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The North America Free Trade Agreement came into effect in January 1994. It is an exhaustive trade pact that defines the regulations regarding trade and acquisitions (NAFTANOW.ORG). Parties to this agreement include Canada, the United States of America, and Mexico.
By and by, the pact has lead to the removal of a majority of tariff and non-tariff barriers to costless commerce and investment between the three signatories to the pact (NAFTANOW.ORG). It is the largest free trade area in the whole world in terms Gross Domestic Product (Amadeo).
NAFTA is manned by several trilateral institutions that make sure that the pact is properly interpreted and implemented as per the provisions of the pact (NAFTANOW.ORG). These institutions include The Free Trade Commission which has ministerial delegates from the member states and whose main role is to arbitrate in disputes related to the pact (NAFTANOW.ORG). Other institutions are the NAFTA Coordinators, Working Groups, the Secretariat and the Commission for Labor Cooperation (NAFTANOW.ORG).
Objectives of NAFTA
NAFTA was formed to fulfill several goals. Principally, the pact was to do away with all barriers to commerce and aid the cross-border transportation of commodities and services between the member states (NAFTA Secretariat). Secondly, the pact was to enhance an environment of unbiased competition in the jurisdiction of the pact.
The pact also aimed at adding more trade chances across the jurisdictions of the member states (NAFTA Secretariat). Over the pact was to offer proper protection of intellectual property rights, establish institutions and procedures for joint oversight and create structures for increased trilateral cooperation in the future (NAFTA Secretariat).
Advantages of NAFTA
Through the elimination of trade barriers, the pact has resulted in the expanded trade, lower levels of unemployment, and afforded consumers more options at very competitive prices. In addition, the three party states have enjoyed increased prosperity (Bautista). Removal of tariffs leads to reduced inflation since it decreases the costs incurred in imports. Cost of trade has also been reduced and this has resulted in increased investment in the free trade area (Amadeo).
In regard to increased trade in commodities and services, it was noted that commerce between the member states grew by more than four times between by 2009 (Amadeo). U.S exports to Canada and Mexico increased from 142 billion dollars to 452 billion dollars in 2007 while exports originating from Canada and Mexico to the U.S. grew from 151 billion dollars to 568 billion dollars in 2007 (Amadeo).
The pact has lead to the increased U.S. farm exports to Canada and Mexico. The exports grew from 22 percent of the whole U.S. farm exports back in 1993 to 30 percent in the year 2007. This was made possible by removal of huge Mexican tariffs. Mexico is the greatest importer of U.S. products like grown beef, soybean meal, apples and beans among others (Amadeo).
Services such as healthcare and financial operations have received a big boost as a result NAFTA. For instance, NAFTA increased service exports from the U.S. to Canada and Mexico by 81.8 billion dollars between 1993 and 2007 (Amadeo). Previously, imports from Canada and Mexico were a paltry 35 billion dollars. Such a boost has been made to happen because NAFTA removed barriers in almost all service sectors and this reduced the cost of doing business (Amadeo).
The U.S. has enjoyed reduced oil prices courtesy of NAFTA. On the same line, the pact helped The U.S. to minimize her dependence on Middle East and Venezuela for oil imports (Amadeo). As a matter of fact, the U.S. does not import oil from Iran any more (Amadeo). Cost of import is relatively low due to reduced tariffs on imports.
The enactment of the agreement has also lead to increased Foreign Direct Investment (FDI) in each of the three signatories’ territory (Amadeo). It is interesting to note that The U.S. FDI in Canada and Mexico increased by more than three times between 2007 and 2009 (Amadeo). One of the key reasons for such a growth in FDI is the guarantee that investors have the same legal rights as the local business people (Amadeo).
Disadvantages of NAFTA
Unfortunately, the agreement has had its own shortcomings. NAFTA leads to a loss of 1.3 million jobs in the Mexican farms (Amadeo). The U.S. subsidized her agribusiness to as high as 40% and thus, on removal of the tariffs, the Mexican peasant found it hard to compete as the U.S. products went for lower prices (Amadeo).
The cost of labor is relatively low in Mexico in comparison to the U.S. As such, numerous manufacturing companies transferred their production to Mexico leading to the loss of over 600,000 jobs in the U.S. It was evident that over 80 percent of the job losses in the U.S. were related to the companies that shifted (Amadeo). For those that were lucky to retain jobs, their wages were slashed to keep up with the industries in Mexico (Amadeo).
In conclusion, a free trade area has advantages as well as disadvantages. Those that are not avoidable should be accepted as the necessary trade offs for a better state. The advantages are more than the disadvantages.
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Amadeo, Kimberly. “What is NAFTA?” About. com. US Economy. 2 February 2012. Web.
Bautista, Luis Ernesto Derbez. “Advantages, Disadvantages and the Future of NAFTA.” New York Times. 6 October 2011. Web.
NAFTA Secretariat. “North American Free Trade Agreement.” 29 March 2013. Web.
NAFTANOW.ORG. “NAFTA.” 12 April 2012. Web.