North American Free Trade

Agreement
A free-trade zone between Canada, Mexico, and the United States.

Contents

Introduction Goals and Benefits of the NAFTA Drawbacks Conclusion Sources

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Introduction

 The North American Free Trade Agreement, also known as NAFTA, is a freetrade agreement between the United States, Mexico, and Canada. It is presently the worlds largest free trade zone with a population of 360 million and an economy of more than $6 trillion1. This free trade agreement allows the three nations to do free trade on the majority of all goods and services with each other. It was created and ceremonially signed in 1992 on December 17 by U.S. president George H.W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican president Carlos Salinas2. However, NAFTA was not formally ready to be enforced before it was ratified by the nations legislative or parliamentary branch. By the time it was ratified, George H.W. Bush and Brian Mulroney were both replaced in their positions respectively by Bill Clinton and Kim Campbell, who signed the agreement into law on December 8, 1993. On January 1, 1994, the agreement went into effect3 and the countries could then on enjoy the benefits of the free trade agreement.

Goals and Benefits of the NAFTA

The ultimate goal of NAFTA is to eliminate barriers to trade and investment between United States, Canada, and Mexico4. By erasing the barriers to trade, the countries can more easily import and export goods and services with one another. Also, NAFTA seeks to eliminate investment barriers between the three countries so that domestic corporations and businesses can operate out of another country of NAFTA. Thus, NAFTA is created to help its member countries improve standards of living and strengthen their economies, among other important aspects within the countries society. Another goal of NAFTA is to change Mexico from a poor developing country to a stabile country with a new market for the U.S. and Canada. The U.S. and Canada already had a trade agreement under the name, The Canada-United States Free Trade Agreement, which was formed in 19885. The American government wished to have the same kind of free trade agreement with Mexico, and entered into negotiations with the Mexican government for a treaty like the one they already had with Canada. The Canadian government joined the negotiations for a trilateral trade agreement. Thus, the creation of the NAFTA superseded the CanadaUnited States Free Trade Agreements. From the first day of January 1994, a large number of tax impositions on imported goods were eliminated. Tariffs on more than one half of the U.S. imports from Mexico and over one third of U.S. exports to Mexico were eliminated. Moreover, the U.S. and Mexican governments came up with a 10-year plan that sought to eliminate all U.S.-Mexico tariffs, except for certain U.S. agricultural exports to Mexico. Still, those tariffs were to be eliminated in another 5 years.
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The Future of Business North American Free Trade Agreement (NAFTA) Wikipedia.com NAFTA Negotiation and ratification 3 Wikipedia.com NAFTA Negotiation and ratification 4 Wikipedia.com NAFTA Provisions 5 Wikipedia.com NAFTA
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NAFTA has contributed to a number of improvements for each country and has radically increased trade among the three counties, especially between the U.S. and Mexico. Since the agreement came into effect, trade between the U.S. and Mexico has increased from $80 billion to a massive $275 billion per year6. Moreover, a survey conducted in USA and Canada showed that 73% of Canadians and 77% of Americans believe that NAFTA has a key role in the North American prosperity7. The survey was not conducted in Mexico, so it is difficult to say what the Mexican people think of NAFTA. However, it is clear that NAFTA has been very beneficial to Mexico. One of the reasons that Mexican standards of living have improved is due to the elimination of the investment barriers. This caused a huge rise in foreign investment. For example, during the first four years of NAFTA, foreign investment in Mexico rose more than double, from $3 billion to $10 billion. NAFTA has thereby made it easy for the U.S. and Canada to do business with and in Mexico; companies can operate and manufacture their products within the borders of Mexico, which profit both the companies and Mexico. The low wages in Mexico enable the companies to produce their products at a much lower cost, which ultimately brings a number of sufficient jobs available for Mexicans. Thus, Mexicos unemployment rate declines and its standard of living rises. The major corporations have probably benefited the most from NAFTA, among others IBM and Volkswagen have started to operate and produce in Mexico. Likewise, the Mexican textile industry has prospered because of NAFTA. Today, Mexico is the largest and most important provider of textiles to USA. Before NAFTA, China held that position. NAFTA has also had a positive impact on the United States. Due to the elimination and reduction of tariffs, goods produced in the U.S. have become cheaper and therefore more competitive in the markets of Mexico and Canada. As a matter of fact, Mexico and Canada were the two largest purchasers of U.S. exports in 2008. Canada was the largest, with a total purchase of a massive $261.2 billion8, while Mexico bought another $151.2 billion9 of U.S. exports. Thus, U.S. exports to its NAFTA members in 2008 were $412.4 billion, which is represents an increase of 149% from 1994, and an increase of 190% compared to 199310. Moreover, U.S. exports to Mexico and Canada accounted for 32% of total of American exports11. As a result of this lower price level, the quantity of demand for U.S. goods has increased. Larger demand requires more production, creating more jobs in the American export industry.

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The Future of Business North American Free Trade Agreement (NAFTA) The Future of Business North American Free Trade Agreement (NAFTA) 8 www.ustr.gov - NAFTA 9 www.ustr.gov - NAFTA 10 www.ustr.gov - NAFTA 11 www.ustr.gov - NAFTA

The increase of U.S. exports is vital to its GDP because it has a trade deficit. U.S. imports exceed its exports and as a result, more money from trade flows out of the country than flows into it. U.S. imports from NAFTA countries have also increased significantly. In 2008, Canada and Mexico were respectively, the most and 3rd most supplying countries of American imports. Canada was the largest trader for the U.S., accounting for $338.5 billion of U.S. goods imports12, while Mexico imported goods to the U.S. for $215.9 billion in 200813. Thus, NAFTA countries accounted for a total of 555.4 billion of U.S. imports in 2008, which is a rise of 268% from 1993, when NAFTA still was not enforced. Imports from NAFTA accounted for 26.4% of the total U.S. imports in 200814. The elimination of investment barriers has opened doors to a new market and thereby, new business opportunities. Along with the reduction and elimination of tariffs, this has increased the trading and investment, creating jobs, lowering the consumer price, and raising the standard of living and the GDP. Evidently, NAFTA has improved the economy of the United States. The third country of the NAFTA agreement, Canada, has similarly to the U.S. and Mexico experienced national economic growth and benefits because of NAFTA. The trade of goods between Canada and the U.S. has doubled between 1993 and 2008. Since 1993, Canadian exports to the U.S. have been growing consistently at 6.3% each year15. The trading of services between Canada and the U.S. has also increased impressively since 1993, growing from $42.3 billion in 1993 to a remarkable $91.3 billion in 2008. While trade of goods and services has increased even more between Canada and Mexico, trade of goods between these two countries has quadrupled and reached close to $23.8 billion in 200816. Consequently, Canadas total trade of goods with its NAFTA partners reached nearly $626.3 billion in 200817. Approximately 80% of Canadas total exports of goods were allocated between Mexico and the United States, more going to the latter. Today, one in five jobs in Canada is at some level related to trade as a result of NAFTA18. Canada has experienced an increased production in goods, which have created more jobs for Canadians in the export sector. During the period of 1993-2008, more than 4.3 million new jobs were created within Canadas boarders19. Thus, NAFTA has contributed to Canadian economic growth and raised the countrys standard of living. Drawbacks

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www.ustr.gov - NAFTA www.ustr.gov - NAFTA www.ustr.gov - NAFTA www.international.gc.ca Overview A foundation for Canadas future prosperity www.international.gc.ca Overview A foundation for Canadas future prosperity www.international.gc.ca Overview A foundation for Canadas future prosperity www.international.gc.ca Overview A foundation for Canadas future prosperity www.international.gc.ca Overview A foundation for Canadas future prosperity

There is no doubt about that NAFTA has had many positive effects since its enforcement in 1994. However, there have been some negative effects as well. Two of the negative impacts have been the loss of jobs, and decreased wages in the U.S. and Canada. NAFTA created millions of jobs in the export sector, but other production industries have moved their fabrics and facilities to Mexico where manufacturing and operating costs are much lower due to lower wages. Consequently, millions of jobs have been transferred to Mexico, leaving millions of Americans and Canadians with no jobs20. As mentioned earlier, the real winners of NAFTA are the major production companies and corporations. Lower wages in Mexico decrease production costs and ultimately increase the corporations profits. Moreover, those corporations that can move their facilities to Mexico can and have used the lower Mexican wages as a threat against employers21, which forces them to accept a lower wage than they already have. This threat has caused lower U.S. and Canadian wages in the production industry. A third negative effect of NAFTA is seen in the Mexican farmers. Due to the elimination of tariffs between the U.S. and Mexico, food that Mexican farmers grow and cultivate has been exported to Mexico and sold at lower price than the farmers can offer22. Thus, the elimination of tariffs makes it impossible for Mexican farmers to compete with imported food from the U.S. As a result, the Mexican farmers go out of business and become unemployed. Conclusion Since the beginning of NAFTA, millions of Americans and Canadians have lost their jobs, while wages have decreased in the U.S. and the Canadian production industry. Likewise, NAFTA has put a large number of Mexican farmers out of business. However, due to the elimination of the investment barriers, corporations have moved their facilities to Mexico, which have provided many jobs and economic growth in Mexico. The Canadian and American corporations have more than anyone else benefited from NAFTA by moving their facilities to Mexico where operating and production costs are much lower. Furthermore, the opportunity of moving business facilities to Mexico has given corporations the power to lower the wages of domestic employers. While there have been negative consequences of NAFTA, the positive consequences outweigh the negatives. It is a fact that The North American Free Trade Agreement has played a key role in North American prosperity. Through the reduction and elimination of tariffs and investment barriers, trade between the three countries has increased significantly. There has thus been higher productivity, which ultimately provides more jobs, causing the unemployment rate to decline. In addition, free trade assures a lower consumer price, reduces inflation, and raises standards of living. All in all, NAFTA has brought economic growth in all three countries and proven to be a solid foundation for North American prosperity.

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www.useconomy.about.com - Loss of U.S. Jobs www.useconomy.about.com - Lower U.S. Wage www.useconomy.about.com - Mexico's Farmers Are Being Put Out of Business

Sources

Books: The Future of Business: The Essentials. 4th Edition By Lawrence J. Gitman & Carl McDaniel Web Sites: www.wikipedia.com http://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement www.international.gc.ca http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/naftaalena/index.aspx www.useconomy.about.com http://useconomy.about.com/od/tradepolicy/p/NAFTA_Advantage.htm

www.ustr.gov http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-tradeagreement-nafta