Nafta - North American Free Trade Agreement - Impact on the U.S., Canada and Mexico

The North American Free Trade Agreement (NAFTA) is one of the most influential and extensive treaties in the world and is the expansion of the legacy Canada-US Free Trade Agreement of 1988 (Private Rights, 2001, Mayer, 1998). The agreement governs the whole spectrum of North American trade and it history extends from hemispheric cooperation on the largest scale ever seen (Private Rights, 2001). NATFA is a treaty between Canada, Mexico and the United States and was intended to cultivate greater trade between these three countries (Private Rights, 2001). NAFTA was put into effect in January of 1994 and has since been updated to include two significant additions, the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement for Labor Cooperation (NAALC) (NAAEC, n.d., NAALC, n.d.). The NAAEC was an addition in response to environmentalist concerns that the United States would begin to lower its environmental standards if all three countries did not come to an agreement related to environmental regulation (NAAEC, n.d.). The NAALC augments NAFTA and attempts to create the groundwork for cooperation between the three countries for the resolution of labor issues and to promote increased cooperation between trade unions and social organizations working for improved labor conditions (NAALC, n.d.). Most recently the integration of the Security and Prosperity Partnership of North America has worked to encourage cooperation related to issues of national security (Security and Prosperity, n.d.). One of the most significant aspects of NAFTA is its elimination of tariffs on goods shipped between Canada, Mexico and the United States (Private Rights, 2001). United States goods were mostly sold to Canada and Mexico were accompanied with high tariffs (tax placed on imported goods) (Private Rights, 2001). As you can imagine, Mexico and Canada did not wish to incur these tariffs, as such these goods were not sold in North America. Restrictions related to motor vehicles, computers, textiles and agriculture were eventually lifted (Private Rights, 2001). The treaty protects intellectual property rights, including patents, copyrights and trademarks and outlines the removal of investment restrictions among the three countries (Private Rights, 2001). NAFTA is trilateral in its nature in that the majority of its terms apply uniformly to Canada, Mexico and the United States (XXXX). Exceptions to the trilateral nature of the agreement include exceptions in the area of agriculture where stipulations, tariff reduction phase out periods and protection of selected industries were negotiated on a bilateral basis (XXXX). Provisions related to environmental and worker protections were added later as a result of supplemental agreements (NAAEC, n.d., NAALC, n.d.).

The effects of NAFTA have been viewed as both positive and negative for the economies and cultures of the United States, Canada and Mexico.

Positive Impacts
• Comparative Advantage: Conceptually everyone benefits when countries produce and sell freely what they do most efficiently. Everyone should specialize in what they do best and governments should intervene as little as possible in the process (Pros & Cons, n.d., Friedman, 2000).
• Protectionism is expensive: Tariff and non-tariff barriers (NTBs) result in higher prices for consumers. Barrier costs are passed on to consumers and consumers are forced to buy more expensive domestically produced goods (Pros & Cons, n.d., Friedman, 2000).
• Competition: Competition encourages lower prices, efficiency in production, and innovation (Pros & Cons, n.d., Friedman, 2000).
• Functionalism: Cooperation in one area (such as trade) promotes cooperation in other areas. In theory, the drug problem, immigration problems, etc. can be more directly addressed (Pros & Cons, n.d., Friedman, 2000).
• Interdependence: Free trade leads to interconnections that make conflict too costly (Pros & Cons, n.d., Friedman, 2000, Hufbauer & Schott, 2005). Dependency reduces the likelihood of war.
• Economic Growth: Through free trade’s promotion of economic growth, pressing social problems, such as unemployment, environmental deterioration, or illegal immigration can be alleviated by being brought into the forefront for discussion (Pros & Cons, n.d., Friedman, 2000).
• Defense against protectionism elsewhere: Regional free trade agreements help offset the danger of protectionism elsewhere and secure markets for exporters (Pros & Cons, n.d.). NAFTA has leverage against other large economic entities, like the European Union.
• Introduction of capital and technology: For less developed countries, free trade can promote the introduction of capital and technology into their economies (Pros & Cons, n.d., Friedman, 2000).
• Democratization: Free Trade is thought to promote democracy because it promotes discipline and transparency (Pros & Cons, n.d., Friedman, 2000).

Negative Impacts
• Threats to domestic industries/jobs: Many mainstream economists choose to dismiss the threat of job and industry losses, stating that free trade also creates jobs and growth and that labor unions and domestic industries use this argument to push protectionism (Pros & Cons, n.d., Freidman, 2000). Free Trade agreements however have the potential to cause dislocations and attendant ripple effects in an economy, even if they create a bigger economic pie (Pros & Cons, n.d., Private Rights, 2001, Cox, 2003).
• Infant Industries: Less developed countries have argued that they needed to protect “infant industries” so they may get them off the ground (Pros & Cons, n.d., Private Rights, 2001). Many economists see this as a valid argument, but argue that it then becomes hard to take the protections off (Pros & Cons, n.d., Private Rights, 2001).
• Too much dependency on a few products: Specialization through comparative advantage could make an economy (especially a smaller economy) too dependent on a few resources or products (Pros & Cons, n.d.). If demand in those areas falls, economic catastrophe could ensue.
• Nice free traders can finish last: Governments often control exports and imports, heavily subsidize their producers, or erect NTBs which limit trade. In this world, nice free traders can finish last. The US allowed discriminatory practices from others after WWII, but fights them now that it no longer represents the majority of the world economy (Pros & Cons, n.d).
• Security is endangered: Protectionists argue that a country should not become so dependent that it cannot defend itself (Pros & Cons, n.d., Private Rights, 2001). For example, the U.S. should not let its shipbuilding industry die simply because ships can be built cheaper in other places; steel production is yet another example of a potential concern (Pros & Cons, n.d., Private Rights, 2001).
• Cultural Imperialism: Similarly, countries in Latin America and elsewhere worry about cultural imperialism (i.e. Media & Culture infiltration) and the loss of historic industries and values (Pros & Cons, n.d., Private Rights, 2001).
• Trade is a powerful policy tool: When dealing with other countries trade leverage should not be given up because of a belief in economic rationalism (Pros & Cons, n.d., Private Rights, 2001). Similarly, we should not give up our sovereignty over trade matters to regional or international bodies. They shouldn’t be able to claim our laws are unfair barriers to trade (Private Rights, 2001.
• Harmonization downward: Free trade has the potential to force countries to lower their environmental, labor, or other standards in order to compete (Pros & Cons, n.d., Private Rights, 2001, Freidman, 2000, Went, 2000, Louie, 2001). Additionally, such standards could be declared unfair trade practices by regional or international bodies (Pros & Cons, n.d., Private Rights, 2001).

While there have been major benefits and disadvantages associated with NAFTA, of all the countries associated, Mexico appears to have been the most financially and socially impacted overall. Large trade surpluses with the United States have not been enough to overcome even larger trade deficits between Mexico and the rest of its partners (Scott, Salas & Campbell, 2001). Mexican wages and incomes dropped between 1991 and 1998, and post the inception of NAFTA, inequality has grown and job quality has deteriorated for most workers (Scott, Salas & Campbell, 2001). NAFTA has resulted in Mexico’s increased dependence on the U.S. economy. While Mexico has implemented numerous trade agreements, removing trade barriers with over 40 countries, more than 80% of Mexican trade continues to be with the U.S. (CIA, 2006). Mexican trade with the U.S. and Canada has tripled since the inception of NAFTA (CIA, 2006). Mexico’s gross domestic product (GDP) however has not grown accordingly. The Penn World Tables estimates that Mexican real per-capita GDP has averaged 1.8% in growth since the inception of NAFTA, while Mexican GDP growth rates have averaged 2.7% in the 1950s, 3.5% in the 1960s and 3.2% in the 1970s (n.d.). This is disconcerting because developing countries should grow faster than wealthy developed countries. The 1980’s were the only decade where Mexican GDP did not grow, averaging a negative 0.3% growth rate (Penn Tables, n.d.). NAFTA has resulted in an increase in International investment between the U.S. and Mexico. The removal of Mexican limits on foreign investment and tariffs has made it more profitable for the U.S. to invest in Mexico. Increased investment has been particularly significant in the area of plants for the final assembly of products destined for the U.S. (Congress of the United States Congressional Budget Office, 2003). Between 1995 & 1999, manufacturing exports improved quickly, at a rate of 16%, due mostly to maquiladora factories built near the border for the purposes of manufacturing exports to the U.S. (Scott, Salas & Campbell, 2001). Maquiladora employment rates grew rapidly over the last 2.5 decades, remaining largely unaffected by the recession of the mid 1990 due to their limited dependence on the Mexican economy (Scott, Salas & Campbell, 2001). While these factories and plants have thrived under NAFTA, they have contributed little to Mexico’s development and internal markets (Scott, Salas & Campbell, 2001). Wages, benefits and worker rights are consciously suppressed within maquiladoras (Scott, Salas & Campbell, 2001). Mexico has little to no social safety provisions and deteriorating labor conditions have been reflected primarily in lower quality jobs, rather than in the unemployment rate (Scott, Salas & Campbell, 2001). Mexico’s inability to create higher quality jobs is reflected in the growing number of urban workers holding low productivity, low paying jobs (Scott, Salas & Campbell, 2001). Although official unemployment rates are lower in Mexico, after the implementation of NAFTA there has been an increase in underemployment and low paying/low productivity jobs, resulting in decreased incomes. Sweatshops are one of the unfortunate realities of globalization. When big corporations are free to locate & re-locate their manufacturing plants in developing countries where labor is inexpensive, and where there are no environmental and employment standards, exploitive treatment of workers, here and abroad are sure to manifest (Louie, 2001). Developing countries have to compete for the patronage of these corporations by lowering their labor standards, wages and workplace safety requirements. This results in atrocious working conditions due to a lack of state oversight to make the factories improve them. NAFTA has resulted in improvements to Mexican quality of life. According to several speakers at a NAFTA conference, health care for the citizens of Mexico has improved due to the importation of U.S. health services and technology (n.d.). However, due to broad and differing income levels, as well as differences in the level of health care facilities, availability and delivery of quality health care to all Mexican citizens is affected (Bushman, 2007).

The benefits and consequences associated with the implementation of NAFTA have been varied and broad and will most likely continue to be debated for as long as it is in place in its present state. Any widening of the trade agreement without increased consideration for labor and social development will have far reaching and potentially irreversible negative consequences. If NAFTA is to truly bring about the benefits it has touted, North American countries need to revisit the agreement and develop a model of economic integration which takes into consideration the quality of life of those most impacted; the nations’ citizens.

References

Bushman, M. (2007, January 15). How NAFTA Has Affected Mexico. Associated Content. Retrieved March 4, 2008 from http://www.associatedcontent.com/article/117131/how_nafta_has_affected_mexico.html?page=2&cat=3

Central Intelligence Agency (CIA). (2006). The World Fact book: Mexico. Retrieved March 4, 2008 from https://www.cia.gov/library/publications/the-world-factbook/index.html

Congress of the United States Congressional Budget Office. (2003). The Effects of NAFTA on U.S.-Mexican Trade and GDP. Retrieved March 8, 2008 from Congressional Budget Office website: http://www.cbo.gov/ftpdocs/42xx/doc4247/Report.pdf

Cox, J. (2003, December 30). 10 years ago, NAFTA was born. Retrieved March 2, 2008 from USA Today website: http://www.usatoday.com/money/economy/trade/2003-12-31-nafta_x.htm

Friedman, T. L. (2000). The Lexus and the Olive Tree. New York: Anchor Books

Hufbauer, G. C., & Schott, J. J. (2005). NAFTA revisited: achievements and challenges. Washington, DC: Institute for International Economics.

Private rights, Public problems a guide to NAFTA 's controversial chapter on investor rights. (2001). Winnipeg: International Institute for Sustainable Development.

Louie, M. C. Y. (2001). Sweatshop warriors: immigrant women workers take on the global factory. Cambridge, Mass: South End Press.

Mayer, F. W. (1998). Interpreting NAFTA: The Science and Art of Political Analysis. New York: Columbia University Press

The North American Agreement on Environmental Cooperation (NAAEC) (n.d.) Retrieved March 3, 2008 from http://www.unep.org/dec/onlinemanual/Enforcement/InternationalCooperation/ConsistencyinLawsRegulations/Resource/tabid/1151/Default.aspx

The North American Agreement on Labor Cooperation (NAALC) (n.d.). Retrieved March 3, 2008 from the COMMISSION FOR LABOR COOPERATION website: http://www.naalc.org/naalc.htm

Penn World Tables (n.d.) Retrieved March 3. 2008 from http://pwt.econ.upenn.edu/php_site/pwt62/pwt62_form.php

Security and Prosperity Partnership Of North America (n.d.) Retrieved March 3, 2008 from http://www.spp.gov/

Southern Center for International Studies (SCIS) (n.d.). The Pros and Cons of Free Trade. Retrieved March 14, 2008 from http://www.southerncenter.org/

Scott, R., Salas, C. & Campbell, B. (2001, April 10). New Report Shows NAFTA Has Harmed Workers In all Three Countries. Economic Policy Institute. WASHINGTON, DC

Went, R. (2000). Globalization: Neoliberal Challenge, Radical Responses. London: Pluto Press

References: Bushman, M. (2007, January 15). How NAFTA Has Affected Mexico. Associated Content. Retrieved March 4, 2008 from http://www.associatedcontent.com/article/117131/how_nafta_has_affected_mexico.html?page=2&cat=3 Central Intelligence Agency (CIA) Congress of the United States Congressional Budget Office. (2003). The Effects of NAFTA on U.S.-Mexican Trade and GDP. Retrieved March 8, 2008 from Congressional Budget Office website: http://www.cbo.gov/ftpdocs/42xx/doc4247/Report.pdf Cox, J Friedman, T. L. (2000). The Lexus and the Olive Tree. New York: Anchor Books Hufbauer, G Private rights, Public problems a guide to NAFTA 's controversial chapter on investor rights. (2001). Winnipeg: International Institute for Sustainable Development. Louie, M The North American Agreement on Labor Cooperation (NAALC) (n.d.). Retrieved March 3, 2008 from the COMMISSION FOR LABOR COOPERATION website: http://www.naalc.org/naalc.htm Penn World Tables (n.d.) Retrieved March 3 Security and Prosperity Partnership Of North America (n.d.) Retrieved March 3, 2008 from http://www.spp.gov/ Southern Center for International Studies (SCIS) (n.d.) Scott, R., Salas, C. & Campbell, B. (2001, April 10). New Report Shows NAFTA Has Harmed Workers In all Three Countries. Economic Policy Institute. WASHINGTON, DC Went, R