Nafta Pest Analysis

“NAFTA” ……….PEST Analysis and its effects on Business Environment

Module Name: Managing International Business

Submission date: 8th Nov, 2011 Subm
Table of Contents:

1 Executive Summary

2 Aims and Objective

3 The Pest Analysis * 3.1 Political Environment * 3.2 Economic Environment * 3.3 Social Environment * 3.4 Technological Environment

4 Conclusion

5 Appendix

6 Bibliography

7 Reflective Statement *7.1 By Akansha Kalra *7.2 By Nikita Hundal *7.3 By Ruchir Wakde *7.4 By Tanya Mittal Executive Summary:

The North American Free Trade Agreement (NAFTA) was instigated with negotiations between U.S, Canada and Mexico. Sovereign nations face many differences, the reason being every nation having their own importance. Technologically some are better; some are economically stable while some might have cheap labour force and mobility. For the widespread betterment of all the regional nations, a pact like NAFTA played a vital role in solidifying nations (US, Mexico and Canada). Eighteen months later to the discussion on 1st January 1994, a formal trade agreement was signed by Prime Minister Brian Mulroney of Canada, President Bush of America and President Carlos Salinas de Gortari. Apart from the trade agreement, two other agreements which dealt with labour and environment were also signed. [Office of the United States Trade Representative, 2007] On basic grounds NAFTA took birth to liberalize trade between the member countries, augment investment opportunities and promote economic co-operation. NAFTA is complex set of agreements consisting of more than 2000 pages. There are eight parts in the provision that deal with various provisions: eliminating trade barriers, rules of competition and strategy to enhance competition, Rules of origin to access goods all over the area, establish working framework for further trade and protection of intellectual property rights. [In Wake of NAFTA, Journal, 9(2)]. Even after the decade of its implementation, debates regarding its impact still prevail. There have been timely discussions on its economic impact on society. Economically, there certainly have been many beneficiaries. The joint agreement created the world’s largest free trade area, hence creating a huge bond between 450 million people, manufacturing goods and services worth $17 trillion. NAFTA’s various policies for investors have further reduced trade barriers. US, Mexico as well as Canada since then discuss and share an extensive range of joint hemisphere as well as global issues. This immensely affects each one of them and also re-establishes the views regarding social and economic well being, safety and security of citizens. It was due to NAFTA, that Mexico became politically stable and enjoyed the tang of economic success after collaborating with super power; U.S. After, the implementation NAFTA has Politically, Economically, Socially as well as Technologically shaped the business environment in all the three member countries.

Introduction: (Aims and Objectives of Report)

For the overall progression of nations, various countries come to a joint agreement many a times for the advancement of their national and mutual economic interests. NAFTA being one such agreement tries to aim and generate the prosperity of all the three North-American continent countries (U.S., Mexico and Canada). The subsequent work laid throws light on the work of NAFTA as a joint venture of all the three countries. Further, PEST analysis has been taken up to investigate the functioning of NAFTA and how it’s Political, Economical, Social and Technological i.e. Macro environment shapes the Business environment. In addition, NAFTA’s success and failures in various genres has also been discussed. The report also presents; a review on alliance formed, trading blocs and confederations to liberate the trade flow among the member nations which add on to the important flashes about NAFTA and strengths the background of business trade.

3.1 Impact on Political Environment:

Political Eagerness of the US for NAFTA agreement in Mexico despite of the unending campaigns against it: Despite of the indistinct certainties about NAFTA from several Mexican as well as Americans, the intra-industry trade between the two countries has thieved quite well. A general view in Mexico was that the major advantageous activities could be grabbed from the United States and it would have been a golden opportunity for a developing nation like Mexico to clinch close relations with a super power. U.S. on other hand had contradictory stance on enforcement of NAFTA. It was contentious joint for the US as it was its first such agreement with a developing country having wages equivalent to only 15% wages of the US manufacturing sector wages. Numerous US labour unions were in opposition to this agreement since the very beginning of the NAFTA. The agreement was signed by President George Bush of the U.S.A., Prime Minister Brain Mulroney of Canada, and President Carlos Salinas de Gortari of Mexico on January 1, 1994 which incorporated about 400 million consumers together. Politically this joint was actively supported by US President, George H.W Bush and Bill Clinton. The prime objective was to accomplish the political closeness between Mexico and United States which as a result would lead to the encouragement in FDI of the country and will motivate Mexican economic growth along with increase in mutual trade. As Mexico is the second-largest market for the United States exporters after Canada. The prime intention was, “The more Mexico flourishes, the better circumstances it would land-in for the US exporters” As the NAFTA agreement came successfully in action, the political trends showed an upward moving grid. The whole Mexican scenario of elections showed complete reversal. The politician no longer made nastier comments and judgment on U.S judgmental ways and procedures rather speeches were made on “how to increase co-operation between the two countries”. Post NAFTA years brought political stability in the Mexico and political stability is directly related to economic prosperity of a nation. Hence, future year brought positive changes in business environment. Since the day NAFTA came into run; the institutional acme has been flourishing between the two countries.
Free Trade Policies: Mexico discarded its long-standing import protection policy in the early 1980’s and then entered into this free trade agreement with the United States in 1994. “As a quintessence, Mexico jumped from a well-managed state-controlled development model to a drive for export expansion, building on low import protection”. [Political Economy, Aug 2000]. A democratic breakthrough was experienced by Mexico by the loss of presidency post by ‘Partido Revolucionario Institucional’. “Mexico’s president-elect; Vicente Fox made a clear statement that the objective of the country was just to deepen the joint agreement NAFTA even more”. [Political Economy, Aug 2000]. On the other block i.e. U.S, Failure of Clinton’s administration to protect fast-track authority globally can be counted in as a threat of competitiveness from imports of low-wage developing countries.

3.2 Impact on Economic Environment:

NAFTA created world’s largest free trade area, which now links 450 million people producing $17 trillion worth of goods and services.
NAFTA (in1994) eased restrictions on commerce between the member states by providing duty free trade on several classes of goods (remaining restrictions were eliminated on Jan 1, 2008 and now Working groups on rules of origin (WGRO) has reached an agreement on fourth set of changes in NAFTA’s rule of origin) and initiating new conventions to promote cross border corporate investment. Thus, NAFTA has bolstered trade between the three member countries; from 1994 to 2006 trade climbed 198 % [U.S Trade Representative, Oct 2007]. Much of the trade involved ‘exporting’. Trade between U.S and NAFTA members has soared since the day of action. U.S exports to member states accounts for 32.2% of overall goods and account $411.5 billion, showing an increase of 149% since 1994[U.S Trade Representative, 2010] (refer appendix figure 1). Also goods imported from Canada and Mexico to U.S has increased from $151billion in 1993 to $400 billion in 2009 [World Trade100, July 2010] (refer appendix figure 2). There was increase in shipment of beef, wood, agriculture and paper products from Canada to U.S. (refer appendix figure 3) The free trade movement at some instance showed negative results as in case of Mexico. Mexican industrial units sprang up near border to take advantage of cheap labour. Workers were to assemble the parts into products and re-export the assembled products to U.S. This investment was foreseen to create Mexican middle class that would become a huge souk for U.S goods. But the arrangement showed pessimistic results; skills and productivity lagged in the products, U.S-Mexico truck transport issue raised the transportation costs and migration of workers created overpopulated slums and high living cost for Mexican workers.
NAFTA as a benefactor for Mexico was in field of agriculture. U.S agricultural imports from Mexico increased $6.7 billion in 13 years [U.S Trade Representative, 2007](Refer figure 2).
Overall the exports from Mexico has shown an upward trend (refer figure 3) Other major effect in trade was due to, Government procurement provision of NAFTA which pertain to procurement of services, goods and construction services. Under this U.S or any other member country is granted non discriminatory rights to supply other countries’ central government bodies. This increases opportunities of exports in sectors such as communication and computer system, pharmaceutical equipments, heavy electrical equipments etc. Investment is the key to economic growth and NAFTA has contributed by giving opportunities to member countries to invest in neighbor country. The Agreement’s rations ensure greater constancy and certainty for investment decisions by guaranteeing fair, transparent and unbiased management of investors and their investments throughout the NAFTA region. Canada’s foreign direct investment (FDI) has risen by 54%. (Refer appendix figure 5). Capital investment in member countries has also increased due to NAFTA’s contribution to competitiveness. The investment has further led to generation of new jobs and has led to valuable high-tech knowledge transfer. Various companies are now using outward investment i.e. mergers, joint ventures, partnerships etc to increase their operations and to penetrate into new markets and acquire new skills.

3.3 Impact on Social Environment:

NAFTA turned all the three countries U.S., Canada and Mexico into a solitary giant market. But within this wide region, the cultural differences do exist between Unites states and Mexico (U.S. and Canada share similar culture practices).A country differs from another in terms of national cultures enriched with numerous subcultures. There are about 263 million people living in United States and Mexico has population of about 93 million, which is comparatively low. U.S. is a potpourri with people from all over the world. English is the central language in U.S and now Spanish which is formal language of Mexico has become U.S’ second language which clearly depicts mixing of two cultures. Social benefits and health care varies from country to country participating in NAFTA. Hence NAFTA has little relevance in health care of any particular country. The two general provisions of NAFTA related to social and health care services are: National treatment provision in which “the country has to take care of goods, services and investor from the other two countries same as they treat their own” [Epps & Flood, 2002] and second is “expropriation of heath system [Epps & Flood, 2002]”- it states that a country has to pay compensation if it nationalizes any health related component which was part of private sector earlier. The second stipulation was made to safeguard private enterprises so that they can claim for compensation in case of loss of business opportunities. This trade agreement was the first ever legal act that gave significance to environmental provisions. In addition to primary goals of NAFTA, an environmental side accord known as “North American Agreement on Environmental Cooperation” (NAACE) was established in 1994 to look after the environmental risks associated with NAFTA. After the agreement, as mentioned in Economic development, there was increase in imports in Mexico and hence the competition increased, the sudden changes challenged the poor Mexican farmers and these conditions forced them to cut million of acres of forest to increase their production. To produce high quality export crops they further made use of pesticides, herbicides and irrigation was made by placing huge pressure on water resources and soil; escalating environmental risk to their land. NAFTA in Chapter 11 of agreement has clearly allowed MNC’s to challenge health and safety issues, which hinder their business interest and they can ask for compensations in case of harm. Thus NAFTA has totally negated any ability to protect environment and health issues from NAFTA investors. [Prussia, 2006, p. 385-386] Agriculture too suffered from social loses. Due to increase in free trade, the agriculture business acquired heights under the influence of NAFTA and the Mexicans were the most impacted ones both financially and in terms of social justice. Export of agricultural products increased in Mexico but imports of staple crops like corn and beans challenged the Mexican farmers, as the heavily subsidized corn from U.S. was sold at a discount of 30% or more. The price of corn declined and many farmers have to discard their traditional crop as it serves as a symbolic cornerstone of Mexican culture. During 1991 to 2000 Mexicans lost about 1 million jobs among corn producers. [Salas, 2006]

3.4 Impact on Technological Environment:

As trade in high-tech products and other intellectual property rights-related commodities have grown; intellectual property protection has grown as an important trade issue. Insufficient intellectual property protection and the resulting piracy hinder the permissible trade and acts as a trade barrier. Even before WTO Agreement on Trade-Related aspects of Intellectual Property Rights (TRIPS); NAFTA realized importance of intellectual property protection and enforcement in context of trade related agreements. NAFTA’S intellectual property provisions generate authorized standards for protecting and enforcement of intellectual property. For the companies wishing to do business in U.S., Canada and Mexico; NAFTA provides them with means to not only protect intellectual property but also with improved laws for doing business. NAFTA provides protection on wide range on intellectual property including patents, copyrights and trademarks. NAFTA also protects semiconductors, geographical indicators, satellite broadcast signals, industrial designs and sound recordings. The benefits are not restricted to only those industries whose goods rely on intellectual property rights protection but relatively for any company that seeks to protect its logos, patents, trade secrets etc. NAFTA’S copyright agreement facilitates owners with “rental rights”, allowing owners of software to either permit or prohibit the rental of computer programs. Neither Mexico nor Canada recognized rental rights, the changes were significant to the U.S. industry since, earlier the entities would rent software which resulted in frequent use of software programs without additional revenue the manufacturers but now each use could fetch them gains The latest press release of NAFTA disclosed about the bilateral mutual recognition agreements (MRA’s) [Office of United States Trade Representative, 2011] that will set up trial for accepting test results from testing facilities and laboratories within the NAFTA territory for use inconformity evaluation of telecommunication equipments. This will facilitate manufacturers as they just have to conduct the test once and their results will be accepted in other member states. NAFTA is searching for new areas for further collaboration. The increased FDI as already mentioned in the economic development, has an important effect on renewal of equipments and plants. Now, 26% of countries FDI are used for machinery and transportation equipments. Also, due to increase in investment, expenditure on R&D has shown an increase after 1994.

Conclusion:

NAFTA’s overall impact has been positive , though it has not been able to stand up to the expectations of its proponents. It made U.S companies, their investors, and their managements richer. On the contrary, NAFTA for small companies hasn’t been that advantageous. Also it has cost many U.S manufacturing workers their livelihood and has failed to raise the living standard of majority in Mexicans. For Canada too, NAFTA showed both optimistic and pessimistic outcomes. Any major market change not dictated by natural market forces creates both opportunity and loss, same has happened with NAFTA.

Appendix:
Figure 1 Source: The North American Economies After NAFTA.(2003) Journal of Political Economy, 33(3) Sept, pp.5-27.

Figure 2

Source: The North American Economies After NAFTA.(2003) Journal of Political Economy, 33(3) Sept, pp.5-27.

Figure 3
Canadian Merchandise Exports to the United States Canadian Merchandise imports from the United States

Source: Foreign Affairs and International trade Canada, 2009
Figure 4 Source: Banco de Mexico and INEGI
Figure 5
United States Investment In Canada Canadian Investment In the United States Mexican Investment In Canada

Canadian Investment In Mexico Source: Foreign Affairs and International trade Canada, 2009

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