Evaluation of the North American Free Trade Agreement

1831 words (7 pages) Essay

8th Feb 2020 Economics Reference this

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The North American Free Trade Agreement was created in 1994 to reduce trade barriers between Canada, the United States of America, and Mexico (Macdonald, 2017). The agreement was a way to promote free trade between all three countries as it offered Canadians, Americans, and Mexicans a higher standard of living. This allows greater production in North America as economists believe each country has an advantage in producing certain goods and services. When countries produce goods in which they excel in and trade them with neighbouring countries, everyone benefits and by doing this, it helps boost the economy. Economists also say this trading system is more beneficial as it allows more goods to be produced worldwide, rather than the amount that would be produced if countries did not trade at all.

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Canada wanted to join NAFTA as key fundamentals of the agreement included the elimination of tariffs and the reduction of many non-tariff barriers. It also included a quick and fair way to settle trade disputes. Canada’s main industries are transportation equipment, chemicals, minerals, food products, wood, paper, fish, petroleum, and natural gas. Main goods that are imported into Canada are machinery, motor vehicles, crude oil, electricity and durable consumer goods. The U.S. and Mexico are in Canada’s top five main export and import partners. This is one of the main reasons why NAFTA was introduced. With all three countries being so close together, they should be able to aid each other in times of need without penalty.

International trade influences a significant amount of the Canadian economy, particularly for its abundance of natural resources. Canada is lucky for its vast areas of land and its comparatively small population. It is said to provide a high-standard trade agreement that will result in a freer market, a fairer trade and strong economic growth in North America for workers, farmers, and businesses. It will strengthen middle class workers, create well-paying jobs and better opportunities for all North Americans.

NAFTA increased competition between Canada, USA, and Mexico in the global marketplace. It allows all three countries to better compete with China and the EU. Main industries of the U.S. include petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, electronics, food processing, consumer goods, lumber and mining. Main imported goods include agricultural products, fuels, mining products and manufacturers, which is the production of merchandise. America’s largest trading partners are China, Canada, and Mexico. Therefore, NAFTA is one of the most important agreements the USA can be apart of. Not only does America have the worlds largest economy, they are the second largest by purchasing power. So, to keep these numbers at par, the U.S. must keep good relations with neighbouring countries. The new agreement also allows America with greater access to the Canadian dairy market. This is a huge success for the States as it has been an important issue affecting American dairy farmers.

With both Canada and America being very well-developed countries, the NAFTA agreement is supposed to help citizens of Mexico in economy development by proving more jobs to middle class workers and help enable Mexicans to save themselves from the lower class (Panda, 2018). The economy is expected to grow but has been steady as of today. However, NAFTA has improved the foreign investment and the goods exported out of Mexico. This now constitutes a great percentage of the Mexican Gross Domestic Product. The North American Free Trade Agreement has impacted the employment rate, but wages have remained stagnant over the last few years.

One of the most significant economic effects of NAFTA was the establishment of regional supply chains (Macdonald, 2017). With the increase in trade between the three countries, producers must relocate manufacturing and assembly plants to carry out different parts of the production process in the most efficient way possible. Many economic sectors, especially automobiles, have become extremely integrated across the North American region (Macdonald, 2017). Currently, the USA is Mexico’s largest trade partner, with approximately 89% exports going to America. This results in Mexico’s economy to be hugely reliant on the U.S economy. Back in 2008, not only did America suffer from a financial crisis, but Mexico was affected too due to their dependency on the USA.

There were many concerns by each nation with the proposal of NAFTA. While it’s supposed to be economically efficient between these three countries, not everyone will be completely satisfied. Since labour is so cheap in Mexico, thousands of Americans lost their job as numerous manufacturing companies withdrew part of their production from the high expenses of the United States. It is said that 682,900 jobs were taken from the States and went to Mexico. States that were heavily impacted were California, New York, Michigan, and Texas (Amadeo, 2018). Majority of these industries had relocated their plants into Mexico. This included the production of textiles, computers, automobiles, and electrical appliances. Not only did the U.S. unemployment rate increase but so did the Mexican farmers unemployment rate. Due to NAFTA, 1.3 million Mexican farmers lost their jobs (Amadeo, 2018). When NAFTA removed trade tariffs, agricultural companies began to export corn and other grains to Mexico below cost. This caused rural Mexican farmers to not be able to compete which meant many small Mexican farmers were put out of business by highly subsidized American farmers. This resulted in unemployed farmers to cross the border illegally to find work, even though the government claimed that NAFTA would reduce migration by creating jobs in Mexico.

Also due to NAFTA, maquiladora workers were exploited. Maquiladora is where American owned companies employ Mexican workers near the border. They assemble products for less, then export it back into America. The program grew to employ 30% of Mexico’s labor force (Amadeo, 2018). The workers had no labor rights or health protections and work days would stretch to 12 hours or more per day, and woman could be forced to take a pregnancy test when applying for a job. In the process, Mexico’s environment is noticeably starting to deteriorate in response to NAFTA’s competitive pressure. Mexican farmers increased their use of fertilizers and chemicals, costing $36 billion per year in pollution. Rural farmers expanded into marginal land, resulting in deforestation at a rate of 630,000 hectares per year (Amadeo, 2018). Deforestation results in the destruction of wildlife and global warming. NAFTA also allowed Mexican trucks access into the United States although Mexican trucks are not held to the same safety standards as American trucks, which raises safety concerns.

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Since 1994, economic growth rates in Mexico were low, while inequality and poverty remained high. It could be argued that Mexico could potentially benefit more if NAFTA had been accompanied by stronger domestic policies aimed at improving education and social well-being, as well as greater investment in infrastructure and regional development (Panda, 2018). Agriculture was one of their many issues. Millions of Mexican farmers lost their land because of government decisions to remove taxes on corn and other staple foods. Meanwhile, America continued to subsidize the production of corn. This meant producers in Mexico were not able to compete with cheap import prices.

Many advantages of NAFTA included the quadrupled trade rate between Canada, Mexico, and the U.S. With the agreement eliminating tariffs, trade between the three countries increased to $1.14 trillion in 2015. NAFTA increased U.S. growth by as much as 0.5% a year. Three industries benefited the most from increased exports which were agriculture, automotive, and health care and financial services (Amadeo, 2018).

Better economic growth created more work. U.S. exports to Canada and Mexico meant millions of job opportunities to Americans. In the early stages of NAFTA, manufacturers created thousands of jobs (Amadeo, 2018). The trade agreement also meant lower prices. Oil imported from Mexico did not include tariffs, therefore it decreased America’s dependency on oil from the Middle East. Low oil prices result in lower gas prices, which lowers the cost of transportation, which ultimately results in lower cost of transported goods. NAFTA also aided with government spending. With each country`s government contracts being available to suppliers in Canada, Mexico, and America, this amplified competition and dropped the costs.

There are many advantages and disadvantages to NAFTA. Worker mistreatment and environmental damage are significant issues, but from an economic perspective, NAFTA holds many advantages. Without the agreement, the States could not be a strong enough competitor against China or EU, considering their size and economic power. The unemployment rate could be worse without NAFTA. Ultimately, in a world of globalization, North America is stronger together.

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