NAFTA Grows Up

Free trade agreements become a necessary part of doing business globally


By Jim Preuninger

The Chinese year of the rat — 2008 — marks two milestones in the history of the North American Free Trade Agreement, or NAFTA: record trade levels under the agreement and an end to remaining trade barriers, including those on U.S. corn and Mexican sugar. Full implementation of NAFTA went into effect this year on January 1.

NAFTA has been wildly successful, not just increasing trade among Canada, the United States and Mexico, but also spurring the creation of free trade agreements (FTAs) across the globe. Since its inception the world has seen the rise of other FTAs, including the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR), signed on August 5, 2004, as well as bilateral agreements between the United States and such countries as Chile and Israel. Other FTAs, including the ASEAN Free Trade Area, Mercosur and the European Union, have skyrocketed in importance since NAFTA.

WIIFM — What's in It for Me?

This increasing use of FTAs, and NAFTA in particular, boils down to two simple realities for Canadian, Mexican and U.S. companies — NAFTA can save you money, and it's here to stay.

NAFTA requires knowledge of country of origin for goods, which in turn requires visibility into the items that comprise a finished good. Knowing preferential duty rates for various items can help a company determine lowest-cost sourcing — for example, whether it's better to source from China or Mexico.

Even companies that may not be manufacturing in the NAFTA region today may want to keep abreast of preferential duty rates to determine whether they should manufacture and source goods in Canada, Mexico or the United States in the future. With the decline of the dollar, increases in fuel costs and the increasing likelihood of supply chain bottlenecks, manufacturing within NAFTA is looking more attractive than ever before. In the 2007 study "Five Ways to Increase the Business Value of Trade Compliance," Aberdeen Group found that if five U.S. importers shifted their sourcing mix across existing suppliers to maximize trade agreements, they could potentially save more than $150 million.

Yet companies need to do their homework before taking advantage of NAFTA. An automobile, for example, has thousands of parts. Companies need a qualification process to determine country of origin for such a product. Because there are many rules and regulations around the answer, determining country of origin for even a single product with many parts is a complex procedure, which is why most companies that want to take advantage of NAFTA procure software that automates the process. Larger companies that source from around the globe and produce thousands of products face even greater challenges.

Technology can help companies manage a variety of NAFTA issues, from overseeing suppliers and FTA information, to qualifying finished goods, to developing a master data repository of product information and trade transactions. Furthermore, using a solution to automate a NAFTA qualification process allows companies to take advantage of other FTAs and bilateral agreements, since all the product information resides in one place.

A Measure of Success

NAFTA's results speak for themselves: the FTA created the world's largest trade bloc. According to the office of the United States Trade Representative (USTR), from 1993 to 2005, trade among the NAFTA nations climbed 173 percent, from $297 billion to $810 billion. U.S. merchandise exports to NAFTA partners grew more rapidly — at 133 percent — than our exports to the rest of the world, at 77 percent. Canada and Mexico are now our first and second largest markets, accounting for 36 percent of our export growth to the world.

Last October, NAFTA trade reached record levels, 11.1 percent higher than in October 2006, reaching $74.2 billion, the highest monthly level ever recorded by the Bureau of Transportation Statistics, part of the U.S. Department of Transportation. The previous monthly high for surface trade was $69.8 billion in March 2007. October 2007 topped that by 6.4 percent.

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