The world has witnessed a wide range of efforts to promote free trade throughout history. While there are several reasons, which contribute to this phenomenon, it is worth noting that the realization of secure trade liberalization has always been the driving force. However, several debates have been tabled about free trade agreements, among them being the possibility of this concept to divert, other than creating trade for various states affected by the efforts.
Based on this, history has recorded little diversions, with evidence revealing that free trade and regional agreements have been tremendously effective in promoting trade liberalization for several decades. Among others, free trade organizations are considered to be more workable during negotiations, as compared to multilateral parties (Schott, 2004). This is mainly based on the fact that there are always fewer parties on the table, a factor that allows the involvement of limited personal interests.
In addressing some of the negative effects of free trade agreements, analysts have made their arguments based on the possibility of such agreements to diminish economic welfare especially if they are not set up within the correct framework. Additionally, free trade agreements have been considered to be ineffective especially in cases where parties outside the agreements have a considerably higher influence on the parties involved (Schott, 2004).
A good example of a free trade agreement, whose impact has been detailed, is NATFA. This research paper gives the advantages and disadvantages of NATFA since its formation, several years ago. Of great significance in this analysis will be the economic impact of the agreement on parties, which are involved and how the lives of people have been influenced, since the signing of the agreement.
The North American Free Trade Agreement, abbreviated as NATFA, is a treaty, which was ratified in January 1994 by the governments of the United States, Canada and Mexico. Based on this ratification, a North American trade bloc came into being. Importantly, NATFA was considered to be more promising than the Canada-United States Free Trade Agreement, which brought together the two countries, the U.S. and Canada in terms of trade. By the year 2010, NATFA was ranked first globally, as the bloc with the highest combined Gross Domestic Product. Notably, the agreement has two principle supplements, which are NAAEC and NAALC (Villarreal, 2010).
Like many other agreements, which exist in the world today, NATFA came into force after a process of negotiations. This was necessary to allow all the parties involved to make decisions and project the feasibility of the bloc in augmenting trade liberalization among its member states.
These negotiations began as early 1986, before a meeting for leaders of the three members in December 1992, to adopt the treaty in San Antonio. George Bush, Brian Mulroney and Carlos Salinas signed the agreement, even though it was to be adopted by each nation’s legislative branch before becoming operational. However, different leaders rose to power before the agreement had been ratified. These were Bill Clinton of the United States, Jean Chrétien and Kim Campbell of Canada (Villarreal, 2010).
Prior to its adoption, NATFA became a controversial issue, with some people disagreeing with the need to have free trade in the region. For instance, the issue was a determinant during Canadian elections, which were held in 1988 (Villarreal, 2010). Despite the resistance among Canadian political leaders, Mulroney’s side won the election, with the majority in parliament, giving hope to the progress of free trade efforts.
As a result, the Canada-U.S. Free Trade was passed with a lot of ease, together with NATFA. Due to Mulroney’s unpopularity, he was forced to resign in June 1992 and was replaced by Kim Campbell, who lost the 1993 elections to Jean Chrétien, a liberal party leader, who promised to block the formation of NATFA. As a result of these changes in leadership, there was need for certain alterations to takes place with regard to the progress of negotiations. For instance, Jean Chrétien and Bill Clinton agreed on two supplemental agreements, NAAEC and NAALC (Audley et al., 2004).
Concerns were also witnessed in the United States, after Bill Clinton took the presidential mantle from George Bush. President Clinton is remembered for having introduced certain clauses in the agreement, to safeguard the interests of American workers, after House members expressed deep concerns about the issue (Audley et al., 2004).
Additionally, the United States was to remain focused on maintaining certain environmental practices as before. The bill was endorsed by the House of Representatives in November, 1993, before it was recognized as law in December of the same year, after it was signed by the president. On the signing day, President Clinton applauded the agreement, noting that it was packed with more jobs for Americans and projected that good-paying jobs motivated him to sign the bill into law.
Provisions of NATFA
What was the goal of NATFA? It is believed that the main objective of NATFA was to eliminate any trade obstacles, which existed in the region and allow free trade within the region. For instance, there was elimination of tariffs in 1994, promoting export trade between the United States and Mexico.
By the end of the first ten years of NAFTA’s implementation, the U.S. had abolished all its tariffs, apart from those imposed on agricultural products, which were eliminated in fifteen years time. By this time, the trade between Canada and the United States was already free (Audley et al., 2004). Besides this key goal, NATFA was also to safeguard the intellectual property of various products, which were being traded in the region, together with promoting duty-free trade barriers within the bloc.
Effects of NAFTA
As stated in the above segment, the endorsement of NAFTA was a major milestone in international trade for Canada, Mexico and the United States. It is important to note that the agreement has had both negative and positive effects in its history and in the economic progression of the three nations. This segment of the research explores some of these effects.
NAFTA in U.S. and Mexico
The effect of NAFTA in the United States can be viewed in two perspectives, positive and negative. However, analysts have agreed that the positive effects of the agreement outweigh its negative impact by far. Although NAFTA has significantly been responsible for an array of economic changes in the country, it is equally essential to appreciate the role played by other factors. Some of these changes include but not limited to unfavorable weather conditions, the movement of exchange rates, technological advancements, population growth, and macroeconomics of the nation.
Proponents of NAFTA believe that it has highly contributed to the increase of American agricultural exports to Mexico. This has been the case even though there has been a general decrease in the country’s exports to other nations around the world. It is worth noting that agricultural exports to Mexico account for more than $7 billion, which is equivalent to approximately 6% of the country’s exports to Mexico. In particular, the exports doubled since 1994, when NAFTA was ratified (Hufbauer & Schott, 2005). As a result, the United States supplies almost seventy five percent of agricultural products in Mexico.
Even though there has been a continuous increase in America’s exports to Mexico, there was a significant drop in 1995, which was attributed to the peso devaluation that took place during Mexico’s devastating economic crisis in the country’s economic history (Hufbauer & Schott, 2005). Despite this crisis, which threatened the country’s economy, NAFTA played a vital role in ensuring that Mexican markets remained open to agricultural products from the United States.
It is doubtless to affirm that this interplay was highly applauded for promoting the recovery of Mexico’s economy with a lot of ease. Apart from that period of economic turmoil, agricultural exports to Mexico have increased every year, courtesy of NAFTA’s influence.
Several United States exports to Mexico, which registered an increase after the implementation of the treaty, included but not limited to dairy products, rice pears, cotton and apples. Additionally, there was a substantive increase in high fructose syrup (Hufbauer & Schott, 2005). Sorghum was the only export, which registered a low volume in terms of export growth, while sugar and peanuts recorded the highest rate of increase among all agricultural products, which were exported from the United States to Mexico. Importantly, some of the exports may have registered a drop since 1994, due to other factors outside the boundaries of NAFTA.
Another factor, which contributed to this export boom, was Mexico’s proximity to the United States and the maximum utilization of each country’s comparative advantage. For instance, the United States has the potential to produce livestock and livestock products more than Mexico (Illing, 2004). Thus, the U.S. has a comparative advantage in these products. Similarly, Mexico can produce fruits, flowers and vegetables more effectively than the United States.
The former therefore has a comparative advantage. As a result, the export growth, which was augmented by the implementation of NAFTA, helped the two countries to capitalize on their comparative advantage in the production of certain products.
Moreover, NAFTA has promoted the development of a reputable transport network in the countries covered by the agreement. What contributed to this achievement? It is believed that a good transport system was highly needed as a result of the exponential growth in several agricultural products. In this regard, every country had either to establish or improve the existing system in order to meet the growing volume of agricultural products (Illing, 2004).
Noteworthy, NAFTA was recognized as the first trade agreement around the world to incorporate environmental policies in its structure. These policies have remained significant in curbing the possibilities of environmental pollution, emanating from the increase in trade activities among the three countries. Furthermore, funding of these policies was made possible through funds that were obtained from each country’s income.
Foreign Direct Investment
NAFTA has played an important role in promoting more investments in Mexico. For instance, the United States is the largest source of Foreign Direct Investment in Mexico. This accounted for over $19 billion, which was invested in the country by the year 2006. For this to be effective, U.S. companies have turned out to be key financiers of Mexico’s maquiladoras. This refers to a collection of factories in Mexico, which specialize in the assembly of products from components that are obtained from the United States, before they are exported back to the United States.
The contribution made by these firms amount to approximately fifty percent of American exports, which translates to almost $41 billion of sales yearly (Derbez-Bautista, 2011). The immense investment in Mexico has been applauded for its role in enhancing the efficacy of the United States domestic production.
Many American companies are able to deal with the problem of high manufacturing costs by shifting their assembly needs to maquiladoras. This had a positive impact in the United States by boosting the country’s manufacturing by almost sixty percent between 1993 and 2006. This figure contrasted 42% of output, which had been realized in more than ten years before the implementation of NAFTA.
As noted before, there was significant resistance towards the implementation of NAFTA by various leaders from the three member states. Most of these arguments were based on the notion that free trade in general, which included NAFTA, had a negative impact on employment opportunities. This misconception stems from the fact that while most benefits, which emanate from free trade get distributed within the economy, losses tend to occur in a few industries (Derbez-Bautista, 2011).
Nevertheless, job losses are normally balanced by new opportunities, which are created in other sectors of the economy. Unlike other jobs, which existed before the adoption of NAFTA, the new opportunities offered higher salaries to employees. To support this fact, the United States registered an employment of 137.6 million in 2007, compared to 110.8 million in 1993, which translated to a 24% increment. Additionally, the unemployment rate in the United States averaged at 5.1 percent, thirteen years after the implantation of the agreement. Before this, the country recorded an unemployment rate of 7.1%.
Cons of NAFTA
Despite the fact that The North American Free Trade Agreement has had an array of advantages since it came into force in 1994, it is paramount to note that the agreement opened doors to challenges, which were to be faced by the three countries. Some of these disadvantages have been discussed below:
NAFTA has contributed to the rise in the number of disputes among members. Most disputes, which have been realized, have involved the United States and Mexico, with the latter being considered as the originator. For example, Mexico has given threats, accompanied with sanctions on several crops. For many years, high fructose corn has been a contentious issue, which was heavily exported to Mexico after the endorsement of the agreement.
As a result, Mexico imposed a tariff on HFCS, which aimed at limiting the importation of these products from the U.S. This development was definitely against the objectives of NAFTA policy, which was to promote a tariff-free trade (Derbez-Bautista, 2011). Due to this, Mexico ventured into domestic production of sugar, since the price of sugar went down. While this was happening, the United States recorded a sharp decline in the production of corn. Besides HFSC dispute, Mexico has used anti-dumping duties, which limit the United States from selling its products below its cost of production to increase its market share.
Opponents of NAFTA argue that it led to a sharp decline in labor supply in the United States. This has been coupled with a considerable decline in employment, especially in the textile and apparel sectors. The decline has highly been attributed to the construction of maquiladoras, which promoted the establishment of American assembly factories in Mexico (Villarreal, 2010).
This led to a shift of several job opportunities to Mexico. Besides this shift, many critics of NAFTA argue that it has contributed to low-wages for workers. Despite this unfavorable shift in job opportunities, the agricultural sector of the U.S. registered a slight increase in employment, which is thought to counteract the decline experienced in the textile industry.
Real wages in Mexico have been lower, compared to what existed before the implementation of NAFTA, in 1994. However, this setback cannot be solely blamed on NAFTA, since there are other factors, which played a role, thus contributing to the fall n wages. The devaluation crisis of 1980s has been highly blamed for low-wages (Audley et al., 2004). The peso crisis of 1994 has also been theorized to have contributed to a drop in Mexico’s wage rates. Even though NAFTA cannot carry the wage-blame alone, one wonders how the treaty contributed to growth in international growth without improving the wages of its workers.
Since its implementation, the agreement has promoted several environmental issues resulting from elevated agricultural changes, which took place, mainly in Mexico. This impact has extremely been felt by Mexico since its environmental protection infrastructure is not as developed as that of the United States (Schott, 2004). It is quite amazing that these issues emerged after implementation even though they had been noted during the 1994 agreement.
As a way of addressing competitive pressure, which followed the opening of the region for trade, Mexico concentrated on the use fertilizers, pesticides and other chemicals to boost its agribusiness. This resulted in an annual cost of $36 billion to deal with environmental pollution issues. Additionally, there was high demand for agricultural land in rural areas, which forced farmers to infest marginal land, causing a loss of forest cover at the rate of 630,000 hectares annually.
A side from negative influence to the environment, NAFAT has also contributed to poor quality of food in Mexico. Importantly, the two countries have diverse policies, governing the quality of food (Hufbauer & Schott, 2005). This implies that products, which meet a country‘s needs may not necessarily meet the other’s. As a result, the bloc does not have standardized policies, which are holistic in addressing the question of food quality.
From the above analysis, it is evident that NAFTA has had an array of effects, drawing critics and supporters at the same time. Since its ratification in 1994, the agreement has promoted agribusiness in Mexico and the United States. Producers and consumers in the U.S. effectively utilized their comparative advantage over Mexico to respond to changing economic dynamics (Illing, 2004).
Although there are disadvantages of the agreement, its merits seem to take lead in the debate, with agricultural advancements being prioritized. Above all, The North American Free Trade Agreement has promoted economic and social unity in the region.
Audley et al. (2004). NAFTA’s Promise and Reality. Carnegie Endowment for International Peace. Web.
Derbez-Bautista, L. (2011). Advantages, Disadvantages and the Future of NAFTA. School of Law of the University of Colorado. Web.
Hufbauer, G., & Schott, J. (2005). NAFTA Revisited: Achievements and Challenges. Washington, D.C: Peterson Institute.
Illing, K. (2004). Benefits and Costs of Regional Integration: The Impact of NAFTA on the Mexican Economy. Munich: GRIN Verlag.
Schott, J. (2004). Free Trade Agreements: US Strategies and Priorities. Washington, D.C: Institute for International Economics.
Villarreal, A. (2010). NAFTA and the Mexican Economy. CRS Report for Congress. Web.