History and Background
Implemented on 1 January 1994 by Canada, Mexico and the United States, the North American Free Trade Agreement, (NAFTA) is designed to facilitate business dealings within the North American continent. Specifically, NAFTA aims to eliminate national trade barriers and ease restrictions on the cross-border movement of goods, services and investments between its three member states.
This objective is reflected in the NAFTA legal framework which, among others, seeks to:
- Eliminate barriers to trade and facilitate the cross-border movement of goods and services between the territories of the member states;
- Promote conditions of fair competition in the free trade area;
- Increase investment opportunities and enforcement of intellectual property rights in each member state’s territory;
- Create effective procedures for the implementation and application of this agreement; and
- Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the agreement.
The results have been impressive: NAFTA has created one of the world’s wealthiest marketplaces. It represents a single market of more than 416 million customers with approximately USD12.3 trillion in economic output. 1
In the ten years since it was implemented, the total trade among the NAFTA members has more than doubled: from USD302 billion in 1993 to USD652 billion in 2003. Now NAFTA members trade the equivalent of USD1.8 billion every day or USD1.2 million per minute. 2
Effect of NAFTA
With the enactment of NAFTA, manufacturers and companies in North America have found it easier to import from other member countries and to sell their wares to customers in other member countries. Thus, for example a Canadian parking lot management company will find it easier under NAFTA to expand into Mexico and the USA. At the same time, it will be easier for said company to buy hardware supplies and/or to hire attendants from both Mexico and the USA. This example is not an isolated one; the advantage of an expanded single marketplace has proven true in most other industries, be it agriculture, financial services or pharmaceuticals. This clearly illustrates that NAFTA has had the desired effect of expanding the marketplace for companies by easing import/export restrictions and by standardizing business regulations among the member countries.
NAFTA and Cash Management
The expansion of their marketplace into different countries with different currencies means that companies and service providers have new requirements for their cash management providers. Too many banks continue to limit their cash management offering to a single country or currency (or separate offerings for each of the countries or currencies), thereby forcing their customers to have at least one cash management provider per country. Regardless of the fact that companies and service providers would clearly benefit from receiving multi-currency cash management services from a single bank.
It is only by using a single bank present in all of the three member countries through an integrated service platform, that a company can benefit from a single point of account management contact, a consistent level of service and an enhanced liquidity management process. This last point is important and merits further explanation.
Indeed, by choosing a multi-currency cash management platform, from a single bank provider, a company can receive a consolidated view of all cash balances, deposits, and receivables. Receiving a single data-feed of information, encompassing all three currencies at once, from a single bank via a single communications format, significantly enhances a company’s ability to manage its liquidity in an effective manner. Specifically, it allows that company to review its current cash positions and anticipated cash positions in each of the currencies and the countries in one single viewing.
Value Added Services
However, a company intent on fully reaping the benefits of NAFTA will require even more value-added services from its cash management provider.
In our example of the parking lot management company, the company may want to convert Canadian dollar (CAD) revenues into US dollars (USD) investment capital in order to buy additional parking lots in Detroit or Mexican pesos (MXN) to buy sites in Mexico City. Our parking lot management company would therefore benefit from having the ability to convert one currency into another quickly, confidently and cheaply. This is of course a service that only a truly global bank can provide.
Efficient cross-border payment execution of all types of payment, be it bulk or one-off payments, as well as collections are other important requirement for companies throughout the NAFTA region. Again, only international banks can offer such a service. The diagram below shows the services an international company operating throughout the NAFTA region may currently require and how an international bank such as HSBC can meet these requirements. It is important to bear in mind that this overview should be read as a snapshot as the number of value-added services offered by international banks is likely to grow as the NAFTA market place becomes more integrated and information technology creates new demands and opportunities.
Summary
NAFTA has offered North American companies and other service providers access to a significantly expanded market. In order to take maximum advantage of this opportunity, NAFTA-type companies need banks that can offer multi-currency cash management services, starting with the provision of multi-currency information – a simultaneous view for all three currencies. In addition to consolidated reporting, multi-currency cash management providers can bring added value to their clients’ businesses by enhancing liquidity management and providing easy currency conversion as well as offering cross-border payment execution and collection.
1 CIA – World Fact Book (2003).
2 Senate Committee of Foreign Relations (2004).