Untitled Essay, Research Paper

NAFTAThe North America market is one of the richest in the world. Measured in

terms of GDP, it is the equivalent of Western Europe. But with a somewhat

smaller population, GDP per capita in North America, Canada, Mexico and the

U.S., is around 12 percent higher than in Western Europe. The North American

Free Trade Agreement (NAFTA), which came into effect January 1, 1994, sets

out the schedule for tariff elimination for members.. As a small country,

Canada has always been careful in it’s dealings it’s large neighbor,

the U.S., however, compliance to this agreement threatens our very existence.

Canada was unfairly taken advantage of in the singing of this agreement,

our identity of a sovereign nation is at risk.The North American market is also one of the most sophisticated and demanding.

It is an excellent base from which to develop and launch new products. From

a Canadian base, companies can establish a solid market position throughout

North America and then reach out to serve global markets. This agreement,

which and contains many key provisions to facilitate the conduct of business

among the three countries, has been a benefit to Canada-U.S.-Mexico trade.

The continent-wide transportation system that binds this market together

is efficient and cost-effective. Carriers of all modes are investing in more

sophisticated technology and entering into strategic alliances to improve

service. Border crossings are becoming easier.Canada provides an ideal location for serving the entire North American market.

Companies based in Canada have preferred access to a market of 380 million

people, with a combined Gross Domestic Product (GDP) of more than $10 trillion

(Canadian dollars). However, our participation in the agreement allows the

U.S. unobstructed to our market. This poses a serious problem when looking

at pure numbers. Canada is a country of approximately 28,000,000 people and

the U.S. a country of about 280,000,000. The extra “0″ means the U.S. in

ten times greater then Canada in population size. The implications of this

are enormous.Because of the difference in size it is logical to assume that the average

Canadian firm is about ten times smaller then its U.S. counterpart. As an

example, Bell Canada (Canada’s major telecommunications company) is

worth an estimated 9 billion dollars. AT&T (U.S. major telecommunications

company) is worth approximately 108 billion. These numbers should speak for

them selves. Although it hasn’t happened yet, AT&T could attempt

a competition war on Bell CanadaThere are many ways to view North American markets. Initially, they can be

viewed as three national markets, with certain differentiating characteristics

in terms of tastes, preferences, disposable incomes and spending patterns.

Because national accounts are the source of much of the general information

on domestic markets, this is often how North American markets are portrayed.In fact, though, North America is increasingly a collection of regional markets

that cut across national boundaries. Companies based in east-central Canada

view the north-eastern U.S. states as their proximate market area, and companies

in Vancouver, for example, look southward to the U.S. states of Washington,

Oregon and California for market opportunities. Although east-west transportation

routes are well developed and national characteristics of markets are still

important, there is no escaping the geographic pull of the north-south

axis.Increasingly, North America will be viewed as a single market. The market

opportunities for products and services produced by a Canadian-based company

are as likely to be in Chicago, Houston, and Mexico City, as in Canadian

cities.Thus, although some general characteristics of the three national markets

are highlighted here, potential investors should also be attuned to the many

cross-border regional markets that constitute the North American market,

and to the fact that North America is in many ways a single market.CanadaAlthough many investors see Canada as an excellent base from which to export

to North American and other global markets, the rich domestic market holds

numerous growth opportunities as well.Canada’s population, which is increasing at a little over 1 percent annually,

is fast approaching 30 million. The two central provinces of Ontario and

Quebec account for over 60 percent of the total, but the western provinces

of British Columbia and Alberta, with 22 percent, have the highest population

growth.The majority of Canadians live in urban centres located within 100 kilometres

of the U.S. border. This creates a string of regional market clusters along

the Canada-U.S. border that can be served from a Canadian location. Even

on their own, though, several Canadian cities located close to the Canada-U.S.

border are large markets. The Toronto metropolitan area has a population

of 4 million, Montreal has more than 3 million, and Vancouver has just under

2 million.The average family income in Canada is about $54,000. With the sharp increase

in the proportion of working-age women who have entered the labour market

since the mid-1970s, the typical family tends to have two income-earners.

In the first half of the 1990s, growth in personal incomes has been 2-3 percent

annually, a rate which has been affected by the recession and smaller increases

in wage settlements.There are regional income differentials, with Ontario,British Columbia, Alberta

and Quebec having the highest levels of per capita income. But income

redistribution programs limit the variations between the richer and poorer

parts of the country.Canadians spend some $450 billion on consumer goods and services each year.

The amount of discretionary income that is available for purchases of

“non-essential” goods such as electronic products, and services such as travel,

sports and recreation has been increasing. The market for consumer products

related to information technologies has been especially buoyant. Between

1981 and 1994, computers and audio/visual electronics enjoyed the fastest

growth in sales. In the service sector, an ageing and increasingly affluent

population is increasing demand for home maintenance, health services, financial

services, travel and leisure activities.Among the trends shaping the Canadian consumer marketplace of the future

are increasing ethnic diversity and multiculturalism; continued expansion

of the service sector; greater public awareness of environmental issues and

values; increasing consumer demands for convenience; and a trend toward

differentiating, segmenting and customising consumer markets.The United StatesThere is no other national market for consumer and industrial products and

services that is near the size of the U.S. In terms of GDP, Japan comes closest,

with a GDP that is two thirds that of the U.S., which in 1994 stood at US

$6,738 billion. The demand for imports in the U.S., at US $669 billion in

1994, was about double that of Germany, the second largest market for imports.

Simply put, the U.S. market is a magnet for companies around the world.What is less appreciated about the U.S. market is that it is all easily

accessible from Canada. There are more than 110 million consumers within

a day’s drive of southern Ontario. Montreal, Halifax and Moncton are within

a day’s drive of New York, Boston and Philadelphia. Winnipeg is just 17 hours

by road from Chicago and eight hours from Minneapolis. From Vancouver, markets

all along the Pacific coast of the U.S. can be easily served. It takes about

48 hours to ship by truck from Vancouver to Los Angeles. With increasingly

efficient transportation routes, even the southern U.S. states are considered

to be close to major Canadian cities.In 1994, the population of the U.S. reached 261.5 million. This is dispersed

across four large regional markets: the Northeast has 19.9 percent of the

total, the Midwest 23.6 percent, the West 21.7 percent, and the largest,

the South, has 34.7 percent.The GDP of each of these regions is larger than individual countries of Western

Europe, with the single exception of Germany. As a share of total U.S. GDP,

the Northeast, Midwest and West each has roughly 23 percent. The South’s

share is around 31 percent.In 1994, per capita GDP in the U.S. was US $25,820, second to Japan among

the G7 countries. Median household income was about US $32,200, with

married-couple households having a significantly higher US $45,041. Generally

speaking, consumer markets in the U.S. are similar to those in Canada, and

spending patterns do not vary considerably. For companies offering consumer

products and services, these similarities provide an opportunity to test

products in the Canadian market before making an entry into the U.S.If a foreign company is considering an investment in North America to, among

other things, tap the rich U.S. market, a Canadian location is eminently

attractive. When cost-effective access to the U.S. market is combined with

the range of other business advantages — generally lower corporate tax rates,

the most advantageous investment tax credits for R&D activity, and a

quality of life that is recognised as one of the best in the world — the

foreign investor has the best of all worlds.MexicoIn contrast to the advanced economies of Canada and the U.S., Mexico is an

emerging market. Mexico’s GDP per capita is 15 percent that of the U.S. and

20 percent of Canada’s, and in terms of income levels and income distribution,

Mexico resembles a developing country. On the other hand, with a population

of about 92 million, most of which is young, a growing middle class of educated

Mexicans, and programs of political and economic reform, there is a dynamism

in Mexico that is inviting.With dynamism comes volatility, and Mexico is no stranger to this. The plunge

of the peso that began at the end of 1994 and continued through the first

quarter of 1995 created a financial crisis that has led to a significant

decline in economic activity and real incomes. But the economy is recovering

and investor confidence is being restored.In the coming years, there will probably be more vacillations as the economy

goes through periods of rapid growth and then slows to keep inflation under

control. Throughout these cycles, Mexico will undoubtedly be relying more

on international trade and investment as engines of growth. In 1994, total

trade was the equivalent of almost 40 percent of the country’s GDP. Mexico

will remain a significant import market in the years ahead. A potential foreign

investor in North America should therefore consider the advantages of locating

in Canada, and supplying the Mexican market from a Canadian location.In approaching the Mexican market, companies should be aware of its diversity.

There are large disparities in incomes, regional markets vary considerably,

and there is demand for basic infrastructural needs as well as more sophisticated

consumer and industrial products.The largest regional markets are those of metropolitan Mexico City, with

a population of almost 20 million; Guadalajara, the capital of the

central-western state of Jalisco; and Monterrey, the capital of the north-eastern

state of Nuevo León. Mexico City is the country’s economic, financial

and industrial centre. With upper and middle-income groups numbering in the

vicinity of five to six million, it offers the largest consumer market in

the country. Guadalajara, with a population of around 3.5 million, is an

important commercial and financial centre. Monterrey, of roughly the same

size as Guadalajara, is one of the country’s most important industrial centres,

with 53 percent of Mexico’s top 500 businesses.Despite Mexico’s current economic difficulties, there are many business

opportunities in the Mexican market. Perhaps most enticing, though, is Mexico’s

potential.Since the end of World War II, Canada-U.S. trade grew steadily into the largest

bilateral trading relationship in the world. One of the more significant

developments in the history of the two countries’ trading relationship came

in 1965 with the signing of the Canada-U.S. Auto Pact, which governed duty-free

trade in automobiles and parts. Largely as the result of this agreement,

trade in this sector has remained a central part of the two countries’ overall

trade.The Free Trade AgreementThe Canada-U.S. Free Trade Agreement (FTA) took economic co-operation between

the two countries to a new level. Effective January 1, 1989, under the terms

of the FTA, tariffs on goods manufactured in Canada and the U.S. would be

gradually eliminated over a ten-year period, provided the goods met

“rules-of-origin” requirements. Many of the tariffs would be eliminated before

the end of the ten-year time frame, and the initial phase-out schedule for

products could be accelerated if the two sides agreed.The FTA also provided Canadian products with “national treatment” on most

sales to U.S. government departments and gave equal access to potential suppliers

on tendering and bidding information. A number of other sectoral and

institutional issues were included in the Agreement to facilitate trade,

identify exceptions and clarify other aspects of the trading relationship.In addition to the trade-creating provisions of the FTA, Canada and the U.S.

have been working on the harmonisation of standards, testing and certification

procedures.Prior to signing the FTA, most of Canada-U.S. trade was duty-free under GATT

rules. Nevertheless, the FTA had a dramatic effect on the volume of two-way

trade. Between 1988 and 1993, trade between the two countries increased by

40 percent, to $257 billion, with a strong 46 percent growth in Canadian

exports to the U.S. These gains were registered despite an economic recession

in the middle of this period. Specific sectors, such as office,

telecommunications and precision equipment; chemical products; pharmaceuticals;

and textiles showed particularly strong growth in trade.The North American Free Trade Agreement (NAFTA)Effective January 1, 1994, the NAFTA improved the FTA and added Mexico to

the free trade zone. By this time, Canada-U.S. trade was overwhelmingly

duty-free.Under NAFTA, a tariff-reduction schedule was worked out for trade with Mexico

whereby tariffs would be reduced over a ten-year period from the implementation

date. Most of Mexico’s non-tariff barriers, such as import licences, will

also be eliminated during this period.The key provisions of the NAFTA are:Elimination of Tariffs: Tariffs on Canadian exports to Mexico will be phased

out over 10 years. Mexico has provided immediate duty-free access for many

of Canada’s key export interests.National Treatment: Canada, the U.S. and Mexico treat each others’ goods,

services, and investors as they treat their own. International investors

with investments in Canada are covered by the NAFTA if they use Canada as

a “home base” to make investments in the U.S. or Mexico.Secure Market Access: The NAFTA provides secure access for Canadian exports

to the U.S. and Mexico.Dispute Settlement: Settlement or determination of remedies regarding

anti-dumping and countervailing disputes is by bi-national panels, not domestic

courts. Disagreements between investors and NAFTA governments may be settled

through international arbitration.Government Procurement: All three countries have agreed to provide substantially

increased access to government procurement opportunities not only in goods,

but also in services, including construction services.Business Travel: Simplified procedures expedite business travel. Eligible

business people can be granted temporary entry without prior approval

procedures.Intellectual Property: The NAFTA includes comprehensive coverage of intellectual

property rights to encompass standards of rules and enforcement.Under the NAFTA, many Mexican tariffs were eliminated immediately, including

those on a range of Canada’s key exports: agricultural and fish products,

many metals and minerals, most telecommunications equipment, many types of

machinery, and certain wood and paper items. (For more information on NAFTA,

see the FaxLink document 60170.)The first year of NAFTA saw a large jump in Canada’s trade with the U.S.

and Mexico. Canada’s two-way trade with the U.S. rose by 21 percent, to reach

$311 billion, while that with Mexico grew at a similar rate, to total $5.5

billion. These growth rates were higher than the increase in Canada’s overall

trade, meaning that North America is becoming even more important for Canadian

exporters and importers. In 1994, 82 percent of Canadian exports went to

the U.S. and Mexico, and 70 percent of imports were from these countries.North-south Transportation LinksNorth-South linkages by road, rail, marine, air, pipeline, and intermodal

services permit easy access to North American markets, especially the U.S.

Since transborder business is a vital part of their operations, Canadian

carriers get goods to the U.S. quickly and inexpensively.”The continent has shrunk to overnight delivery by air and three days by

truck from all of the major industrial centres. We look at North America

as one big country.”

Max Persaud, Manager

Corporate Logistics, Customs and Traffic

Philips Electronics Ltd.RoadRoad transport is dominant, a fact which reflects the large flow of manufactured

goods and the integration of regional markets. The trucking industry has

adapted well to the demands of just-in-time (JIT) manufacturing. The Canadian

for-hire trucking industry earns about one fifth of its intercity revenues

from transborder business. Several trucking companies specialise in this

increasingly competitive area.North American Truck Delivery (in hours)New YorkChicagoSan FranciscoMexico CityHalifax to:2456144120Montreal

to:1825120110Toronto to:1220108115Winnipeg to:72368470Calgary

to:82465878Vancouver to:108703688RailIn preparation for expanded traffic throughout North America, rail networks

are expanding on a continental scale. Strategic alliances between Canadian

and U.S. railways speed the flow of goods to market, expedite border crossings,

and provide quality intermodal services. Canadian rail carriers have co-ordinated

Canada-Mexico freight services through agreements with the Mexican state

railway and with U.S. railways and barge lines.North American Rail Delivery (in hours)New YorkChicagoSan FranciscoMexico CityHalifax to:9677180205Montreal

to:4836144169Toronto to:4824130155Winnipeg to:7236120191Calgary

to:1026696215Vancouver to:1209672250Source: CN North AmericaMarineSeveral of Canada’s deep-water ports are strategically located near large

U.S. markets. Many of these facilities are open year-round. Marine travel

is concentrated in the Great Lakes/St. Lawrence Seaway system and on the

east and west coasts of North America. The St. Lawrence Seaway serves an

area containing some 61 million people in much of the industrial heartland

of North America.AirFlights from Canadian airports serve all major North American centres, allowing

for overnight delivery by air cargo. Following the signing of the 1994 “Open

Skies” agreement, Canadian carriers have unlimited rights to fly from anywhere

in Canada to any point in the United States. U.S. airlines enjoy similar

rights to destinations other than Toronto, Montreal and Vancouver. Equal

access for U.S. carriers will be phased in over three years. The arrangement

will mean better connections and more competitive pricing for both passengers

and cargo.Complementing the agreement is the “Border Management Accord,” a planned

expansion of pre-clearing facilities to allow travellers to the U.S. to clear

customs before leaving Canada.North American Air Links (in hours/minutes)New YorkChicagoLos AngelesMexico CityHalifax to:2:152:546:017:15Montreal

to:1:172:186:246:40Toronto to:1:261:405:164:50Winnipeg to:3:351:505:456:15Calgary

to:5:053:053:006:29Vancouver to:5:533:522:456:19IntermodalIntermodal transportation combines the attributes of more than one mode.

Increasingly, intermodal services are competing with trucking companies for

transborder traffic. Railways are making important investments in intermodal

terminals and equipment to ensure their competitiveness. Specialised container

trains provide timely, high-quality service to Canadian and U.S. cities.

CP Rail has direct access to the port of Philadelphia via one of its U.S.

subsidiaries. Access to other U.S. ports is available through interchanges

with U.S. carriers.Strong Support ServicesMassive North American trade flows have spawned extensive support services

for Canadian companies that ship to the U.S. and Mexico. Customs brokers

are familiar with all aspects of international shipping, from packaging and

labelling requirements to the relative cost-effectiveness of different routings

to and from Canada. Freight forwarders consolidate shipments from several

sources to take advantage of volume discounts and design efficient and

cost-effective distribution systems.Companies doing business in Canada also benefit from a nation-wide system

of 142 privately-owned warehouses licensed and bonded by the federal government.

Warehouses in all large metropolitan centres offer on-site customs inspection,

bar-coded storage and handling, and after-hours clearance.Efficient Border CrossingThe Canadian and U.S. governments are actively co-operating to streamline

the border crossing process. Programs that use electronic data interchange,

bar-coding technology and pre-clearance of goods are speeding up the release

of shipments. These innovations make it even easier for companies located

in Canada to export to the U.S.”Pratt & Whitney has a world-wide distribution network. Customs operations

have been streamlined to the point that the Canada-U.S. border plays no role

in our distribution system…”

Brian McGill, Director of Transportation

Pratt & Whitney Canada Inc.Future DirectionsWith the NAFTA and the modernised, efficient transportation links throughout

the continent, the entire North American market is easily served from a

Canadian-based company. Foreign investors from outside North America should

therefore look upon a Canadian location as an entry into all regional markets

of the NAFTA countries.A number of U.S. multinational enterprises — 3M, Dow, DEC, IBM, Bell

Helicopter-Textron, and Procter and Gamble — have already made moves toward

serving the North American market from Canadian subsidiaries. To create economies

of scale in manufacturing, these subsidiaries are being given North American

or global mandates. There will undoubtedly be more examples of this trend

in the near future.As the number of NAFTA signatory countries expands, the market will become

even more attractive. Negotiations are currently under way for Chilean accession

to the NAFTA, and other South American countries have expressed interest.The North American Free Trade Agreement–An OverviewBackgroundThe North American Free Trade Agreement, (NAFTA) has, since it became effective

on January 1, 1994, created a free trade area comprised the United States,

Mexico and Canada. The agreement’s major objectives are to eliminate tariffs,

to improve market access to the goods and services among NAFTA countries,

to eliminate barriers to manufacturing, agricultural and services trade,

to remove investments restrictions, and to protect intellectual property

rights. It also addresses labor and environmental concerns.The U.S.-Canada Free Trade Agreement (CFTA) has been effective since January

1, 1989, and the NAFTA expands this agreement within services, investment,

land transport, intellectual property and government procurement, but keeps

the status quo in agriculture and energy.NAFTA negotiations represented an opportunity for the U.S. to achieve its

economic objectives: expanding sales opportunities in Mexico for U.S. companies;

formalizing recent Mexican market liberalization initiatives; and enhancing

North American international competitiveness by permitting companies to establish

operations anywhere in North America without facing the obstacles caused

by trade or investments barriers.For Mexico, the agreement represented a turning point in its relations with

the U.S. By entering NAFTA, Mexico turned its back on decades of nationalism

and economic protectionism and culminated its move from a nationalized, protected

economy to one governed by market-oriented principles.Canada’s participation in the Agreement can be seen as a defensive maneuver

to ensure that NAFTA would not dilute the Canadian benefits of origin of

goods so that free trade status is effective among the NAFTA countries.

Generally, 50 % of the tariffs between the U.S. and Mexico has been eliminated

immediately, 65 % will be by 1999. Most U.S.-Canada tariffs will be phased

out by 1998.