North American Free Trade Agreement (NAFTA) was passed and signed in 1992 by three nations: Mexico, Canada, and the United States and was preceded by the Canada-US free Trade Agreement. The agreement came into effect on 1st January in the year 1994 with a total elimination of both non-tariff and tariff barriers to trade among the signatory nations. The agreement also called for a gradual lifting of barriers on trading for both goods and services, and cross-border investment among the three nations that was to take effect over a period of fifteen years. The implementation of the NAFTA marked the creation of the largest trade region in the world that had core objectives and intentions to generate and stimulate economic growth (Shiells 12). The agreement was also intended to assist in raising the living standards of the citizens living in the three nations. NAFTA has acted on strengthening rules and procedures that govern trade and investment the act has been viewed by economist as a solid foundation that has played a significant role in building Canada’s prosperity. NAFTA has also played an important role in setting a valuable example of liberalizing trade among the other countries of the world (Baier, and Bergstrand, 72).
The state-of-the-art market-opening agreement has in a systemized way managed to eliminate tariff and non-tariff barriers to investments and trade between the signatory nations through the establishment of a framework for investments that are stable and liable. NAFTA has also contributed significantly to helping in the creation of confidence environment that is stable and necessary for the establishment of long-term investments. During the implementation, NAFTA eliminated tariff barriers on exports, for instance, it lifted barriers to export on Mexico’s products that are exported to the US by more than one-half and approximately one-third of US goods and services that are exported to Mexico. According to the agreement, the first ten years of implementation was meant to lift all the barriers to trade in goods and services exported to and from Mexico and US in an exemption of agricultural exports to Mexico that was supposed to be lifted over the period of 15 years. The agreement also took into consideration of protecting intellectual property rights on traded products and as a result eliminated non-tariff trade barriers that were attached (Baier, and Bergstrand, 79)
According to the economists, NAFTA managed to create the largest free-trade zone in the world that entailed approximately not less than four hundred and fifty million people. The trading bloc has been termed as an economic powerhouse that when measured in the terms of gross domestic products (GDP) it is worth approximately $ 20.08 trillion. The value is supported by the fact that United States economies are worth $17.97 trillion, and Mexico is equivalent to $2.2 trillion while Canada stands at $ 1.6 trillion. The size of the economic output among the signatory’s nations of the NAFTA has been suggested to be greater than the one produced by the entire 28 nations in European Union (Shiells, 22).
The opponents of the NAFTA who included the labor unions, religious groups, environmental, and consumers argued strongly while opposing the move to free trading area. The supported that, NAFTA would results into launching of a race-to-the-bottom in wages, wipe out hundreds of thousands of goods produced in US and jobs as well that were held by native citizens, and cause destabilization of democratic controls that concerned domestic policy-making. They also argued that NAFTA would be threatening health, food safety standards and the environment. Contrary, NAFTA promoters who included majority number of the largest corporations in the world suggested and made firm promises concerning the agreement. The promoters suggested that the agreement to form NAFTA bloc would instead create hundreds of thousands new U.S jobs that would be paying high wages. The bloc would also result in the raising of standards of living in the three nations, improving environmental conditions and transforming Mexico from poor developing nation to form a new booming market for the US exports (Baier, and Bergstrand 88).
Among the three nations, each one of them has the inherent and unique natural advantages that help a country during the production processes of goods and services. The advantages help in ensuring that the country manages to produce its goods at a cost-efficient when compared with others. Through the elimination of tariffs by NAFTA, it allowed all the three signatory members to the agreement to concentrate all their productivity effort to their natural advantages in the production process. For instance, US enjoy its natural advantages in the production of consumer goods in that it can produce a high-quality product at a very low cost. On the other hand, Mexico has natural advantages in that it has the ability in producing specific foods and crops at a low cost than other nations. Canada and Mexico have been cited by economists to be the two major export markets for the United States (Shiells 37).
The two nations have been purchasing more of made-in-America commodities than any other country worldwide since the establishment of NAFTA. The U.S. state, for instance, Ohio, Illinois and Michigan have made significant exports across American territories. Through the elimination of tariff barriers as a result of the implementation of NAFTA made it possible for the Mexican to manage purchasing of cheap consumer goods from the US. Similarly, the agreement also allowed the US food distributors manage to buy low-priced crops from Mexico Baier, and Bergstrand 91).
Shifting of industrial focus for every nation as a result of lifting the trade barriers have very high chances of impacting economic negatively though causing job losses among all the members. This is supported by the fact that shifting of country’s demand concerning a given product from domestic purchase to the importation of the product, the industry that manufactured the product in question in the importing nation ends up losing business. This would result in leaving many people who were working with the industry without jobs. There is also high chances of disappearing and weakening of the entire industries over time as a result of free trade agreements such as NAFTA resulting to the increased levels of unemployment (Baier, and Bergstrand 95).
NAFTA as one of the free trade agreements has high chances of helping in encouraging the members to the accord coordinate and cooperate when facing a challenging political issue. For instance, as a result of formation and implementation of NAFTA, Mexico has been willing to cooperate with the US in its efforts of cracking down on the immigrations that take place against the law and controlling international smuggling. Despite the fact that the bloc can result in the cooperation and coordination when solving political issues, some scholars have argued that the challenges of controlling illegal immigrations and smuggling have not been weakened enough to support the fact that cooperation is of great essence to the political threats (Fernández-Kelly, and Massey 98).
The signing of the NAFTA was an indication that Mexican manufactured good would reach the American market with ease and hence act as a motivator to the citizens of Mexico to stay in their country and hence discouraging illegal immigration. Contrary, from the time NAFTA was created, there has been a higher increase in the number of illegal immigrants between Mexico and the US. The trends in the markets have indicated that for the duration of ten years from the year 1990 and the fiscal year 2000, despite the creation of NAFTA the number of the illegal immigrant on an annual basis has been doubling. This has indicated a disadvantage of the NAFTA in its ineffectiveness to prevent and eliminate immigration crisis (Fernández-Kelly, and Massey 109).
Strong political ties between the North American nations have granted each country a defensive approach against any protectionist acts that a foreign nation could assume towards a signatory member. For instance, in a case that a NAFTA member depends on an outside nation for a specific imported good, and unexpectedly the nation that was exporting commodities to one of the members suddenly imposes aggressive tariffs or other measures. The member can immediately switch demand for that product to one of the domestic allies. The measure would help the signatory nations to alleviate the negative effects of the original exporter of the commodity (Turkman 1). Even if the interdependence as a result of the formation of free trade agreement has a lot of very powerful advantages, all nations stand very high chances of suffering if the ties happen to be broken. There are high chances that the nations under the control of free trade agreement could have crippled industries or end up lacking labor for specific industries especially if they tend to depend on imports from each other over a long period (Trakman 5).
Consumer prices for all the imported commodities are maintained under the control within the NAFTA nations. This is supported by the fact that the prices of imports are not inflated by tariffs artificially. As a result, importers are in a position to buy more quantity of goods and services which in turn permits the exporters to produce more of the products and hence resulting in an increased Gross Domestic Product. Lower tariffs among the member countries of NAFTA contributed to the reduction in import prices lowering the risks of inflation and hence allowing Fed to maintain interest rates at a low level. The lower prices are specifically important for the America since its largest import is in oil products. The US has since the agreement imports oil from Mexico and Canada avoiding importing from the Middle East and Venezuela who are a bit unfriendly nations which use oil to harm other nation on political bases. Importation of food also increased in the year 2013 to 39.4 billion from a figure of 428.9 billion in the year 2009. The increase caused the lowering of prices of fresh vegetables, fresh fruits, beef and chocolate (Shiells 55)
It is worth noting that the very same factor that is advantageous to consumers is a disadvantage to the governments. The fact is being that governments depend on tariff revenue, just like any other form of tax, when raising their incomes. Through tariff elimination as a result of forming trading blocs, the government budget could negatively be impacted leading to a deficit budget. It is also evidence that an increase in the level of import from a member country causes a decrease in the imports that a country makes from other foreign countries hence resulting in further negative impacts on tariff revenue (Feils, and Rahman 147).
Falling in prices resulted in the boosting of the trade as indicated by financial analyst comparing the levels from the year 1993 and 2015. According to financial analysts, the trade between the members in NAFTA quadrupled from $ 297 billion in the year 1993 to $1.14 trillion in the fiscal year ended 2015. The increased trade has been a major boost to the growth of the three countries economies, increased profits levels, and hence adding to the creation of new jobs. The increased trade also lowered the consumer prices. NAFTA played a significant role in boosting the trade through the elimination of all tariffs between the three nations. NAFTA also created an agreement on international rights for business investors which acted as a way of reducing the cost of trading (Trakman 10). The move acted towards spurring investments, stimulating growth, particularly for the small and medium enterprises. Many small businesses, on the other hand, have argued that NAFTA has contributed towards making their operations less competitive as a result of low wages that the immigrants from Hispanic are ready to work for to cater for their living needs. The negative effects of NAFTA have been intense especially among the hospitality and construction industries (Feils, and Rahman 155).
One of the most important advantages and the objectives of NAFTA were to reduce or fully eliminate taxes on commodities that are to be exported from the three countries. From the fiscal year ended 2008, all the tariffs on agricultural exports that were carried out between US and Mexico were fully eliminated, and a lot has been eliminated between Mexico and Canada. Conversely, the two nations, Canada, and Mexico have been taxing sugar, poultry, eggs and dairy products. The reduction and elimination of tariffs contribute towards enhancing trading activities between the nation conducting international businesses (Shiells 60).
As a result of the elimination of trade barriers by signing of the NAFTA, Mexico’s farmers were put out of business. It has been indicated by the economists that Mexico lost a minimum of approximately 1.3 million farm jobs after the signing of the NAFTA. The 2002 Farm Bill passed by the Congress was meant to subsidize the United States agribusiness by to an extent of about 40% of the net farm revenue. It is also evident that after the removal of trade barriers by the signing of NAFTA, United States exported corns and other grains to Mexico at a price that were below the cost of production of which rural Mexican farmers were unable to compete. During the same period, Mexico lowered it subsidies that were offered to farmers from 33.2 % in the year 1990 to 13.2% in the year 2002 of the total farm income. Ironically, a large amount of the subsidies benefited only the Mexico’s large farms while the rural farmers did could not get any (Fernández-Kelly, and Massey 118).
The elimination of tariffs also resulted in an expansion of the maquiladora program in which the companies that were owned by the US hired employees near the border from Mexico. The main intention was to achieve the goals of assembling the products at lower costs for them to be exported to the United States. The program resulted in growth in the Mexico’s labor by 30% who did not enjoy any labor right or health protections. The laborers work about 12 hours a day or, even more, depending on the day’s targets, and women are also forced to take pregnancy tests before they apply for jobs (Trakman 23).
NAFTA introduced tariff policies that are intended to affect commodities that are manufactured directly within the three nations who are the signatory to the agreement. The agreement has specifically outlined that commodities that are manufactured in countries that are not members of the North America would continue to operate with the restrictions imposed by the tariffs barriers. The fact is of paramount significance in that it has acted as a measure to create incentives for the three member countries to nurture their domestic producers and hence motivate them towards producing goods for export. The policies also have acted as a measure of preventing any of the member nations from exporting goods in the trade bloc that have been bought outside North America (Feils, and Rahman 163).
Impact on Jobs
The exports that are made from the US to Canada and Mexico have contributed significantly in supporting more than 3 million American jobs. United States carrying out trade activities with NAFTA partners has also led to the unlocking of opportunities for the millions of American citizens through the support of made-in-America jobs and exports. For the duration of the years 1993 and 200, the exports that were made as a result of the signing of NAFTA caused a creation of 5 million US new jobs (Shiells 76).
The manufacturing sectors in the US increased the number of employees by more than eight-hundred thousand jobs between the years 1993 to the fiscal year 1997. Imports from NAFTA partners also played a major role in the creation of jobs among the member nations. This is supported by the fact that almost 40% of US imports from Mexico traced its origin from American companies. The American companies designed their products on domestic levels after which they outsourced some parts of the manufacturing process from Mexico. In the absence of the trade bloc, America could have outsourced a portion of the process from other nations (Trakman 37).
NAFTA has also been linked with the positive effects it has caused on labor and wages. The trade agreement has caused the emerging of the parallel accord on labor cooperation that is referred to as North American Agreement on Labor Cooperation (NAALC). The cooperation is mandated to ensure improved working conditions and improvement in the standards of living among the three nations. The labor cooperation agreement is meant to ensure the rights of employees are free from violations and also assist in addressing specific labor issues, for instance, discrimination, balloting, secret and protecting the migrant workers. The agreement in addition caters for the standards of employment and the occupation health and safety issues (Fernández-Kelly, and Massey 111).
On the other hand, NAFTA has been cited to have contributed to the loss of American jobs. Given the fact that labor is cheaper in Mexico, a number of manufacturing industries shifted the proportion of their production from the high-cost United States in America. In the years between 1994 and 2010, the trade deficit in the US with Mexico amounted to $97.2 billion terminating 682,900 jobs in the US. The wages for the US workers were also suppressed by the factories that did not move to Mexico where workers were forced to make decisions concerning losing their jobs or joining the unions. Without unions, workers had no bargaining powers and hence the wage growth was suppressed (Fernández-Kelly, and Massey 118).
Implementation of trade agreement allowed the manufacturers to exercise their freedom in outsourcing employees from Mexico to benefit from cheap labors, and hence many workers lost their jobs in the US. For the factories that did not relocate to Mexico or outsource workers was forced to lower the wages for their employees to lower their production costs and hence remain competitive on the prices of their products. Similarly in Mexico, the fact that food products could be imported from the US overwhelmed the role of Mexican farmers by the Agricultural output from America. As a result of the agreement, a high number that was approximated to be above 1 million farmers in Mexico lost their jobs (Shiells 98).
NAFTA had high chances of creating negative environmental impacts especially taking into consideration that the agreement was formed between two developed nations and a developing nation. US government had to secure approval from the Congress for NAFTA and as a result, it had to address the concerns of the public regarding environmental impacts of forming the Northern American trading bloc. Over the years, there has been a lot of complaints especially from the nations that receive US dollars investment in that it is involved in influencing their political activities. There have also been various reports concerning the way excessive pollutions that have been produced by the United States companies in the nations that in most cases lack strict environmental standard similar to the ones the US applies (Trakman 47).
Nafta was feared to present fundamental threats to the Northern American environment. However, threats happened in several areas where the policies and infrastructure were not adjusted to accommodate the increased production levels as a result of trade liberalization. The highest pollution levels were experienced in the industries like metal, transport and the Mexican petroleum sector. Mexico’s environment has been cited to have been deteriorated as it responded to the pressure injected by the competition as a result of the regional trade bloc. As a result, Mexico agribusiness applied other chemicals and extra fertilizers that have contributed to pollution cost of $36 billion annually. Rural farmers have been forced to extend into a more marginal land which has resulted in deforestation at a rate of about 630,000 ha annually (Shiells, 112).
Scholars have agreed that trade pacts are naturally disruptive but insist on the uncalled for concentration on the Americans citizens who lost their jobs and hence livelihood resulting from the formation of NAFTA. It has been evidenced that the trade blocs like NAFTA has more positive impacts than the negatives and hence necessitating the need to support them while working on the negativity through a creation of policies and proper infrastructures. NAFTA has been cited to have created bases being one of the largest free trading zones and has a resulting triggered immense economic growth in the US, Mexico, and Canada. Since the year 1994, NAFTA has practically indicated the benefits of forming free trading zones worldwide as reflected in the increased wealth, competitiveness and ability to deliver real benefits to consumers, employees, farmers, families and the manufacturers.
All these facts have contributed to supporting the strong opinion that NAFTA has contributed significantly towards promotion of economic growth through stimulating competition in domestic markets and promotion of investment from both foreign and domestic sources. The formation of open market-agreement has played a primary role in making the US a stronger competitor in the global market and reducing the government deficits for the three nations under the NAFTA partnership.
Baier, Scott L., and Jeffrey H. Bergstrand. “Do Free Trade Agreements Actually Increase Members’ International Trade?” Journal of International Economics 71.1 (2007): 72-95.
Feils, Dorothee J. and Manzur Rahman. “Regional economic integration and foreign direct investment: The case of NAFTA.” Management International Review 48.2 (2008): 147-163.
Fernández-Kelly, Patricia, and Douglas S. Massey. “Borders for whom? The role of NAFTA in Mexico-US migration.” The ANNALS of the American Academy of Political and Social Science 610.1 (2007): 98-118.
Shiells, Clinton R. Modeling trade policy: Applied general equilibrium assessments of North American free trade. Cambridge University Press, 2008.
Trakman, Leon. “The proliferation of free trade agreements: Bane or beauty?.” Journal of world trade 42 (2008): 1-47.