ECONOMICS

Globalization and Free Trade Agreements



Globalization and Free Trade Agreements

Introduction

Globalization is the highly controversial process by which the world economy is moving toward a more homogenous and unified structure dominated by the principles of capitalism and free trade. The integration of the global economy has been under way for much of modern history, and the current incarnation of that process is called globalization. It is distinct from previous integration phases in several ways and has elicited a sizable amount of criticism.

An important trend in the global economy since the early 1990s has been the proliferation of regional initiatives among countries (Bairoch, 1993). The North American Free Trade Agreement (NAFTA) and the European Union (EU) best illustrate such a trend; however, regionalism among developing countries has also become popular. The paper discusses two important trade blocs NAFTA and ASEAN.

Discussion

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) was ratified in 1994, linking Canada, Mexico, and the United States under a regime of liberalized trilateral commerce that harmonized procedures for defining rules of origin, expedited customs clearance for cross-border trade, and provided for a wide variety of institutional reforms to safeguard environmental interests and the rights of workers (sidebar agreements). The accord also included provisions to maintain stable flows of energy products, easier business travel, and reduced restrictions on foreign direct investment (FDI) across major sectors outside the energy domain (a concession to Mexico's oil industry). Despite many side agreements covering spheres such as labor conditions and environmental protection, a central goal of the accord was to achieve a phased elimination of import duties for most products and services by 2004. This goal has been achieved, though many nontariff trade barriers are still in place. A further goal was to dilute long-standing restrictions on capital mobility (FDI) and pave the way for new investment across the trilateral region. The net result over the past 15 years has been a dramatic expansion of intra-industry trade (IIT) between the three nations, with much of this IIT being conducted on an intra-corporate basis (Folsom, 1999).

NAFTA has to address and modify a great many policies and practices to achieve its goal of establishing a free trade zone. The agreement calls for elimination over a 15-year period (1993-2008) of tariffs on goods and restrictions on cross-border activity in service industries such as telecommunications, trucking, and finance. It also calls for allowing businesses from any NAFTA country to set up operations in any other member country and be treated the same as if they were nationals of the country in which they established operations.

Merchandise trade within the NAFTA area is now more than 70% IIT in nature. For example, Ford USA can import components or final assemblies on a duty-free basis from its subsidiaries located in Canada or Mexico—provided that such inputs qualify as 50% North American (i.e., “local content”). Automotive companies from outside NAFTA can also compete on the same basis, provided that 50% NAFTA content can be ...