Lecture 9 - How do FTAs affect trade and employment

Question 1

What is NAFTA?

Answer 1

• Free trade areas remove trade restrictions preferentially
• One of the largest FTA is the North American Free Trade Agreement (NAFTA) formed between US, Canada and Mexico in 1994

Question 2

What is the Rules of Origin in NAFTA?

Answer 2

Only goods wholly or largely of area origin (originally produced within the Free Trade Area) can cross internal borders tariff free

Question 3

Why does Rules of Origin exist in NAFTA?

Answer 3

• Since the US, Canada and Mexico are free to set their own tariffs with non-member countries, without ROO there is danger of trade deflection
• Trade deflection would occur when say an EU good is shipped to the US via Mexico or Canada, if Mexico or Canada have lower tariffs on that good

Question 4

How strict do the ROO’s criteria have to be for NAFTA?

Answer 4

ROO’s criteria of area origin have to strike a balance between too tough so that few goods qualify as FTA-produced and too lax so that trade deflection occurs

Question 5

What is the main rule of NAFTA?

Answer 5

The main rule of NAFTA is that all non-NAFTA inputs must have a different product classification from the product exported
eg. bread baked in Mexico from European flour but not European bread-mix is ok to export tariff-free to the US since bread-mix and baked bread belong to the same product category

Question 6

How has NAFTA dealt with non-tariff trade restrictions?

Answer 6

Services: Barriers to entry have been eliminated in nearly all sectors + enhancement of regulatory transparency
Public procurement:
Intellectual property rights: NAFTA rules on protection and enforcement