The North American Free Trade Agreement is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America.
The agreement came into force on January 1, 1994. It superseded the Canada–United States Free Trade Agreement between the U.S. and Canada.
NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).
Most economic analyses indicate that NAFTA has been a small net positive for the United States, large net positive for Mexico and had an insignificant impact on Canada.
Negotiation and U.S. ratification
Following diplomatic negotiations dating back to 1990 among the three nations, U.S. President George H. W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas signed the agreement in their respective capitals on December 17, 1992. The signed agreement was then ratified by each nation’s legislative or parliamentary branch.
The earlier Canada–United States Free Trade Agreement had been controversial and divisive in Canada, and the 1988 Canadian election involved discussion on the issue. In that election, more Canadians voted for anti-free trade parties (the Liberals and the New Democrats) but the split caused more seats in parliament to be won by the pro-free trade Progressive Conservatives (PCs). Mulroney and the PCs had a parliamentary majority and were easily able to pass the 1987 Canada-U.S. FTA and NAFTA bills. However, he was replaced as Conservative leader and prime minister by Kim Campbell. Campbell led the PC party into the 1993 election where they were decimated by the Liberal Party under Jean Chrétien, who had campaigned on a promise to renegotiate or abrogate NAFTA; however, Chrétien subsequently negotiated two supplemental agreements with the new U.S. president. In the U.S., Bush, who had worked to “fast track” the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing of the implementation law to incoming president Bill Clinton. Prior to sending it to the United States Senate Clinton added two side agreements, The North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC), to protect workers and the environment, plus allay the concerns of many House members. It also required U.S. partners to adhere to environmental practices and regulations similar to its own.
After much consideration and emotional discussion, the House of Representatives passed the North American Free Trade Agreement Implementation Act on November 17, 1993, 234–200. The agreement’s supporters included 132 Republicans and 102 Democrats. The bill passed the Senate on November 20, 1993, 61–38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; the agreement went into effect on January 1, 1994. Clinton, while signing the NAFTA bill, stated that “NAFTA means jobs. American jobs, and good-paying American jobs. If I didn’t believe that, I wouldn’t support this agreement.”
The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of Mexico’s exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty-free. NAFTA also sought to eliminate non-tariff trade barriers and to protect the intellectual property rights on traded products.
Securing U.S. congressional approval for NAFTA would have been impossible without addressing public concerns about NAFTA’s environmental impact. The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the CEC was given a mandate to conduct ongoing ex post environmental assessment of NAFTA.
In response to this mandate, the CEC created a framework for conducting environmental analysis of NAFTA, one of the first ex post frameworks for the environmental assessment of trade liberalization. The framework was designed to produce a focused and systematic body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a “race to the bottom” in environmental regulation among the three countries, or the hope that NAFTA would pressure governments to increase their environmental protection mechanisms. The CEC has held four symposia using this framework to evaluate the environmental impacts of NAFTA and has commissioned 47 papers on this subject. In keeping with the CEC’s overall strategy of transparency and public involvement, the CEC commissioned these papers from leading independent experts.
From the earliest negotiation, agriculture was (and still remains) a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The Canada–U.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico–U.S. pact allows for a wider liberalization within a framework of phase-out periods (it was the first North–South FTA on agriculture to be signed).
NAFTA established the CANAMEX Corridor for road transport between Canada and Mexico, also proposed for use by rail, pipeline, and fiber optic telecommunications infrastructure. This became a High Priority Corridor under the U.S. Intermodal Surface Transportation Efficiency Act of 1991.
Like Mexico and the U.S., Canada received a modest positive economic benefit as measured by GDP. Many feared declines failed to materialize, and some industries, like the furniture industry, which were expected to suffer, grew instead. Canadian manufacturing employment held steady despite an international downward trend in developed countries. One of NAFTA’s biggest economic effects on U.S.-Canada trade has been to boost bilateral agricultural flows. In the year 2008 alone, Canada exports to the United States and Mexico were at $381.3 billion, and imports from NAFTA were at $245.1 billion.
A 2007 study found that NAFTA has “almost zero welfare impact on member and nonmember countries”. A 2015 study found that Canada’s welfare decreased by 0.06% as a result of the NAFTA tariff reductions, and that Canada’s intra-bloc trade increased by 11%.
Maquiladoras (Mexican assembly plants that take in imported components and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla; all three larger in population than Tijuana, Ciudad Juárez, and Reynosa.
The overall effect of the Mexico–U.S. agricultural agreement is a matter of dispute. Mexico did not invest in the infrastructure necessary for competition, such as efficient rail roads and highways, which resulted in more difficult living conditions for the country’s poor. Mexico’s agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.
One of the most affected agricultural sectors is the meat industry. Mexico has gone from a small player in the pre-1994 U.S. export market to the second largest importer of U.S. agricultural products in 2004, and NAFTA may be credited as a major catalyst for this change. The allowance of free trade removed the hurdles that impeded business between the two countries. As a result, Mexico has provided a growing market for meat for the U.S., leading to an increase in sales and profits for the U.S. meat industry. This coincides with a noticeable increase in Mexican per capita GDP that has created large changes in meat consumption patterns, implying that Mexicans can now afford to buy more meat and thus per capita meat consumption has grown.
Production of corn in Mexico has increased since NAFTA’s implementation. However, internal corn demand has increased beyond Mexico’s sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of subsidies expanded by former president Vicente Fox, production has remained stable since 2000.
A 2001 Journal of Economic Perspectives review of the existing literature found that NAFTA was a net benefit to Mexico. By the year 2003, 80% of the commerce in Mexico was executed only with the U.S. The commercial sales surplus under NAFTA with the U.S., combined with the deficit on the rest of the world, created a dependency in Mexico’s exports. These effects were evident in 2001–2003; the result of that recession was either a low rate or a negative rate in Mexico’s exports.
A 2015 study found that Mexico’s welfare increased by 1.31% as a result of the NAFTA tariff reductions, and that Mexico’s intra-bloc trade increased by 118%. Inequality and poverty fell in the most globalization-affected regions of Mexico over the introduction of NAFTA. 2013 and 2015 studies show that Mexican small farmers benefitted more on NAFTA than large-scale farmers.
NAFTA has also been credited with the rise of the Mexican middle class. A Tufts University study found that NAFTA lowered the average cost of basic necessities in Mexico by up to 50%. This price reduction has increased cash-on-hand for many Mexican families, allowing Mexico to graduate more engineers than Germany each year.
The growth from new orders of products indicates that there was an increase in the demand from manufacture products. This increased demand resulted in an expansion of the production and a higher employment rate to satisfy the increment in the demand. The growth in the maquiladora industry and in the manufactory industry has been of 4.7% by August, 2016. Three quarters of the outer market of importation and exportations comes from the U.S.
Tufts University political scientist Daniel W. Drezner has argued that NAFTA made it easier for Mexico to transform to a real democracy and become a country that views itself as North American. This has boosted cooperation between the United States and Mexico.
In a 2012 survey of leading economists, 95% supported the notion that on average, U.S. citizens benefited on NAFTA. A 2001 Journal of Economic Perspectives review found that NAFTA was a net benefit to the United States. A 2015 study found that US welfare increased by 0.08% as a result of the NAFTA tariff reductions, and that US intra-bloc trade increased by 41%.
In 2015, the Congressional Research Service concluded that the “net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment among their economies.”
The U.S. Chamber of Commerce credits NAFTA with increasing U.S. trade in goods and services with Canada and Mexico from $337 billion in 1993 to $1.2 trillion in 2011, while the AFL-CIO blames the agreement for sending 700,000 American manufacturing jobs to Mexico over that time.
University of California, San Diego, economics professor Gordon Hanson has said that NAFTA helped the U.S. compete against China and therefore saved U.S. jobs. While some jobs were lost to Mexico as a result of NAFTA, considerably more would have been lost to China if not for NAFTA.
The U.S. had a trade surplus with NAFTA countries of $28.3 billion for services in 2009 and a trade deficit of $94.6 billion (36.4% annual increase) for goods in 2010. This trade deficit accounted for 26.8 percent of all U.S. goods trade deficit.
In a study published in the August 2008 issue of the American Journal of Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification. The study focused on the effects that gradual “phase-in” periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increase in members’ agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.
The U.S. foreign direct investment (FDI) in NAFTA countries (stock) was $327.5 billion in 2009 (latest data available), up 8.8% from 2008. The U.S. direct investment in NAFTA countries is in nonbank holding companies, and in the manufacturing, finance/insurance, and mining sectors. The foreign direct investment of Canada and Mexico in the United States (stock) was $237.2 billion in 2009 (the latest data available), up 16.5% from 2008.
Many American small businesses depend on exporting their products to Canada or Mexico under NAFTA. According to the U.S. Trade Representative, this trade supports over 140,000 small- and medium-sized businesses in the US.
According to the Economic Policy Institute, California, Texas, Michigan and other states with high concentrations of manufacturing jobs were most affected by job loss due to NAFTA. EPI economist Robert Scott estimates some 682,900 U.S. jobs have been “lost or displaced” as a result of the trade agreement. However, other studies have found that NAFTA only had a modest impact on manufacturing employment, and that automation explains away 87% of the losses in manufacturing jobs.
According to University of California, Berkeley professor of economics Brad DeLong, NAFTA had an insignificant impact on US manufacturing. The adverse impact on manufacturing has been way exaggerated in US political discourse according to DeLong, which is something that Harvard economist Dani Rodrik agrees with.
For more details on this topic, see NAFTA’s Impact on the Environment.
According to a study in the Journal of International Economics, NAFTA reduced pollution emitted by the US manufacturing sector: “On average, nearly two-thirds of the reductions in PM10 and SO2 emissions from the U.S. manufacturing sector between 1994 and 1998 can be attributed to trade liberalization following NAFTA.”
According to the Sierra Club, NAFTA contributed to large-scale, export-oriented farming, which led to the increased use of fossil fuels, pesticides and GMO. NAFTA also contributed to environmentally destructive mining practices in Mexico. It prevented Canada from effectively regulating its tar sands industry, and created new legal avenues for transnational corporations to fight environmental legislation. In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA’s measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers threatened to discourage more vigorous environmental policy. The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada.
Mobility of persons
According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national’s dependent (TD) status. Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier). According to the International Organization for Migration, deaths of migrants have been on the rise worldwide with 5,604 deaths in 2016.
Canadian authorities estimated that, as of December 1, 2006, a total of 24,830 U.S. citizens and 15,219 Mexican citizens were present in Canada as “foreign workers”. These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law. New entries of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans). Nevertheless, the institutional frameworks of the cross-border migrations are weak, so as the institutional roles and responsibilities at both in the national and international levels
Impact of withdrawing from NAFTA.
A range of trade experts have said that pulling out of NAFTA as Trump proposed would have a range of unintended consequences for the U.S., including reduced access to the U.S.’s biggest export markets, a reduction in economic growth, and increased prices for gasoline, cars, fruits, and vegetables. The worst affected sectors would be textiles, agriculture and automobiles.
According to Tufts University political scientist Daniel W. Drezner, the Trump administration’s desire to return relations with Mexico to the pre-NAFTA era are misguided. Drezner argues that NAFTA made it easier for Mexico to transform to a real democracy and become a country that views itself as North American. If Trump acts on many of the threats that he has made against Mexico, it is not inconceivable that Mexicans would turn to left-wing populist strongmen, as several South-American countries have. At the very least, US-Mexico relations would worsen, with adverse implications for cooperation on border security, counterterrorism, drug-war cooperation, deportations and managing Central American migration.
According to Chad P. Bown (senior fellow at the Peterson Institute for International Economics), “a renegotiated NAFTA that would reestablish trade barriers is unlikely to help workers who lost their jobs — regardless of the cause — take advantage of new employment opportunities.”
According to Harvard economist Marc Melitz, “recent research estimates that the repeal of NAFTA would not increase car production in the United States.” Melitz notes that this would cost manufacturing jobs.