In order to understand why the United States entered the North American Free Trade Agreement (NAFTA), as well as if we have benefited from entering it, we must first understand what NAFTA is. As previously stated, NAFTA is the North American Free Trade Agreement, consisting of the United States, Canada and Mexico, based off of European Economic Community due to its’ success. The overall objective of the Agreement was to eliminate tariffs between the three biggest North American countries in order to stimulate trade. With this in mind, NAFTA wants North America to be a free-trade area that would bring increased trade and production to all North American countries (Bondarenko, 2019, p. 1). Broken down further, NAFTA is split up into six in-depth objectives. These objectives, or provisions, consist of eliminating trade barriers in respective territories while facilitating the movement of goods and services cross-border, promoting conditions for fair competition within the free trade area, increasing investment opportunities substantially in the territories of all participating parties, providing effective enforcement and protection of intellectual property rights, creating procedures for the application and implementation of the Agreement, and establishing a framework for trilateral expansion and benefit enhancement of this Agreement (“tcc.export.gov,” n.d., p. 1). Now that we know generally what the purpose behind NAFTA is, why did the United States decided to enter into NAFTA?
The United States decided to join NAFTA for essentially all of the previously listed reasons. First, as a country we wanted to stimulate tariff-free trade across borders with our neighboring countries. If there are trade barriers in place restricting new businesses from joining the market, as well as remaining costly for existing businesses to continue, then removing these would increase trade. For example, when Mexico eliminated all non-tariff barriers alongside trade-distorting restrictions, it allowed U.S. exporters to ship more products into Mexico as well as exporting was now cheaper due to burden of obtaining import permits no longer being there. The next reason the United States joined NAFTA is for more-fair trade conditions. Without NAFTA in play, Mexico would’ve been able to raise their tariffs up to 50% because of the international trade rules. Prior to NAFTA, Mexican tariffs were 2.5 times higher than that of U.S. tariff rates. After NAFTA, Mexican tariffs on all goods entering from the United States were eliminated entirely (“iatp.org”, n.d., p.1). Although we could’ve hiked up tariffs on Mexico, we import too many necessities that we can’t risk not receiving including vehicles, electrical machinery, machinery, agricultural products, oil and other mineral fuels, and optical and medical instruments. Overall, imports from Mexico accounted for 13.7% of the United States’ total imports in 2017 and is the United States’ third largest two-way trading partner for goods (“Mexico”, n.d., ¶ 1-9).
A few more big reasons that coincide with each other and have influenced the United States’ decision to join NAFTA are the elimination of investment conditions, the removal of investment barriers and fairness for investors. Prior to NAFTA, foreign investors looking to invest in Mexico were required to export a specified level or percentage of all goods and services, to use goods and services that are domestic to Mexico, to transfer technology used to competitors, and to limit imports so that they don’t exceed a certain percentage of exports. The elimination of these investment conditions allows Mexican companies to have more freedom in buying U.S. parts alongside having less of an incentive to export to the United States. In terms of providing fairness to all investors, NAFTA now ensures that U.S. investors are treated the exact same as domestic firms in Canada and Mexico. Some of the rights given to U.S. investors were the right to send profits and capital back to the United States, the right to fair compensation in expropriation circumstances, and the right to an international arbitrator in disputes that have monetary damages (“iatp.org”, n.d., p.1). These are just some of the main reasons that encouraged the United States to join NAFTA, but did we benefit from joining? At first glance from statistics, it seems as if this deal was overall beneficial for all parties involved. I don’t want to make any assumptions, so we need to look at the overall pros and cons for NAFTA.
There are six main advantages coming from NAFTA, the first one being the amount of trade done in North America since enactment. According to a report done by the Congressional Research Service, based on data from the Department of Commerce in 2017, trade between the United States, Mexico, and Canada has tripled (Amadeo, n.d., ¶ 3; “fas.org”, n.d., p. 11). Secondly, overall economic output has increased due to greater trade. It is hard for experts to get an exact figure due to the plethora of factors involved, but it is estimated once NAFTA has been implemented entirely that the United States growth would increase by about 0.5% per year (Amadeo, n.d., ¶ 4). Thirdly, the growth of free trade has supported over 5.4 million jobs directly while the trade supported 17.7 million jobs throughout Canada and Mexico (Amadeo, n.d., ¶ 5; “uschamber.com”, p. 2). The fourth pro, and probably the biggest, is the massive and continuous increase in foreign direct investment (FDI) between countries. Due to the United States joining NAFTA, from 1993 to 2012 the United States’ FDI in Mexico increased by 586.8% while Mexico’s foreign direct investment in the United States increased by over 1,283%. On top of that, the United States FDI in Canada increased by 404.9% while Canada’s FDI in the United States increased by 911%. In both time frames, the United States got substantially more investments, in terms of percentages, from Canada and Mexico than we invested into them (Amadeo, n.d., ¶ 6-7). Fifth on the list is the most recognized yet unknown benefit, lower oil prices. What I mean by this is that the vast majority of consumers utilize this benefit without even knowing it comes from NAFTA. Because NAFTA got rid of the tariffs between the U.S. and Mexico, the U.S. doesn’t hold as big of a reliance on the Middle East for oil (Amadeo, n.d., ¶ 8). Lastly, the sixth pro of NAFTA is that the agreement made government contracts for each nation available to suppliers in each of the three countries. Due to this, it lowered costs and increased competition (Amadeo, n.d., ¶ 10).
Over the more recent years, statistics show that foreign direct investment rates are still increasing continuously. If the United States are continuing to receive more and more investments every year, as well as exporting more goods and services, then how could this be a bad deal for the United States? Well with every international agreement there are cons that have significant weight in comparison to the pros. For there being six main advantages to NAFTA, there are also six main disadvantages. The first con, and most disappointing one, is in 2011 it was estimated that NAFTA actually lost the United States in between 500,000 and 750,000 jobs. These jobs were mainly in the manufacturing industries such as automotive, computer manufacturing, and electrical appliances (Amadeo, n.d., ¶ 12). When you compare this to the previously stated remark about our biggest imports from Mexico, it actually makes perfect sense. If we were manufacturing these products because importing them costed too much and then tariffs got eliminated, there’d be no reason to not import them again for cheaper. Secondly, wages were suppressed due to job migration. Companies were threatening to move to Mexico and prevent workers from joining unions that way they couldn’t bargain for increased wages (Amadeo, n.d., ¶ 13). The next three disadvantages go hand in hand with one another being Mexican farmers going out of business due to American subsidized prices which caused illegal immigration for jobs, unemployed Mexican farmers working in substandard conditions for U.S. companies to assemble and export products cheaply back to the United States, and the degradation of the Mexican environment. The environmental regulations in Mexico weren’t as strict as the United States’ so agricultural companies used more fertilizers and chemicals (Amadeo, n.d., ¶ 14-17). Lastly, NAFTA provisioned Mexican trucks access into the U.S., but since they’re not held to the same standards, the U.S. congress never allowed it to go into effect.
Given all of the information provided above, I have concluded that overall the United States has benefited from joining NAFTA. Although there are some disadvantages that need to be taken seriously, they seemed to have posed as problems early on and not so much in recent years. All three of the major nations involved have economic growth that continues to increase due to the provisions in place within NAFTA. With some environmental, immigration, and economical regulations, I believe that NAFTA will continue to succeed given that President Trump doesn’t do anything drastic with it, such as pull the United States out of it.
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