NAFTA

Updated on January 30, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is NAFTA?

NAFTA, or the North American Free Trade Agreement, is a trade agreement between the United States, Canada, and Mexico. The primary purpose of this agreement was to cut tariffs between these countries and make North America a global marketplace.  

NAFTA

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NAFTA eliminates the trade barriers within these countries. Also, it helps in boosting investment opportunities. It promotes fair competition in the industry. Besides, it improves market stability and increases global trade. It provides good tactics for dealing with trade disputes. However, it gave some negative results as unemployment rose, majorly in the manufacturing, textile, and automobile sector. 

Key Takeaways

  • NAFTA (full form – North American Free Trade Agreement), is a three-tie-up agreement between the U.S., Mexico, and Canada. It aimed at removing tariff rates while importing-exporting goods. 
  • In 1993, U.S. President George Bush, Canadian Prime Minister Brian Mulroney, and Mexican President Carlos Salinas signed the agreement at the Shamrock Summit in Quebec City. 
  • The agreement eased up trade giving priority to some countries over others. Also, they got various protection rights over intellectual property and other fields. 
  • The effect includes specific pros & cons, like the investment growth accelerated threefold during 1993-2015 while it led to unemployment in the manufacturing sectors & increased illegal smuggling. 

NAFTA Explained

NAFTA erases the trade bumpers within North America, especially the U.S., Mexico, and Canada. Thus, in 1974, George H. W. Bush proposed the NAFTA agreement. It aimed at easing rules for trade within the countries. As a result, the official flag of NAFTA includes the respective flags of the U.S, Mexico, and Canada arranged in vertical slabs. 

The NAFTA countries gain certain benefits from the agreement. The countries entering it gets the status of most-favored among others. Also, they earn the most deductions on tariffs and other customs duties during a trade. However, the NAFTA members entering the agreement must follow specific rules and the assigned guidelines. The parties involved in this agreement must sign a ‘Certificate of Origin‘ form. The following are the rules of the NAFTA Certificate of Origin:

  1. As per the rule, only the exporter must fill out this form, not the importer. 
  2. Once qualified for NAFTA, the exporter can parcel the items to Canada or Mexico for more than $10,000.   
  3. If the value exceeds $10000, the exporter must present a written form stating the qualifying item.
  4. Once the authorities sign the certificate, they need to send the original or copy to the importer. First, however, they need to secure that transaction for five years from the transaction date. 

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NAFTA History

Let us look at the history of NAFTA and its influence on the U.S. economy:

Although the U.S signed the NAFTA agreement in 1993, the parent cause dates back to the late 1950s. After World War II, there was economic tension in the devastated nations. Thus, in 1959, the European Economic Community (ECC) removed all the tariffs to boost trade. Following the ECC, the U.S. and Canada also signed a similar agreement. As a result, supporters stood aligned with the idea of tariff-free trade. According to them, trade and production would increase, and this deal would create jobs.

Likewise, in 1980, U.S. President Ronald Reagan proposed the idea during their presidential campaign. In 1985, Canadian Prime Minister Brian Mulroney stepped forward with this plan for the United States. As a result, in 1988, both countries signed the Canada-US agreement. However, it came into effect on January 1, 1989. 

After one year (i.e., in 1990), Mexican President Carlos Salinas also showed interest in the North American trade zone. Thus, in 1991, the next U.S. president, George Bush, proposed a joint trade agreement between the U.S, Canada, and Mexico. In 1992, all three nations signed the deal at the Shamrock Summit in Quebec City. They also signed two agreements on labor and environmental protection in 1993. However, it came into force on January 1, 1994.

NAFTA Functions 

The NAFTA agreement has six main functions to achieve along with other rights. According to Article 102, the following are the NAFTA objectives. Let us look at them:

  • Eliminating trade barriers and enabling the cross-boundary transfer of products and services.
  • Promoting fair competition within the area.
  • Increasing investment opportunities across the country’s borders. 
  • Providing enough protection and enforcement of intellectual property rights. 
  • Creating effective procedures for implementing the agreement and for trade disputes.
  • Developing trilateral, multilateral, and regional relations to expand trade benefits. 

Examples

Let us look at the examples of NAFTA members to comprehend the concept better:

Example #1

On July 1, 2020, the North American free trade agreement ended. The same day, the countries enacted the USMAC (United States, Mexico, and Canada Agreement). In the previous NAFTA form, there were 22 chapters. Currently, it is reduced to 21. Chapter 11 allowed foreign investors to take back profits to the host country. Thus, it got removed from the renewed agreement. 

Example #2

In September 2022, Odyssey Marine Exploration, a global subsea mineral exploration, filed a post-hearing brief against Mexico. As per the agreement, the latter breached Article 1105. The article states that all parties should follow fair and equal treatment, protection, and security. However, the Mexican government disapproved of the environmental approval of an element (Exo Phosphate) violating the NAFTA objectives. Thus, on September 4, 2020, Odyssey filed a case against them. 

Pros & Cons

Although NAFTA countries consider it to be a boon, it has specific cons attached to it too. Let’s consider the following NAFTA pros examples- 

During these 24 years, trade increased threefold. There was an increase of 258.5% in trade between 1994 to 2015. Also, the Gross Domestic Product (GDP) grew by quite a good percentage (0.5% per year). A 2010 report states that the deal accelerated jobs creating 5.4 million jobs. Besides, during 1994-2015, the FDI in the U.S. surged from $15.2 billion to $352.9 billion. In contrast, Mexico and Canada saw an increase of 1283% and 911%. 

Among all these pros, there are negative impacts of NAFTA on the American continent. After the deal removed all the tariffs, smuggling and drug dealing hiked up. People got addicted badly to cooked-up cocaine (popularly known as ‘Crack’). The tariff-free trade brought in addiction among the folks. Also, people were losing jobs in the manufacturing sector. The wage rate in the industries dropped drastically. There was a pile of unemployment gathering in these countries. The Mexican farmers could not adjust themselves to the subsidized prices. As a result, they started making losses.  

Pros Cons
Increased trade and economic output.High unemployment in the manufacturing sector.
Balanced government spending.Increased drug smuggling and illegal practices.
Eliminated and reduced tariffs (duties).Suppressed wage rates.
Higher employment opportunities.Mexican farmers suffered losses.
Foreign Direct Investment (FDI) tripled by 3x.Environmental loss.
Lower prices of goods, oil, and services.Critical conditioned workers.
Created friendly relations within nations. 

Frequently Asked Questions (FAQs)

1. Is NAFTA still in effect?

No. The North American Free Trade Agreement ended on July 1, 2020, after 24 years. Soon after, under the Presidency of Donald Trump, a new agreement got signed on the same date. And it was primarily named the United States, Mexico, and Canada Agreement. 

2. Is NAFTA a successful agreement?

Yes, it was a successful agreement. However, there were certain disadvantages attached to it. While this agreement created jobs, there was a massive loss in the manufacturing, automobile, and textile sectors. As a result, people were losing jobs. Also, substantial illegal activities appear on the surface, boosting the underground economy. 

3. What is the difference between NAFTA to USMCA?

The main difference between NAFTA and USMCA was that the latter was the renewed agreement of the former. While the countries enacted the former in 1993, they signed USMCA on July 1, 2020. However, there are slight differences in USMCA. For example, the tariffs on digital music, e-books, and other products were removed. Also, Chapter 11 of the former got released. 

This article has been a guide to what is NAFTA and its meaning. Here, we explain it in detail, with its history, functions, and examples, along with its pros & cons. You can learn more about it from the following articles –

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