NAFTA : Free Trade Agreement, Increase Investment Opportunities, Promote Competition, Encourage Currency Exchange
International trade is the economic transactions that are made between countries. Trade is essential for growth and development in an economy. A free trade agreement is an economic cooperation between countries by eliminating or limiting tariffs and other hindrances on the sales of goods and services between each other. There are several free trade agreements these include EFTA( European Free trade Association), SAFTA(South Asian free trade area), Pacific Alliance, and NAFTA (Northern American Free trade agreement). Countries often get into a free trade agreement because they enlarge markets, increase investment opportunities, promote competition, encourage currency exchange, and spreads risks.
GATT( General Agreements on Tariffs and Trade) showed how beneficial economic cooperation could be as it was an agreement set up after the great depression in the 1930s to combat the protectionism that weakened economies at the time. GATT significantly decreased tariff barriers on manufactured goods in industrial nations. This helped to encourage the expansion of world trade after the second world war. GATT was later transformed into The World Trade Organisation which consists of over 100 countries. However, there is some drawbacks of free trade these include massive job loss, the decline in some domestic industries which leads to vulnerability, and tax troubles for the government e.g. due to relocation of manufacturing to other countries.
The focal point in this essay is on The Northern American Trade Agreement. This essay aims on providing an in-depth analysis on NAFTA, its current problems, and its restructuring.
The Northern American Free Trade Agreement (NAFTA) treaty between the USA, Canada, and Mexico which was put into effect on the first of January 1994, after two years of negotiations between President George W Bush (USA), and Prime Minister Brian Mulroney, and President Carlos Salinas. Bill Clinton the 42nd American president signed the agreement on December 8th, 1993. The agreement eliminated most tariffs and taxes on imports and exports between the three countries creating the world’s largest free-trading zone. The idea for a North American market was first sought after by President Ronald Ragen during his 1980 campaign. He was inspired by the European Common Community (1957-1993) which was an association that integrated economic cooperation- by eliminating most trade barriers - between several countries in Europe including France, Luxembourg, The Netherland, Italy, West Germany, Belgium, and other countries which joined later. There already existed a trade agreement between the USA and Canada called the Canada- United States free trade agreement (CUSFTA) signed in 1988 which eliminated tariffs and reduced non-tariff barriers. NAFTA broadened this agreement by including Mexico.
Mexico was seen as a poor country with numerous inhabitants this created a fear of significant job loss for Canada and the USA, especially for low-skilled jobs. The USA would have to invest in training its workforce to combat this problem. To ensure NAFTA was passed Bill Clinton stressed the environmental and labor protections to reassure Americans that NAFTA is beneficial. This is one of the main reasons there are only three nations in NAFTA. It only included the three largest nations in North America to encourage trade and minimize loss.
The goals of NAFTA are trade liberalization, the promotion of fair competition, the creation of investment prospects, protection and encouragement of intellectual property rights, and the promotion of cooperation between members. The terms under the agreement were used as tools to achieve these goals.
Under NAFTA tariffs on goods imported between the three nations were eliminated. Some were eliminated immediately while others were gradually eliminated in presiding years. There are specific RULES OF ORIGIN listed in chapter 4 of the NAFTA agreement which make goods eligible for the free-tariff grant. These RULES OF ORIGIN consider where the product is being produced and the materials being used to produce it. Only originating goods as defined by NAFTA can receive free duty or reduced tariffs under NAFTA. These complex rules were put in place to promote fairness.
NAFTA’s service provision contains rules and obligations for service trade. Services traded between the countries are to be treated like domestic services. NAFTA provided certain rights that had to do with cross-border sales, investment, and non-discriminatory treatment and it eliminated any disguised trade barriers.
The USA-CANADA FTA was used as a reference point for the procedures of preventing and solving disputes within NAFTA. A system to Arbitration was introduced to deal with disputes this is supervised by the Free trade commission- a body established to deal with the implementation of NAFTA.
Under NAFTA, it is stated that each state should provide other countries in NAFTA with measures to shield and impose intellectual property rights. These rights comprise copyrights, secret recordings, trademarks, and others. The countries are required to impose provisions of major intellectual property conventions including the Berne Convention for the Protection of Literary and Artistic Works. Criminal procedures are employed as a means to impose property rights laws.
Most investment barriers were eliminated under NAFTA. The agreement ensured protection for NAFTA investors and created a means of settling investment disputes between investors and a country. Investors from any foreign country had to be treated with the same type of respect as would an investor from a domestic country. The agreement also allowed countries to impose regulations for the requirement of safety health and environmental concerns.
NAFTA has benefited its three participants. Trade between the three countries has skyrocketed since NAFTA. The Wharton (University of Pennsylvania) estimated that trade between the three countries grew from 290 billion dollars in 1993 to over 1.1 trillion by 2016.
It is challenging to get a precise estimate of the agreement's effect on the US economy. However, it is estimated by the council of foreign relations that NAFTA has caused the US economy to grow by 0.5% each year. NAFTA encouraged an increase in imports of goods in which Mexico and Canada had a comparative advantage see appendix 1 and an increase in exports of US services. The US trade with Mexico is said to revolve around cars this is evident in appendix 1 as it is estimated that the US imports 93 Billion worth of cars from Mexico. US imports from Mexico have surpassed its import from Canada see appendix 2. Imports from Mexico stimulate the US economy as the cars and parts-mostly by American automakers- are intended for US markets. This allows the US to compete with rapidly growing foreign auto industries. The US is also heavily dependent on Mexico for machinery, produce, and furniture. NAFTA is said to cut government budget deficits by encouraging more competition and lower cost-bids. NAFTA reduced the prices of imports of oil within North America. This benefited the USA as it mostly imports oil. NAFTA, therefore, reduced the US reliance on oil imports from the Middle East and Venezuela.
The Mexican Economy also benefited from NAFTA. Thousands of auto manufacturing jobs were created. Mexican leaders we able to reduce public debt, build up foreign reserves and stabilize inflation that is why it was able to bounce back from the American recession in 2008 that reduced exports significantly. It is estimated that from 1993 to 2013 the Mexican economy increased at a rate of 1.3% a year.
It has been said that Canada has benefited the most from NAFTA. Foreign direct investment has immensely increased as of 2017 US FDI in Canada is said to be estimated at 391.2 billion USA. Canada’s FDI stock has enlarged due to investment from both Mexico and the US. These increases in FDI can be attributed to NAFTA reducing investment risks by ensuring investors they have the same rights. Canada’s agricultural sector greatly benefited from NAFTA. Canada imports prolific agricultural goods from the US causing an increase in the US- CANADA agricultural flows.
Despite these advantages of the agreement, there are also several drawbacks. The problems NAFTA causes in the USA are prominent when looking at unemployment and trade deficit. NAFTA marked the first major US trade agreement with a developing country, It was stated in 2014 by the US Chamber of Commerce that 6 million US jobs depend on trade with MEXICO and 8 million are dependent on trade with Canada. However, NAFTA is often targeted as the source of loss of jobs and wage stagnation as production companies move to Mexico to lower prices and the influence of trade unions while increasing the trade deficit see appendix 3 and 4.
Mexico is said to suffer lots of disadvantages from the NAFTA agreement. It caused job loss for small business owners and Mexican farmers by allowing the US to subsidize farm products into Mexico. In the 2000s it is estimated that 1.3 million farmers lost their jobs. This contributes greatly to illegal immigration. In the search for jobs many Mexicans moved to the US illegally in the early 2000s it’s said that there were up to 4.5 million illegal immigrants in the US from Mexico. The recession in 2007 increased this number, however, the number is currently said to have subsided in recent years.
Working rights in Mexico has said to have worsened due to US companies. Maquiladora is where US companies employ Mexican workers to cheaply manufacture products that would be exported to the US. Many Mexicans are subjected to the Maquiladora program because they can’t get better-paying jobs.
The Mexican environment has deteriorated this can be linked to the signing of the treaty. The environmental clause is NAFTA was expected to encourage Mexico to undertake stricter environmental rules however pollution has severely increased due to US and Canadian companies. This includes soil erosion, water pollution, deforestation, soil waste increase, and many other detrimental effects on the environment. It can even be argued that the environmental damages over ways the benefits to the economy.
There were additions to NAFTA to combat these problems these include: The American Agreement On Labor Cooperation and The Northern Agreement On Environmental Cooperation. These were introduced with the aims of improving working conditions, living standards, and the economic impacts on the environment. Despite the introduction, these agencies people still aren’t satisfied. The current American President has been a vocal advocate for the renegotiation of NAFTA. President Trump is adamant that “NAFTA is the worst trade deal” that has been signed by the US. He has used aggressive import tariffs to encourage renegotiation. In August 2018 Trump and Mexico agree on a bilateral agreement to replace NAFTA and threatened to remove Canada. Canada joined negotiations on 30th September 2019. The renegotiated version of NAFTA is called the United States Mexico Canada Agreement.
The main differences under the USMCA include: Automobiles having 75% of its contents made in the member countries to qualify for zero tariffs. 30% of components have to be produced by laborers who earn a minimum of 16 dollars per hour. This is more than double what Mexican autoworkers currently earn. The agreement is also said to prevent any tariffs for the first 2.6 million Canadian automobile exports to the US. Under USMCA Canada has to yield a larger market share for American dairy products. Canada would give 3.6% of its market share to its trading partners. Ridged intellectual property rights for the preservation of patents and trademarks were implemented including those for financial services and nanotech. The terms of property rights were extended to 70 years. It further elongates the period that which drugs could be protected from generic competition.
The 16th year's sunset clause means the terms of the agreement would be terminated –“sunset” after 16 years. The deal will be reviewed every 6 years its members would decide if they want to extend the USMCA. These policies under the USMCA may not be very effective. As with the Automobile policy cost of production of cars will increase this could make automobiles produced in North America less competitive compared to those produced in Asia and other foreign countries. This may even cause more problems in regard to inflation.
The terms under dairy products may negatively affect Canadian farmers by causing job loss due to competition from US products. However, the government is ready to introduce subsidies and protection schemes to help Canadian dairy farmers. It is also predicted that Canada would benefit less from the protections due to the differences in the size of these sectors in Canada and the US.
In conclusion, Free Trade Agreements are extremely important as they often benefit the countries involved. The North American economies have definitely gained from the introduction of Natta. However, It seems that its restricting would benefit all participants. This is needed to combat the problems of lost jobs, trade deceits, deteriorating working conditions, and environmental problems. NAFTA was negotiated and signed 2 decades ago times have changed and the agreement needs to adapt to current economic environments. The USMCA is quite similar to NAFTA only with a few differences. This may mean its implementation would not cause any significant changes as there may still be winners and losers as stated above.
