NAFTA and Venture Capital
The VC market in North America has played a role in Free Trade. In many cases these two not only co-exist, but complement one another. The North American Free Trade Agreement (NAFTA) has been instrumental in terms of economic growth for North America. Efraim Landa and other venture capitalists need a strong economic platform from which to operate and the NAFTA has been beneficial for helping provide it.
What is NAFTA?
The North American Free Trade Agreement was implemented in January of 1994. It is an agreement between North American countries to eliminate most of the tariffs on trades made between the nations. Following the agreement, the United States, Canada and Mexico began to phase out tariffs. The purpose of the NAFTA was to encourage economic activity between the three North American nations.
Around ¼ of the imports coming into the US are from Canada and Mexico. These two are the second and third largest suppliers to the US when it comes to imported goods. When President Clinton initially signed the NAFTA into law, the goal was to create 200,000 jobs for Americans within a couple of years and about a million new jobs inside five years. This was expected because imports play a major role in the growth of the US economy. For the venture capitalist, economic growth lays the foundation for new investment opportunities and profitability down the road.
How NAFTA Influences Foreign Investments
One element of the NAFTA that many miss is how the rules in the agreement have had a positive influence on foreign investors. The rules basically strengthen foreign investors’ rights to retain profits from initial investments. The NAFTA also helps ensure equality between domestic and foreign investors. It also prohibits countries from enacting new laws that change statuses for foreign investors and investments once they are made. NAFTA has helped spread the use of technology and its advancements across the region and helps lower costs for consumers. It has also increased employment as proposed and increased earnings from investments that have been made abroad.
NAFTA and Investment Capacity
NAFTA is just one part of an expanding attempt to broaden the capacity of American investors. This and other international free trade agreements are being instituted by organizations with a strong US base. No matter how much capital investment has increased recently, developing countries still lag behind those countries considered to be “developed.” Poorer countries do not have the same access to the funds as richer regions. This brings a great disparity between nations when it comes to VC funding. Europe has a similar agreement between its nations but they allow worker mobility which helps benefit all of the nations involved in the agreement. The North American agreement does not have a mobility element that allows workers to freely move about the three nations to work. American trade agreements are not increasing human rights but instead they are giving in to corporations and investors instead of dealing with human rights and environmental issues. To increase VC funding, there needs to be more mobility between the nations.
Is NAFTA successful?
The question remains then if NAFTA has been a success in spurring economic growth and if it has helped improve trade and increase investments. Trends indicate it has indeed been a success. From 1994 to 2000 the average annual growth rate of the US and Mexico improved significantly. Exports from Mexico increased twice as much as South American countries. Growth rates of the three countries involved in the NAFTA were remarkable.
After 2000 the growth rate trends slowed quite a bit and other nations wanted to capitalize on Free Trade. China began to compete with Mexico for the US market. Mexico has had a difficult time keeping up when it comes to technological advancements. Mexico has stepped up to improve technology and by restructuring they have been able to maintain. Technology acquisition has helped them remain a major player in the world’s economy and opened up a new market for venture capitalists.
Benefits of Free Trade
There are many benefits from Free Trade in general on a global level. Having an open market brings about many positive effects. Just the US economy has been able to experience a growth of more than 23%. This has added over $2.1 trillion in terms of GDP to the US economy. It’s also added to the wealth rate of the average US consumer. The economy has responded well to expanding trades on a global and domestic level. The NAFTA and the establishment of the World Trade Organization (WTO) have provided a platform to help settle trade disputes and boost the world’s economy. This expands the platform VC firms have to work from and with.
Posted on June 29, 2015, in VC investments, Venture Capital, Venture Capital Markets and tagged Free Trade, Global economics, investments, NAFTA, North American Economy. Bookmark the permalink. Leave a comment.