North American Free Trade Agreement

Abstract

This article concerns the North American Free Trade Agreement (NAFTA), which became effective in 1994. This is an agreement signed by the United States, Canada, and Mexico aimed at eliminating trade barriers among the three nations. Essentially, NAFTA is an extension of the Free Trade Agreement between Canada and the United States that was established in 1989. There are a number of other considerations beyond free trade under the scope of the NAFTA, including but not limited to intellectual property, telecommunications, and environmental protection. This article will provide an overview of the history of NAFTA and its impact on trade and labor in North America. There will also be a discussion of the agreement's effect on certain industries in each signatory country as well as issues related to NAFTA.

Overview

History of NAFTA. In January of 1994, the United States, Canada, and Mexico entered into the North American Free Trade Agreement (NAFTA or the Agreement), and in so doing created the largest free trade zone in the world. At that time, NAFTA was the most comprehensive free trade agreement implemented by friendly nations. Moreover, the Agreement marked the first time that a developing nation entered into such a trade relationship with developed nations (Hirsch, 1995).

NAFTA was essentially an expansion of the Free Trade Agreement (FTA) entered into between the United States and Canada in 1989. Canada and the United States were already each other's largest trading partners and the FTA was aimed at eliminating tariffs between the two countries. Even though the U.S. and Canada had long established trading relations, there were numerous disputes over tariffs imposed on certain products. This was particularly the case with respect to trade of softwood lumber.

Softwood lumber is the largest product that Canada exports to the United States and is used extensively by U.S. homebuilders. Softwood lumber is produced from pine, spruce, firs, and other "softwood" trees. In addition to softwood lumber, Canada also supplies the United States with oil and natural gas while the United States exports significant amounts of beef as well as a broad array of agricultural products to Canada. So the FTA was aimed at eliminating barriers to trade between the two nations, and ultimately to make the agreement multilateral.

Prior to the enactment of NAFTA, goods traded between Canada and the United States received "most favored nation" treatment. This designation affects the manner in which nations must treat each other's goods and services. Most favored nation status provides equal levels of "preferential" treatment to products manufactured in countries who are signatories to the General Agreement on Tariffs and Trade (GATT), an agreement initially negotiated in 1947 among 23 countries including the United States, Canada, and those in Western Europe. Over the ensuing years, GATT was expanded to include many of the developing nations. The so-called Uruguay Round of negotiations during the 1980s resulted in the establishment of the World Trade Organization (the WTO) in 1995. The purpose of this organization is to oversee the further implementation of GATT and the agreements established by the Uruguay Round. Included in those agreements were the elimination of duty restrictions and a timetable to eliminate tariffs on certain products. These are important developments to consider as the expansion of world trade has affected trade among the U.S., Mexico, and Canada.

In addition to goods and services traded between the United States and Canada being granted most favored nation treatment, under the terms of the FTA, Canadian manufactured goods that were made from products imported from the United States and which were subsequently exported back to the U.S. were entitled to the return of duty that had been imposed on the imported products. A duty is essentially a tax on an imported good or service, and in some ways is similar to a tariff. A tariff, moreover, is a fee imposed on imported goods that gives locally produced goods a price advantage over similar goods that are produced abroad. Essentially, there are two types of tariffs:

• An ad valorem tariff is a fee calculated as a percentage of the value of the imported good.
• A specific tariff, on the other hand, is a set dollar amount applied to each imported unit of a product.

With respect to products that were exported from Mexico to Canada, duty rates were decreased because Mexico is considered a developing country (Hirsch, 1995).

Including Mexico in a free trade agreement was a natural progression of the FTA, since both the United States and Canada were trading with Mexico under separate bilateral agreements. Further, the fact that disputes still remained between Canada and the United States required revisions to the FTA. The main objectives of NAFTA were to eliminate trade barriers and expedite the shipment of products among the nations, to allow for fair competition and enhanced investment opportunities, to establish effective implementation procedures and a system to resolve disputes, and finally, to create a framework for the expansion of the agreement to establish greater multilateral trade and cooperation (Hirsch, 1995).

Effects of NAFTA. NAFTA effectively eliminated duty rates for products flowing through the three nations and requires the importer to verify the origin of the goods. Since NAFTA was initially limited to the three signing nations, there was a need to establish strict controls to verify the country of origin of imported products. This was an especially sensitive issue for Canada, since certain wood products from the U.S. are manufactured with wood from other countries. Therefore, NAFTA established a system that places the burden on manufacturers and importers to verify the country of origin. The administrative procedures put into place require the completion of a certificate of origin. This is a statement provided by the supplier of a good or service that the product is in compliance with the rules of origin requirements of the agreement (Hirsch, 1995).

At the time NAFTA was being negotiated, it was a hot-button political issue that played a role in the presidential campaigns in all three nations. However, since the agreement was signed in 1994, there has been an increase in free trade among Canada, Mexico, and the United States. Trade is considered "free" or open when goods or services can be delivered into markets without duty restrictions and, therefore, prices are ultimately determined by supply and demand. One of the objectives of free trade is to provide consumers expanded choices for goods and services. This increased competition should result in lower prices and improved quality of products and most importantly economic stability in the North American marketplace.

While each of the signatory nations to NAFTA has benefited from the pact, there have been complications. The establishment of the WTO in 1995 and the agreements of the Uruguay Round contained provisions for eliminating tariffs that replaced or superseded those established by NAFTA. Moreover, after China was granted most favored nation status by the U.S. and eventually admitted into the WTO, increased trade between China and the United States affected trading levels with Mexico and Canada. In fact, for a time, China became America's largest trading partner and American manufacturing jobs that many claimed would be lost to Mexico were actually lost to China. The future of NAFTA was called into question with the inauguration in 2017 of Donald Trump as US president; Trump had campaigned on a protectionist, anti-free-trade economic platform and vowed to either renegotiate or walk away from NAFTA.

Applications

Benefits. Notwithstanding the foregoing impediments to the success of NAFTA, the agreement has been positive for all three signatories. In addition to the benefits that have arisen for consumers, there have also been benefits for certain North American businesses and industries. From the perspective of the United States, many businesses gained access to a greater market throughout North America and have been the beneficiaries of new export and investment opportunities. For Mexico, all products imported from the country became duty free by 2008, as all of the act’s provisions became vested in January of that year. Canada has also benefited because the agreement established procedures to resolve trade disputes that were not as extensive as the provisions originally set forth in the FTA. Ultimately these procedures prompted the United States and Canada to resolve the longstanding dispute over the tariffs imposed by the U.S. on Canadian softwood lumber (Howard, 2006). However, softwood lumber tariffs were reimposed by the Trump administration in April 2017.

Canadian Furniture Industry. On a corollary note, the Canadian wood furniture industry has seen an increase in trade with the United States. Increased exports to the U.S. of Canadian-produced wood furniture has helped provide Canada with the opportunity to invest in modern technology, which ultimately led to more efficient and productive companies. On the other hand, in connection with rules and requirements for certificate of origin mentioned above, some Canadian manufacturers now use wood or other products that are manufactured in China and other Asian countries. In addition, these countries are also producing wood furniture at a lower cost than the Canadian producers, some of whom claim that the Asian nations are not competing fairly. Despite this development, there is still a great deal of opportunity for Canadian manufacturers, particularly those that emphasize the quality of their products (Howard 2006).

American Manufacturing. Some of the other industries that have benefited from NAFTA include those involved with agricultural trade, the automotive industry, and the textile and apparel industry. For the U.S., NAFTA has enhanced the production and efficiency of the agricultural sector as the market has become more integrated. Moreover, vehicles and automotive parts that are manufactured in America have become more competitive and efficient. While some of these manufacturing jobs have been displaced from Midwestern states, there has been a net gain of manufacturing jobs in this sector in the Southeast. There has also been improvement in the American textile and apparel industry. Prior to NAFTA, America faced stiff opposition from Asian markets and this sector saw many textile market job losses. However, the effect of the agreement has been enhanced efficiency and productivity and manufacturing investment in the United States' textile and apparel industry (Field 2006).

North American Markets. One of the effects of increased international trade and competition has been the need for foreign businesses to establish a presence in North America. Moreover one of the most significant impacts of NAFTA has been the effect the agreement has had on the North American labor market. This is being manifested in the integration of a bi-national labor market particularly in the United States and Mexico; a result of the dramatic influx of Mexican citizens into the United States. Between 1994 and 2004, 10 million Mexicans moved to America. However, since that time, Mexican immigration to the United States has dropped off considerably. From 2005 to 2010, 1.4 Mexicans immigrated to the United States (Passel, Cohn, & Gonzalez-Barrera, 2012). The influx of Mexican immigration from 1994 to 2004 correlates to the implementation of NAFTA, while its decline in subsequent years is attributable to the financial crisis that began in 2008 as well an increased spotlight on border security (Passel, Cohn, & Gonzalez-Barrera, 2012).

One factor contributing to the influx of migrant workers into the U.S. is the increased need for low skilled labor, especially in the hospitality, construction, and agricultural industries. In this regard, the Mexican government has not been successful in establishing economic policies to create these jobs in their own country. In addition to the increased need for low-skilled workers, however, the United States and Mexico have also established programs for the recruiting, training and seasonal allocation of managers, technicians and skilled professionals. These developments have far reaching implications for both countries (Quan, 2005).

American Economy. Overall, the agreement has had a positive impact on the United States' economy. For example, during the 1990s, U.S. exports to Mexico increased 400 percent, while exports to Canada increased by more than 200 percent. Further, exports from these two countries to the United States and each other also rose dramatically. This trend continued in the first decade of the twenty-first century. However, there have been other world developments that have tempered the positive effects of NAFTA. While China, as a most favored nation, became the largest exporter of goods to the United States and the integration of the European Union has resulted in increased global competition for the North American trading partners, another significant event had an effect on the early promise of NAFTA: the September 11, 2001 terrorist attacks on the United States. The ensuing war years prompted America to partially turn its attention away from trade relations with Mexico to focus attention on the Mideast and Central Asia (Field, 2004).

Viewpoints

Political, Economic & Environmental Issues. There are many political, economic, and environmental issues related to trade relations. In particular, the Doha Round of negotiations in the WTO for a time contemplated the elimination of all tariffs for products manufactured and traded among WTO members, which had the potential to mitigate possible future benefits of NAFTA, and could have also resulted in increased global trading competition. However, the WTO members participating in the Doha Round reached an impasse in 2008, and no significant progress has been made since. Notwithstanding the concerns of global trade agreements, the North American Free Trade Agreement has benefited the three signing countries, albeit in different ways and to different degrees.

Central American Free Trade Agreement. In addition to the aforementioned initiatives, the provisions of NAFTA were expanded by the signing of the Central American Free Trade Agreement in 2005. This is an agreement based on the principles of NAFTA that was entered into among the United States and its new Central American trading partners: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. CAFTA eliminates most of the duties on certain U.S. products exported to those countries and has potential benefits for the chemical, environmental, and transportation equipment industries. At the same time, this agreement calls for investment by the United States in each of these countries. The aim of this investment is to develop infrastructure and to create jobs (Field 2006).

Terms & Concepts

Certificate of origin: Under the provisions of NAFTA, the certificate that a manufacturer or importer is required to obtain from a supplier that verifies the origin of a product.

Common tariff: A concept being considered that would create a common tariff on similar products manufactured in the U.S., Canada and Mexico the funds from which would be used to finance the development of infrastructure in central Mexico.

Doha Round: The current round of negotiations by the WTO aimed at implementing the agreements originally established under GATT which call for the elimination on all tariffs among the participating countries.

Dominican Republic–Central American Free Trade Agreement (DR-CAFTA): A 2005 pact among the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua that eliminates tariffs on U.S. goods and contemplates direct foreign investment by the U.S. in each of the signatory countries.

Duty: 1A tax imposed on an imported good..

Free trade: Trade that allows for goods and services to be delivered to markets without duty restrictions.

Free trade agreement (FTA): (1989) The agreement entered into between Canada and the U.S. that eliminated certain trade barriers and ultimately led to the establishment of NAFTA.

General Agreement on Tariffs and Trade (GATT): The agreement entered into in 1947 that established international trade policy among the signatory nations in an effort to ensure economic security after WWII..

Most favored nation: Status given to a signatory nation to GATT (and its successor, the WTO), that ensures equal treatment of all signed countries regardless of size, economic status, etc.

North American Free Trade Agreement (NAFTA): (1994) Agreement among the U.S., Canada, and Mexico that replaced the FTA and that eliminates trade barriers and duty restrictions on products traded among the three countries.

Products: Goods and services that are manufactured and ultimately traded among countries.

Rules of origination: Provisions established under NAFTA that require the verification by a supplier that a good or service contains products exclusively from the providing country or one of the trading partners.

Tariff: A fee imposed on a good or service that gives local goods a price advantage over goods produced abroad.

Uruguay Round: (1986-1994) Trade negotiations that established the WTO from what was the General Agreement on Tariffs and Trade, and called for elimination of duty restrictions and the easing of certain tariffs.

World Trade Organization (WTO): The organization founded in 1995 and responsible for overseeing the implementation of GATT and the agreements of the Uruguay Round.

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Carlson, J. (2014). NAFTA's legacy. Baylor Business Review, 32, 26–28. Retrieved November 17, 2014, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=95937980&site=bsi-live

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Passel, J. S., Cohn, D., & Gonzalez-Barrera, A. (2012, April 23). Net migration from mexico falls to zero—and perhaps less. Pew Research Center. Retrieved December 3, 2013 from http://www.pewhispanic.org/2012/04/23/net-migration-from-mexico-falls-to-zero-and-perhaps-less/

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Suggested Reading

Carpentier, C. L. (2006). NAFTA Commission for Environmental Cooperation: Ongoing assessment of trade liberalization in North America. Impact Assessment and Project Appraisal, 24, 259–272. Retrieved on January 11, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=23423119&site=ehost-live

Cooke, A., Hamilton, T., & Werner, M. (2017, October). Trade governance at a crossroads: Continuity and change in uncertain times. Competition & Change, pp. 388-396. doi:10.1177/1024529417729325. Retrieved March 12, 2018, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=125555996&site=ehost-live&scope=site

Field, A. M., Szakonyi, M., & Cassidy, W. B. (2014). NAFTA at 20. Journal Of Commerce, 15, 10–17. Retrieved November 17, 2014, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=93998106&site=bsi-live

Frickel, B. J., Kotcherlakota, V. V., Tenkorang, F. A., & Elder, B. R. (2011). The effect of NAFTA on trade and investment between member countries. International Business & Economics Research Journal, 10, 1–8. Retrieved December 3, 2013 from EBSCO online database, Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=62812597&site=ehost-live

Hakim, P. (2006). Is Washington losing Latin America? Foreign Affairs, 85, 39–53. Retrieved on January 12, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=19250175&site=ehost-live

Ley-Borras, R. (2005). A decision analysis approach to policy issues: The NAFTA case. Review of Policy Research, 22, 687–708. Retrieved on January 12, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18316325&site=ehost-live