NAFTA: One of the Largest Free Trade Agreements in the World

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Half of all of Canada’s direct foreign investment comes from the United States. This relationship was established by the National American Free Trade Agreement or NAFTA in 1994. NAFTA is one of the largest free trade agreements in the world and includes the United States, Canada, and Mexico. NAFTA is important because it paved the way for North American Trade, established trading practices, impacted our economy, and is evolving to this day. Without NAFTA North American relations would be drastically different.

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NAFTA was created by the leaders of the U.S., Canada, and Mexico in hopes of promoting free trade throughout North America. NAFTA was caused by the belief that tariffs, between the largest countries in North America, acted as trade barriers. The leaders of Canada, the U.S., and Mexico believed that NAFTA would create millions of better-paying jobs, bring prosperity to North America, and modernize the Mexican economy. Canada and the U.S. viewed Mexico as a great place to expand exports and a low-cost investment location.NAFTA originated from a trade agreement between the U.S. and Canada which came to a close in 1988. This agreement formed into NAFTA when it was extended to Mexico and reached a primary agreement in August 1992. NAFTA’s creation was based upon the elimination of tariffs and trade barriers which the leaders of North America viewed as an opportunity for increased free trade.

NAFTA introduced a reduction of tariffs and new rules regarding intellectual property and disputes, but not all parties supported these actions. Many tariffs and customs duties were reduced to allow more free trade throughout NorthAmerica. The reduction of tariffs varied greatly as some were removed immediately while others gradually decreased up to fifteen years later. Under NAFTA imported products were not allowed to be taxed by any form of government. The reasoning behind this was to allow for duty-free access to a plethora of products and goods. NAFTA legislated that the three countries had to follow rules that secured intellectual property and the conduct of how investors from NAFTA countries would solve disputes. Additional regulations insured that participating countries acted in opposition to industrial theft. NAFTA allowed corporations to sue governments for not complying with the terms of the treaty. There was a lot of support for the agreement, but many believed that it would result in a loss of jobs. Many were worried that corporations would opt for cheaper labor in Mexico and viewed the deal as a way for corporations to get rich while leaving citizens in the dust. Environmentalists believed that rapid industrialization in Mexico would injure the environment as Mexico had a history of ineffective environmental regulations. Additional concerns were the displacement of farmers, decline of health conditions, and promotion of privatization. NAFTA’s rules were made in an effort to eliminate trade barriers but faced opposition from environmentalists and economists worried about the loss of jobs.

NAFTA neither had an overwhelmingly positive or negative impact on the Canadian, American, and Mexican economies. The main result of NAFTA’s impact on Canada was the improvement of Canadian and American relations. Examples of this improvement are exported from Canada to the U.S. grew from $110 billion to $346 billion, Canada and U.S. agricultural exports have tripled since 1994, and U.S. investment in Canada has tripled since 1993. In fact investments from the U.S. were $70 billion in 1993 and as of 2013 are over $368 billion. In the U.S. trade has tripled and GDP has expanded by 0.5% which is roughly $80 billion. On the flip side, economists theorize that since NAFTA has been legislated over 600,000 American jobs have been lost. There is much debate over this as other economists believe for the jobs lost higher-paying jobs, better productivity, and lower consumer prices are gained. The most major change in Mexico is the $340 billion increase in exports from 1994 to 2014. Imports have also increased which has lowered prices and provided better quality goods for Mexican consumers. Despite this, the poverty level is unchanged as of 1994 and unemployment has risen. This is due to the displacement of 2 million Mexican farmers by U.S. corporations given subsidies and has in turn increased illegal immigration to the U.S. Despite NAFTA failing to reach its goals it expanded to other Central and South American countries creating Central America Free Trade Agreement (CAFTA) in 2004. The further expanded to the Trans-Pacific Partnership (TPP), which was signed in 2015 and is the largest expansion of NAFTA. Economists debate whether NAFTA had an overall positive or negative impact. Regardless, leaders expanded the trade deal to include Central and South America.

In the last few years, NAFTA has undergone much renegotiation and revision of rules. Renegotiation began when U.S President Donald Trump came into power and severely disliked the agreement. His main point and the center of the discussion on NAFTA is that is takes away American jobs. Once elected Trump pulled the U.S. out of TPP, which is yet to be ratified, and put tariffs on steel, aluminum, and cars. By August 2018 the U.S. and Mexico came to an agreement, which Canada reluctantly signed on September 30, 2018. The new agreement is known as United States-Mexico-Canada Agreement (USMCA). Revisions include vehicles exempt from tariffs must have 75% of their parts made in North America compared to the previous 62.5%. As well, vehicles exempt from tariffs must have 30% of work done on them by workers receiving over $16 an hour. The new agreement gives access to Canada’s dairy market, but U.S. lawmakers failed in eliminating Chapter 19. Chapter 19 surrounds the issues of countervailing and anti-dumping which are simply foreign companies using subsidies given to them to undercut the local competition. This is usually taken up by domestic courts which are slow, unreliable, and can cause companies to go bankrupt from waiting so long. Chapter 19 allows these issues to be reviewed by binational panels per request. USMCA’s sunset clause was extended by Canada from five to sixteen years. USMCA was officially signed by all three countries on November 30, 2018. Mexico ratified the agreement on June 19, 2019. Canada is waiting for the U.S. to ratify, which hasn’t been done since Democrats oppose Trump. If the agreement is not ratified by 2020 then it will be subject to U.S. elections and may not be ratified for another year. NAFTA has now been altered to become USMCA, but there is doubt about when this new agreement will be adopted by the legislature.

NAFTA is significant to Canadian history because it opened up our borders and strengthened our relationships with other countries. It began the improvement of free trade throughout North America. Without NAFTA there wouldn’t be CAFTA, TPP, or USMCA. NAFTA created a set of rules to improve free trade. These rules not only improved trade between countries but improved working conditions. NAFTA has had an impact on North America whether that is debated to be positive, negative, or neutral. The main and arguably most significant impact it’s had is the strengthening of Canadian, American, and Mexican relationships. While NAFTA is no longer NAFTA, but USMCA, it still holds great importance because it decides the future of North American Trade. It is important to learn about the history and future of our countries’ trading practices as it affects every person in one way or another. Trade is an extremely important concept in our global economy and one that we should educate ourselves about.   

24 May 2022

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