The Implications of the FTA and NAFTA for Canada and Mexico

This report highlights the possible implications of the Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA) for Canada and Mexico. While it is still early, the initial evidence indicates that these treaties are contributing to a continental process of industrial restructuring that will contribute to higher living standards over time.

The report focusses on the chapters in the treaties that deal with financial services. The FTA was path-breaking because it was the first international treaty of its kind to deal explicitly with financial services. NAFTA also broke new ground in that it went beyond attempts to resolve identified bilateral problems and established principles to guide future trade relations.

The financial service provisions of NAFTA will have significantly greater practical implications for Mexico than for either Canada or the United States. Since Mexico is embarking upon a relatively greater shift towards openness, the gain in efficiency in the provision of domestic financial services and the international allocation of capital will also be commensurately greater. Nevertheless, the report does note certain important implications for Canada and the United States as well.

The fact that the financial markets of Canada and the United States were highly integrated prior to these treaties implies that they will not have significant effects on the conduct of Canadian monetary policy. In contrast, the liberalization of Mexican financial markets is likely to make the framework of Mexican monetary policy look more like that of Canada.

The report finishes by asking whether freer trade in North America should be accompanied by fixed exchange rates between the economic partners. It concludes, largely on the basis of arguments about optimum currency areas, that both Canada and Mexico will be better served by maintaining a regime of flexible exchange rates with respect to the U.S. dollar.