Question

Define NAFTA. When was NAFTA created? Who are the members of NAFTA? Explain maquiladoras.

Answer 1

NAFTA refers to the North American Free Trade Agreement which is a treaty signed by the US, Canada, and Mexico which allows the free flow of goods and services between the countries. NAFTA had existed between the US and Canada since 1989 but it came into effect from January 1, 1994. This treaty was made to eliminate the tariff barriers to agricultural, manufacturing, and services, to remove investment restrictions and to protect intellectual property rights.

Small businesses were benefitted most from this treaty as it became easy and inexpensive to do business with Canada and Mexico, further reducing the need for red tape to import or export goods

The United States, Canada, and Mexico are the members of NAFTA

Prior to NAFTA tariffs of 30% or higher were common for exporting goods to Mexico and there were long delays due to extensive paperwork involved in the transportation. NAFTA provided 'national goods' status to products imported from other countries. No local, state or provincial government could impose a tariff on those goods

NAFTA opened up new opportunities for small and mid-sized businesses. Mexican consumers tend to spend more on US goods with respect to their counterparts from Europe and Japan. Further, boosting the economy of the US in the long run

Maquiladoras: Maquiladora is a low-cost factory in Mexico situated near the US-Mexico border which operates under a favorable duty or tariff-free basis. These are mainly the manufacturing operation or a factory in Mexico. These factories get certain tax advantages further making it as an attractive destination for businesses. With the help of this provision, companies can take benefit of cheaper labor in Mexico (low cost) and further receive benefits of the high selling prices in the US. The presence of maquiladoras has contributed significantly to the industrialization of the Mexican-American border

The Mexican Secretary of Economy decides whether a plant is officially considered to be a Maquiladora or not. This certification is important as it qualifies the plant for unlimited foreign capital investments and duty-free imports. Maquiladoras produce everything from clothing and consumer electronics to cars, drones, medical devices, and aircraft components. The reduced customs and duties give the company edge over others in the US market, whereas, cheap Mexican labor costs much less than what is paid for American labor. This further pushes the profit margins for the companies