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Advantages and Benefits of NAFTA and CAFTA

The US is working aggressively to open global, regional and bilateral markets and expand American opportunities in overseas markets. Two of the successful trade agreements are the The North American Free Trade Agreement (NAFTA) and the Dominican Republic-Central America Free Trade Agreement commonly known as the DR-CAFTA.

Benefits of NAFTA

NAFTA is an exceptional demonstration of the rewards for outward-looking countries that implement trade liberalization policies as a means of enhancing wealth and competitiveness. The NAFTA is an example of the benefits that all countries could derive from moving forward with multilateral trade liberalization. The reduction of arbitrary and discriminatory trade rules benefits farmers, workers and manufacturers, whereas consumers enjoy lower prices and more choices. By strengthening trade and investment rules and procedures on this continent, NAFTA has allowed trade and investment flows to flourish in North America. According to figures of the International Monetary Fund, total trade among the three NAFTA countries has more than doubled, passing from US$306 billion in 1993 to almost US$621 billion in 2002. That’s US$1.2 million every minute. NAFTA was an enormous success for the United States and its NAFTA partners. It has helped Americans work smarter, earn more and increase purchasing power. It has contributed to more trade, higher productivity, better jobs, and higher wages. Total trade between the three countries has more than doubled in ten years of NAFTA, from $ 306 billion in 2003 to $ 621 billion. That’s $1.7 billion in trade every day. In the first ten years of NAFTA, U.S. exports to Canada and Mexico increased from $ 142 billion to $ 263 billion. And Mexican exports to the U.S. increased 242%, improving lives and reducing Mexico’s poverty.

Advantages and Benefits of NAFTA and CAFTA

Benefits of CAFTA

The DR-CAFTA, the treaty originally encompassed the United States and the Central American countries Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The Dominican Republic then joined the negotiations in 2005, and the treaty was called DR-CAFTA. The CAFTA-DR is Latin America’s second largest export market in the U.S., behind Mexico alone, buying over $ 16 billion in U.S. exports.  Successful implementation of CAFTA-DR is critical to America’s broader policy goals to strengthen democratic governance, expand economic opportunities and invest in people. For the majority of goods and services in Central America, CAFTA would require market liberalization. In return, the US promised greater market access for some Central American sectors, such as textiles and a limited increase in sugar quotas. To add, CAFTA is important to the DR–CAFTA countries’ own businesses, enabling them to increase produc­tivity and increasing the skills of millions of work­ers as new foreign businesses and new technologies enter their economies. Workers will be more valuable and earn more money with higher skills which will increase their living standards. As living standards rise and people enjoy better lives, their interest in preserving these benefits also increases. Because they have more to lose from a crisis, they strive to preserve peace and stability. The probability of civil conflict decreases as a result. At the same time, the improved domestic situation reduces the incentives to leave home in search of a better life elsewhere.

According to the Organization for Economic Cooperation and Development (1997) more workers in more firms in more countries derive their livelihood from cross-border trade and investment activity. Trade and investment have become major engines of growth in developed and developing countries alike. The volume of world merchandise trade is today about sixteen times what it was in 1950, a period during which the value of world output increased by a factor of 5.5. The period since 1950 saw a near doubling, from 8 to 15 per cent, of the ratio of world merchandise exports to global production. Most remarkable has been the accelerating pace of trade-led integration: during 1985-96, the ratio of trade to world GDP rose three times faster than in the preceding decade, and nearly twice as fast as in the 1960s. Trade in services has also grown rapidly and since the mid-1980s has become one of the fastest growing components of world trade. These facts underscore an important point that, far from being a zero-sum game, increased trade and investment and the greater prosperity it brings, are a win-win proposition.  The OECD cites that the benefits of trade and investment liberalization are not all about large or global companies. The growing integration of manufacturing and services activities, and the lowered transaction and information costs associated with open markets, relate to small and medium scale industries.

A second core foundation is based on the age-old principle of comparative advantage: countries, like individuals, prosper when they use their resources — natural, human, industrial, financial — to concentrate on what they do well relative to others. The essence of the case for liberal trade and investment is that incomes will be higher, nationally and internationally, if individuals and companies are free to engage in specialization and exchange. Specialization allows both businesses and individuals to deploy their relative strengths, abilities and expertise. Freedom of exchange through trade and investment lowers prices, broadens the range of quality goods and services available to firms and consumers, and allows investors to diversify risks, channel resources to where returns are highest and secure access to capital at the lowest possible cost. In short, open markets allow resources to be used more efficiently and productively. The efficiency benefits of an open trade and investment regime contribute to economic growth and hence rising incomes. By contrast, restrictions on trade and investment, in common with other economic distortions, shift an economy to a less efficient and sustainable mix of investment, production and consumption patterns, thus depressing economic growth prospects and reducing attendant benefits such as job creation and innovation. Open trade and investment helps firms tap into world markets, increase their sales potential, realize economies of scale and spread the fixed costs of research and development over a wider customer base. Each of these improves profit, which sustains employment and investment. Market openness brings real, direct economic gains to all consumers — whether firms or individuals. Firms benefit from better access to competitive sources of materials, components and services. Individuals benefit because lower prices and greater product diversity increase the purchasing power of their wages. Imports can also help dampen inflation by disciplining the price behavior of domestic producers.    Exposure to trade and foreign investment also provides powerful incentives to local producers to lift their performance by minimizing waste, improving production techniques and using research and development to generate innovations that will enhance their products’ competitiveness. By encouraging the adoption of best-practice production processes, trade and investment facilitate the transfer of ideas, know-how and technologies across borders. A higher degree of openness allows smaller countries to absorb technologies developed in other countries at a faster rate and thus to grow more rapidly than countries that are less open. From a policy perspective, a more open domestic market is far from being a handicap. Quite the contrary, it is a source of competitive strength.

Also Study: Pros and Cons of Tariffs

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