North American Free Trade Agreement Essay, Research Paper

The North American Free Trade Agreement

In January 1994 the United States, Mexico and Canada entered into the North American Free Trade Agreement (NAFTA) and created the largest free trade sector and the richest market in the world. Over 410 million consumers are able to take advantage of the benefits of this treaty (de Blij, Muller 186). In 1995 Chile was added to the treaty and will become a full-fledged member early in the next century.

The North American Free Trade Agreement is unique because the treaty not only created the largest free trade zone in the world but also outlined economic policies, which set the standard for many other treaties and addressed other issues such as environment and working conditions.

In order to better understand NAFTA, the most important goals of the treaty need to be discussed. The first major goal was to reduce barriers to trade such as tariffs, licensing and quotas. This was accomplished by decreasing or removing import/export tariffs from all three countries and allowing trade goods to flow to all of the treaty members without restriction as long as the goods met the standards as outlined in the treaty. Another goal was to improve working conditions in North America. It was proposed that by increasing trade and a set of standards that working conditions would improve through increased wages and newer safer facilities. Creating an expanded and safe market for exports/imports and services was also a goal and is ongoing even today as more goods and services flow across the borders. Trade rules that were beneficial to all treaty members were established and have ’standardized’ the quality of all trade items as well as provided the environmental support to “clean-up” any environmental “hot spots”. The last major goal of the treaty was to foster world trade and set the example for trade cooperation in the world environment and encourage other countries to establish more free trade areas.

There are many economic incentives for all the treaty members to include access to the larger North American market with over 410 million consumers, new opening investment and development opportunities for North American industries with exports as the driving force, elimination of tariffs (Canadian and United States tariffs were eliminated on January 1, 1998 and Mexico should have all tariffs eliminated by 2008), effective procedures to resolve trade disputes, standardization of goods between all treaty members and “free-flowing” cross border movement of goods and services. Increased international trade would be a source of economic growth, which would in turn create a more efficient use of resources, lowers costs and would promote increased competition, which lowers costs for both producers and consumers. Increases in income caused by economic growth would be a powerful source to expand markets especially for Mexico because of its’ low average income. All of these reasons were a great incentive to all treaty members.

Economic concerns for each treaty member were numerous at the outset of the treaty, with the number one concern for Canada and the United States of lost jobs with corresponding unemployment and the exodus of industries to Mexico with its cheaper wages and resources. Mexico was initially concerned that increased influx of Canadian and United States industries would cost it huge loss of territorial lands for the new factories and facilities. Both of these major concerns proved to be less of a problem than first expected but were not totally baseless as will be discussed later. All three countries have benefited from the treaty but not without some initial problems. Other economic concerns were higher prices in Mexico and lowering of wages in Canada and the United States. On the whole wages increased in all three treaty nations, but Mexico still remains under the poverty level in some regions. Immigration of migrants to the United States from Mexico was another concern as it was assumed that the influx would increase. Also of concern for all treaty members was the dislocation of laborers, and increased competition for jobs.

One of the benefits that were used as a selling point for the North American Free Trade Agreement was an environmental standard for all three countries, which would help protect the environment and insure standardization of environmental protection laws and enforce these standards to protect future generations (Miller 27). On a whole the North American environment would be strengthened and protected. The North American Free Trade Agreement Commission for Environmental Cooperation (NAFTA CEC) was created to promote increased cooperation on a large area of environmental issues to include endangered wildlife, illegal trade in hazardous and toxic waste and the elimination of toxic chemicals and pesticides. Initially, both Canada and the United States, which already have strict environmental regulations, were concerned that the cost to bring Mexican industries in line with environmental standards would be astronomical, however the cost to achieve some of the goals was offset by the gains made after NAFTA was in effect. Through efforts by the NAFTA CEC, Mexico has agreed to join Canada and the United States in banning DDT and Chlordane, ensuring that these toxic chemicals no longer are produced by the treaty nations or cross the NAFTA borders. DDT and Chlordane have relatively long lives, remaining toxic for up to 100 years, causing cancer and birth defects in animals and man (Stewart 44). Industries are no longer permitted to “dump” hazardous/toxic waste into landfills or river and streams. Toxic waste is now disposed of in accordance with environmental standards as set forth in NAFTA and regulated by the NAFTA CEC. Toxic waste sites must meet strict standards (derivates of Canadian and United States Environmental Protection Agency) and the NAFTA CEC and environmental agencies of each of the treaty countries check these standards. In addition to the standards agreed upon by NAFTA, The United States and Mexico have also agree upon the Border 21 program which established a five year plan for cleaning up the border environment.

Positive Aspects of the North American Free Trade Agreement

Consumers participate in international trade every day as they purchase goods and services that cross international borders. Therefore, they are affected by what they pay for the products and how safe those products are. Consumers in North America have benefited from NAFTA by having a grater variety of choices in goods and services. Another benefit to consumers are lower prices and improved quality products. Since its implementation, NAFTA has eliminated tariffs and other barriers to commerce and allowed consumers to benefit by the law of supply and demand and made available products that would otherwise be tied up by barriers to commerce (tariffs & regulations). Areas in which NAFTA has provided significant benefit are Agricultural Trade, Automotive Industry and Textiles and Apparel. The United States is the world’s largest exporter of agricultural products. NAFTA has stimulated a trend toward a more efficient and productive agricultural sector in America and has integrated North American agriculture into the NAFTA marketplace. United States farm income is also expected to increase. Consumers are benefiting from more access to more sources of supply. United States agricultural exports throughout North America have increased dramatically since NAFTA went into effect, and will increase in the next few years if they continue their current trend. Also, the United States, with its’ production enhancing technologies will be a key factor in competition.

The automotive industry has benefited greatly from NAFTA with exports to Mexico and Canada increasing drastically due to lowering of restrictions and elimination of tariffs (Mexico had a 20% tariff on imported automobiles prior to NAFTA). Toyota Motor Company has built a 450 million dollar expansion plant in Canada to make Corollas for North America. Most foreign auto makers want to invest and build plants in North America to get in on the North American market with less fears, and NAFTA makes this possible by allowing them to trade for less if they have a factory in North America. Also as a note, these new plants will mean more jobs for Canadians, Americans and Mexicans. With the reduction and the eventual elimination of trade barriers, increased investment incentives and liberalized investment rules coupled with the “rules of origin”, United States parts and vehicle manufacturers have become more efficient and competitive in the North American market. NAFTA has also increased economic activity and enhanced prospects for textile and apparel producers in the United States and Canada by improving productivity and concentrating on specialized products. NAFTA has enabled United States and Canadian producers to optimize production and manufacturing investments in North America, which has resulted in a shift of production from the Far East to North America, which has strengthened North America’s textile, and apparel trade on the worldwide market. Textile and Apparel trade among the treaty countries has dramatically increased since NAFTA was implemented from 6.4 billion dollars in 1993 to 12.4 billion dollars in 1996 (DOC). Treaty countries are also able to monitor production sites to insure that child labor or “sweat shops” are not tolerated. NAFTA has also created jobs for American, Canadian and Mexican workers in export related industries, which are higher in productivity and pay thirteen to sixteen percent more than the average wage. NAFTA has created new coalitions, which cross borders and political party lines and affect workers, farmers, environmentalists, consumers and religious groups. Banks have now marketed mutual funds to all treaty countries, which also make North America more appealing to foreign investment.

Also a positive factor, incentives brought about by NAFTA have strongly encouraged other countries in Middle and South America to make efforts to reform in order for them to qualify to enter into the agreement. Most countries will not be able to meet these reform goals very rapidly, but by stimulating reform, NAFTA brings a stabilizing effect to the region.

Negative Impacts of the North American Free Trade Agreement

One of the greatest impacts on Canadian and United States economies has been loss of jobs and decreased wages. Even though NAFTA has created jobs in the export sector, other production industries have moved their facilities to Mexico where wages are lower and operating costs are lower. Also, wages in Canada and the United States have been held in check and in some cases lowered by the threat of job loss associated with companies moving to Mexico if employees were not willing to work for less benefits or wages. On a whole, it is perceived that workers rights have diminished somewhat because employers now can hire “cheaper labor”. In the United States and Canada some wages are stagnating if not declining somewhat. In addition, many border workers on the United States and Mexican sides have lost their employment when factories were relocated to other areas where lower wages helped decrease production costs and increase profits. In essence, the larger corporations and businesses have benefited from NAFTA while smaller companies have been effectively erased from the economic equation. In Mexico, the number of maquiladoras has increased thus adding to the loss of jobs on the United States side of the border.

The influx of immigrants from Mexico has increased even though some see this as only temporary but nonetheless has also led to loss of jobs or wages for some Americans because the immigrants will work for minimum wage more readily and generally do not have the “power heavy” unions to protect them.

The agricultural sector from all sides has seen various adverse effects of NAFTA. United States and Canadian exports are increasing in the agricultural sector but the value of the exports has decreased due to competition from the “south”. Mexican farmers have also seen increased exports but have lost their government subsidies, which effectively negates the gains from increased exports.