FREE TRADE AND THE PRICE ELASTICITY OF DEMAND: NESTLE cuca The 1990s were characterized by an explosion of free-trade agreements among impor- tant trading partners, The Europe 1992 plan virtually eliminated trade barriers, and goods now flow freely and without tariffs from one European country to another. Increasing stan- dardization of products in these markets will further reduce trading barriers. On the NorthPART I Demand and Forecasting ‘American continent, the North American Free Trade Agreement (NAFTA) was ratified in the United States, Canada, and Mexico. In 1994, the General Agreement on Tariffs and Trade (GATT) was implemented, leading to a worldwide reduction in tariffs and other trade barriers. ‘What are the implications of these reduced trade barriers for estimates of price elas- ticity of demand? Free trade results in an effective increase in the number of substitute goods that are available to consumers and businesses in any country. Consequently, as barriers to free trade come down, the demand will become more price elastic for goods that historically have not been able to flow easily (without significant tariffs or quotas) between countries. Nestlé’s yogurt and custard products now travel from manufactur- ing sites in the British Midlands to Milan in 17 hours, whereas the customs processing and transportation bottlenecks once required 38 hours. Similarly, iron forging of crank- shafts and engine blocks for U.S. auto companies now occurs primarily in Mexico. The winners in this globalization process should be consumers, who will have a wider vari- ety of products to choose from at competitive prices. The losers will be those firms that cannot compete in a global market on the basis of cost, quality, and service.