NAFTA and Its Effects on Banking

By Monique M. HO* The North American Free Trade Agreement is viewed to be the economic entente for the United States, Canada and Mexico. Four years after the negotiation agreements for NAFTA and nearly two years after taking effect, the ramifications of reduced tariffs between the countries of North America have had limited effect on the banking industry. However, the last four years are simply a snapshot in time compared to the possible changes that could flourish in the next fifty years. Since Canada's economy and trading relations with the United States are stable, the purpose of this writing is to examine the trading relationship between the United States and Mexico. In order to capitalize on the opportunities NAFTA has to offer, the bare essential of a solid, well-fertilized foundation is necessary before a healthy crop can be harvested. Strong economies in both the United States and Mexico are imperative for the intended goals of NAFTA to be realized and to reap the rewards for the banking industry. The devaluation of the Mexican peso, coupled with political instability, has not encouraged the necessary economy in order for the trade agreement's goals to be realized. The depreciating Mexican peso compared to the strong U.S. dollar has led to the United States importing more Mexican goods rather than exporting more U.S. goods. This will not foster the expected growth and financial environment needed to encourage trading across the U.S.-Mexico border. What have been NAFTA's effects on the banking industry thus far? It would seem logical that the initial impact would be felt along the border states of the United States, particularly Texas. NAFTA was passed with the ultimate idea of reducing tariffs in order to promote trade around the United States, Canada and Mexico. However, in order for the desired increase in trade to result, a closer look at the economies of the participating countries is necessary. The United States is currently experiencing growth and a relatively strong economy. One of its NAFTA counterparts has not been as fortunate. NAFTA should be examined in a broader scope than solely on its direct impact on the U.S. economy. Since Mexico's GDP is significantly less than that of the United States, the benefits of the trade agreement are expected to be minimal for the near future. Whereby, NAFTA's long-term benefits are projected to be substantial since exports have now become the fastest-growing component of the United States national income. Mexico is currently the fastest growing major market for U.S. goods and is now the third biggest trade partner of the United States. NAFTA is particularly beneficial for U.S. banks. Since the Mexican government agreed to major concessions under NAFTA, U.S. banks will be subject to the same rules and standards governing their Mexican competitors (Haraf, 1994). To begin to answer the proposed question of what the effects have been, a complete understanding of the last four years following NAFTA's passage is needed. Much controversy circled around the passage of NAFTA, from all three sides. Canada is responsible for importing more U.S. goods than any other country in the world. NAFTA has encouraged this already strong trading relationship and has facilitated its expansion with reduced tariffs. The United States, Mexico and Canada completed, on August 12, 1992, the negotiations for the passage of the NAFTA. NAFTA's founding goals were simple: to progressively eliminate barriers to trade in goods and services, remove investment restrictions and protect property rights, such as patents and copyrights (Laderman, 1992). However, in 1996, after the dust has settled from the controversy surrounding NAFTA's passage, the preliminary effects remain to be seen. NAFTA reverses a 50-year policy of prohibiting foreign bank ownership of Mexican banking institutions. It will allow U.S. and Canadian banks or other financial institutions to acquire or to establish wholly owned banking, insurance and securities operations in Mexico and to compete on the same terms as Mexican financial institutions. …