Introduction
The business practise all over the world has been such that countries come together to form strong integrated bodies. International integration often occurs either at the regional level or globally and mainly focuses on enabling the member states to benefit from numerous advantages that comes with association. International companies and businesses stand a better chance of benefitting from such integrations because their scope of operations is equally expanded. As a result, they operate in an even larger market compared to when they concentrate only in their national markets or have to face the international market without any integration framework.
Additionally, international integration widens the recruitment field for the companies operating in the market. Some countries have an abundance of trained personnel, which makes it easier for the international company to find its labour market even if its home country has a limited supply of the labour resource. The North American Free Trade Association (NAFTA) is an example of a regional body that comprises of the US, Canada, and Mexico. This paper seeks to discuss in detail the benefits that international business stand to gain as a result of regional integration. In particular, the paper concentrates its discussion on the case of the United States of America (USA).
Substantial Increase in Trade and Investment Volume
Overly, regional integration in North America has seen trade among the member states increase significantly. By 2006, the financial volume of trade had risen by 198 percent to $883 billion from $297 billion in 1993. This implies that the international business has benefited immensely from the integration ever since the integration was formed. During the same period, merchandise originating from the USA to both Canada and Mexico increased at a rapid rate of 157 percent compared to exports destined for other countries in the rest of the world, which only grew by 108 percent.
In terms of agriculture, the NAFTA has been critical in increasing the overall US agricultural exports of the years. Today, half of all animal and plant products produced in the USA are destined for Mexico and Canada. While the US has succeeded in making Mexico its number one market for agricultural products, the latter has also had much of its farm produce destined for the USA increase by an overwhelming percentage figure since 1993.
The daily business value in 2006 pitting the NAFTA member countries stood at an average of about $2.4 billion. This amount represents an active participation of all the three countries, although the USA still enjoyed a superior value. The regional integration has since transformed Canada and Mexico into the US’s leading export markets respectively. In 2006 alone, the US export to these two countries accounted for 35 percent of the country’s total exports. This has particularly been heightened by the trade-enabling environment created as a result of the integration. Most taxes have been eliminated or otherwise reduced to very small values, which makes it easier for goods manufactured in the USA to compete effectively. The integration does not only provide a larger market for the US products but also the incentives for the products to be bought to be acquired at affordable rates.
Economic Growth and Expansion
Over the period between 1993, when NAFTA was formed and became fully operational, and 2006, the American economy has registered substantial growth and development. The growth in the economy has particularly resulted from improvements registered in the various sectors of the national economy.
In terms of job availability and employment, the NAFTA was responsible for 25 million additional jobs in 13 years between 1993 and 2006. By December 2006, 137.2 million Americans had secured employment positions compared 112.2 million by the close of 1993. This represented a 22 percent growth in employment, which is specifically attributed to the regional integration. Between 1981 and 1993, at a time when the USA was not yet a member of any regional integration body, the country’s average unemployment rate stood at 7.1 percent. In contrast, however, the same rate was reduced significantly by 2.0 percentage points to stand at an improved cut of 5.1 percent between 1994 and 2006.
The rise in jobs and employment rates also improved the overall compensation in the country. Workers in the manufacturing sector particularly received great salary and wage increases as a result, because NAFTA mainly offered a big market for the manufactured goods from the country. According to statistics, the average real compensation rose by 1.6 percent in annual rates between 1993 and 2006. For the thirteen year period ending 1993, which was before the formation of the NAFTA, only a paltry 0.9 percent was registered as the average growth rate in compensation.
In the manufacturing sector, output in the US rose substantially from 1993 to 2006, at a time when the country became a member of NAFTA. The growth rate recorded attained a 63 percent raise, compared to the paltry 37 percent increase that was achieved from the 1980 to 1993. The investment industry has equally not been left out as part of the economy that has benefitted immensely from NAFTA. The significant improvement in the living standards of Americans has mainly resulted from growth of investment. By 2006, the total investment excluding business, housing, and non-residential fixed, had risen by a promising 107 percent. This was for the 13 year period ending in 2006, unlike the 45 percent recorded annually for a similar period ending 1993.
The Free Trade Area of the Americas (FTAA)
Another significant regional integration has seen the US join forces with other countries in both South and North America. Horticulture products originating from the US to the Western Hemisphere countries have particularly been in favour of the US. In 2001, horticultural exports to this region accounted for close to 26 percent of the entire exports of agricultural products that the US sold. This amounted to $5.1 billion, representing a 4 percent increase in the total exports compared to the previous year 2000.
Venezuela imported US horticultural products worth $70 million during the 2001 period under the FTAA auspices. Another significant member state that offered a ready market for the US horticultural products in 2001 included the Dominican Republic, Bahamas, as well as Brazil, all of which imported horticultural goods worth $50 million, $54 million, and $65 million respectively. Overall, these statistics show how beneficial the regional integration is to American trade. Because of the elimination of many barriers that the FTAA member states become subject to by virtue of their membership, this integration has helped in creating express market for the US horticulture products. Sales of the same commodity to other non FTAA member states would not produce the same amount of revenue because of the trade barriers that international trade often is subjected to.
The Australia-United States Free Trade Agreement (AUSFTA)
The AUSFTA integration further provides the US with an even extended market that spreads all the way to Australia. The purpose of this integration is mainly to enhance the performance of trade between the two countries, targeting all the significant sectors of the country’s economy. As per this agreement, close to 70 percent of previously existing agricultural tariffs were eliminated to allow enhanced trade participation. The US benefits from this integration in the sense that it exports its horticultural as well as meat products, mainly lamb and sheep, to the Australian market. Further agreements of the business integration seek to eliminate tariffs completely with the progress of the trade cooperation.
The agreement offers many trade advantages to the US given the manner in which it has been structured. With its strong industrialisation, the US is assured of an economically stable market for the direct export of her commodities. Because of the elimination of general trade barriers, such as tariffs and other import-export taxes, the flow of goods to the market takes place efficiently. The commodities are protected from competition from other products imported to Australia from other countries, thus creating a sure market.
Industries and Chains of Supply
NAFTA is particularly responsible in instigating US manufacturers, and particularly motor vehicle manufacturers, in becoming more competitive in the global market. NAFTA prompted these advancements as a result of developing and expanding the related supply chains. In the case of US-Mexico trade, for instance, increased flow of products and services between the partners resulted from specialisation particularly because manufacturing along with assembly plants have undergone transformation. This has seen the sector put more focus and emphasis on achieving economies of scale advantages. Supply chains, as a consequence, have gradually been crossing international boundaries while the manufacturing activity is retained in locations where it can be supported in the most efficient way.
Trade within NAFTA mainly occurs on the production sharing basis, where the manufacturers based on each of the three member states work jointly to create goods. Trade expansion has occasioned the vertical supply relationship formation, particularly along the border with Mexico. Intermediate inputs manufactured within the US and destined for Mexico, together with the opposite finished products’ flow have enhanced the importance of this cross-border region. Manufacturing industries in the USA that mainly specialise on electronics, automotive, and machinery are relying wholesomely on assistance accorded to them by the Mexican manufacturers.
In a report highlighting the actual overreliance of these industries and manufacturing companies, up to 40 percent of imports in America obtained from Mexico originally came from the USA. On the other hand, 25 percent of commodities that the US acquires from Canada also originated from the US itself. This contrasts with the country’s imports from other parts of the world, such as China for instance, where only 4 percent of the commodities’ content can be traced back to America.
Overly, the USA imports up to 75 percent of its domestic content. This is beneficial to the US in the sense that while it is a major producer, it allows the production and refining of such produce to take place in a foreign country but within the same region. Apart from enhancing specialisation, which results in improved quality of the finished products, this mode of operation also helps the country to maintain low production costs. Compensation rates and other factors of production are comparatively expensive in the US, a situation that may lead to the US products lacking competitive edge if they were to be fully manufactured in the country.
As a further extension of NAFTA’s benefits, US auto parts manufacturers are allowed to incorporate components manufactured by another of the NAFTA partner, say Canada, for the assembly activity before being shipped to the third member state, in this case Mexico. It is from this final destination that the assembly of the vehicles will be undertaken before selling takes place in all the three countries. This cycle of parts and accessories during manufacturing is enabled by the NAFTA provisions that abolished the mandatory need for performance requirements before the US manufacturers and dealers can operate in Canada for instance. Because the USA is by far the largest of economies among the three NAFTA member states, it is critical to point out that the country would have found it difficult to have easy access to any of these NAFTA markets had the regional body not been formed.
Fear of competition as a result of high quality products competing in a market a local market that produces relatively inferior products would have most certainly cajoled Mexico and Canada to bar American commodities. In particular, it was after the formation of NAFTA that Mexico was required to remove its policies on trade and investment that were highly restrictive. Today, therefore, USA products and commodities can freely be traded within Mexico without the respective manufacturers fearing that they will face unwarranted tariff and other similar trade barriers.
NAFTA’s establishment and subsequent enforcement of the requisite policies saw an increase in the volume of auto parts and vehicles manufactured in the US. The total export of the US vehicles destined for Mexico increased by a significant 232 percentage points, with the imports also increasing by 480 percentage points.
Enhanced Service Industry Performance
The US service industry, just like manufacturing and agriculture, has recorded substantial benefits owing to the country’s regional integration. The service industry today generates almost three quarters of the US economic output. The private sector employment in the country is contributed to by the service industry to the tune of 80%. Services that have particularly benefited from the US’ regional integration include banking, information technology, express delivery, insurance, audiovisual, as well as telecommunications.
The value of services produced in the US and destined for Mexico and Canada markets is currently tripling the amount registered in 1993. In 2011, the US the service export originating from US was valued at $82 billion, up from a feeble figure of $27 billion only in 1993. The US has numerous of its banks, insurance companies, telecommunications, and even express delivery services that today dot both the Mexican and Canadian markets. These translate to huge profit values being achieved by the American firms, with the resultant revenues helping to grow and develop even further the country’s economy.
Reduced Prices of Oil and Grocery
Oil
The USA remains as one of the biggest oil consuming nations in the world owing to its large and highly industrialised economy. Any interference with the supply of oil to America is likely to bring the country’s operations to a halt. Mexico’s crude oil deposits play a critical role in supporting and cushioning the American economy from experiencing harsh effects as a result of unsteady supply. As a member of the NAFTA, Mexico sells its oil products to the US without the inclusion of tariffs. This helps in spurring the US economy even further because it implies that the price of oil in the country is cheaper than would be the case if the oil was acquired from a non-regional member state.
According to statistics, the US spent only $116.2 billion on importing oil from both member states of the NAFTA, compared to the figure spent in 2007 which stood at $157.8 billion. This implies that the country is saving more revenue in its acquisition of oil from its regional integration body than is the case when the commodity is imported from other non regional body member states. These saved funds are in turn being channelled to other important economic activities, such as investment on infrastructure, which further helps in expanding the economy.
It is critical to note that the Middle East region remains by far the leading supplier of crude oil throughout the whole world. However, with America’s position on global politics constantly being in the cross hairs with countries in the region, it has been difficult for the sustained and assured supply of crude oil. Countries such as Iran have constantly hatched out plans to create artificial shortages and denying the US access to its rich oil supply. Equally, other countries such as Venezuela, which also boasts of a huge reservoir of crude oil, have been creating barriers and instituting tariffs to make it difficult for the US to acquire its oil. Such machinations, however, have been curtailed by the fact that Canada and Mexico both form a regional integration body with the USA that bridges the gap in the supply of such important commodities.
Food
Other than oil production and requirement needs, the US also requires a steady supply of food products to feed her large population. The US population currently ranks as the third largest in the world, after China and India respectively. Mexico and Canada provide perfect food in the USA, to help the country feed her population. At 2010, food imports from the regional integration body were valued at $29.8 billion, which was a drop from the previous 2009 performance, where total food imports were $28.9 billion. Among the most important food types that the US imports from the regional integration body include chocolate, fresh fruits, as well as beef.
The NAFTA’s policy and resolution on tariff elimination particularly helps the US to acquire these food stuffs at cheaper prices. These food products would not be imported at the same cheaper prices had they been originating from producer countries outside the regional integration body. As a result, America saves substantial amounts of revenue from the importation of foodstuffs. The saved revenue is invested in other important economic activities that help in enhancing growth. Additionally, cheaper food imports help the US to maintain inflation rates at normal levels required to sustain growth and expansion.
Food is a basic commodity that has to be affordable in any given country to help maintain inflation rates at promising levels. Thus, the regional integration is helping the US to maintain rates that support economic growth throughout. Apart from NAFTA, the US also has other steady food producing partners in various integration bodies, including Brazil, Australia, and Venezuela, among other international trade partners.
Enhanced Foreign Direct Investment
While American firms and other businesses expand into Canada and Mexico to take advantage of the regional integration, foreign firms from these two countries also target the US market. Because of the strong economy, many foreign firms are banking on reaping from the powerful buying market. As a result, the regional integration is spurring the foreign direct investment in America. By 2007, firms from both Canada and Mexico had made investments worth $219 billion in total. This figure had increased to $237.2 billion by 2010, highlighting the significant impact of the regional integration.
The foreign direct investment within the US enhances growth and development in various ways. Firstly, it helps by creating employment opportunities in the banks, insurance companies, and other similar companies that establish their operations in the country. The reduction in unemployment rate equally helps in economic growth as it increases the circulation of money among the citizens. The businesses also contribute towards the revenue collection by the government, as part of their daily operations. These revenues are in turn used in significant investment areas, including building infrastructure and expanding operations in other critical areas.
Other than direct foreign investment from Mexican and Canadian firms, other firms originating from outside the NAFTA equally get attracted to establish their operations in America. These firms target the US as their strategic market launching position as they plan to capture the entire integrated market of North America. As they pursue their business course in America, these companies remit taxes as well as offer additional positions of employment to Americans, thus contributing towards economic growth and general expansion.
Filling Labour Deficit Gap
The regional integration in Northern America offers an easy, quick, reliable, and affordable way through which the local firms can effectively fill in vacant positions. This situation can particularly become critical and more pressing when specific skills and specialists are needed to help the firms undertake their operations as intended. The numerous manufacturing and other corporate businesses operating in the US and focusing more on the regional market are poised to suffer negative business implications in instances where they fail to obtain adequate numbers of employees with the skills needed.
It would be almost impossible for such firms to organise and arrange for employee training sessions to build the requisite capacities needed. This would particularly be more difficult during instances when the firms are expected to act swiftly in addressing heightened demand levels. However, the regional integration body that includes Canada and Mexico helps in addressing such concerns. NAFTA agreement gives an opportunity for Mexican and Canadian nationals to travel across to the USA with minimal visa restrictions. In particular, highly trained personnel from any of these two countries, Mexico and Canada, can travel to the US and secure expert jobs that match their training without any undue disturbances or long bureaucratic processes.
In essence, this arrangement offers the US with additional labour techniques that might not be adequately supplied within the local labour market. These buffer labour skills are critical in sustaining the continuity of economic performance. Because the experts are acquired from within the regional body, the acquiring firms are not faced with the demand of compensating them highly because of their foreign status. The salaries paid to such experts drawn from within NAFTA are instead exempted from the high taxes that any such workers from other countries of the world get subjected to. Thus, the manufacturers and other business organisations enjoy the benefit of maintaining their operations at manageable costs even as they avoid the inconvenience of shutting down operations for lack of adequate labour capacity.
Trade Balance
The USA is by far the major beneficiary of the regional integration in Northern America, by virtue of its effectively healthy balance of trade payments. In the case of the direct trade between Mexico and the USA, more commodities manufactured or originating from the US are imported into Mexico than is the case with export commodities from Mexico destined for the US market. In the same breadth, trade between the US and Canada is skewed in favour of the US.
This implies that USA manufacturers and producers as a whole benefit more from the regional integration created out of NAFTA. Because of tariffs and other taxes levied on commodities imported out of the NAFTA region, the products originating from the USA do not face any market competition challenges. Even products that the US imports from Mexico originally were attained from the US itself in the form of raw materials or in semi-refined state, before eventually being re-imported back to the country.
In the FTAA region, the US equally exports more commodities than it actually imports from the countries. Even in instances where the US acquires products from the FTAA region, most of the products are often in semi-refined states. Thus, because of the high industrialisation that the US enjoys, relative to its weaker trade partners, the company imports such commodities and undertakes additional value added to them. Once they are refined, the country can still re-export the same and achieve greater revenues from the outcome.
Global Financial Crisis
The recent global financial crisis that ravaged the entire world economy significantly originated from the USA. The crisis has continued to wreck havoc in many countries years after it first struck in 2008. Among the countries that continue to experience the aftermath of the crisis include Greece and Portugal, mainly from the EU bloc. However, it is critical to point out that despite having originated from the US economy, the global financial crisis did not cause much havoc in the country as it did to other countries and regions in the world.
The main reason for the US’s strong resilience in the face of the crisis is attributable to the numerous regional integrations that the company is a party to. With the limited supply of credit having been the main reason behind the crisis, the US used its readily available international markets in NAFTA, FTAA, and AUSFTA, among other regional trade bodies, to spur the flow of revenues into the country. Thus, within a comparatively short period, the US had managed to acquire significant revenue amounts that it in turn used to cushion its ailing economy against further ramifications. Had the country lacked such trade associations, it would be difficult for it to raise the necessary revenue amounts just within the short time.
Conclusion
The USA has by far achieved greater economic benefits and growth as a result of the country’s membership into the regional North American Free Trade Association (NAFTA). The regional body that also includes Mexico and Canada has offered assured market for commodities originating from the US. Trade activities take place in a free flowing manner amongst the member states, with the USA being the obvious beneficiary by far. With its multiple industries and a strong economy, the US sales more commodities to its trading partners than it actually imports. The regional body has also abolished tariffs and other kinds of taxes, which makes it easy for the US manufactured and semi-manufactured goods to easily flow across the borders. Mexico has a significant presence of crude oil deposits, which the US imports at much cheaper rates than it does when it buys the commodity from other countries in the world.
America’s economy depends on oil to a large extent, and this helps in spurring its growth and expansion. The regional body does not require member states to pay trade tariffs, and thus the importation of oil from Mexico helps the country in saving significant revenues. America’s service industry has also expanded immensely as a result of the regional integration pitting the three countries. Banks and other financial companies such as insurances, telecommunications, and express delivery services, among other service firms, have expanded to cover the entire NAFTA region. These firms bask on the strong economic foundation of the US, making them strong market competitors. They play a critical role in enabling the US to achieve high revenues collected from both Mexico and Canada where they operate.
Bibliography
Burfisher, ME, S Robinson, & K Thierfelder, ‘The impact of NAFTA on the United States’, Journal of Economic Perspectives, vol. 15, no. 1, 2001, pp 125–144.
FAS online, U.S. horticultural trade with countries of the proposed free trade of the Americas, 2013.
Feils, DJ & M Rahman, ‘Regional economic integration and foreign direct investment: The case of NAFTA’, Management International Review, vol. 48, no. 2, 2008, pp. 147-163.
Fox, J 2004, ‘The politics of North American economic integration’, Latin American Research Review, vol. 39, no. 1, pp. 254-272.
Lloyd, PJ & D MacLaren, ‘Gains and losses from regional trading agreements: a survey’, Economic Record, vol. 80, no. 251, 2004, pp. 445-467.
Martin, P & E Midgley, 2003, ‘Immigration: Shaping and reshaping America’, Population Bulletin, vol. 58, no. 2, pp. 3-3.
Office of the United States Trade Representative, NAFTA Facts, 2007.
Rakhmayil, S, & A Yuce, ‘NAFTA effect on company values and performance’, The International Business & Economics Research Journal (Online), vol. 11, no. 4, 2012, pp. 407-407.
Scheinman, MN, ‘NAFTA corporate strategies in a multi-currency area: the case of Ford, Deere, and CN’, Management International, vol. 8, no. 1, 2013, pp. 21-28.
Sunthonkhan, D, The impact of NAFTA on the U.S. labor market, 2010.