North American Free Trade Agreement Essay

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Linking more than 400 million citizens in a single economic unit producing more than $12 trillion worth of goods and services, the 1993 North  American  Free Trade Agreement  (NAFTA) is among the most pivotal agreements in the social, political, and economic evolution of an integrated  North  America. NAFTA’s goals are to eliminate barriers to trade; promote conditions of fair competition;  increase investment opportunities; provide adequate  protection for intellectual property rights; establish effective procedures for the implementation  and  application  of  the  agreement and for the resolution  of disputes; and further  trilateral, regional, and multilateral  cooperation.  Since its inception,  NAFTA has been credited  with boosting economic productivity, creating greater employment opportunities, and reducing the costs of business, as well as for privatization,  deregulation,  environmental concerns,  and  the  erosion  of the  sovereignty of national governments in favor of corporations.

Impetus For NAFTA

U.S. President Ronald Reagan (1981–89) was a prominent advocate of North American free trade, part of an  ideology that  espoused  loosening  governmental regulation  of businesses and the primacy of the free market  in society. Nonetheless,  increased American protectionism, a result of massive trade deficits with Japan and a restructuring economy, prompted fears in Canada that it would be shut out of its most important market (by the mid-1980s, the United States was taking more than 70 percent of Canada’s exports), and convinced traditionally protectionist Conservative Canadian Prime Minister Brian Mulroney (1984–93) that free trade was Canada’s best bet. After years of often-acrimonious negotiations  (and a spirited 1988 Canadian   election),   the   Canada-U.S.   Free  Trade Agreement came into force in 1989.

Reagan’s successor, George H. W. Bush (1989–93), was also an advocate of free trade. Keen to build on the Canada-U.S. agreement, the United States sought an identical deal with Mexico. President Carlos Salinas  (1988–94)  of  the   Institutional  Revolutionary Party (PRI) had, like Mulroney,  turned  his back on decades  of PRI policy. Mexican  industry  had  been heavily protected,  but advocates of free trade argued that Mexico would benefit immensely from access to the U.S. market.  Salinas believed that  Mexico could use its low-cost-labor advantage to lure American business, particularly  to specially created  industrial zones  called maquiladoras.  Not  wanting  to  be left out, Canada joined in the U.S.-Mexico negotiations, and in 1992 an agreement  was reached  that  largely echoed the earlier Canada-U.S. Free Trade Agreement. On January 1, 1993, the North  American Free Trade Agreement became reality.

Key Components

The reduction  of tariff barriers  was the  main  goal of NAFTA. Under  the  agreement,  almost  all tariffs among the three countries were eliminated by January 1, 2003, covering a host of sectors including energy, agriculture, and manufactured goods. Mexican tariffs on U.S. goods, which averaged 10 percent, were phased out over 10 years, allowing the Mexican economy time to adjust to the new competitive reality. Several tariff exceptions remain, however. Canada’s dairy and poultry industries are exempted. Similarly, the sugar, dairy, peanut, and cotton sectors are exempted in the United States. In Mexico, tariffs remained on corn, beans, and powdered milk until 2008.

Rules  of  origin  establish  whether  products   are made in a NAFTA country and, thus, can enter into member  countries  duty  free. Each NAFTA partner maintains  its own  external  tariffs governing  goods from  non-NAFTA  countries.  These rules  of origin are particularly important in certain sectors, including the auto industry,  in which cars and parts must have 62.5 percent  North  American  content  (that  is, must  be made in one of the three  countries)  before they enter  the other  two NAFTA partner  countries duty free. Nonetheless, more than 90 percent of trade among the three countries is duty free.

Investment is a second key component of NAFTA. The agreement’s Chapter  11, which governs investment, makes rules on how investors should be protected  by the NAFTA member  governments.  These rules state that NAFTA countries  cannot  treat companies  that  set up  or  invest  in any of the  NAFTA countries any differently.

In 1997, for example, Canada banned the importation of MMT, a fuel additive produced  by American Ethyl Corp., which the government  felt might be environmentally damaging (the product was not banned in the United States). American Ethyl sued Canada based on Chapter  11 rules and won, forcing Canada to pay $20 million  in damages.  This outcome  led to  some severe criticism that Chapter 11 creates a bill of rights for corporations,  allowing them to conduct business at the expense of environmental or health standards.

Dispute  settlement  is another  central  element  of NAFTA. Although  most  trade  among  Canada,  the United States, and Mexico is problem  free, in some instances governments disagreed and imposed penalties, such as countervailing duties, that applied tariffs on products  coming from one of their NAFTA partners.  The dispute-settlement mechanism  also governs antidumping,  in which one country  claims that another is selling its goods for a price that is below its actual value—dumping goods into a country. In cases of countervailing duties or dumping, the countries go to an arbitration panel made up of representatives  of the two disputing  countries  and a chairperson  who is picked by both countries  to decide whether penalties should apply or whether they should be lifted and restitution should be paid.

NAFTA dispute  resolution  is not  always effective. In 2002 the United States attached  a 27-percent  duty on softwood  lumber  from  Canada.  Canada  claimed that  this duty was unfair and sought recourse  under NAFTA. When the panel found in Canada’s favor, the United States ignored the decision. This long-running lumber  dispute  illustrates  the fact that  NAFTA’s dispute-resolution decisions are not necessarily binding.

Other Issues

NAFTA allows the citizens of each country to move across borders for work outside the regular immigration channels, through  special visas for specialized workers and intercompany transfers.  This arrangement facilitates the flow of cross-border professionals  and  businesspeople   to  meet  economic  needs in member  countries  and also expands the pool of labor  and  job opportunities. These measures  have been  criticized  by some  labor  groups  as allowing employers to lower labor costs, hurting  workers in all three countries.

NAFTA contains  special side agreements  on the environment and labor. These agreements were added during the negotiations  to ensure  that  each country enforced proper  labor laws and environmental standards in an effort to maintain  a certain level of consistency from country to country, and to ensure that none  of the countries  would weaken these areas to attract investment.

Some observers have criticized these agreements as not  being  effective in  maintaining  proper  standards in either the environment or in the workplace. Many critics point  to the Mexican maquiladoras  as examples  of  situations  in  which  lower  wages and poorer  working  conditions  have  hurt  workers  and their communities.

Impact

The economic  impact  of NAFTA on the economies of the three countries since 1993 has been significant. Trade  growth  is by far the most  telling statistic.  In 1994, total trade  among  Canada, the United  States, and Mexico amounted  to $297 billion. By 2002 that figure was $676 billion, an increase of 128 percent. Every day, NAFTA partners  trade $1.8 billion worth of goods. By 2001, Mexico had  overtaken  Japan  as the  United  States’s  second-largest   trading  partner (12.4 percent  of U.S. trade), after Canada (20.4 percent). The key sectors for trade in the NAFTA region include  transportation equipment,   electronics  and communications equipment, and textiles.

The impact of free trade on each of the three countries has been impressive. Canada attributes  40 percent of its gross domestic product  to external trade. Every day, more than $1 billion worth of goods crosses the Canada-U.S. border. Canada’s merchandise  trade with the United  States and Mexico rose from $112 billion  in  1993  to  $235  billion  in  2000. Canadian trade with NAFTA countries has more than doubled, whereas its trade with the rest of the world has grown by only 29 percent. Along with the auto trade, lumber, agricultural products, and energy (oil and gas) exports constitute  the primary trade for Canada.

The United  States, by far the largest economy  of the  three  partners,  has also witnessed  a significant growth in its NAFTA trade. Between 1993 and 2000, U.S. merchandise exports to its NAFTA partners more than  doubled  and was well ahead of the 52 percent growth  in exports  to the rest of the world. In 1993 total U.S.-Mexico trade amounted  to $150 billion. By 1999 that figure had grown to $320 billion, as exports to Mexico from the United  States increased  by 133 percent, primarily in electronic and electrical equipment, industrial machinery, transportation equipment,  and chemical  and metal  products.  U.S. trade with Canada has also increased significantly, although Canada-U.S. trade had been increasing since the 1989 agreement. U.S. exports northward  increased 35 percent between 1993 and 2001, whereas imports  from Canada increased 69 percent. Overall employment in the United States increased by 12 percent, or 15 million jobs, during that period.

The growth  in trade  in Mexico since that  country joined NAFTA has been  equally significant. By 1996, Mexico’s third year in the NAFTA agreement, Mexico-U.S. trade reached $148 billion, a 65 percent increase  from  the  1993 pre-NAFTA  level. Canada-Mexico trade increased 43 percent by 1996 over preNAFTA  levels and  positioned  Canada  as Mexico’s third-largest  trading partner,  whereas Mexico is now Canada’s sixth-largest trading partner.

Although all these statistics point to a massive growth in trade and investment among the three countries, the human benefits of NAFTA are more difficult to ascertain. Unemployment rates in some parts of Canada and the United States have remained relatively stable since 1993, and deindustrialization has increased,  particularly in the American Midwest. Poverty remains significant in Mexico, and although wages and employment may have increased  in some areas, much  of Mexico retains the status of a developing country. Many have argued that the true benefits of freer trade have been unevenly distributed  to corporations that  have taken advantage of the new regime.

Political Aspects

Politically, free trade in North America has not been without its challenges. In Canada, free trade has historically been linked to national identity and sovereignty, and opposition  to the  1989 FTA was particularly intense.  During  the  1992 U.S. presidential campaign, free trade was a divisive issue, most visibly exhibited by the stunning  electoral story of H. Ross Perot, the anti–free trade Texan famous for his warning that Americans would inevitably hear the “giant sucking sound” of U.S. jobs being drained southward by Mexico.

Mexico, however, has experienced the most pointed challenges. On January 1, 1994, the Zapatista National Liberation Army (EZLN), led by Subcomandante Marcos,  took  over villages in the  Mexican  province of Chiapas. The Zapitistas declared NAFTA a “death sentence” for the indigenous  peoples of Mexico and proclaimed  a state of war against the federal government. Although the Zapatista uprising was eventually quelled, the Zapatista legacy is strong, and a consistent anti-NAFTA organization  remains in Mexico, uniting labor, academic, aboriginal, and nationalist groups.

Since the  initial  outburst   of protest  against  the agreement  in the early 1990s, opposition  to NAFTA and  free trade  has remained  significant. Civil-society groups believe that governments  have ceded too much  sovereignty to corporations and to pro-trade bodies such as NAFTA and the World  Trade  Organization (WTO), and that the globalization represented by free trade has given anti–free  trade forces significant traction. The high-profile protests  against the WTO  and the proposed  Free Trade Area of the Americas (FTAA) have given anti–free  trade groups significant publicity. But civil-society groups are not the only ones that  have continued  to challenge free trade. Mainstream  opposition  to NAFTA continued in  the  2008 presidential  election,  in  which  Democratic candidates Barack Obama and Hillary Clinton called for  the  agreement’s renegotiation.  Nonetheless, NAFTA remains a central aspect of an emerging North American polity.

Bibliography:   

  1. Ted Chambers   and  Peter   Smith,  , NAFTA  in  the  New  Millennium (University  of  Alberta Press, 2003);
  2. Kerry A. Chase, “Protecting Free Trade: The Political Economy of Rules of Origin,” International  Organization (v.62/3, 2008);
  3. Dorothee J. Feils and Manzur Rahman, “Regional Economic Integration and Foreign Direct Investment: The Case of NAFTA,” Management  International  Review (v.48/2, 2008);
  4. Ralph Haughwout Folsom, NAFTA  and  Free Trade  in  the  Americas  in  a  Nutshell (Thomson/West, 2008);
  5. Mordechai Krenin, Building a Partnership: The Canada–United States Free Trade Agreement  (Michigan  State  University  Press,  2000);
  6. Gordon Laxer and John Dillon, Over a Barrel: Exiting from NAFTA’s Proportionality Clause (Parkland Institute,  2008);
  7. Joseph A. McKinney and H. Stephen Gardner, Economic Integration in the Americas (Routledge, 2008);
  8. Karl Meilke, James Rude, and Steven Zahniser,  “Is ‘NAFTA Plus’ an Option in the North American Agrifood Sector?” World Economy (v.31/7, 2008);
  9. Isidro Morales, Post-NAFTA North America: Reshaping the Economic and Political Governance of a Changing Region (Palgrave Macmillan,  2008);
  10. NAFTA and the Maquiladora  Program: Rules, Routines, and Institutional  Legitimacy (Western  Press, 2008);
  11. Leslie Rockenbach, The Mexican-American Border: NAFTA and Global Linkages (Routledge, 2001).

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