Effects NAFTA and CAFTA Have 1 Effects NAFTA and CAFTA Have on America Presented to: Dr. Mark Kroll November 14, 2005 Prepared By: Christopher West, Christopher Wasson, and Sumit Bhatia Effects NAFTA and CAFTA Have 2 Table of Contents EXECUTIVE SUMMARY: .....................................................................................3 INTRODUCTION: .................................................................................................4 UNITED STATES AS AN ORGANIZATION: .......................................................4 DEFINITION OF AN ORGANIZATION:................................................................4 ORGANIZATIONS AND CORE COMPETENCIES: .............................................5 NAFTA DEFINED:................................................................................................7 ADVANTAGES OF NAFTA: ................................................................................9 FIGURE 1 .............................................................................................................9 DISADVANTAGES OF NAFTA:.........................................................................11 AN UNBIASED ANALYSIS:...............................................................................13 CAFTA DEFINED:..............................................................................................15 ADVANTAGES OF CAFTA: ..............................................................................16 DISADVANTAGES OF CAFTA:.........................................................................17 GROUP POSITION: ...........................................................................................20 CONCLUSION:...................................................................................................23 REFERENCES: ..................................................................................................24 Effects NAFTA and CAFTA Have 3 Executive Summary: The North American Free Trade Agreement and the Central America Free Trade Agreement are the first steps toward a free-trading global economy. The United States government, as well as other governments involved in the agreements, enacted these agreements because they believed the results would yield an economy that has no trade limitation among them. There are people who promote and people who discredit these trade agreements. Each group can give valid reasons for their bias. However, neither side can nail down evidence that provides conclusive information. The information gathered suggests that the agreements are a step in the correct direction. Effects NAFTA and CAFTA Have 4 Introduction: The North American Free Trade Agreement (NAFTA) and the Central America Free Trade Agreement (CAFTA) have been the major topic of heated debates over the past few years. Some wonder why the United States wants to engage in such agreements, while others do not know which side of the debate to join. This paper will bring these issues to light. United States as an Organization: In order to help explain why the NAFTA and CAFTA agreements are important to the United States, the U.S. is compared to a modern business organization. First, the definition of an organization is defined. Second, the roles of individuals and groups within an organization are defined and compared to similar positions and roles within the US. Next, the concept of a core competency is defined and related to the United States. Definition of an Organization: There are several definitions for an organization. The resource based view of an organization states an organization is a “resource based system deliberately constructed to facilitate the activities of people seeking common interests” (Pfeffer & Salanick, 1978). The agency based view of an organization claims, “An organization is a legal fiction represented by a nexus of contractual relationships between the management and the stakeholders of an organization” (Jensen & Meckling, 1978). The political view of an organization states that Effects NAFTA and CAFTA Have 5 “Organizations are coalitions altering their purposes and domains to accommodate new interests, sloughing off parts of themselves to avoid some interests, and where necessary, becoming involved in activities far a field from their stated central purposes” (Pfeffer & Salanick, 1978: 24). For simplistic purposes, the political view of an organization will be used throughout this document. An organization is made up of different groups as well as individuals. A publicly traded organization is owned by the shareholders. The shareholders vote on a board of directors. This board of directors selects the management of the organization with the most influential person being the Chief Executive Officer (CEO). There are also several other levels of management within the organization that help facilitate the operations of the organization. The United States of America is a public organization that is made of US citizens (shareholders), the Electoral College (board of directors), the President (CEO), and the different levels of legislation (SBUs). Together these groups and individuals work for the best interests of the shareholders (the US citizens). The government acts as management over the rest of the country. It is the role of management to make decisions that are for the benefit of the company and the shareholders. Organizations and Core Competencies: Hamel and Prahalad (1990: 82) describe a core competency as “the collective learning of an organization, especially how to coordinate diverse Effects NAFTA and CAFTA Have 6 production skills and integrate multiple streams of technologies”. These core competencies give organizations a sustainable competitive advantage, which provides a super-normal return of profits. The internal environmental resources are what provide organizations with their core competencies. For these resources to be considered a core competency, they have to meet certain requirements. They must be valuable, rare, have no substitutes, and be imperfectly imitable. If a resource does not meet these requirements, it will not be considered a core competency (Hamel & Prahalad, 1990). Some organizations have competitive advantages in one area, but need further assistance in getting their product delivered. In order to achieve the processes the organizations are not competitive in, the organizations will use outsourcing. “Increasingly intense competition form world-wide manufactures has led many U.S. firms to establish international production sharing operations to improve their cost competitiveness” (Fawcett, 1995: 25). For instance, Nike Corporation has a great core competency when it comes to designing and marketing athletic shoes and apparel. However, it does not excel in manufacturing those products. Therefore, Nike will outsource the manufacturing process to other organizations. In the same way, the United States has the advantages in certain areas, but needs to outsource other processes. Just as the definition of the organization states, an organization will slough off the parts that they do not wish to be involved in. One of the areas the United Effects NAFTA and CAFTA Have 7 States does not excel in is the manufacturing of items for inexpensive costs. The United States has often outsourced manufacturing jobs that were historically done within the United States. For the outsourcing process to go smoothly, the transportation of goods from one company to the next needs to be effective and efficient. Trade barriers where complicating the transportation process for companies that choose to outsource certain jobs to the surrounding countries. The government needed a solution that would “eliminate barriers to trade in, and facilitate the cross border movement of goods and services between the territories of the barriers” (Duina, 2004).This has lead top management (Presidents of the U.S.) to enter into agreements such as the North American Free Trade Agreement and the Central America Free Trade Agreement. NAFTA Defined: The North American Free Trade Agreement was passed by the U.S. House of Representatives in November of 1993 and was implemented on January 1, 1994 (Shahabuddin, 2003). NAFTA was designed to eliminate nearly all tariffs between the North American countries of the United States, Canada, and Mexico (Duina, 2004). In theory, nearly all tariffs between the U.S. and Mexico are to be eliminated by 2008. By 1998, nearly all of the tariffs between the U.S. and Canada were to be eliminated. NAFTA was also designed to remove many of the non-tariff barriers, such as import licenses, that have helped exclude U.S. goods from the other two markets, especially Mexico (Duina, 2004). Effects NAFTA and CAFTA Have 8 NAFTA was formed to ensure that investment will not be coerced by restrictive government policies, that U.S. investors receive treatment equal to domestic investors in Mexico and Canada (Duina, 2004). In addition, NAFTA’s easing of cross-border services rules ensures that if U.S. companies do not wish to invest in another country to provide their services, they do not have to (Duina, 2004). There are core objectives of the NAFTA agreement. These objectives are listed below. (1) Eliminate barriers to trade in, and facilitate the cross border movement of goods and services between the territories of the barriers. (2) Promote conditions of fair competition in the free trade area. (3) Increase substantially investment opportunities in their territory. (4) Provide adequate and effective protection and enforcement of intellectual property rights in each party’s territory. (5) Create effective procedures for the implementation and application of this agreement, and for its joint administration and the resolution of disputes. (6) Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this agreement (Duina, 2004). Effects NAFTA and CAFTA Have 9 Advantages of NAFTA: There have been numerous advantages brought forward for NAFTA. In the world of agriculture alone, NAFTA has removed all non-tariff hurdles between the United States and Mexico and, in the process, has allowed U.S. agricultural products to regain market share within Mexico (United States Department, 2001). NAFTA has allowed the agricultural exports of United States farmers to Mexico to nearly double (Office of the United States, 2001). Figure one helps to explain the proportion of the agricultural growth. The first two years after NAFTA was enacted saw little change in the exporting of agricultural products. However, as time passed, the effects of NAFTA are more visible. After the year 2000, the number of dollars from exports beings to rise more rapidly. Figure 1 .S. gricultural E U A A A xports toN FT Partners ave H Increasedby $9.3 BillionSince 1993 an a exico C ad M $Billions 12 10 8 6 4 2 0 1993 1994 1997 2000 2003 2004 SelectedYears Effects NAFTA and CAFTA Have 10 Also noted from the implementation of NAFTA, is that overall trade between the United States and Mexico has increased by 149 percent and that the percentage of increase of trade between the United States and Canada has been 112 percent (United States Department, 2005). These statistics are just beginning to scratch the surface of the economical change that has occurred since the beginning of NAFTA. Other statistics have also stated that there is an improvement of trade between the United States, Canada, and Mexico. Such statistics are that United States exports to the other NAFTA countries have grown $116.3 billion over the lifetime of the free trade agreement (Office of the United States, 2004). NAFTA has not only benefited the United States in trade, but has also benefited Canada and Mexico. These countries have improved trade amongst themselves over $333.8 billion during the existence of the union (Office of the United States, 2004). Information regarding job growth would be important to note, since one of the largest disadvantages to NAFTA was the fear of loosing jobs. During the 1990s, the manufacturing output for the United States increased by 44 % (Office of the United States, 2003). Employment has also increased between 1993 and 2000 to include 20 million new jobs over this time period (Office of the United States, 2003). One more important idea to note is that “more people lose their jobs each year from labor strikes than from import competition” (Fitzgerald, Effects NAFTA and CAFTA Have 11 2001). This information is in quite stark contrast to the beliefs of groups that have disagreed with NAFTA from the beginning. According to the advocates of NAFTA, an open market among countries that will facilitate the exchange of goods and services across national boundaries is the desired end result of NAFTA (Shahabuddin, 2003). In the free trade economy, countries should produce and sell what they can cheaply and competitively manufacture. In consequence, the standard of living of the involved countries will be improved and sustained. Pro-NAFTA groups claim that raising the standard of living in the countries involved will result in a higher demand for the goods and services produced in the United States (Freedman, 2004). Proponents also claim that 25,000 jobs are created for every additional billion dollars the U.S. exports. Over 150,000 new jobs associated with NAFTA were reported during the last five years. According to supporters, these jobs would not have been made possible if NAFTA was not in place (Shahabuddin, 2003). Disadvantages of NAFTA: On the contrary, there are many people that believe that NAFTA has done more harm that good for the United States. The biggest argument against NAFTA is that this agreement will force jobs out of the United States to Mexico where the cost of labor is much lower. One individual has stated that there has been over 1 million jobs lost in the United States since the advent of NAFTA and 20,000 of these jobs were lost in the state of Tennessee alone (CAFTA will cost, Effects NAFTA and CAFTA Have 12 2005, July 26). Non-proponents believe the higher standard of living theory is flawed. They believe that companies and government in Mexico do not intend to help raise the standard of living. Instead, the companies will continue to pay low wages, never attempting to abide by environmental laws in order to facilitate their search for quick profits (Freedman, 2004). This group claims that many production jobs will be lost due to relocation to Mexico. In addition, the jobs that were not totally lost are predicted to pay significantly less in order to remain competitive (Freedman, 2004). It is theorized that the American owned manufacturing and processing corporations will not be able to remain competitive, in terms of pricing, unless they reduce the costs of production associated with labor. There are some disadvantages to moving to Mexico that many companies have not thought about. These disadvantages have not been improved by the passage of NAFTA as what was previously thought. Moving or creating operations in Mexico requires more time and effort for American companies, a process that has changed little since the beginning of NAFTA (Morrison, 2005 Aug/Sep). Another issue is that the Mexican infrastructure for transportation is still in the beginning phases and this will cause a logistical nightmare for any American company that has not properly implemented a flexible plan to have operations in Mexico (Morrison, 2005 Aug/Sep). NAFTA has also not been a cure-all for the economies of the three countries. The United States has increased trade between both Canada and Mexico, but has become more Effects NAFTA and CAFTA Have 13 dependent on the Chinese and other Asian countries. This is due to the ability of these countries to produce products that are competitive with the Mexican market (Morrison, 2005 Aug/Sep). One could easily state that NAFTA has not been the answer to all of the economical dreams for the United States when this agreement first became law. An Unbiased Analysis: To truly develop an idea of whether or not NAFTA is good for the United States, a non-biased analysis must be conducted. This will allow a more accurate reflection of the results created by NAFTA. To measure NAFTA’s results, parameters for results must be taken into consideration. NAFTA was designed to create a better standard of living. Therefore, part of NAFTA’s success should be based on whether living conditions have improved or worsened. However, according to experts, not enough time has passed to give credible evaluation of changes in the standard of living (Shahabuddin, 2003). “Liberalization of trade among member countries is another measure of the success of NAFTA” (Shahabuddin, 2003: 307). When a country exports its goods and services, job opportunities are created. The more a country exports, more jobs and opportunities will be available. On the other hand, when a country imports goods and services, jobs will be sacrificed. Analyzing trade patterns will be necessary to determine which countries are experiencing desired results. This will involve studying trade patterns before and after the NAFTA enacted. Effects NAFTA and CAFTA Have 14 Before NAFTA was enacted, Mexico was the third largest trading partner of the United States. The balance of trade between the U.S. and Mexico jumped back and forth over the years. During one three year stretch, Mexico would realize an export surplus. Then the U.S. would realize an export surplus during another three year stretch. However, the overall victory went to Mexico. “Between 1987 and 1993, U.S. exports totaled 204 billion dollars, and imports 206 billion dollars; which resulted in a trade surplus of two billion dollars in favor of Mexico” (Shahabuddin, 2003: 308). During this time, trade was already open between the United States and Canada. “Before NAFTA, the trade deficit with Canada hovered around 13 to 16 billion dollars per year” (Shahabuddin, 2003: 309). This trade relationship resulted in a surplus of 100 billion dollars in favor of Canada. The relationship between Canada and Mexico was in favor of Mexico. Canada experienced an 8.6 billion dollar trade deficit due to this relationship (Shahabuddin, 2003). It is evident that Mexico and Canada were on the better end of the trade relationships during this time. After NAFTA, the trade deficit of the U.S. more than doubled in its trading with Mexico. The U.S. now had a 16 billion dollar deficit in 1995, unlike the 6 billion dollar deficit in 1987. Now the total trade deficit was 64 billion compared to only 2 billion in the years before NAFTA (Shahabuddin, 2003). All imports and exports increased for both nations. However, Mexico’s exports increased at a much higher rate than its import. This is contributed to American companies Effects NAFTA and CAFTA Have 15 building factories in Mexico in order to manufacture products and then export those products back to the United States (Shahabuddin, 2003). The fluctuations in trade between Canada and the U.S. were not very noticeable. The total of imports from Canada increased 60 percent while exports to Canada increased 52 percents. This is very similar to the trade relationship before NAFTA ever came along (Shahabuddin, 2003). According to this information, Canada and Mexico should be realizing an increase in the number of jobs and opportunities created. This should allow the standard of living to improve dramatically, especially in Mexico. In future times, this improvement in the standard of living is theorized to provide an increase in demand for U.S. goods and services. However, this also means a reduction in the manufacturing jobs within the United States. CAFTA Defined: “The Central America Free Trade Agreement (CAFTA) promotes trade liberalization between the United States and five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua” (Washington Office, 2005). CAFTA was barely passed in Congress, winning approval in the Senate by ten votes and by only two votes in the House of Representatives (Bainbridge, 2005 p. 1). This agreement was modeled after NAFTA and is said to be a “stepping stone to the larger Free Trade Area of the Americas (FTAA) that encompasses 34 economies” (Washington Office, 2005). The objectives of the CAFTA agreement are very similar to those of NAFTA. Effects NAFTA and CAFTA Have 16 Advantages of CAFTA: There are numerous advantages associated with CAFTA. First of all, the United States will gain a greater presence within these Central American countries with the trade agreement. This agreement will “offer the United States duty-free access to goods made in Central America and the Dominican Republic” (CAFTA Will Cost, July 26, 2005). This will allow many American companies to add more value to different parts of the value chain and most importantly cut costs. The end effect of the agreement should be a smaller price tag for end users. Also, the agreement is not expected to have any impact on the American economy other than the textile and sugar producing industries (Thiruvengadam, 2005). One of the larger hopes of CAFTA is to stabilize a politically unstable area such as Central America (Eizenstat, 2005). With this hope in mind, we are looking at having strong allies to help in gaining “a level playing field” against the Chinese and other countries (Diana, 2005). Overall, this agreement was in favor of the United States. The Central American countries that are part of this deal had to concede on two of their larger industries, the textile and sugar (King, 2005). There are many who question why the United States would want to be a part of this agreement. In the countries that are part of this FTA, the United States already has more significant market share than any other country (Gordon, 2005). The main reason for such a FTA is the movement to make China less of a player in the United States economy Effects NAFTA and CAFTA Have 17 (Eizenstat, 2005). Once the United States has the ability to blend in economically with these Central American countries, the hope is that America will become less dependent upon the Chinese. Disadvantages of CAFTA: The main disadvantage, or in this case the fears, regarding CAFTA is the fear of losing jobs (King, 2005). This is foreseen by different groups due to the route that NAFTA has taken. In the 12 years that NAFTA has been in place, there have been a total of 1 million jobs lost. (CAFTA Will Cost, July 26 2005). CAFTA has many people in the textile and sugar industries worried about reduction of jobs and operations. (Thiruvengadam, 2005; Moffat, 2005) There has been a projection of “tens of thousands of textile jobs” being moved from North Carolina to Central America (Moffat, 2005). The fear is that the trend of NAFTA will continue and jobs will be lost to these Central American countries. Another disadvantage is the loop holes within CATFA. One of the major points of CAFTA was to have the United States less dependent on China and more dependent on our neighbors, the Central America region. There are loop holes, however, that allows Chinese goods, such as textile, to be bought by the agreeing Central American countries and then sold to the American market (Moffat, 2005). This causes a great deal of concern to anyone looking at this agreement. Some would say that this even undermines the purpose of the agreement. Effects NAFTA and CAFTA Have 18 Other concerns come from the sugar industry, where many groups are waiting to feel the effects from the CAFTA agreement. At this time, CAFTA allows less than 2 % of the United States total consumption to be imported into the United States from the CAFTA countries (Thiruvengadam, 2005). Other disadvantages are that federal trade deficit will increase due to CAFTA (Diana, 2005). Diana (2005) also states that another side effect of CAFTA is that credit will be harder to come by for companies that are moving operations to Central America. The main complaint about the CAFTA agreement is the loss of jobs, which is a strong argument that stands against the FTA. There are other groups that are concerned that CAFTA will not improve already poor working conditions within Central America (Global Exchange, 2005). These working conditions would not be allowed in the United States. Therefore, the United States should improve these working conditions through the CAFTA agreements. There were three major groups that were strongly against this new free trade agreement: textile producers, sugar companies and unions. (King, 2005). The labor unions of the United States rallied against the agreement when it was first being discussed. Organized labor in the U.S. used their magazines to warn members about the “serious flaws” involved in the agreement. They claimed that their jobs would be sent to foreign lands and the labor wage rates of the remaining workers would be significantly reduced (Freedman, 2004). The overall perception by Effects NAFTA and CAFTA Have 19 groups outside of these three was that CAFTA was so minor to the American economy and that there was no reason to be that worried about the agreement. As a shareholder, we do not want to hear negative publicity or loss of jobs with regards to our organization. However, the bottom line with any company and stakeholder is the performance of the organization. In this particular case, the United States’ performance in the textile industry has proven to be declining in the last few years. As shareholders, we should want the officers of the organization to do what is right to improve the bottom line. As mentioned earlier, companies should focus on their core competencies. American businesses have had rising costs and, unfortunately, their competencies are running low in the textile and sugar industries. The hope is that Central America can help with improving American business to become more profitable. The truth is that most Americans will not feel the effect of the CAFTA agreement and should stand to benefit more from the changes than to lose anything. The other idea to consider is if CAFTA would have not been passed, this would have gone against everything that the United States stands to keep. The economy of the United States has always been focused on free- enterprise and competition. If CAFTA would have been defeated, the US economy would have stated that these ideas were no longer valid in our economy today. Effects NAFTA and CAFTA Have 20 Group Position: NAFTA and CAFTA have many advantages and disadvantages associated with their existence. However there comes a time when one must decide if these free trade agreements are indeed essential for the success of the United States. At this time, the jury is still out on whether the U.S. is winning from the laws passed with these two agreements. There were many compromises that the United States had to agree with in order to have these agreements to be accepted by other countries. However, the United States’ engagement in the free trade agreements with neighboring countries was the correct decision. A prime example for this point deals with low cost products. The United States cannot produce goods at many of the low prices that exist in the current market places. China and other Asian countries have flooded markets with products that are low in price for the American consumer. When an individual walks into a store such as Wal-Mart to purchase goods, this individual does not have the intent to purchase items that are vastly more expensive than the lower costs goods. This is where American companies can not compete with foreign companies. The cost structure for American companies is higher than international firms due to employee wages and other costs. By agreeing into NAFTA and CAFTA, American companies are leveling their playing field with international companies and allowing themselves to begin moves to regaining Effects NAFTA and CAFTA Have 21 market share. In return for this lower cost, countries such as Mexico will benefit with a growth of jobs that will in turn allow these individuals to buy goods from American companies that were at one point in time too expensive to purchase. Another reason that engaging in free trade was important for the United States is that the United States was able to be less reliant upon certain countries. Porter (1985) states in his ideal external environment that there should be numerous suppliers and by meeting this criterion, the organization will be less dependent on just a few suppliers. This will allow the organization to be more of a price setter than price taker. The United States has become more dependent on goods from China and other Asian countries. NAFTA/CAFTA will give the opportunity to the U.S. to diversify their suppliers and, in turn, be able to set prices for these suppliers which will allow American companies to become more competitive. Lastly, another reason that NAFTA/CAFTA is good for the United States is that these agreements promote free enterprise. The idea of free enterprise is what sets the U.S. different from other countries in the world. Free Enterprise for economies usually does not work well with governments that are Socialistic and/or Communistic in nature. This being the case, countries affected by NAFTA/CAFTA will gravitate to more of a Democratic or Republic type of government. Another plus is that these agreements will bring stability to areas that are not the most politically stable at this current time. Overall, the United Effects NAFTA and CAFTA Have 22 States will have stronger ties with these countries while, at the same time, spread more democratic ideals to the rest of the world. Not only will these countries benefit politically, but there will be a benefit with competition as well. The companies will have the opportunity to have larger buyers at a more beneficial price than before. This will lead to more American companies desiring to do business with more North and Central American companies. Overall, by the United States not embracing NAFTA and CAFTA, a message could be taken that the U.S. is afraid of a challenge from countries that are not on the same level (CAFTA’s Benefits, 2005). This is not the message that American people and business want to send to countries that are perceived to be weaker. Americans must embrace NAFTA and CAFTA in order to be successful in the future. As an organization, the United States will benefit from these agreements. There are some areas of concern that are brought to the table by NAFTA and CAFTA, but these concerns are dwarfed by the positives that free trade can bring to the United States. No one likes to see jobs lost, but if the country would be on the same path before NAFTA/CAFTA, an argument could have been made that more jobs could have been removed. In order for America to survive, businesses must prosper. At this time, steps are being taken through NAFTA and CAFTA to allow American business to prosper in an economy that is becoming more global in nature. Effects NAFTA and CAFTA Have 23 Conclusion: It is clear that the North American Free Trade Agreement and the Central America Free Trade Agreement have various advantages and disadvantages. Pro-NAFTA and CAFTA groups provide very convincing advantages. However, the disadvantages provided by the other end of the spectrum are convincing as well. It is very difficult to indefinitely determine whether or not these agreements are beneficial to the United States economy or not. The short-run information is not sufficient enough to make such a decision. However, the information available does suggest that, perhaps, these agreements are in the right step to developing a global economy that works more efficiently. A global economy that works more efficiently will definitely be advantageous to the United States of America. 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