International Business and Free Trade Agreement | Free Essay Example

International Business and Free Trade Agreement

Words: 994
Topic: Business & Economics
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Introduction

The North American Free Trade Agreement, which has been in existence for seventeen years, was signed in 1994. This agreement created a free trade area between Canada, the USA, and Mexico. Since its inception, there have been critics and supporters of this agreement. This paper seeks to examine both the advantages and shortcomings of this agreement and thereafter draw an individual conclusion.

Advantages of NAFTA to the USA

Government estimates indicate that the Gross Domestic Product has increased by 5% every year since NAFTA came into force. This means there’s more money in the US economy as a result of the increase in trade. The agreement caused trade tariffs between the three countries to be abolished. This encouraged traders to engage in cross-national trade. Goods that previously lacked market in the home country could be exported to Canada and Mexico.

Exports have tripled over the past four years. It can be said that the manufacturing sector has benefited the most from NAFTA. The ability to outsource labor and non-core activities to Mexico, where costs are cheaper, has facilitated growth in the sector. Importing oil from Mexico has led to lower oil prices in the US. Oil is a necessity in all industries. Lower oil prices lead to lower prices of all other goods. The mobility of human capital has also increased greatly. Professionals have been able to work anywhere within the three countries where there was a demand for their services. This means that American citizens have access to the best professional services (McNett, Minor, Greinger, & Ball, 2009).

Disadvantages of NAFTA to the USA

Critics of NAFTA have cited the loss of approximately 800,000 jobs in America after the agreement was implemented. This was attributed to the decision by many manufacturing firms to outsource their labor and other non-core functions to nearby Mexico. Companies that chose to retain American laborers reduced wages by ΒΌ to cover for the perceived increase in costs. Citizens working in the manufacturing sector suffered the most (Caulfield, 2010).

Farmers in the US have suffered as a result of this agreement. NAFTA contains provisions that favor large exporters over small farm owners. Cheaper groceries from Mexico have also flooded the American market, leaving the neighborhood farmers unable to compete. American firms have aided in the creation of tonnes of waste that have been dumped in Mexico. This is an ethical issue and cannot be tackled by rules- based framework. Mexico has less stringent environmental laws than the US. The country will end up with a huge burden of environmental problems shortly. American companies that have failed to behave ethically in regards to waste disposal have created a bad image for the country in Mexico (McNett, Minor, Greinger, & Ball, 2009).

Individual Conclusion

NAFTA may have several disadvantages but it still is a worthwhile venture. The jobs that were lost in the manufacturing sector were the price America had to pay for greater benefits. The increase in jobs in the export sector was much greater than the loss of jobs in the manufacturing sector. America should consider how to improve the competitiveness of its manufacturing sector. This way, it will reap even greater benefits from NAFTA (Caulfield, 2010).

Question Two

Exporting from the United States-This would be the easiest of all options to adopt. Establishing operations in the home country would mean establishing a factory to manufacture the computers. This would result in tax deductions for the new investment. It would also result in job creation which would give the company a good public image. Having domestic operations would also enable the company to control the quality of the new computers. All the profits obtained from sales would also belong to the company.

However, establishing a company would require a large initial capital outlay. This would mean the company takes a huge loan to finance the project. Since this is a new product, many lenders may not be willing to invest in it. Raising the necessary finances may prove to be an uphill task. Running a company would require good management skills and a large workforce which the company does not have at the moment. Bottlenecks in the exporting process and tariffs could be costly to our company (McNett, Minor, Greinger, & Ball, 2009).

The licensing-This option involves allowing a company in Western Europe to manufacture and sell the computer on our company’s behalf. The licensee company would pay a certain percentage of sales to our company as the license fee. This is a good option as no capital will be required. The licensee is likely to have an already existing customer base from which we can benefit. The legal process is also less cumbersome than that of establishing a subsidiary.

Adopting the licensing option would mean relinquishing some of our rights as the owners of the new computer idea. Our company may not be able to control how the licensee produces or markets the product.

Establishing a wholly-owned subsidiary- Establishing a wholly-owned subsidiary would give our company the same control over the manufacturing and marketing process as retaining operations at home. However, export costs would be avoided. The company stands to benefit from the expertise of Western European citizens. Transfer payments and intercompany transactions can also be used to take advantage of tax reliefs in both countries.

The process of establishing a subsidiary is expensive and time-consuming. The legal preparations could take almost a year. This will lead to loss of time which could also lead to loss of the first-mover advantage. The host company may have restrictions against whole owned subsidiaries intended to protect local companies. These may prove expensive to comply with.

Recommendation

The licensing option is the most attractive option for our company. The problems of lack of control can be dealt with by a thorough screening of potential licensees. The lack of initial capital outlay means that this option can be implemented almost immediately. I would recommend licensing over exporting and establishing a subsidiary.

References

Caulfield, N. (2010). NAFTA and Labor in North America (Working Class in American History). Illinois: University of Illinois Press.

McNett, J., Minor, M., Greinger, M., & Ball, D. (2009). International Business: The Challenge of Global Competition. Chicago: Irwin.