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