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North American Free Trade Agreement (NAFTA)

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The North American Free Trade Agreement, or NAFTA, is a three-country accord negotiated by the governments of Canada, Mexico, and the United States that entered into force in January 1994.

NAFTA’s terms, which were implemented gradually through January 2008, provided for the elimination of most tariffs on products traded among the three countries.

Liberalization of trade in agriculture, textiles, and automobile manufacturing was a major focus. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and, through side agreements, implement labor and environmental safeguards.

NAFTA fundamentally reshaped North American economic relations, driving an unprecedented integration between Canada and the United States’ developed economies and Mexico, a developing country.

NAFTA milestones

NAFTA enjoyed bipartisan backing it was negotiated by Republican President George H.W. Bush and passed through Congress and implemented under Democratic President Bill Clinton.

It encouraged a more than tripling of regional trade and cross-border investment between the three countries also grew significantly. Yet NAFTA has remained a perennial target in the broader debate over free trade.

President Donald J. Trump says the deal has shifted U.S. manufacturing production, and jobs, to Mexico, and his administration has vowed to renegotiate or withdraw from it.

NAFTA chart

Advantages and Disadvantages of NAFTA

NAFTA’s immediate aim was to increase cross-border commerce in North America, and it did indeed spur trade and investment among its three member countries by limiting or eliminating tariffs. It was especially advantageous to small or mid-size businesses because it lowered costs and did away with the requirement of a company to have a physical presence in a foreign country to do business there.

Increased Trade

Most of the increase came from trade between the U.S.A and Mexico or between the U.S.A and Canada., though Mexico-Canada trade grew as well. Overall, there was $1.0 trillion in trilateral trade from 1993 to 2015, a 258.5% increase in nominal terms (125.2% when adjusted for inflation). Real per-capita gross domestic product (GDP) also grew slightly in all three countries, primarily Canada and the U.S.

During the NAFTA years, U.S. trade deficits (importing more from a nation than you export) did increase, especially with Mexico. So did inflation.

Intellectual Property Protections

NAFTA protected non-tangible assets like intellectual property, established dispute-resolution mechanisms, and, through the NAAEC and NAALC, implemented labor and environmental safeguards. It increased U.S. competitiveness abroad and “exported” higher U.S. workplace safety and health standards to other nations.

Job Loss and Immigration

From the beginning, NAFTA critics were concerned that the agreement would result in U.S. jobs relocating to Mexico, despite the supplementary NAALC. In fact, many companies did subsequently move their manufacturing operations to Mexico and other countries with lower labor costs—in particular, thousands of U.S. auto workers and garment-industry workers were affected in this way. However, NAFTA may not have been the reason for all those moves.

Some critics also cite the rising wave of Mexican immigrants to the U.S. as a result of NAFTA—partly because the expected convergence of U.S. and Mexican wages didn’t happen, thus making the U.S. more attractive to Mexican workers.

    Pros

    • A spurred surge in cross-border trade and investment
    • Increased competitiveness of U.S. industry
    • Opened up opportunities for small businesses
    • Implemented universal, higher health, safety, and environmental standards

    Cons

    • Caused loss of manufacturing jobs, especially in certain industries
    • Increased inflation in the U.S.
    • Increased U.S. trade deficits
    • May have spurred Mexican immigration