The North American Free Trade Agreement (NAFTA) : its effect on South Asia

Over the past three decades, free trade agreements were mostly a European phenomenon European Free Trade Agreement [EFTA], European Economic Community [EEC], and their regional arrangements). Recently, this phenomenon has reached the Americas and is growing. The authors show that free trade agreements now cover about half of world trade in manufactured goods and about 46 percent of total world trade. Free trade agreements discriminate in favor of member countries, so other exporters are naturally concerned about their trade being displaced. The authors try to quantify the adverse third-part effects of the recently concluded North American Free Trade Agreement (NAFTA) on the developing countries of South Asia. They find that because the NAFTA countries and South Asia export different types of goods,exports from South Asia will be displaced for only a narrow range of products (probably little more than 10 four-digit SITC groups). The sector most affected is textiles and clothing, given that the preferential removal of tariffs (in the 15 to 30 percent range) and MFA quotas could give Mexico a formidable competitive advantage in the U.S. market. But domestic supply constraints (Mexico seriously and consistently underutilizes its textile and clothing quotas), and NAFTA's domestic import content regulations should limit the amount of trade that Mexico may displace in these sectors. Using a partial equilibrium trade projection model developed by UNCTAD and the World Bank, the authors try to quantify the trade diversion South Asia could experience in North America as a result of NAFTA. The model focuses on NAFTA's short-run impact on South Asian trade. This study does not address dynamic long-run effects, such as changes in terms of trade, investment diversion, and externalities associated with the growth dividend. The results suggest that the total export decline could be about 1 percent, with projections for Bangladesh slightly higher (because textiles and clothing represent a higher-than-average share of Bangladesh's exports). The authors argue that successful completion of the Uruguay Round would considerably reduce South Asia's potential losses, as it would lower the preference margins that NAFTA could provide its member countries. To put the two events in perspective, the authors note that the trade gains South Asian countries could experience from successful completion of the Uruguay Round are about 100 times greater than the losses they might incur from NAFTA.