Nafta: Pros and Cons

The Ups and Downs Due to the Creation of the North American Free Trade Agreement

The North American Free Trade Agreement was put into effect in 1994, although the thought of a free trade in North America was first pushed by President Ronald Regan, who based a campaign on a common North American market. President Ronald Regan and Canadian Prime Minister Brain Mulroney agreed to begin negotiation to establish a free trade between the United States and Canada. These negotiations would eventually lead to the signing of the Free Trade Agreement in 1988, and placed into effect in 1989. In 1992 President George H.W. Bush, Mexican President Carlos Salinas de Gortari, and Canadian Prime Minister Brian Mulroney would cause the dissolution of the Free Trade Agreement with the signing in of NAFTA. In 1993 President Bill Clinton signed NAFTA into law and it took force on January 1, 1994. Although NAFTA promoted free trade between the three North American countries it was not until January 1, 2008 when all tariffs between the three signing counties were finally eliminated. While reading this paper you will be informed of not only the positive effects that North American Free Trade Agreement has had on North America’s economy, but you will also gain an insight of the negative impact it has brought along with it. The purpose of this paper is not to try and persuade you to agree with either side independently. Are purpose is to provide you with the present facts so you as a individual can draw your own conclusion on whether or not NAFTA should continue, be dissolved, or maybe even be altered. For the first section of the paper we will cover the positive effects that NAFTA has had on North American countries, and follow up with the negative effects it brought upon the involved countries.

Positive Effects of NAFTA
Since its inception, NAFTA has provided many benefits to the countries and people involved within the agreement. It essentially created the world’s largest free trade area, “linking 444 million people and producing $17 trillion in goods and services annually” (Advantages of NAFTA). It also has helped to increase the US GDP every year. The reason for this is because it eliminates tariffs and taxes as well as to help to create agreements based on international rights for business owners. This is especially good for small businesses as it reduces costs of trading, thus spurring increased investment and growth. Based on this, inflation can be reduced because import costs are less. One area in which NAFTA has been a benefit for the US is the trade surplus in services. More than 40% of the US GDP is made up of services, such as health care and financial services. However, these are not easily transported, so NAFTA has allowed for them to be easily exported into surrounding countries. NAFTA helped to increase exporting services in “Canada and Mexico from $25 billion in 1993 to $106.8 billion in 2007” (Advantages of NAFTA). This boost was caused by the elimination of highly regulated trade barriers in the services sector. The hidden costs of business were thus reduced as governments are now required to publish any regulations they have. Not only that, but NAFTA has allowed for each of the partner countries to encourage specialization. The agreement helps to promote for countries to concentrate and specialize in their own products and services. This allows for increased efficiency. “For instance, in 2008, the NAFTA partner countries were the third largest suppliers of goods to the US. NAFTA accounted for 26.4% of overall US imports and included products such as mineral fuel and oil, vehicles, electrical machinery, machinery, and other special returns” (Benefits of NAFTA). NAFTA therefore has led to a stable and more prosperous neighborhood between the US, Canada, and Mexico. For example, the US foreign direct investment (FDI) in these surrounding countries “was $348.7 billion in 2007, which was 11.3% more as compared to 2006” (Benefits of NAFTA). The majority of these investments came in the fields of finance, manufacturing, non-bank holding companies, and also the mining sectors. Meanwhile, federal direct investment into the US by Canada and Mexico increased to $219.2 billion. This included investment into the fields of finance, banking, and manufacturing. Many analysts will agree that NAFTA offers improved opportunities for small and medium-sized businesses. The elimination of various trade sanctions, such as the requirement to establish a presence in a country before one can do business, has opened markets for smaller businesses that in past circumstances may not have been able to afford them. Investor risk has been reduced as foreign investment is guaranteed the same legal rights as local investors. In regards to other nations involved with NAFTA, Mexico has also seen specific improvements following its ratification. In the years between 1993 and 1997 the garment, jewelry, and ceramic and handcraft industries experienced significant increase in revenue and exports. For the garment industry, revenues increased by 314% during this time period. The jewelry and ceramic/handcraft industries saw increases in exports of 50% and 60% respectively. (Specific Improvements of NAFTA). Mexico’s tariffs have also been reduced to roughly 2%, which makes a large number of US exports to Mexico duty-free. NAFTA has opened up the Mexican by encouraging zero tariffs in both directions (exports and imports). The development of trade between the two countries has helped to result in the growth of the job market too. Mexico can make use of advanced technology from the US to boost its industrial and economic development. In turn, the US appreciates the comparatively cheaper labor supplied by Mexico. “Mexico’s modernization would require the purchase of US components and technology, which in turn will encourage better economic integration” (Benefits of NAFTA). Furthermore, given that Mexico purchases more US goods than countries outside of North America, the ratification of NAFTA meant the exponential expansion of various markets that were previously largely inaccessible.

Increased Trade One of the positive outcomes, and the overall reasoning of establishing the North American Free Trade Agreement, was the increase in trade between the three participating North American countries. In a report issued by the Department of Transportation in March of 2005, product totaling more than $633 billion left the United States going over the boarders of the NAFTA participating partners. The large number of goods crossing the boarders represents a 12.6 percent increase from the 2003 numbers, before the implementation of NAFTA (Green). Not only has the amount of trade increased increase substantially, but the increase of ground transportation has also seen a dramatic increase. One of the factors that can make this possible is the lack of geographic barriers between the NAFTA partners. United State exports to Canada and Mexico via ground transportation rose 11.9 percent between in the first year NAFTA was implemented. On the reverse side, imports from their NAFTA partners via ground transportation rose 13.1 percent. Although an impressive increase, no increase is as impressive as the 82.7 percent increase in trade of exports via pipeline (Green).

Negative Effects of NAFTA NAFTA has been a major experiment when it comes to trade agreements among the countries. The European Union is a combination of countries that have similar economies, but NAFTA combines the US, Canada, and Mexico and Mexico is nowhere near the economic productivity of the other two countries. Soon after the implementation of NAFTA, many parties began to be affected. The Mexicans believed that the agreement was going to cure all of the country’s economic problems. However, it has created even more. Mexicans earn about triple what Chinese earn for performing the same work. There are cheaper imports flowing into the country from places such as China and Korea, causing the loss of millions of jobs and even more flocking over to the US to find any job that will earn a decent wage. The money that Mexico has earned from the increased workload (at least at the beginning of the implementation) has not gone to improve schools, as promised by the government. The schools are still having troubles filling the classrooms with teachers and supplies. If NAFTA has disappointed, it is in large part because the Mexican government has failed to capitalize on the immense opportunities it offered. "Trade doesn 't educate people. It doesn 't provide immunizations or health care," says Carla A. Hills, the chief U.S. negotiator in the NAFTA talks. "What it does is generate wealth so government can allocate the gains to things that are necessary. (Smith & Lindblad, 2003).

No Jobs, An Increasing Workforce in Mexico, and Competition with China Even with a growing economy, there are not enough jobs to go around to the growing Mexican workforce. To make matters worse, assembly line workers in China earn 59 cents per hour while a Mexican working the same job earns $1.47 per hour (Smith & Lindblad, 2003). Companies operating in Mexico have moved operations to China or are in the process of moving to save money on labor expenses. "They (Chinese companies) have extremely aggressive tax incentives, low salaries, very aggressive worker training, and a supply chain that allows them to have immediate access to the latest technology" (Smith & Lindblad, 2003).

Mexico’s Declining Agricultural Sector and Movement of Mexicans into the US The agricultural sector of Mexico’s economy has been devastated by NAFTA. Because of the technology invested in US agriculture over the last couple of decades, US farmers have been able to produce a surplus of food and raise much more livestock. Therefore, with the agreement, this food and livestock is flowing into Mexico and taking over the farming industry very quickly. Around 1.3 million jobs in the farming industry alone had been lost in a 10 year span since the inception of the agreement (Smith & Lindblad, 2003). As these farmers and others like them were losing their jobs, they were leaving their homes and packing up to leave for the US. In 2000, there were 4.8 million Mexicans working in the US illegally, this is more than double the amount in 1990. According to Reuters in 2009, that amount was closer to 10 million, or even higher (Emmott, 2009). In an ironic twist, the illegal Mexicans working in the US, in 2003, estimated to send back over $14 billion to their families, which was more than the investment the country expected to receive that year (of $10 billion) (Smith & Lindblad, 2003). Instead of Mexicans having to cross the border to find work, the US should give even a quarter of the $14 billion to the country to get some industries moving and invest in the education for the future of the country.

The Mexican Government and Shortcomings of NAFTA The Mexican government is also to blame for the shortcomings of NAFTA. Many of the economic sectors of the country, including agriculture, as mentioned before, were not prepared for the imports and competitiveness of the US and Canada. The government has not invested money into the poor areas of the country that need the aid the most, and many of the people who live in these areas are migrating to the US to find jobs. China, on the other hand, is investing in low cost, high performing factories, and requiring that foreign companies who wish to manufacture products there must use domestic suppliers for most of the components and give technology updates to their Chinese partners. The Mexican government has done none of this to try to advance their economy (Smith & Lindblad, 2003). The Mexican government is having a hard time trying to keep the country looking attractive to investors. A $50 billion investment in the power grid had to be completed recently, and companies are still having issues keeping energy costs low. Grupo México, the world 's third-largest copper producer, is considering moving its refining operations across the border to Amarillo, Tex., where it pays just 4 cents per kilowatt-hour of electricity, compared with 8.5 cents in Sonora. "Politicians are completely ignoring the impact that high energy prices are having on the country 's productive companies," says Juan Rebolledo, Grupo México 's vice-president for international affairs (Smith & Lindblad, 2003).

Natural resources are treated differently among the three countries. Mexico has not allowed other countries to invest in the country’s rich oil reserves. The government decides how much oil it would like to export to the US when it feels like it depending upon the rest of the country’s needs. Many Mexicans have a sense of pride in knowing that their country has some control over internal development of the economy. However, PEMEX (the state run petroleum company) has had low development and has not met measured standards of production (Carlsen, 2007).

National Security in the US, Mexico, and Canada After 9/11 National security has also been an issue for the US, Canada, and Mexico, especially since the events of 9/11. The US has mandated that both Mexico and Canada follow their lead and increase security at the borders and modernize equipment and invest in new technologies to fight terrorism. This has been an issue for Mexico because the country does not have the financial resources to address all of the border issues, and the government tries to take a neutral view on issues that do not directly affect the country. Additionally, the US has actually posed the greatest threat to Mexico’s security out of other countries in the past. The security measures that Mexico has taken have actually hurt relations with friendly countries such as Brazil and Ecuador, whose citizens must now have a visa to enter the country. The security context for each country should be developed by each country themselves, not the US controlling everything in their own best interests. These decisions are being made behind the scenes without public knowledge, and are hurting public confidence in the Mexican government. The enemies of the US are made the enemies of Mexico by putting forth the US counter-terrorism policies as their own (Carlsen, 2007).

Consumer Price Differences Among NAFTA Countries Consumer prices differ among the countries involved in NAFTA, even with the integration of their individual markets. There are still barriers that make trade inefficient. One of these barriers is the cost of transporting goods from one location to another. By shipping goods from a location where the prices are low to a location where the prices are high, profits will only be generated if the transportation costs can be recovered. Otherwise, it may be a more profitable idea to produce goods in the home country instead of trading for them. There are price differences occurring among the US, Canada, and Mexico because of the transportation cost issues (Juvenal, 2010). Another barrier to efficient trade is tariffs. NAFTA has eliminated most tariffs that existed prior to its inception, but there are still some tariffs that exist on commodities. Because commodities are base ingredients to many products that are produced in all three countries (such as sugar, cocoa, etc.), these tariffs could cause significant trading and price issues. A third barrier is the ending supply chain costs. After a product is produced, there are marketing, distribution, and other costs added onto the end product price. A product distributed in Mexico is going to have much lower costs than one distributed in the US, the final price depends upon the location of distribution (Juvenal, 2010).

Problems with US/Mexican Truck Program There have been problems with the US/Mexican truck program under the NAFTA agreement. “Mexico has no meaningful system for driver’s licenses, drug testing or hours of service,” (Rep. Peter, D-Ore) DeFazio said. “This is a trade agreement that threatens the safety of the American public. Mexico has no right to use tariffs to force unsafe trucks with exhausted over-worked, under-paid drivers into the United States” (Truckinginfo, 2010). The border was supposed to have been open to border-state traffic in 1995 under the NAFTA agreement, but did not open until 2007 because of resistance from US labor and citizen advocacy groups that did not want US jobs being lost to Mexicans and who wanted the US highways and roads to remain safe from over-tired drivers. After the US rejected a cross border trucking pilot program, the Mexican government assessed $2.4 billion of tariffs are US products coming into Mexico. This action did not help matters (Truckinginfo, 2010). Some members of the US Congress would like to renegotiate truck safety standards and other issues with the Mexican government and to eliminate retaliatory tariffs, which is hurting US export profitability but also the terms of the agreement. Congress would like to see the same high safety standards enacted in Mexico as the US has for its trucking industry, the inequalities cause a fear for the US public and also an economic fear for loss of jobs (Truckinginfo, 2010).

US/Canada Trade Issues
There have been growing trade and supply chain issues between the US and Canada since the signing of the NAFTA agreement and made worse by the 9/11 attacks. There has been increased security at both the Mexican and Canadian borders because of the attacks, and this has also hurt the Canadian economy. “Security costs, border wait times, and costs to truckers and traders for programs to facilitate secure and rapid passage are all up. Canada 's manufacturing sector, which until recently was the leading export sector, has been structurally weakened by the thickening of the border” (Moens, 2010). NAFTA has allowed the US to control the trade between itself and Canada, and has hurt relations that had been built up over the last 20 years. “The trade-distorting value of different product standards and regulations, of customs processing, and of border security, neutralize many of the gains we made 20 years ago in getting rid of most tariffs” (Moens, 2010). Environmental and energy regulations enacted by the US are making it more difficult for trade to exist efficiently between the two countries. Canadians feel as if the US is trying to control what they can export, how much, and where they can export the products to. Energy products are Canada’s second largest export, and considering how much the two countries trade among each other, these actions will hurt relations between the countries. Canada is trying to trade with the European Union and invest in companies in Asia, but the only country it seems to have a trade surplus with is the US, because of the large consumer market. It would take a year of trading in Europe to earn the profits that Canada makes with the US in one week. Canada depends upon the US to remain competitive in the manufacturing sector throughout the world, so both countries have to work on a pact in order to keep NAFTA viable (Moens, 2010).

Conclusion Since its inception, NAFTA has created the world’s largest free trade area and has led to the economic growth of all the partner countries by boosting their trade, agriculture, and employment opportunities. The goal of NAFTA was to eliminate barriers of trade and investment between the US, Canada and Mexico. It has accomplished this task to a varying degree, with positive effects for each of the involved countries, but there have been negative impacts as well. While NAFTA has been largely beneficial in many areas, there have been downsides to the agreement as well. Some of the positive effects that have been provided for by NAFTA include improved overall GDP for North America, an increased amount of available jobs, increased transparency between nations, increased exports, and others. However, it may have contributed to an overall economic imbalance between the three countries. Many will agree that there have been some issues that have resulted from NAFTA. “For example, threats to the Canadian water supply and ecosystem, the loss of jobs in certain important sectors, and various disregarded NAFTA violations by all three countries have often been cited in criticisms” (www.naftaworks.org). Overall, it is clear that NAFTA is an imperfect legislation, and many issues must be resolved as much more can be done to deepen the market integration within North America.
Works Cited
1) Amadeo, Kimberly. “Advantages of NAFTA”. Useconomy.about.com. December 21, 2009. Web. 25 Nov. 2010.
2) Juiet, J. “Benefits of NAFTA”. Benefitsof.com. 2010. Web. 26 Nov. 2010.
3) “Benefits of NAFTA”. Naftaworks.org. Web. 27 Nov. 2010.
4) Green, Eric. United States. Increase in Reported Trade with NAFTA Partner. , 2005. Web. 05 Nov 2010

1.) Carlsen, Laura. “NAFTA: Kicked Up a Notch” Washington, DC: Foreign Policy In Focus, May 2007. Web. 8 Oct. 2010.
2.) Emmott, Robin. “A Third of Mexicans Would Migrate to US: Survey”. Reuters. 2010. Web. 6 Oct. 2010.
3.) Juvenal, Luciana. “Why Do Consumer Prices Differ Among NAFTA Members?”. The Regional Economist. Dec. 2009: Page 23. Web. 8 Oct. 2010.
4.) Moens, Alexander. “U.S. trade is Canada 's No. 1 Concern”. Telegraphjournal.com. Jan. 2010. Brunswick News, Inc. Web. 7 Oct. 2010.
5.) Smith, Geri and Cristina Lindblad. “Mexico: Was NAFTA Worth It?” Bloomberg. BW Online: Dec. 2003. Web. 5 Oct. 2010.
6.) Truckinginfo. “Bipartisan Letter Calls for Repeal of Mexican Truck Program”. Heavy Duty Trucking. April 2010. Newport Business Media. Web. 5 Oct. 2010.

Cited: 1) Amadeo, Kimberly. “Advantages of NAFTA”. Useconomy.about.com. December 21, 2009. Web. 25 Nov. 2010. 2) Juiet, J. “Benefits of NAFTA”. Benefitsof.com. 2010. Web. 26 Nov. 2010. 3) “Benefits of NAFTA”. Naftaworks.org. Web. 27 Nov. 2010. 4) Green, Eric. United States. Increase in Reported Trade with NAFTA Partner. , 2005. Web. 05 Nov 2010 1.) Carlsen, Laura. “NAFTA: Kicked Up a Notch” Washington, DC: Foreign Policy In Focus, May 2007. Web. 8 Oct. 2010. 2.) Emmott, Robin. “A Third of Mexicans Would Migrate to US: Survey”. Reuters. 2010. Web. 6 Oct. 2010. 3.) Juvenal, Luciana. “Why Do Consumer Prices Differ Among NAFTA Members?”. The Regional Economist. Dec. 2009: Page 23. Web. 8 Oct. 2010. 4.) Moens, Alexander. “U.S. trade is Canada 's No. 1 Concern”. Telegraphjournal.com. Jan. 2010. Brunswick News, Inc. Web. 7 Oct. 2010. 5.) Smith, Geri and Cristina Lindblad. “Mexico: Was NAFTA Worth It?” Bloomberg. BW Online: Dec. 2003. Web. 5 Oct. 2010. 6.) Truckinginfo. “Bipartisan Letter Calls for Repeal of Mexican Truck Program”. Heavy Duty Trucking. April 2010. Newport Business Media. Web. 5 Oct. 2010.