Category: Business Report

Introduction

NAFTA, North America Free Trade Area, refers to the free trade region formed by the United States, Canada, and Mexico. This block of the three North American countries has removed trade barriers and tariffs on trade in agriculture, clothes, and electronics. Consequently, it has helped to increase trade in these commodities between the member countries. For instance, the United States trade in agricultural products with Canada has improved immensely due to the free trade area. This is because the block gives the country the comparative advantage in the market for its goods in all the three member countries. On the other hand, Swiss Credit is a multinational company from Switzerland that offers financial services in many countries worldwide. It has its headquarters in Zurich and operates the Suisse Bank among other financial services companies. Multinational companies enjoy comparative advantage, especially when they operate in the regions with a single currency or in a trading block, such as NAFTA.

Overview

Comparative advantage allows a country that has efficiency in producing a good or offering a service to produce and export it to the countries that have lower efficiency in production. This paper examines the comparative advantage of the countries in NAFTA. Additionally, it analyzes the advantages and disadvantages that the countries that operate a single currency have and the way it helps the multinational trade. This happens by eliminating their need for hedging and aiding them in accounting and reporting. In addition, the paper analyzes the economic similarities of the economies/countries, where Swiss credit operates, and the economic differences of those economies.

Comparative Advantage for Countries in NAFTA

Comparative advantage is an ability of one state to produce a good at lower costs, both marginal and opportunity, than other states. Regardless of one country’s ability to produce all goods more efficiently than others, the three members may still do trade with one another, as long as they have differing relative efficiency. The block trades freely on agriculture, clothes, and electronics. The country that has a better comparative advantage in producing any of these items is, therefore, given free access to the market in the three countries (Pastor, 2001).

How NAFTA Affects Trade and Employment

NAFTA has helped multinationals, such as Swiss credit, in many ways. For instance, the block offers a bigger market for the services that the financial multinational provides. It enables the corporation to trade freely in the three economies due to the decreased trade barriers. It is able to reduce cost by offering some of the services in the most efficient member country, while still being able to supply the services in the entire block (Clement, 1999).

In addition, NAFTA provides the corporation with a pool of potential employees from all the member countries. Swiss credit can employ the most affordable human resources from any member country. This reduces its cost of maintaining the human resource and, therefore, affects the corporation in a positive way.

Figure 1: Statistics for NAFTA Countries

NAFTA Partners

Canada

U.S.

Mexico

Combined

Population (July 2008 est.)

33.3 million

304.1 million

106.7 million

444.1 million

Languages

English and French

English

Spanish

 

Gross Domestic Product, 2008 (Current prices, US$)

1,501 billion

14,441 billion

1,087 billion

17.0 trillion

Trade with NAFTA Partners, 2008 (Current prices, US$)

570.8 billion

919.9 billion

393.5 billion

946.1 billion

Inward Foreign Direct Investment Among NAFTA Countries, 2008 (US$)

240.0 billion

229.8 billion

156.0 billion

 

Jobs Created 1993-2008 (millions)

4.3

25.1

9.3

39.7

National Employment Level, 2008 (millions)

17.1

145.4

43.2

205.7

Pros of a Single Currency

Using a single currency has a number of advantages, as compared to the situation, where each country maintains its own currency. For instance, a single currency puts to an end the problems of instability in currency by permanently fixing the exchange rates. Curbing exchange rates fluctuations and reducing the external currency instability increases exports and, therefore, spurs economic growth.

In addition, the citizens of the states that operate a single currency do not have to change currency every time they close the boarders. This would eliminate the costs of changing currency and, therefore, encourage cross-border trade. Businesses involved in transactions in the different countries of the block also eliminate the need to hedge against the threats of currency fluctuations. They also eliminate administrative accounting costs for the currency change.

Moreover, a single currency reduces the problems of current account deficits. It results in lower interest rates across the block, because individual member states lock monetary credibility on a better rated state. This stability pact forces the member countries into a responsible fiscal system, which, in turn, enhances the currency’s international credibility. This leads to more investments, lower cost of mortgage, and more jobs than in other systems.

Disadvantages of a Single Currency

A single currency makes it difficult for the member states to implement some economic measures. For instance, a country may find difficulties to change exchange rates to combat recession. It will not be allowed to devalue its currency in order to boost exports, and it will be curtailed to boost job creation in borrowing or even cut taxes, when it deems it fit.

Additionally, the member states of an economic federation are not always in the same economic condition. Some of the states may be growing better than the others. The situation, compounded by the inability of member’s central banks to set inflation level for each member, may cause a financial crisis capable of bringing the other members down. Single currency leads to erosion of national sovereignty, in addition to being very costly. Language barriers and cultural differences also impede mobility and, therefore, erode the advantages of a single currency.

How a Single Currency Impacts Multinational Corporation

Multinationals like Swiss credit can be viewed as stateless organizations. The Swiss credit has international networks that enable knowledge transfer and movement of best practices across national and functional boarders.

The companies such as Swiss credit are affected positively by a single currency. For instance, a single currency aids in the accounting processes of the company. It helps the company to value its entire assets uniformly, regardless of the country of location. In addition, a single currency helps the company in transactions. It enables the currency to buy or sell any of its services in one currency. This eliminates the need for hedging, which is usually a huge expense. A single currency would also help Swiss credit during reporting. Reporting is a legal requirement for all listed companies. A single currency would enable Swiss Bank to prepare a single financial report for use in all countries that use the currency.

Swiss credit operates in more than 56 countries all over the world. There is a number of similarities and differences in the economies that Swiss credit operates in; for instance, in Europe the corporation enjoys the advantage of the single currency, Euro. It also operates in other trade blocks, such as NAFTA. This region has a lot of administration and tariff similarities that have been put to ease trade inside the block in place.

Furthermore, Swiss Bank operates in the countries with liberal financial policies. Most of its area of operation does not suffer from the unnecessary trade barriers.

On the other hand, all countries outside Europe, where it operates, have different internal regulations. They also operate different tax regimes and employment policies. For instance, employee protection in South Africa is not as strict as it is in the United States.

Conclusion

Economic integration plays a huge role in creating a conducive environment for business, especially multinationals, to operate. It eases trade within the block and spurs economic growth in all the member states. It also increases employment, because multinationals set up in places to promote economic and labor policies. In addition, each country is left to produce only the goods that it has a comparative advantage in producing and imports the rest.

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