1.!Why did the US, Mexico, and Canada sign the North American Free Trade Agreement?
Which sectors would you expect to gain most from this agreement?
NAFTA allowed for the free flow of goods and services between the three parties, US,
Mexico and Canada by immediate or phased elimination of tariffs on numerous goods. This
free trade would in turn lead to comparative advantage i.e. each country could specialize in
producing goods/ services in which they are relatively more productive than their trading
partners, increasing overall productivity and output. Hence, the parties to NAFTA signed the
agreement so that companies can leverage aggregating and arbitration opportunities within the
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•! Political reforms in free trade: Post NAFTA Mexico signed similar free trade
agreements with 32 other countries, in the US it marked the end of bipartisan support for
trade liberalization and paved way for other regional free trade agreements such as FTAA.
At the same time there were also some negative implications of NAFTA e.g. Mexico and
Canada lost almost 1.8 M jobs in agriculture, Mexican economy experienced a slowdown
during the US recession in 2001 due to high inter-linkages between the economies and illegal
immigrants from Mexico to US increased accounting for 55% of all illegal immigrants in the
US (an implication of loss of jobs in Mexico)
In summary, NAFTA had a mixed outcome for all three countries and continuous amends
were made as its results unfolded as well as economic environments changed. However,
NAFTA was still a landmark agreement which marked the beginning of an era of trade
liberalization not only in the North American region but globally.
3.! What opportunities and challenges did NAFTA create for North American firms
already operating within the three countries of Mexico, the US, and Canada?
Using the ADDING framework, we can summarize the opportunities available to North
American Firms after the signing of NAFTA:
•! Volumes: Free trade between the region implied the availability of a much larger market
to all the companies. As the case illustrates, companies like Walmart leveraged this
opportunity to become Mexico’s largest retailer and 3rd largest employer by 2001
•! Costs: Companies could now decrease costs by leveraging arbitrage opportunities e.g.
since NAFTA abolished tariffs on many goods, manufacturers could reduce costs further
by taking advantage of Mexico’s cheap labor and outsourcing manufacturing to
•! Differentiating: Some companies could also leverage NAFTA to differentiate their
products and get higher margins. E.g. Mexican beer Corona was positioned as a premium
import beer and became the number 1 import beer in the US post NAFTA.
•! Industry attractiveness: NAFTA also presented companies an opportunity to consolidate
or acquire smaller players within the region to demand market power.
•! Normalizing risk: Firms had the opportunity to set up operations at multiple locations
and hedge against risks such as natural disasters or currency fluctuation.
•! Generating Knowledge: NAFTA allowed not only for free movement of goods and
services but also...