Understanding NAFTA, The North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) was created to create free trade between the United States, Canada, and Mexico. The aim is to remove all trade barriers in the three countries, including reducing or eliminating import and export tariffs.

NAFTA was the most significant free trade agreement in the world when it was ratified on January 1, 1994. However, due to some controversial steps, NAFTA was replaced with The United States-Mexico-Canada Agreement (USMCA) on November 30, 2018.

The United States-Mexico-Canada Agreement, or USMCA, came into full force on July 1, 2020, replacing NAFTA. This agreement is valid for 16 years from its signing (if there is no extension).

History of NAFTA

The North American Free Trade Agreement
The North American Free Trade Agreement

According to Investopedia, about a quarter of all U.S. imports, such as crude oil, machinery, gold, vehicles, fresh produce, livestock, and processed food, come from Mexico and Canada. They are the second and third most significant countries in the US, respectively. In addition, about one-third of US exports, mainly machinery, auto parts, mineral fuels/oils, and plastics, go to Canada and Mexico.

The United States, Mexico, and Canada are cited as solid economic supporters. The existence of the NAFTA free trade agreement is expected to facilitate trade between the three regions further.

NAFTA was formed through a long journey, starting in the 1980s during the reign of President Ronald Reagan. The treaty was signed in 1992 by President George HW Bush, Mexican President Carlos Salinas de Gortari, and Canadian Prime Minister Brian Mulroney.

Due to some concerns about liberalizing labor and environmental regulations, NAFTA was finally passed into law on December 8, 1993, by President Bill Clinton. Later, it came into effect on January 1, 1994.

2. Purpose of NAFTA

There are seven goals for forming NAFTA, as quoted from The Balance page. Among others are:

  1. It gives signatories (signing countries) the status of “most favored country.” That is, each country treats other countries fairly.
  2. Remove trade barriers and facilitate the movement of goods and services across borders.
  3. Promote conditions of fair competition.
  4. Increase investment opportunities.
  5. Provide protection and enforcement of intellectual property rights.
  6. Establish procedures for the settlement of trade disputes.
  7. Establish a framework for further trilateral, regional and multilateral cooperation to expand the benefits of trade agreements.

3. Pros and cons of NAFTA

However, this trade agreement is also free of pros and cons. There are many significant advantages, especially for the economic sector, but the losses caused are also not kidding.

Advantages of NAFTA

  1. Increase in cross-border trade and investment.
  2. Increasing the competitiveness of the US industry.
  3. Opening opportunities for small businesses
  4. Lower food prices due to tariff-free imports from Mexico.
  5. Lower gas prices

Disadvantages of NAFTA

  1. Causing the loss of manufacturing jobs, especially in specific industries.
  2. Rising inflation in the US
  3. Increase the US trade deficit.
  4. Lower wages.
  5. The exploitation of workers in Mexico. Mexico suffers from poor working conditions because of the Maquiladora program, a low-cost, US-owned manufacturing operation of plants in Mexico.

Although NAFTA has been changed to USMCA, they still have the same goal. Some of the striking differences between the two are the renewal of the agreement, which is more adapted to the needs of the times, and the revision of the deal’s contents, which causes many cons.

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