NAFTA is an acronym which stands for the North American Free Trade Agreement. It is a treaty which has been signed by Mexico, Canada, and the United States. With the GDP of these three nations valued at more than $20 trillion, NAFTA is one of the world’s largest free-trade agreements ever signed.
NAFTA would also be the first time that two developed countries would sign a trade agreement together with a country coming from an emerging market.
The goal of NAFTA was to eliminate barriers to trade, such as tariffs, to create more investment opportunities between the three countries. In total, the original NAFTA agreement is more than 2,000 pages in length.
One of the core campaign promises offered by the Trump Campaign for the 2016 presidential election was to turn NAFTA into a “better deal.” One of President Trump’s first actions was to sign an executive order requiring the re-negotiation of NAFTA. Here are the pros and cons of this treaty to consider in its current form.
List of the Pros of NAFTA
1. All 3 nations receive the same status within the treaty.
One of the foundational elements of NAFTA, and why it was such a ground-breaking treaty, is that Mexico, Canada, and the United States are given the same status in the agreement. All countries are granted a most-favored nation status. That status requires each one to treat everyone else in the treaty equally. That equality even applies to foreign direct investments. No country can receive a better deal than any other when it comes to investment opportunities.
2. It eliminated import and export tariffs between each country.
Tariffs are a way to earn money for governments through taxes that are placed on goods entering or leaving the country. NAFTA eliminated all tariffs between the three countries in the agreement. Specific rules were created for specific industries as well, such as clothing and agriculture, along with finance and telecommunications services, to ensure that the import/export market between the three countries remains beneficial to all.
3. It requires certificates of origin.
There must be a certificate of origin in place for the tariffs to be waived on imports. That means the goods or services in question must originate from the U.S., Canada, or Mexico to comply with the regulations involved in NAFTA. If a product is manufactured in Brazil, then shipped to Canada, it cannot then be shipped to the United States without a tariff. If there are tariffs on Brazilian goods, the U.S. would be able to still impose them, even though the secondary shipment originated in Canada.
4. Legal expenditures are reduced under NAFTA.
One of the most important advantages established through NAFTA is the trade dispute procedure. Businesses are protected through NAFTA from unfair practices. An informal resolution is fired attempted between the parties involved in a trade dispute. If that process does not work, then NAFTA allows the Secretariat to establish an official panel to review the issue. The decisions made from the panel are final. That process helps businesses avoid the cost and time that a lawsuit would require.
5. It recognizes intellectual property rights.
All countries involved with NAFTA must recognize the intellectual property rights of individuals and businesses. Trademarks, copyrights, and patents from all nations involved must be respected by the other nations. At the same time, the agreement also puts in a process that allows for free trade to continue without interference that may be created by respecting these specific rights.
6. There is a greater freedom of movement between the three countries.
A formal passport is not always required to travel between the three countries involved in NAFTA. For land and sea crossings, an identification that is compliant with the Western Hemisphere Travel Initiative can serve as a substitute for a passport. That means the Enhanced Driver’s License option, which is often available in border states, allows for an easier process through customs.
7. The treaty helped to lower prices for consumers.
According to The Financial Post, many of the benefits of NAFTA are invisible to consumers. That is because NAFTA increased competition between the three countries, which allows for lower prices at the consumer level. At the same time, exports to the United States from Canada tripled between 1993-2014, with imports from the U.S. seeing a similar boost. That means fewer foreign imports and exports outside of the continent, creating local jobs, which have a bigger economic impact.
8. It established trade standards.
NAFTA requires member nations to improve numerous standards in safety, industry, and health. The treaty specifies that the highest existing standard must be used. Although the treaty would be more powerful if it set even higher standards than current best practices, this provision eliminated another barrier to trade between Mexico, Canada, and the United States. There are also environmental provisions within the treaty which address pollution concerns.
9. NAFTA created wage increases.
The Washington Post reports that after NAFTA was fully implemented, between 1993-2012, there was real wage growth in all three countries. Mexico saw wages grow by 1.3% over this time period, while Canada experienced growth of almost 1%. Even the United States saw wage growth of 0.17%. Although wages did grow, it should be noted that the overall wage growth from NAFTA did not keep pace with the rate of inflation during this period, even though it created more than 5 million jobs in total.
10. The economy of Texas immediately benefits from NAFTA.
In the first year of NAFTA, some industries in Texas saw immediate increases in their profitability. The San Francisco Chronicle reports that the textiles and metal industries in Texas saw a 13% improvement in their overall profitability because of the number of exports that came across the border from Mexico. In the U.S. and Canada, communities along the border saw similar improvements as well.
11. It increased the amount of exports the United States creates regionally.
With NAFTA, the United States exports almost $600 billion in goods and services thanks to the presence of this treaty. Many of the exports go directly to Canada, with reciprocity occurring. This creates closer ties between neighbors and adds a hefty sum to the GDP. About $80 billion in value has been added to the GDP because of NAFTA in the United States.
12. It improved the agricultural business in the United States.
Some of the biggest U.S. beneficiaries of NAFTA are agricultural businesses. Associations like the U.S. Wheat Associates, the American Soybean Association, and the National Pork Producers Council have all seen increased profits because of the expanded market opportunities NAFTA provides.
List of the Cons of NAFTA
1. It shifted manufacturing jobs away from the United States.
Because of the competitive nature of NAFTA, a developing nation is able to create products at a lower labor cost than developed nations. For that reason, many businesses found it cheaper to produce products in Mexican manufacturing facilities. From 1994-2016, about 350,000 manufacturing jobs were removed from the U.S. economy. During this same period, about 400,000 manufacturing jobs were added to the Mexican economy. That left a gap between low-skill and high-skill employment for many workers in the United States.
2. The treaty had the unintended effect of reducing Mexico’s agricultural sector.
Family farms in Mexico found it difficult to compete with products grown at a much larger scale when NAFTA was implemented. Large agri-businesses were able to offer cheaper products to the markets in all three countries, which forced farmers out of business. Many agricultural workers did find work in the manufacturing sector, though at a lower wage than before the implementation of NAFTA. An estimated 1.4 million jobs were eliminated from the agricultural sector.
3. It kept wages low in Canada and the United States.
For the middle-class jobs which stayed in the U.S. and Canada, the threat to move employment to Mexico allowed employers to keep wages artificially depressed. The downward pressure on salaries is still present in many employment sectors because workers in Mexico can earn less than U.S. or Canadian workers and create a similar standard of living for themselves.
4. Workers in Mexico did not have equal access to benefits.
One of the more controversial practices that started because of NAFTA was to move manufacturing and industrial jobs just over the Mexican border. Workers in Mexico would then assemble products to be exported back into the United States. Without tariffs or restrictions in place, the cost-savings generated by this practice could be realized immediately. At the same time, health benefits, labor rights, and worker safety issues were not addressed in the same manner as they would have been in the U.S. and Canada, which placed Mexican workers at a greater threat of harm.
5. It may have increased overall illegal immigration rates.
Because there was a greater prospect for employment in Mexico because of NAFTA, the treaty was thought to offer the possibility of reducing the overall rates of illegal immigration into the United States and Canada. The opposite effect, however, ended up being reality. Between 1990-2000, the rates of illegal immigration originating from Mexico doubled.
6. The U.S. trade deficit grew exponentially within the region.
According to the Economic Policy Institute, the trade deficit for the United States in 1993 was about $17 billion. In 2013, the trade deficit was over $175 billion. Part of the reason behind that shift is the transfer of manufacturing jobs which then ship goods back into the U.S. that were once produced here. Another component of this deficit is the fact that Mexico experienced a 150% increase in FDI after NAFTA was enforced.
7. Regulations from NAFTA are inconsistently enforced.
As part of the free-trade movement of goods, Mexico is permitted to cross the border and stay within a 20-mile zone of commercialization for shipping. The commercialization zone is established by Congress. It must be enforced, however, by local officials. Mexican trucks receive much more latitude in the U.S. than American truckers in Mexico within the same radius. Many of the heavier or larger trucks are not even permitted entry into Mexico because of size restrictions that are enforced at the border.
8. Emissions have risen since the implementation of NAFTA.
The goal of NAFTA was to improve more than just working conditions. It was also supposed to improve environmental standards and conditions in the manufacturing and industrial sectors. According to the Huffington Post, however, the opposite occurred. After 20 years of NAFTA being enforced, greenhouse gas emissions rose by 1.3 billion metric tons, reaching 8.3 billion metric tons in 2005. Unsustainable water use, deforestation, and other practices have also contributed to environmental harm with this treaty.
9. It creates potential security risks.
Although there are identification standards in place that customs and border officials follow on air, land, and sea crossings, the allowance of identification alternatives, other than a passport, does create certain security risks. Compared to pre-2009 when a valid ID and a birth certificate were all that was required, there have been improvements in border security and population movement. There is still much work in this area that could be done, however, and that is why it could be such a disadvantage.
These NAFTA pros and cons show that some sectors have benefitted from this treaty and others have not. Those who have profited are more likely to support this treaty, while those who have been harmed by it support the idea of re-negotiating it or eliminating it altogether. Only time will tell what the future will be and if NAFTA will be included in it for the U.S., Canada, and Mexico.