How NAFTA has affected the financial service industries in the United States, Canada, and Mexico

The North American Free Trade Agreement (NAFTA) was enacted in November of 1993 with aims to facilitate the free flow of goods, services and labor between the United States, Canada and Mexico. The ratification of NAFTA created the world’s largest free market with roughly 390 million consumers and an estimated total output of $8.6 trillion. Clearly, this trade alliance has had a major influence on the financial service industries of the participating nations and will continue to do so in the future. However, the financial service provisions of NAFTA will have sufficiently greater implications for Mexico than either the United States or Canada. This is in part because Mexico is embarking upon a greater shift towards openness in its financial service industries. The fact that the financial markets of Canada and the United States have been highly integrated prior to NAFTA implies that they will not benefit as much from transactions within their own markets. What’s more, Canada’s trade with Mexico is 1 percent of its trade with the United States. However, the principal gains from financial integration of this sort have largely to do with the more efficient allocation of capital across international boundaries and the more efficient provision of domestic financial services to consumers.

The primary gains to the United States from the NAFTA financial services agreement will be predominantly seen in the long run. The access to a market that includes 90 million people and has been served by a financial and banking sector that has been relatively inefficient and illiquid will prove to be a major advantage to the United States. Although the market access to Mexico’s financial industry has been gradual, U.S. banks, insurers and financial companies have free and fair access to Mexico. Further, in contrast to Canada, the United States has had strong historical ties with Mexico and this familiarity is expected to provide an advantage to the United States in Mexico. In the years to come, further growth of business for U.S. banks and financial institutions because of NAFTA can be expected.

A key impact of the financial services sector is that U.S. banks and financial institutions will be forced to improve their competitiveness. The McFadden Act (1927) and the Glass-Steagall Act (1933) limited branch-based banks an...

... middle of paper ...

...a hemispheric bloc, although experts estimate that an expansion throughout Latin America will take much time and resources due to political maneuvering. Regardless, the implications of such an agreement will most assuredly impact the economies of all countries involved in a dramatic and unparalleled fashion.

REFERENCES

Crary, D, “Royal Bank of Canada and Bank of Montreal Plan Merger”,

Associated Press, January 23, 1998.

Chant, J, “The Financial Sector in NAFTA: A Trinational Analysis”,

S. Globerman and M. Walker, 2000.

Gonzalez-Hermosillo, B, “Financial Integration in North America” Paper presented at the session “Capital Mobility and Financial Integration in North America,”

Allied Social Science Associations annual meetings, Boston (MA), 3-5 January 2001.

Wonnacott, R.J. 2000. “The NAFTA: Fortress North America?” Commentary

(C.D. Howe Institute), no. 54:1-18.

White, W.R. 1999. “Some Implications of International Financial Integration for

Canadian Policy” Technical Report No. 57. Ottawa: Bank of Canada.

Garber, P.M. and Weisbrod, S.R., Opening the Financial Services Market in Mexico”,

The Mexican-US Free Trade Agreement.