The purpose of this term paper is to describe about the North American Free Trade Agreement (NAFTA) and the impact of this agreement on the US, compare the NAFTA agreement to the European Union free trade agreement, and analyze the difference between NAFTA & EU FTA, find out the correlation and interdependence of NAFTA and the EU.
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The North American Free Trade Agreement
From the very beginning of the 1990s, developed and developing countries all over the world tried to change autocratic political and outdated economic systems, for instance, Latin America and Eastern Europe experienced poor governance and inefficient economies; therefore, it was essential to concentrate on institutional development and cooperation among the countries to create market economies, implement quick liberalization and privatizations.
Three North American countries like Canada, Mexico, and the US had signed the ‘North American Free Trade Agreement’ and it enforced in 1994 to remove most barriers to trade and investment (like all non-tariff barriers to agricultural trade between the US and Mexico eliminated) and the government of the member states had changed other legal provisions as well (Sanchez, 2006).
However, Burfisher, Robinson & Thierfelder (2001, p.2) stated that the US Congress approved this agreement after extreme political debate while the opponents focused on many factors, such as, the impact of this agreement on labor markets, adverse influence of the imports from Mexico, the effect trade liberalization in Mexican agriculture, migration of unskilled workers to the US.
At the same time, the supporters of this agreement stated that it has a positive influence on many issues of the US economy, for example, cheaper imports from Mexico assisted the customers, and create new export market and job opportunities (Burfisher, Robinson & Thierfelder 2001, p.2).
The impact of NAFTA on the United States:
Burfisher, Robinson & Thierfelder (2001, p.126) stated that NAFTA affects bilateral trade flows among the member states since it eliminates tariffs and many non-tariff barriers to trade; in addition, Luckstead, Devadoss & Rodriguez, A. (2012) pointed out that Mexicans illegally enter the US to seek better service and living standards.
O’Leary, Eberts & Pittelko (2012, p.2) stated that NAFTA was contentious event in the US politics because the people of this country believed that it would not have a significant impact on the US economy though other two member states had appropriate measures in order to harmonies trade policies.
However, O’Leary, Eberts & Pittelko (2012, p.12) further addressed that before 1994, the level of the US exports and imports of trade with Mexico were both under $50 billion each fiscal year, but it has increased significantly after this agreement, for example, US goods exports and imports to NAFTA in 2010 were $411.50 billion and $506.10 billion respectively.
In addition, O’Leary, Eberts & Pittelko (2012, p.18) stated that easy average of Mexico’s share of the US imports boosted by 224.0% between 1989 and 2000; at the same time, US goods exports increased by 23.40% ($78.0 billion) from 2009 and more than 149.0% from 1994 and US goods imports augmented by 25.60% ($103.0 billion) from 2009, and 235.0% from 1993.
However, the following figure demonstrates that US goods trade with NAFTA and the world before and after enter this agreement –
Figure 1: US goods trade with NAFTA and the world from 1989 to 2010
Source: O’Leary, Eberts & Pittelko (2012, p.13)
According to the subsequent figure, aggregate trade between the US and Mexico increased due to tariff reduction, for example, Mexico’s share of the US imports augmented from 6.90% to 11.5% within eight years membership; at the same time, the share of US exports to Mexico enlarged from 8.90% to 13.9 % from 1993 to 2001.
At the same time, O’Leary, Eberts & Pittelko (2012, p.13) stated that in Canada, simple average tariff rates reduced from 2.350% to 0.450% in 2001 within eight years of NAFTA membership; however, Canada’s share of US imports had not noticed significant improvement though the share of US exports to Canada had evidenced slight growth from 20.90% to 21.70% by this time.
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Figure 2: Mexico’s and Canada’s share of US imports from 1989 to 2010
Source: O’Leary, Eberts & Pittelko (2012, p.16)
On the other hand, the main purpose of this agreement was to improve job market, reduce trade barriers, and protect environment; however, in 2010, NAFTA was the largest trade zone in the globe considering aggregate GDP of its member states.
Moreover, O’Leary, Eberts & Pittelko (2012, p.23) pointed out the estimation of the scholars related to the effect of free trade on the employment and stated that more than 0.5 million US workers would be displaced (or have to change their jobs) because of reduction the incentives for illegal entry of the Mexican into the US.
In addition, Burfisher, Robinson & Thierfelder (2001, p.127) stated that Mexican labors asked very low compensation, which was only $2.170 in 1991 while US labor asked about $15.450; therefore, NAFTA had negative influence on the US economy while local investors had intended to invest in Mexico to implement project plans.
Burfisher, Robinson & Thierfelder (2001, p.128) further stated that staff turnover rate was minimal in case of sectoral employment; however, this agreement had predicted very small wage effects.
Theoretical Comparison of NAFTA & EU free trade agreement
Sanchez (2006, p.3) explored that the literature of institutional development has its keen attention towards two major thought first one is functionalist/ neo-functionalist theory and the second one is political incentives theory, both of the school of thoughts has aimed to identifying the effect of regional and international alliance on the domestic economic reforms and impact on the global economy.
Due to economic linearization, a class of economic elites is created in the national arena, which is eager to maximizing their gains by regional and international markets and they pressure the state machine to form international institutions for further coordination and increase integration among the countries.
Such economic actors specially multinational corporations may not stay behind a country and to work in the overseas market they need strong institutions that protect their property rights, rule of law, trade competitiveness and secured FDI opportunities for effectual business operation where policy anchoring established trade agreements that facilitated enough strong opportunities to protect the rights of that economic actors.
The regional and international integration of the NAFTA and the EU Free Trade Agreement have wide area of similarities and difference as well as interdependence, to compare them this part of the paper illustrates the consistent differences from their institutional performance in Latin America countries and Eastern Europe countries.
The present comparison would first point out that the NAFTA has aimed to explore its trade integration regime among its developed and underdeveloped members in Latin American while the EU in 2004 allowed its five poor member states like Czech Republic, Hungary, Poland, Slovakia, and Slovenia into the EU Free Trade Agreement along with their diverse political and economic reality.
Although in both cases, there are differences among their socioeconomic conditions, political incentives and degree of their intensity, it is difficult to access their differences from the perspectives of institutional performance, but required further in-depth concentration on the degree of compliance and conditionality schemes in context of the missing heads necessary for understanding perceptive factors played behind.
Factors that paid clear view for understanding the differences are as- status of eradicating internal trade barriers, coordination among the external trade barriers to comprise a unified customs union, ensuring free movement of capital and free movement of labor, harmonizing the tax policy, regulatory control over competition, establishing a common currency, coordinating macroeconomic policies along with foreign and defense policies.
Among these determining factors of trade integration, the EU Free Trade Agreement has matched and comply all the criteria, but NAFTA was able to ensure only factors such as eradicating internal trade barriers and to ensuring free movement of capital.
The real-life scenario of EU demonstrated that it has provided stronger political incentives to its poor member states of Eastern Europe with common currency and free movement of labor, although the integration process of NAFTA is comparatively easy-going, but failed to provide such powerful economic incentives and there is no immediate initiatives to facilitate such degree of opportunities.
From this point of view, the NAFTA sustained with the contrary evidence with the EU Free Trade Agreement in terms of current accounts that proved a richer extent of the EU trade integration regime.
During nineties the westerns urged for major political and economic reformations in the less developed counties by influencing the international organizations like World Bank and IMF, such efforts particularly focused in the regions of Eastern Europe and Latin America and they are improving from poor governance to the exhilarating opening with superior domestic processes along with political and institutional development.
The less developed countries turned into hyperactive extravagant removing their inefficient economies, for instance, Mexico under NAFTA and Poland under EU applied “shock therapy” economics to generate market economies by put into practice of speedy liberalization and strong privatizations with the aim to institutionalize economic reforms along with effective democratization.
Although Mexico being a member state of NAFTA, has a past democratic background, it evidenced disparate effect in institutional development while Poland under EU evidenced economically vibrant democracy with strong institutional development during the last decade, the predicted success rate of Poland was very significant while Mexico scored very poor.
It should be noted that revenue generated by Latin America from the tourism sector has only matched with Poland, but the documentation of the development agencies confirmed that the economic incentives for Latin America to meet with the western countries were greater than Poland and even the Eastern European countries.
The wave of reformations were conducted by the myriad of development programs of different development agencies like IMF and World Bank who provided big incentives for harmonization in less developed countries and to implementing the guided reformation Poland resulted superior result than Mexico under NAFTA.
Comparison of NAFTA & EU Based on the Agreement
Schott (2011, p.3) pointed out that the Article 102 of NAFTA has explored the major objectives and motivation for the agreement arguing that it has aimed to promote trade and investment, increase employment opportunities, improve workplace environment including living standards, trade dispute resolution, strong support to impose labor law and effective implication of environmental regulations within the member states.
The member states of NAFTA are obliged to cooperating each other in the regional as well as in the multilateral trade forums with the aim to enhance economic growth, trade, and investment within the region that would ultimately support all three member states.
The historical evidence of NAFTA demonstrated that it has failed to provide sufficient strategic action and necessary guidance for the each country of to maximize the gains supposed from the closer integration, the economic integration has generated both winners and losers, but doesn’t deliver any aggregate benefits for the working class or social communities.
Although this free trade agreement encouraged the structural reform of the economy of three member states, but it has failed to coordinate any adjustment process among the governments while the national adjustment programs are very slow and steady that have been suffering from limited scope and lack of funding to contributing workers restlessness.
Moreover, before establishing the NAFTA during the cold war era United States has bilateral agreements separately with both Mexico and Canada, which were more strategic security purpose and were not intended to treat so many of the evils of the societies such as elevated illegal immigration, drugs trafficking, along with increasing income inequalities among the countries.
The Article–2 of the European Communities explored the major motivation of the EU free trade agreement is to ensure democratic principles, human rights, and market economy in all member states for their domestic and international practice that would ultimately drive towards harmonized and institutional development of the members by improving their trade, investment, and life standard (Crown, 2002 p.3).
However, Baldwin, Francois & Portes (1997, p.4) pointed out that the geography and historical background of the member states of EU free trade agreement prolonged with remarkable dilemmas during the cold war era, war fear, increasing defense expenditures, illegal migration and politically left alignment of the eastern Europe threaten the western Europe until the fall of Soviet Union.
Although Western Europe treated the east as total failure of economy, at the end of the cold war ear, the political shift of the Western Europe to enlarge the length of EU Free Trade Agreement while the costs and benefits analysis of eastern enlargement demonstrated positive impact on the EU and its investors and shifted their perception as development partners.
The Western Europe as a pioneer to put into practice of EU free trade agreement integrating less developed east has proved its efficiency by gaining positive economic outcomes and improving the socio-economic conditions of the counterpart, the United States has no dear to follow the European model of integration within the NAFTA.
Difference between NAFTA & EU FTA
Chanona (2003. p.7) pointed out that regional free trade integration by NAFTA has four basic differences with the free trade integration model of European Union and the first consideration is that Western Europe is the native land of modern capitalism, perfect completion and territorial sovereign, but through the regional integration all these criteria are questioned and going to abolish chronologically.
Contemptuously the impression of sovereignty in Europe has been challenged where the existence of new territorial units evidenced at the expenditure of the nation-state, the novel European doctrine of state aimed to gaining supranational goals all the way through intergovernmental negotiations where the negotiating network of NAFTA has only the prospective to redefine the objectives of integration process.
While the European leaders are keeping their highest effort to strengthen the EU free trade agreement, the US President Barack Hussein Obama blamed the NAFTA for their rising unemployment and economic crisis.
Secondly, The literature of urged that the economics of regional integration is deeply concerned with the strong management, but in real life scenario of Europe explored that economic integration may not possible without political integration for which institutional development is the necessary condition.
The enlargement of the Union is the accomplishment of the institutional development along with its European Central Bank, one single currency, harmonized customs union, unified legislation, independent judiciary of the EU over the national one may not defending the postulation of the state, but amalgamated the perception of ‘new Europe’ taught exclusively from the experience of its regional institution building.
The evidence of NAFTA practice illustrated that market entrance is not the sufficient condition to systematize all regions from a single institutional system, which is a difference of the viewpoints of the masterminds of the agreement with the EU FTA agreement.
Third difference between the EU trade agreement and NAFTA agreement is that the experience of the EU teaches pointing to the key actors, their analysis, decision-making process, and the relation between frameworks and actions explored through the Single European Act that generated debates those analytical from the consequence of attaining the assortment of theoretical opening points.
On the other hand, NAFTA is fetching with the multifarious intergovernmental networks along with nongovernmental actors at the national level are deeply revolving their interests at multinational level, but does possess the strength to pressure them at the regional level, which EU has already successfully gained through its strong regional integration (Verheugen, 2007, p9).
Fourthly, the economic integration and institutional development through free trade agreement of the EU have enriched it with tremendous success that the EU is going to enhance its free trade agreement with other than European counties and already extended such efforts with Korea and India.
However, in content of NAFTA, there is no comparative perspective or moderately clear evidence still where the three very dissimilar and irregular members of NAFTA would meet a free, fair, and imperial regional integration, while the bilateral trade agreements of the USA with Canada and Mexico had no fruitful implication.
During the cold war era, both NAFTA members were strategic security partners of the United States rather than economic collaborators, the complex interrelation of the NAFTA has no greater prospect to reach at the similar motivation like European Union for regional economic integration (Wolinetz, 2003, p.5).
Schott (2011, p.3) in the fifteen years journey NAFTA has not yet conducted any renovation of their agreement to take the challenges of the changing dynamics of the global economy and have no regular study with subsequent trade negotiations, while EU considers it as an ongoing process to strengthen their regional integration.
Rather than regional integration, NAFTA has faced to achieving the commercial objectives set out by their negotiators, but there are no initiatives to implement overstated promises of the policymakers of the three-member states where the governments are not enough brave to enable the domestic policies to facilitate private sector and their employees to enjoy the advantages belong to NAFTA.
Correlation and interdependence of NAFTA and EU
The outcomes of this study have demonstrated that the regional integration of NAFTA is not a true copy of the model of EU regional integration, NAFTA has no immediate evidence of allowing free movement of goods, free movement persons, unified customs, and single currency that the EU already gained through strong institutional development.
While the labor unions of EU engendered with greater openness for labor market and ensured monitoring and justice through the European Union’s Court of Justice, the NAFTA and its labor unions evidenced their protective role for the other members and the role of welfare institutions including labor rights are totally contrast to each other (Medrano, 2010, p.4).
However, NAFAT and EU have close correlation and interdependence for their mutual trade and investment, CGTA (2012, p.1) added that the EU has exported goods and services valued 450.2 billion Euros to the NAFTA in 2008, while it paid import bills of 362.1 billion Euros for the same duration.
In the same year, the EU has exported high-value goods to Canada around 37.4 billion Euros and imported from Canada valued 33.3 billion Euros, while Canada has expressed its cordial desire to establish a free trade agreement with the EU while EU responded to start negotiations for insightful economic integration beyond NAFTA.
On the other hand, EU is the second-largest market of Mexico, and it has established a most comprehensive free trade agreement with EU in 2000 that evidenced with 25.5 billion Euros export from EU to Mexico and 15.4 billion Euros export from Mexico to EU in 2007 where EU has trade surplus in respect of all NAFTA members.
The EU and the USA jointly accounted around half of the global economy, the EU –US relationship dominates as the largest development partner to the rest of the world economy, their interdependence illustrated with 384.3 billion Euros export to the USA from EU, and 315.8 billion Euros import from the USA.
In the previous year, the FDI inflow to EU from NAFTA was 1.15 trillion Euros and the FDI outflow from EU to NAFTA was 1.25 trillion Euros, this figure demonstrates that the two regional free trade agreements have their own significance and interdependence on each other.
The presented facts illustrate that the bilateral free trade agreement between the EU and individually all NAFTA members has provided enhanced opportunity for the EU to gaining trade surplus from this region without bothering to the US political influence on the NAFTA.
The US attitude to the NAFTA members are confusing in nature and to some extent the USA leadership expressed their annoyed to the alliance and urged that it has no meaningful contribution without border burden, drug scandal and destabilizing the labor market with southern neighbor Mexico going to lose its North American identity by aligning with more trade with Latin America.
By the contribution of free trade agreement with developing countries the EU is in the dream of ‘New Global Europe’, NAFTA has not evidenced any further prospect to strengthen their accord.
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