The North American Free Trade Agreement (NAFTA)

NAFTA is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade
bloc in North America.
NAFTA
The North American Free Trade Agreement (NAFTA) is an agreement between Mexico, the United
States and Canada. The agreement was signed by US President George H.W. Bush, Canadian Prime
Minister Brian Mulroney, and Mexican President Carlos Salinas on December 17, 1992 in San
Antonio, Texas, and took effect on January 1, 1994.

The bill removed taxes on products traded between the three countries. It also protects copyright,
patents, and trademarks between those countries. It was updated with the North American Agreement
on Environmental Cooperation, which helped reduce pollution and set more environmental
regulations. It was also updated with the North American Agreement for Labor Cooperation, which
helped people fight for better labor conditions.
Effects
Since NAFTA took away taxes for products traded between the US, Canada, and Mexico, Mexico has
been buying more products from the US. It saved U.S. companies the cost of selling products to
Mexico, and saved Mexican companies the cost of buying items from US companies.
A benefit of the bill is that labels on products exchanged between the three countries come in
French, English and Spanish. That way, Mexicans and Americans who speak Spanish can read the
Spanish label, Americans and Canadians can read the English label, and Canadians who speak
French can read the French label.
NAFTA also encourages more immigration from Mexico to the US. Since small businesses can no
longer be protected by tariffs, many small business owners in Mexico cannot compete with the prices
of subsidized products from the US. As a result, many Mexicans have gone to the US looking for
work. Some believe that NAFTA has been positive for Mexico, which has seen its poverty rates fall
and real income rise.
Others argue that NAFTA has been beneficial to business owners in all three countries, but has had
negative impacts on farmers in Mexico. Mexican farmers have seen food prices fall due to cheap
imports from US agribusiness, while US workers in manufacturing and assembly industries have lost
jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and
Mexico.
Goals of NAFTA
NAFTA was created to eliminate barriers to trade and investment between the US, Canada and
Mexico. The implementation of NAFTA immediately eliminated tariffs on more than one-half of
Mexico's exports to the US and more than one-third of US. exports to Mexico. Within 10 years of

implementation, all US-Mexico tariffs would be eliminated except for some US agricultural exports that
were to be phased out within 15 years. NAFTA also seeks to eliminate non-tariff trade barriers and to
protect the intellectual property right of the products.
In the area of intellectual property, the North American Free Trade Agreement Implementation Act
made changes to the copyright law of the US, foreshadowing the Uruguay Round Agreements Act of
1994 by restoring copyright (within NAFTA) on certain motion pictures which had entered
the public domain.
Trade
The agreement opened the door for free trade, ending tariffs on various goods and services, and
implementing equality between Canada, the US and Mexico. Since the implementation of NAFTA, the
countries involved have been able to do the following:

The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009
(the latest data available).
Foreign direct investment of Canada and Mexico in the US (stock) was $237.2
billion in 2009, up 16.5% from 2008.
Income in the maquiladora sector has increased 15.5% since the implementation
of NAFTA in 1994.
To alleviate concerns that NAFTA would have negative environmental impacts, in
1994 the Commission for Environmental Cooperation (CEC) was given a mandate to
conduct ongoing ex-post environmental assessment of NAFTA.

Agriculture is the only section that requires three separate agreements between
each pair of parties. The CanadaUS agreement contains significant restrictions and tariff
quotas on agricultural products, whereas the MexicoUS pact allows for a wider
liberalization within a framework of phase-out periods.

Mexico has gone from a minor player in the pre-1994 US export market to the
2nd largest importer of U.S. agricultural products.
According to the Department of Homeland Security Yearbook of Immigration
Statistics (2006), 73,880 foreign professionals were admitted into the US for temporary
employment under NAFTA.

_________________________

Understanding ASEANs Free Trade

Agreements
Op-Ed Commentary: Chris Devonshire-Ellis
ASEAN, the Association of South-East Asian Nations, is gaining considerably in importance as a trade bloc and
is now the third largest in the world after the European Union and the North American Free Trade Agreement.
Comprising the Asia Tigers of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam (the ASEAN 6)
with the smaller players such as Brunei, Cambodia, Laos and Myanmar, it has a combined GDP of US$2.31
trillion (2012) and is home to some 600 million people.
The ASEAN bloc have largely cancelled all import and export duty taxes on items traded between them, with the
exception of Cambodia, Laos, Myanmar and Vietnam, who continue to impose nominal duties on certain items.

However, these too will be completely lifted as of December 31st, 2015, meaning that the entire region will be
duty free from this date.
ASEAN has entered into a number of free trade agreements with other Asian nations that are now radically
altering the global sourcing and manufacturing landscape. It has a treaty with China, for example, that has
effectively done away with reduced tariffs on nearly 8,000 product categories, or 90 percent of imported goods, to
zero. These favourable terms have taken effect in China and in the original ASEAN members, including Brunei,
Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Cambodia, Laos, Myanmar and Vietnam will also implement these terms by December 2015.
This has specific impact upon where manufacturing capacity is heading in the future. At the heart of this is China,
which for the past twenty years has been enjoying a worker dividend of cheap, young labour and has become,
as a result, the worlds manufacturing hub. However, China is also growing old and fast, as that same
workforce is now greying and becoming more wealthy. This means that cheap Chinese labour is a thing of the
past, yet this is compensated for by China now emerging as a vast consumer market. With an estimated 250
million Chinese of middle class standards in 2013, this number is set to explode to 600 million by 2020.
The manufacturing trend therefore is to continue to develop products destined for this huge consumer market, yet
place the manufacturing capacity required to do so in a cheaper location. ASEANs free trade agreement with
China allows regional companies and MNCs involved in Asia to do just that. It is a trend already in process as
we note with Foxconn, manufacturer of many of the components that end up in Apples products, which is looking
to shift its 1.3 million strong workforce out of China and to Indonesia where wages are lower and a large and
available workforce exists. It is a sound strategy and one that is being increasingly adopted by many
manufacturers.
When Vietnam comes into full play with the ASEAN treaty in just under a years time, this development of
manufacturing capacity servicing the Chinese market to that country in particular will increase. Vietnam has also
deliberately positioned itself to take advantage of the treaty with China by reducing its corporate income tax
rate to 22 percent 3 percent lower than in China.
Vietnam, Indonesia and other ASEAN countries are benefiting from the China FTA by being able to offer lower
wages, and as such are attracting foreign investment both for the Chinese market, but also from global
destinations such as the EU and United States. There has been some resistance to this, not least where the
subject of Chinas superior infrastructure is raised. However, countries across ASEAN have been upgrading, and
especially the ASEAN 6. As a general rule of thumb, despite the production capability being reduced in some
ASEAN nations when compared to China, it makes economic sense to place manufacturing capacity into the
ASEAN 6 if production levels can reach 70 percent of that achievable in China. Details of the ASEAN-China FTA
can be downloaded here.
ASEAN has a similar FTA with India, which is being phased in and is in the process of reducing tariffs on 90
percent of all traded goods between ASEAN and India. Come 2016, import-export duties on over 4,000 products
will be abolished. This will have a similar effect to the China FTA in that it opens up the Indian consumer market
to ASEAN manufactured goods. India, in fact, has a sizeable middle class consumer market in its own right of
some 250 million, although it is not expected to grow as fast as Chinas in the short term. The ASEAN-India FTA
is also being expanded to include services, discussions are already at an advanced stage and a conclusion is
expected to be reached later this year. Details of the ASEAN-India FTA can be found here.
These two agreements have the collective impact of making ASEAN the strategic hub for global sourcing and
manufacturing. With ASEANs own middle class consumer base of 150 million, this market alone, then coupled
with China and Indias 250 million each represent a total middle class consumer market with complete free trade
of some 650 million people today. By 2030, given Asias increasing wealth and dynamics, some 64 percent of
the global middle class population will be based in Asia, accounting for 40 percent of all global middle class
consumption.
In addition to the China and India FTA, ASEAN also has a combined FTA with Australia and New Zealand,
known as the AANZFTA. The deal, also being phased in, has eliminated tariffs on 67 percent of all traded
products between the regions, and will expand to 96 percent of all products by 2020. It is the first time ASEAN
has embarked on FTA negotiations which covers all sectors, including goods, services, investment and
intellectual property rights, making it the most comprehensive trade agreement that ASEAN has ever negotiated.
Details of this agreement may be found here.
Further ASEAN treaties are in the process of being negotiated, not least with Japan, who already has a series
of Comprehensive Economic Partnerships, while South Korea already has an FTA. Both of these are along
similar lines to those identified above the reduction of over 90 percent of all traded goods between ASEAN and
these countries.
For international businesses, the ability to take advantage of ASEAN status and the FTA benefits the region has
is simple: all that is required is for the foreign investor to establish a subsidiary in one of the ASEAN nations. It is

a geographical qualification only. To this end, and as the region plus the countries of China and India is huge,
it is Singapore that has developed as a regional Asian hub to reach out across ASEAN and beyond and provide
management, financial and other support services to subsidiaries throughout the area.
Incorporation in Singapore is quick and easy it is regularly positioned as first in the World Bank Global Ease of
Doing Business Rankings, while the city state employs a high degree of international standards in its laws and
compliance. Singapore also offers a low tax base of 17 percent corporate income tax and provides tax incentives
for all SMEs including foreign investors. As a result, some 7,0000 MNC corporations have already established
operations in Singapore for the sole purpose of looking at what ASEAN has to offer, the suitability of its various
member states for establishing subsidiary manufacturing facilities, and the emergence of ASEAN as a production
base from which to reach out to the domestic markets of China, India and beyond.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates a specialist foreign direct
investment practice providing corporate establishment, business advisory, tax advisory and compliance,
accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.
Since its establishment in 1992, the firm has grown into one of Asias most versatile full-service consultancies
with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy
and the United States.
For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or
download the company brochure.
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