected between European Union and Britain.
1-Financial Market Inefficiencies
It is quite evident that the financial market is inherently unstable, which affects prices of financial commodities. Therefore, different mechanisms are used to ensure that the prices of financial commodities, such as currency, remain as fair as they could. However, because of innate dichotomy, financial markets produce opportunities such as currency arbitrage. As it is the direct fallout of financial market’s inefficiency; therefore, it is enormously affected by financial market inefficiencies. Larger the size of these inefficiencies, greater the opportunities (size of profit from currency arbitrage). Also, deeper these contradictions would be more complex, these contradictions would be and it would be hard to predict the outcome of an operation (Ashton & Christophers, 2015).
2-Information
In currency arbitrage, another important element is information. The flow of information and its health affects profits directly. For instance, if a trader of a currency knows the accurate value of a currency (against another currency), one may earn high profits. Therefore, the informed decision is directly correlated with the size of profit, which implies that as the flow and wealth of information improves (from a trader), the more profit he/she earns. However, the symmetry of information, in the currency market, adversely impacts profit of a trader. It suggests that symmetry of information, at market level, affects (adversely) currency arbitrage; whereas the symmetry of information, at trader level, positively affects currency arbitrage (Elyasiani, Kocagil, & Mansur, 2007).
Determine two (2) important trends related to the U.S. balance of payments. Predict two (2) outcomes related to these trends.
The balance of Payment is a record of financial transactions (international) that are made by citizens or residents of a country, in a particular year. It is also understood as trade-related transactions; imports and exports of a country. The Balance of Payment (BoP) is surplus when the size of exports is greater than the size of imports; a country exports more goods and services than the goods and services it imports.
The Balance of Payments deficit, on the other hand, occurs, when the size of imports grows greater than exports, which affect both economy and exchange rate.
Study, of the United States’ Balance of payment, aids us in identifying various trends about Balance of Payment. However, some of these trends are more significant than others, as they affect economy stronger, in both short and long run than the rest.
1-Weak Imports
It is evident from the discussion that imports and exports together constitute and affect the balance of payments. Therefore, changes in imports directly affect the Balance of Payments. We have also learned that imports directly correlate with consumption size. It implies that when the size of consumption increases, so does the imports. Study of United States’ economy reveals that the size of consumption, in the United States’ economy, has reduced because of the consequences of the 2007 economic crisis. Also, such periods frequently occur in which size of consumption is smaller than usual. These patches reduce trade deficit during these periods, which appreciates US’ currency. Furthermore, the appetite for foreign products and services have also affected, which has slightly improved the balance of payment (reduced BoP deficit) (Elyasiani, Kocagil, & Mansur, 2007).
2-Emphasizing on Strength (top exports)
The study, about exports and imports, also reveal that its exports are largely based on high-tech products (aircraft), agricultural products and petroleum products (gasoline). According to the evidence, high-tech products remain the premium export commodity, and the United States are emphasizing on it to manage its Balance of Payments deficit. The trend of high-tech manufacturing industry suggests that high-tech exports would increase and the US will maintain a competitive advantage against its rival economies. Similarly, the trend regarding oil-exports suggests that the US will continue to dig and export more oil to revive its economy and to manage it Balance of Payments deficit (Akram, 2009).
Explain two (2) reasons why a multinational enterprise is a source of conflict for source and host countries. Suggest two (2) methods a multinational enterprise would utilize to deal with the rising conflict for sources and host countries.
Multinational firms or enterprises are such companies or firms, which operate in different countries or economies. These enterprises or firms play an important part in the world economy, and they, directly and indirectly, affect source and host countries. As these companies are a manifestation of Foreign Direct Investment (inflows and outflows); therefore, they have great significance and relevance.
Multinational Enterprises as Source of Conflict for Host and Source Countries
Source of Conflict for Source
Flight of Capital: Flight of capital is a serious economic concern, as it slows down economic activity in a country, which increases unemployment level in a country. Flight of capital has badly affected the United States; as it caused deindustrialization. Deindustrialization is such a serious issue in the United States that it almost hijacked the United States’ Presidential campaign.
Transfer of Technology: postindustrial economies rely on technology for competitive advantage; however, when firms shift their operations to other countries, these companies also transfer technology to these countries, which affects the competitive advantage of a host country.
Source of Conflict for Host
Small Spill-over effect: Studies reveal that FDI does not have a huge spill-over (horizontally and vertically) effect, which adversely affects industries of the host country. As a multinational firm has greater capacity and expertise; therefore, it puts tremendous pressure on local enterprises, which cannot compete with multinational enterprises in the absence of spill-over effect.
How to Manage Conflict
Facilitate Spill-over Effect: Host country will benefit when multinational enterprises, encourage and facilitate spill-over effect. There are numerous methods of facilitating spill-over; some are direct, and others are indirect. However, in any case, multinational enterprise must facilitate innovation and spill-over (both vertical and horizontal).
Share Learning with Firms/Companies of Source Country: As a multinational firm operates in various economies, it has a better understanding of an industry. This accumulated information, which could be in any form, can benefit companies/industries of source country in some ways. Therefore, the learning or experience must be shared with source country.
Multinational Companies have great relevance, as they have the capacity and ability to modernize an economy. Therefore, many countries amended their economic systems, after the collapse of the Soviet Union, to attract and facilitate Foreign Direct Investment. It was presumed that the Foreign Direct Investment would intensify economic activity and modernize the economy. However, there is little evidence that Foreign Direct Investment positively affects an economy. There are several other reasons that make multinational enterprises, which are a manifestation of Foreign Direct Investment, the source of conflict for both host and source countries (Ashton & Christophers, 2015).
References
Akram, F. Q. (2009). Commodity prices, interest rates and the dollar. Energy Economics, 31(6), 838-851.
Ashton, P., & Christophers, B. (2015). On arbitration, arbitrage and arbitrariness in financial markets and their governance: unpacking LIBOR and the LIBOR scandal. Economy and Society, 44(2), 188-217.
Elyasiani, E., Kocagil, A. E., & Mansur, I. (2007). Information transmission and spillover in currency markets: A generalized variance decomposition analysis. The Quarterly Review of Economics and Finance, 47(2), 312-330.
Sheppard, B. (2015). What NAFTA tells us about the TPP threat. Green Left Weekly, 1056(1), 18.
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