NAFTA debate

The North American Free Trade Agreement, or NAFTA, is an agreement which helps facilitate trade between the three countries of North America—the United States, Canada, and Mexico. In effect since January 1, 1994, NAFTA has had a major impact on the economies of all three nations; however, it is set to be replaced by the US-Mexico-Canada Agreement, signed by the three countries in 2018.

NAFTA is designed to facilitate the flow of trade between the three countries in North America. Initiatives to ease tariff restrictions and other duties on trade goods have removed nearly all protectionist trade policies between the three countries. NAFTA allows most manufactured and agricultural goods to be exported and imported freely to and from each country with a minimal amount of taxes.

For free-trade advocates, NAFTA has been a rousing success, with the volume of trade between all three countries increasing exponentially since 1994. Foreign investment, especially in Mexico, has increased greatly and helped stimulate job growth. As the weakest economy of the three countries, Mexico has benefited the most from the treaty. A 2014 Center for Economic and Policy Research study showed that Mexico’s real per-capita gross domestic product (GDP) had grown 18.6 percent since joining NAFTA twenty years earlier. Based on such figures, NAFTA supporters then promoted further free trade agreements to encompass all nations in the Caribbean and Latin America in the mid-2000s.

Critics of NAFTA, however, interpret the data differently. NAFTA governments promoted the trade agreement as a solution for sluggish economies and promised that it would spur job creation in all three economies. However, the agreement also included the elimination of restrictions for manufacturing and investment, opening up opportunities in the NAFTA states for foreign industrial development. This meant that nations could invest in industrial manufacturing facilities in any of these three states and benefit from free trade. As a result of these measures, several industries in the United States reported job losses due to companies shifting their operations to Mexico. In the United States, NAFTA became a political issue, with many American voters, especially those who have lost jobs to the free-trade agreement, arguing for a United States withdrawal from NAFTA. President Donald Trump criticized NAFTA for shifting US manufacturing production and American jobs to Mexico and initiated negotiations to replace the agreement. The resulting US-Mexico-Canada Agreement (USMCA), which was pending ratification by all three countries as of 2019, updates various provisions of NAFTA without being a radical departure from it.

Understanding the Discussion

Export: Domestic goods traded into a foreign market.

Free trade agreement: An agreement between a group of countries to eliminate tariffs and taxes on all goods traded between them.

Import: Foreign goods that are traded into a domestic market.

Subsidy: A government payment to domestic industries to protect their products on the international and domestic markets.

Tariff: A tax placed on imported goods in order to protect the same domestic product in that nation’s marketplace.

History

With many economies around the world destroyed or severely weakened by World War II, the United States used a series of international financial agreements and loans to help develop economies and promote international trade. The first substantial contribution was the General Agreement on Tariffs and Trade (GATT), which established limits on tariffs in order to encourage economic cooperation between countries and trading partners. As postwar international trade increased, economists theorized that further free trade and worldwide economic agreements would be economically beneficial by increasing trade, and thereby providing greater economic stability for all countries involved.

In 1989, free-trade advocates pressed the Canadian, Mexican, and US governments to join together in a free-trade agreement. The proposed agreement would eliminate most tariffs on agricultural and manufactured products traded between the three countries. Restrictions on direct investment by foreign companies would also be eased, allowing foreign development of domestic industries. As trade and foreign investment increased, advocates argued, more jobs would be created in each economy, thereby eliminating problems such as illegal immigration and depressed currencies. The agreement would also include provisions to protect workers’ rights and defend the environment.

The framework of the deal was drafted under the administration of US president Ronald Reagan and negotiated under US president George H. W. Bush. In 1989, Canada and the United States signed a free-trade agreement. In 1992, US president Bill Clinton began working to expand the free-trade agreement to Mexico. Many financial institutions and industry leaders supported the expansion, but organized labor opposed it, believing it would hurt American workers. In the 1992 presidential campaign, independent candidate H. Ross Perot claimed that NAFTA would have Americans hearing “a great sucking sound” of jobs leaving for Mexico.

Despite opposition, Congress authorized the expansion, and on January 1, 1994, the North American Free Trade Agreement went into effect.

When NAFTA took effect, the US economy was booming; by 2001, it was in recession. While the economy has fluctuated since that time, some industries have shown a decline, notably American manufacturing and Mexican agriculture. Economists are divided on this issue, with both sides using the same economic data to arrive at opposing conclusions.

For the last years of the 1990s, few could argue against the positive effects of NAFTA. From 1993 to 2002, trade between the three countries increased by 106 percent. The Mexican economy alone grew by 30 percent, and direct investment by American and Canadian businesses averaged US$13 billion annually.

In the United States, more than 200,000 new jobs were added. American agricultural exports to Mexico increased to account for 6 percent of all American exports to Mexico, with American farms providing 75 percent of Mexico’s agricultural products. As trade increased, the transportation of goods between all three countries was streamlined, resulting in faster trade and greater profit.

Encouraged by these statistics, NAFTA advocates hoped to further integrate the three economies and seek to reduce tariffs to below 2 percent. Subsequently, there were high-level discussions by governments in the Western Hemisphere to form a free-trade agreement for all of the Americas. The Central American Free Trade Agreement (CAFTA), which went into effect in 2005, includes the nations of Central America along with several Caribbean islands in a free-trade agreement with the NAFTA countries.

The opponents of NAFTA reach different conclusions. While they do not deny the increase in trade between the three countries, economists point out that large corporations, not the working class, have benefited most from this trade. Many American manufacturing jobs were lost as American corporations moved factories across the border into Mexico, where they could hire Mexican workers for lower wages. Any new jobs created by NAFTA are identified as lower-paying employment, with overall wages declining in the United States and Canada. Moreover, while American agricultural exports have increased to Mexico, Mexican farmers have suffered. Government subsidies allowed American agribusiness to undercut prices, driving many Mexican farmers out of business.

NAFTA Today

Due to increased competition with China, the Mexican economy has struggled to retain its trading status with the United States. Many American companies, previously drawn to Mexico, began building factories and investing in China, where labor costs are lower. Relations between Canada and the United States under NAFTA, however, have thrived steadily. Companies such as Canada’s TD Bank have found great success in their cross-border ventures, and trade between the United States and Canada has been strong. In 2017, US goods and services trade with Canada hit $332.3 billion in imports and $340.7 billion in exports, for a total trade value of $673.1 billion and a trade surplus of $8.4 billion for the United States. Between 1993 and 2015, Canadian goods exports to the United States increased at an annualized rate of approximately 4.6 percent.

Beyond macroeconomics, however, there has existed a great deal of opposition to NAFTA in the United States. Laid-off and unemployed workers frequently blame NAFTA for their unemployment, which has grown with struggling economic conditions. Many Mexican immigrants come to the United States illegally to take advantage of the greater earning potential offered by American industries; opponents argue that the lack of a coherent immigration plan is one of NAFTA’s major faults.

NAFTA is often cited by antiglobalization activists as an example of economic servitude. They charge American corporations with exploiting workers on all sides of the borders by shipping factories to Mexico where they can pay lower wages and benefits and can avoid American labor unions.

In light of the perceived success of NAFTA, the administration of US president Barack Obama sought to expand free trade. In October 2015, the United States and eleven other Pacific nations concluded negotiations on the plurilateral Trans-Pacific Partnership (TPP). TPP included the NAFTA countries, Australia and New Zealand, the Asian countries of Brunei, Japan, Malaysia, Singapore, and Vietnam, and the South American countries of Chile and Peru. In addition to the areas typically covered under an FTA, the TPP aimed to address services, intellectual property, and investments, as well as environmental and labour concerns. However, shortly after US president Donald Trump, who was elected in part on a platform of opposition to free trade, took office in January 2017, he withdrew the United States from the TPP deal.

In 2017, the Trump administration initiated a renegotiation of NAFTA with Canada and Mexico, resulting in the signing of the US-Mexico-Canada Agreement in September 2018. Despite Trump's vows of radical reform and improvement, however, the USMCA did not revise NAFTA drastically; rather, it improved labor and environmental regulations, updated intellectual property and digital trade provisions, gave US farmers more access to the Canadian dairy market, and adjusted country-of-origin rules for automobile manufacturing. As of 2019 the deal needed to be ratified by the governments of all three countries before taking effect and replacing NAFTA.

Some economists have refused to either endorse or oppose NAFTA, insisting that since free trade agreements are so large, complex, and recent, there is little chance of gauging their true effect on world macroeconomies. However, most estimates indicate that NAFTA has had a small but positive effect on the gross domestic product of the United States—representing less than 0.5 percent—and adds several billion dollars to the US economy each year.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

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