NAFTA

February 22, 2020

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Definition and Purpose

NAFTA stands for North American Free Trade Agreement. It is made up of the three largest countries of North America: U.S., Canada and Mexico. The main purpose of NAFTA is to eliminate tariffs (tax on imported goods) and other trade barriers between the countries. NAFTA’s purpose is to expand trade and boost North American competitiveness on the global market.

Secondary Purposes

NAFTA also helps protect intellectual property among the three countries by providing punishment against intellectual theft. Additionally, NAFTA has some environmental and labor regulations for manufacturing in the three countries. For example, the deal boasts an environmental side agreement known as the Commission for Environmental Cooperation that tries to regulate NAFTA’s affect on the environment.

Sources: Council on Foreign Relations, Britannica, The Balance

A Brief History

When NAFTA went into effect in 1994, it was met by bipartisan (both parties) support with 34 Republicans and 27 Democrats signing the bill in the Senate. Over time, NAFTA was expanded through other trade alliances such as the Trans-Pacific Partnership (TPP) that included more countries.

Sources: The Balance, Congressional Research Service

Varying Viewpoints

For NAFTA

Added American Jobs

Supporters of NAFTA estimate that some 14 million jobs rely on trade with Canada and Mexico.
Many of the jobs losses opposers claim are caused by the trade agreement would have happened without NAFTA because of economic trends.

Boost the Economy

NAFTA increased GDP by .5 percent, $80 billion.
A 2014 PIIE study of NAFTA’s effects found that about 15,000 jobs on net are lost each year because of the pact—but that for each of those jobs lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices.

Lower prices of groceries and oil

Without having to import oil from the Middle East, fuel prices went down. Able to use labor from Canada and Mexico, grocery prices also went down.

Increase Competitiveness

NAFTA quadrupled trade between the three countries in 20 years.

Against NAFTA

Reduced American Jobs

The U.S. auto sector lost some 350,000 jobs since 1994—a third of the industry—while Mexican auto sector employment spiked from 120,000 to 550,000 workers. Many link the trend to NAFTA.

Trade Deficit

The U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus in 1993 to a $54 billion deficit by 2014. The Economic Policy Institute argue that this surge of imports caused the loss of up to 600,000 U.S. jobs over two decades.

Lowering wages

Along with jobs flowing across the Mexican Border, in many border states, manufacturing companies threaten to move business or accept lower wages.

Insufficient Environmental and labor policies

While NAFTA has many environmental policies, lack of transparency and expectations make the side agreement ineffective. This especially threatens Mexico, who opposers say the plan caused increased environmental degradation.

Mexican farmers replaced by cheap US goods

Mexican unemployment also rose, which some economists have blamed on NAFTA for exposing Mexican farmers, especially corn producers, to competition from heavily subsidized U.S. agriculture.

American Jobs and NAFTA’s effect

This is by far the most contentious point of disagreement: is NAFTA costing American jobs? Supporters of the bill argue more jobs are created by trade while opposers say more jobs are lost by companies finding cheaper labor in Mexico.

Recent Events and Reformation

The purpose of renegotiation is to boost the manufacturing sector in the United States and decrease the trade deficit, President Donald Trump said.

In August 2017, President Trump initiated a renegotiation of NAFTA with Canada and Mexico. The renegotiations increased tensions between the countries, especially the U.S and Canada, with President Trump threatening to issue tariffs on Canada April 2018 because Canada refused to agree to his terms. By August 2018, however, a new deal was made called the United States-Mexico-Canada Agreement (USMCA). This deal still needs to be approved by the American and Canadian legislative bodies (Congress in the United States). Mexico already ratified the agreement in June 2019. The USMCA is set to go into effect in 2020 if ratified by the U.S. and Canada.

Sources: Vox, Chicago Council, Forbes

How NAFTA Changed

How the New Agreement changed NAFTA:

Auto Companies must manufacture 75 percent of car components in the U.S., Canada and Mexico.

This number was previously 62.5 percent.

30 percent of a car must be made by workers earning at least 16 dollars/hour. In 2023, it must be 40 percent.
Canada eased its dairy restrictions allowing the U.S. to export 560 million dollars worth of dairy products.
There will be a sunset clause, meaning the USMCA will stay for 16 years and see revision every six years.
There will be stricter copyright terms that extend to 70 years, which is up from the previous 50 years.

Source: USAToday