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The North American Free Trade Agreement (NAFTA) was signed in 1994 between the US, Canada, and Mexico. The pact effectively led to the formation of a trilateral trading bloc. In terms of the collective GDPs of the individual nations, the pact is the largest in the world.
The main objective for the signing of the NAFTA pact was to eradicate obstacles encountered by the three nations in trading with each other and effectively reduce trading costs, increase business investments among the three partners, and help North America to be more competitive in the global marketplace.
Upon its ratification in January 1, 1994, NAFTA eliminated tariffs on more than 50% of US imports from Mexico and more than 33% of exports to Mexico. In the US, President Bill Clinton signed NAFTA into law on December 8, 1993 and it went into effect on January 1, 1994 (Gary, Spener & Bair, pp. 7).
Within a decade of its implementation, the pact eliminated most of the tariffs on goods moving between the three participating countries and this has enhanced not only trade among them, but it has also made easy the movement of people within the nations; these people provide labor while others have taken up permanent residency (Deere, pp. 23).
Since its signing, NAFTA has promoted cooperation between the US, Canada, and Mexico, indeed the three nations now resemble a metropolis.
NAFTA actually began with President Ronald Regan, who campaigned on a North American common market. In 1984, Congress passed the Trade and Tariffs Act which gave the president fast track authority to bargain free trade agreements.
Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada -U.S. Free Trade Agreement, which was signed in 1988 and went into effect in 1989, however, this bilateral pact was suspended after NAFTA came into place.
How NAFTA works to Improve Trade among its Members
NAFTA was formed to grant the signatories the most favored nation status, to eliminate barriers to trade and facilitate the cross border movement of goods and services between the three countries. Its implementation on Jan 1, 1994 brought the immediate elimination of tariffs on more than one half of U.S. imports from Mexico and more than one third of U.S. exports to Mexico.
It was also formed to promote conditions of fair competition, to increase investment opportunities and to provide protection and enforcement of intellectual property rights (Gary et al, pp. 7). Its other agendas were to create procedures for resolving trade disputes and to institute a framework for more trilateral, regional and multilateral cooperation to expand NAFTA’s benefits.
NAFTA has made it easier for the member nations to invest in factories and other facilities in any of the three countries. It has also created special economic trade relationships within the three countries, for instance, the nonimmigrant NAFTA Professional (TN) visa allows citizens of Canada and Mexico to work in the US.
NAFTA provides access for US energy and petrochemical suppliers to Mexico’s electricity, petrochemical, gas, and energy services and equipment markets.
Furthermore, NAFTA ensures that US companies operating in Mexico are neither coerced to purchase Mexican-made goods instead of importing US made equipment and components, nor are they required to export their production to the United States (Deere, pp. 12). For firms opting to stay in or invest in Mexico, NAFTA assures equitable treatment.
For example, Americans are allowed to set up, obtain, and operate firms on the same basis as Mexicans and Canadians. The treaty also protects U.S. investors against limitations on their repatriation of capital, profits, and royalties and against expropriations without full compensation. Investors can seek monetary relief from an international arbitral panel for violation of their rights (Hanson, pp. 3).
NAFTA ensures a high level of protection under Mexican and Canadian law for U.S. owners of copyrights, trademarks, trade secrets, and complex electronic programs or gadgets, pharmaceutical inventions, and sound recordings. It also obligates Mexico and Canada to put into effect intellectual property rights effectively against violation both internally and at the border.
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By protecting intellectual property rights, NAFTA increases trade and decreases losses from piracy and counterfeiting. NAFTA provides appropriate and effective procedures to determine trade disputes between the governments or business organizations operating within the bloc.
With regards to solving trade disputes, NAFTA offers a platform through which interpretation of the agreement can be resolved. Indeed, a country whose complaint is sustained by a panel can request trade compensation or withdraw trade benefits of equivalent effect if the losing country does not bring its law into compliance with the agreement.
After NAFTA’s implementation, all non-tariff barriers to agricultural trade between the US and Mexico were eliminated. As a result of the treaty, trade between the signatories tripled from $297 billion in 1993 to $1 trillion in 2007. Exports from the U.S. to Canada and Mexico rose up from $142 billion to $452 billion while exports from Canada and Mexico to the U.S. increased from $151 billion to $568 billion (Bacon pp. 45).
The growth was attributed to the fact that NAFTA provided the capability for firms in member countries to propose on government contracts and it also protected intellectual property. It has also increased investment opportunities and established procedures for resolving trade disputes between any two or all of the member states.
An important impact of NAFTA is that it has increased the competitiveness of the three countries involved on the global marketplace. This has become apparent with the launch of the European Union. NAFTA has been beneficial in so many ways.
For instance, intra-North American trade tripled since NAFTA’s foundation and the value of U.S. agricultural exports worldwide climbed by 65 percent. Agricultural trade in both directions between Mexico and the U.S. increased from $7.3 billion in 1994 to $20.1 billion in 2006 and this has greatly boosted agricultural communities in the two nations (Floudas & Rojas, pp. 52).
In whole, NAFTA oversees trade in goods and services whose value exceeds $17 trillion annually among the more than 444 million people residing in the US, Canada, and Mexico.
From a social perspective, the pact has seen Mexico’s poverty rates fall and real income rise in the form of lower prices for food. Furthermore, the ratification of the NAFTA has resulted to a reduction of oil and grocery prices and has reduced America’s overreliance on oil imports from the Middle East and Venezuela.
Negative impacts of NAFTA
Despite the various benefits attributed to NAFTA, it has had its own criticisms, for example, Mexican farmers have complained that the treaty is one sided since a large number of Mexican farmers were put out of business by U.S. subsidized farm products imported from the US. The Mexican government has argued that NAFTA provisions are not strong enough to protect its less powerful economy (Bacon pp. 72).
Mexico has also argued that the treaty promotes exploitation of its workforce since NAFTA made it possible for many U.S. manufacturers to move jobs to Mexico where labor costs are lower. Due to cheap labor in Mexico, many manufacturing industries moved part of their production from the U.S. to Mexico.
Consequently, Mexico’s environment deteriorated because they were using more fertilizers and other chemicals due to competitive pressure which polluted the land (Bacon pp. 81). The effects of NAFTA on Mexico have actually been more severe as compared to either the US or Mexico.
NAFTA was created to lower tariffs and increase trade between the U.S., Canada and Mexico. As a result, it has made it easier for corporations in these three countries to invest in factories and other facilities and it also creates a special economic trade relationship within them.
It has improved the economic sector of both countries and has also increased investment opportunities, and established procedures for resolution of trade disputes and fair competition between the countries. Even though it has been blamed for job losses in America and sending Mexican farmers out of business, it has improved the poverty rates in Mexico and improved agricultural trade between the US and Mexico.
In addition, NAFTA provisions for labor and environmental protection were not strong enough to prevent Mexican workers from being exploited. However, the trilateral trade pact has strengthened the bloc’s ability to participate in the global business arena, particularly after the formation of the EU. The NAFTA has indeed led to greater achievements that was projected when the US, Canada, and Mexico sat down to create the treaty.
Bacon, David. The Children of NAFTA: Labor wars on the U.S./Mexico Border. Berkeley: University of California Press, 2004. Print.
Deere, Carolyn L. Greening the Americas. Cambridge, Massachusetts: MIT Press, 2004. Print.
Floudas, Demetrius Andreas and Rojas, Luis Fernando. “Some Thoughts on NAFTA and Trade Integration in the American Continent.” International Problems 371.45 (2000), 52. Web.
Gary, Gereffi, Spener, David, and Bair, Jennifer. Free trade and uneven development: the North American apparel industry after the NAFTA. Pennsylvania: Temple University Press. Print.
Hanson, Gordon H. “What Has Happened to Wages in Mexico since NAFTA?” NBER Working Paper, No. 9563 (2003). Web.