7 marks 1) What is the NAFTA? Who are the parties to it? What are the contents of the agreement? Ans. NAFTA stands for North American Free Trade Agreement. It came into being on January 1,1994. The parties to it are United States, Canada and Mexico. It is an American counterpart to the EU but its objective is purely economic. In this respect, NAFTA goes well beyond the scope of a simple free trade area, but it is not a customs union. The agreement contains the following: 1) Abolishes within 10 years, tariffs on 99 %of the goods traded between member countries. 2) Provisions to ensure trade in services like consulting, engineering, software, etc that exist for trade in goods. 3) Protect Intellectual Property rights by enforcing the protective measures while ensuring that enforcement measures do not themselves become barriers to legitimate trade. 4) Removes most restrictions on Foreign Direct Investment between the member countries. 5) Provides a Dispute Settlement process that will be strictly followed instead of countries taking unilateral action against any offending party. 6) Allows each country to apply its own Environmental Standards, provided such standards have a scientific basis. Achievements of the NAFTA: US trade with Canada and Mexico expanded at about twice the rate of trade with non-NAFTA countries in the first nine months of 1994, as compared the same in 1993. US exports to Mexico grew by 22%, while Mexican exports to US grew by 23%. From 1993 to 1998, Mexico replaced Japan as the 2 nd largest market for US exports, while remaining the 3 rd most important supplier to the US market after Canada and Japan. FDI almost flooded into Mexico, rising at $12 billion p.a. during last decade, three times what India receives.
As a result of NAFTA Mexico’s per capita income rose by 24%, to roughly $4000. 2. Discuss EU as a trade block. Ans. The European Economic Community (now EU) was formally established by the Treaty of Rome in 1957. It was reestablished in1991 as European Union by Maastricht Agreement. As of now EU has 25 members. It has 450 million consumers at 10 trillion euros, accounting for 1/4 th of world’s GNP. Though attainment of political integration is the ultimate goal of EU, the economic benefits from this huge trading block are substantial: 1) There will be gains from eliminating the transaction costs associated with border patrols, customs procedures, and the like. 2) Economic growth will be boosted due to the economies of scale that will be achieved when production facilities become more concentrated. 3) There will be gains from more intense competition among EU firms. 4) The free movement of capital allows firms to sell securities, raise capital and recruit labour throughout Europe. 5) Firms of non-member countries also gain from EU. MNC’s are now taking advantage of economies of scale by standardizing their products and processes to the greatest extent possible without compromising local input and implementation.
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