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Nafta

NAFTA

The 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

Canada

There 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.

Canada

Although 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 States

There 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.

Mexico

In 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 Agreement

The 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 Links

North-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.

Road

Road 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.

Rail

In 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.

Marine

Several 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.

Air

Flights 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.

Intermodal

Intermodal 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 Services

Massive 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 Crossing

The 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 Directions

With 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 Overview

Background

The 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.

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