North American Free Trade Agreement (NAFTA) and new markets

Identification Trilateral trade and common tariff agreement among the United States, Mexico, and Canada

The North American Free Trade Agreement significantly altered the economic relationship among businesses in the United States, Canada, and Mexico by approximating the conditions of a common market. The agreement created the largest free trade area in the world and sparked considerable controversy over exactly who benefited most from its terms.

The North American Free Trade Agreement (NAFTA) was negotiated between 1991 and 1992, with additional agreements incorporated in 1993 to shore up US ratification and allow the accord to go into effect on January 1, 1994. The two supplemental agreements were the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). NAFTA’s main objectives included the promotion of a more harmonious development and a greater expansion of trade among its member nations. All of its objectives were consistent with the interests of broad sectors of the American, Canadian, and Mexican business communities. For this reason, the passage of NAFTA largely symbolized the triumph of probusiness lobbies in the three member countries.

NAFTA also increased the pressure on labor unions, particularly in the United States and Canada, and enlarged the possibilities that environmental regulations in these countries could be bypassed by "environmental dumping," that is, relocation of contaminating industries to Mexico, where environmental protection and enforcement is generally weaker. For Mexico, closer ties with American business through NAFTA meant driving a wedge between it and the rest of Latin America. It also required reforms of certain aspects of its development model, including an earlier liberalization of the restrictive rules of collective land tenure that dated back to the Mexican Revolution of 1910. In Canada, NAFTA seemed to some to reinforce the image of Ottawa’s subservience to Washington, DC, creating new hurdles for longstanding grievances between the two countries, particularly with respect to environmental issues. In sum, NAFTA provided a lightning rod of protest for organized labor and various social movements in all three member countries.

A Political Triumph for Business

NAFTA represented the culmination of years of business lobbying efforts aimed at opening up new markets and investment opportunities. The notion of a trade agreement was generally embraced by the US Republican Party and was thrown into high gear during the administration of President George H. W. Bush. Although the terms of agreement were reached in October, 1992, substantial opposition in the US Congress, spearheaded by labor and environmental interests, prevented the Bush administration from achieving quick ratification. Before this tripartite agreement, a United States-Canada Free Trade Agreement had been finalized in 1989. The Conservative Party administration of Brian Mulroney in Canada worked closely with the Bush administration to bring NAFTA to fruition. However, stiff opposition on both sides of the border made passage in the US Congress impossible until the Democratic Party regained the White House. It was ultimately the administration of President Bill Clinton that rallied sufficient bipartisan support for congressional ratification, and only after two separate sidebar agreements addressing labor and environmental concerns were added to the agreement. Once ratified in Washington, NAFTA went into effect on January 1, 1994.

NAFTA was designed to create a free trade area across the three member countries by eliminating tariff and nontariff barriers on agricultural and manufacturing goods as well as services. In addition, it was meant to significantly reduce restrictions on foreign investment among the three countries and offered specific protections of intellectual property rights. Nearly half of all trade was to be stripped of tariff protections at the start of the agreement, and subsequent tariff reductions were to take place in phases over a fourteen-year period. At the time the agreement took effect, the combined free trade area represented $6 trillion and included more than 365 million inhabitants.

In effect, NAFTA ratified a trend toward economic liberalization in the Mexican economy that was already well under way. A shift in political orientation on the part of the ruling Institutional Revolutionary Party had prepared the way for the agreement by systematically dismantling statist protections and opening the country to foreign investment in previously restricted spheres of the economy. Especially notable was the maquiladora sector along the Mexican side of the US border, which consisted of a duty-free, tariff-free platform for assembly-line factories for manufactured goods destined for US consumers. The maquiladora factories grew rapidly during the 1980s, providing cheap labor for American businesses investing across the border, thus helping pave the way for NAFTA.

The American small-business sector was especially attracted to NAFTA because it promised the possibility of an international market for products that had been limited to local and national markets. Ultimately, however, larger businesses such as agribusiness proved to be better positioned to take advantage of the opportunities posed by the expanded markets offered by this agreement. In the final analysis, NAFTA encouraged an already well-established trend, the increasing concentration of transnational capital into the hands of fewer and larger firms.

A Persistent Controversy

When NAFTA was still being negotiated in 1992, independent third-party presidential candidate H. Ross Perot became famous for his slogan "you will hear the giant sucking sound" if NAFTA is eventually ratified. He was referring to the anticipated loss of American industrial jobs heading across the border. As in all free trade agreements, there were indeed winners and losers after NAFTA went into effect. In Mexico, small peasant farmers were most adversely affected, being unable to compete with the massive agricultural food imports from the United States.

Corn production perhaps best illustrates the downside of NAFTA for Mexico’s peasantry, because the crop is grown on more than half of that country’s cultivable land and its production involves nearly half of the agrarian labor force. American producers are heavily subsidized by their government, as are large Mexican producers (albeit on a smaller scale), but the majority of Mexico’s small farmers have no governmental support. They rely on subsistence farming techniques and plow the least fertile lands with the lowest yields. Predictably, these small farmers were ill-equipped to compete with the influx of American-grown corn that occurred after NAFTA came into effect. In a country in which around 25 percent of the population works in the agricultural sector, NAFTA became a hated symbol of liberalization by peasants and the poor. The very day that NAFTA went into effect, a peasant uprising took place in the largely indigenous region of Chiapas, led by the Zapatista Front for National Liberation (EZLN), which declared war on Mexico’s federal government. Frequent and often large protests continued to take place in Mexico, demanding the repeal of the most sensitive sections of NAFTA regarding agricultural liberalization policies.

Implications for Business

NAFTA was originally touted as a move toward regional integration of the Americas. The Bush administration argued that NAFTA was the first major step toward an eventual Free Trade Area of the Americas (FTAA) agreement that would integrate the hemisphere from Canada to the tip of South America. It is important to understand, however, that NAFTA was a trade and investment agreement. It contained none of the political institutions associated with the kind of comprehensive integration created by the European Union (EU). The primary goal of NAFTA was to open up trade and investment markets. Many observers also point to the strategic geopolitical significance that such economic pacts hold for Washington. Clearly, however, these free trade and investment agreements never envisioned a move toward a common currency or even free mobility of labor between their member countries. Indeed, the only move toward expanding NAFTA involved various proposals over the years to increase its geographical reach by including other nation members. Eventually, separate US free trade agreements were signed on a bilateral basis with Chile, Peru, and others, including a subregional trade and investment agreement signed with Central American countries and the Dominican Republic. This left the original terms of NAFTA intact and increasingly under political fire due to persistent opposition on the part of farmers, trade unions, and environmental groups.

The proposed FTAA eventually stalled because of considerable social protests all across the hemisphere. This opposition led important regional actors such as Brazil to pull back, preventing any final agreement under the original timetable of negotiations. In the United States, the possibility of renegotiating NAFTA steadily gained currency among major political figures, at first mostly in the Democratic Party. For example, Barack Obama included renegotiation in his 2008 presidential campaign platform, though he took no action after being elected. In Mexico, a broad coalition of peasant organizations and social movements as well as leftist political parties continued to demand renegotiations on portions of NAFTA that are key for that country. Because opposition to the agreement, particularly over environmental concerns, also remained considerable in Canada, the long-term future of the agreement was uncertain. Still, by the 2010s many analyses of NAFTA's effects suggested it had a positive economic impact overall, despite harmful effects on certain industries.

NAFTA saw a renewal of interest—and controversy—during and after the 2016 US presidential election campaign. Republican candidate Donald Trump promised during his campaign to reform or abolish NAFTA, a policy that broke from the Republican establishment and aligned with some progressives, such as Democratic primary candidate Bernie Sanders. After controversially winning the presidency and taking office in 2017, Trump continued to denounce Mexico during the campaign for taking manufacturing jobs away from the United States. Although a nonpartisan congressional study found that this was not the case, renegotiating NAFTA remained one of Trump's first goals.

In early February 2017, both Mexico and the United States announced that they had begun a ninety-day process of consulting with their respective private sectors to assess the state of business. This was the first step forward in the renegotiation process, and formal negotiations including Canada began in August 2017. However, some observers continued to speculate that Trump would simply withdraw the United States from NAFTA altogether, an action that would likely have major economic repercussions, especially as he imposed separate tariffs. Talks continued into 2018, and that August the United States and Mexico announced a bilateral agreement on a new trade deal. Negotiations to bring Canada onboard followed, and terms were reached on September 30, 2018, just making the imposed deadline.

The Trump administration characterized the resulting United States-Mexico-Canada Agreement (USMCA) as a totally new deal, though it largely followed the structure of NAFTA with some key changes. The main differences included rules on production of automobiles intended to ensure higher wages and grow domestic manufacturing; an easing of US dairy farmers' access to Canadian markets; and stronger protections for US pharmaceuticals and intellectual property. However, the passage of USMCA was far from certain, especially after Democrats took control of the House of Representatives in the 2018 midterm elections.

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