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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 Le�n. 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.
North American Truck Delivery (in hours)
New YorkChicagoSan FranciscoMexico CityHalifax to:2456144120Montreal to:1825120110Toronto
to:1220108115Winnipeg to:72368470Calgary to:82465878Vancouver to:108703688
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.
North American Rail Delivery (in hours)
New YorkChicagoSan FranciscoMexico CityHalifax to:9677180205Montreal to:4836144169Toronto
to:4824130155Winnipeg to:7236120191Calgary to:1026696215Vancouver to:1209672250
Source: CN North America
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.
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:5:533:522:456:19
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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