HistoryThe impetus for NAFTA began with President Ronald Reagan, who proposed a North American common market in his campaign.
In 1984, Congress passed the Trade and Tariff Act. That gave the president “fast-track” authority to negotiate free trade agreements. It removes Congressional authority to change negotiating points. Instead, it allows Congress only the ability to approve or disapprove the entire agreement. That makes negotiation much easier for the administration. Trade partners don’t have to worry that Congress will nitpick specific elements.Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada-U.
S. Free Trade Agreement. It was signed 1988 and went into effect 1989. NAFTA has now replaced it. (Source: “NAFTA Timeline,” NaFina.)Regan’s successor, President H.W.
Bush, began negotiations with Mexican President Salinas for a liberalized trade agreement between the two countries. Before NAFTA, Mexican tariffs on U.S. imports were 250 percent higher than U.S.
tariffs on Mexican imports.In 1991, Canada requested a trilateral agreement, which then led to NAFTA. In 1993, concerns about the liberalization of labor and environmental regulations led to the adoption of two addendums.
In 1992, NAFTA was signed by President George H.W. Bush, Mexican President Salinas and Canadian Prime Minister Brian Mulroney.It was ratified by the legislatures of the three countries 1993. The U.S. House of Representatives approved it by 234 to 200 on November 17, 1993.
The U.S. Senate approved it by 60 to 38 on November 20, three days later.President Bill Clinton signed it into law December 8, 1993.
It entered force January 1, 1994. It was a priority of President Clinton’s, and its passage is considered one of his first successes. (Source: “NAFTA Signed Into Law,” History.
com, December 8, 1993.)Objectives of naftaArticle 102 of the NAFTA agreement outlines its purpose. There are seven specific goals.Grant the signatories most favored nation status.Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
Promote conditions of fair competition.Increase investment opportunities.Provide protection and enforcement of intellectual property rights.Create procedures for the resolution of trade disputes.Establish a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement’s benefits.
(Source: “FAQ,” NAFTA Secretariat.)NAFTA’s immediate aim was to increase cross-border commerce in North America, and in that respect it undoubtedly succeeded. By lowering or eliminating tariffs and reducing some non-tariff barrier, such as Mexican local-content requirements, NAFTA spurred a surge in trade and investment.
Most of the increase came from U.S.-Mexico trade, which totaled $481.5 billion in 2015, and U.S.
-Canada trade, which totaled $518.2 billion. Trade between Mexico and Canada, though by far the fastest-growing channel between 1993 and 2015, totaled just $34.3 billion.Impact of NAFTA: Country wise analysis Economic GrowthFrom 1993 to 2015, the U.S.’s real per-capita gross domestic product (GDP) grew 39.3% to $51,638 (2010 USD).
Canada’s per-capita GDP grew 40.3% to $50,001, and Mexico’s grew 24.1% to $9,511. In other words, Mexico’s output per person has grown more slowly than that of Canada or the U.S., despite the fact that it was barely a fifth of its neighbors’ to begin with. Normally one would expect an emerging market economy’s growth to outpace that of developed economies.
Going by just the real per capita GDP growth rate Mexico does look a little worse off than the U.S.A and Canada, but this one dimensional analysis could be misleading.
In a way, Mexico beats the U.S. at the border.
Prior to NAFTA, the trade balance in goods between the two countries was modestly in favor of the U.S. Today Mexico sells close to $60 billion more to the U.S. than it buys from its northern neighbor.
NAFTA is an enormous and enormously complicated deal; looking at economic growth can lead to one conclusion, while looking at the balance of trade leads to another.Even if NAFTA’s effects are not easy to see, however, a few winners and losers are reasonably clear.United StatesDid U.S lose out jobs to cheap labor of Mexico and Canada like the claims of anti-NAFTA supporters?Finding a direct link between NAFTA and overall employment trends is difficult. The partially union-funded Economic Policy Institute estimated that 851,700 net jobs had been displaced by the U.S.
‘s trade deficit with Mexico, which amounted to 0.6% of the U.S.
labor force at the end of 2013. In a 2015 report, the Congressional Research Service (CRS) said that NAFTA “did not cause the huge job losses feared by the critics.” On the other hand, it allowed that “in some sectors, trade-related effects could have been more significant, especially in those industries that were more exposed to the removal of tariff and non-tariff trade barriers, such as the textile, apparel, automotive, and agriculture industries.
“NAFTA’s implementation has coincided with a 30% drop in manufacturing employment, from 17.7 million jobs at the end of 1993 to 12.3 million at the end of 2016. Whether NAFTA is directly responsible for this decline is difficult to say, however. The automotive industry is usually considered to be one of the hardest-hit by the agreement; yet although the U.S. vehicle market was immediately opened up to Mexican competition, employment in the sector grew for years after NAFTA’s introduction, peaking at nearly 1.3 million in October 2000.
Jobs began to slip away at that point, and losses grew steeper with the financial crisis. At its low in June 2009, American auto manufacturing employed just 623,000 people. While that figure has since risen to 948,000, it remains 27% below its pre-NAFTA level. Anecdotal evidence supports the idea that these jobs went to Mexico. Wages in Mexico are a fraction of what they are in the U.S.
All major American car makers now have factories south of the border. Yet while the job losses are tough to deny, they may be less severe than in a hypothetical NAFTA-less world.How did NAFTA help U.S Industries?The Congressional Research Service (CRS) notes that “many economists and other observers have credited NAFTA with helping U.S. manufacturing industries, especially the U.S. auto industry, become more globally competitive through the development of Supply chains.
While thousands of U.S. auto workers undoubtedly lost their jobs as a result of NAFTA, they might have fared worse without it. By integrating supply chains across North America, keeping a significant share of production in the U.S.
became an option for car makers. Otherwise they may have been unable to compete with Asian rivals, causing even more jobs to depart. “Without the ability to move lower-wage jobs to Mexico we would have lost the whole industry,” UC San Diego economist Gordon Hanson told the New York Times in March 2016. On the other hand, it may be impossible to know what would have happened in a hypothetical scenario.The same goes for the Garment and Textile Industries.
PricesAn important point that often gets lost in assessments of NAFTA’s impacts is its effects on prices. The Consumer Price Index (CPI), a measure of inflation based on a basket of goods and services, rose by 65.6% from December 1993 to December 2016, according to the Bureau of Labor Statistics (BLS). During the same period, however, apparel prices fell 7.5%. Still, the decline in garment prices is no easier to pin directly on NAFTA than the decline in garment manufacturing.
Because people with lower incomes spend a larger portion of their earnings on clothes and other goods that are cheaper to import than to produce domestically, they would probably suffer the most from a turn towards protectionism – just as many of them did from trade liberalization. According to a 2015 study by Pablo Fajgelbaum and Amit K. Khandelwal, the average real income loss from completely shutting off trade would be 4% for the highest-earning 10% of the U.S. population, but 69% for the poorest 10%.
ImmigrationPart of the justification for NAFTA was that it would reduce illegal immigration from Mexico to the U.S. The number of Mexican immigrants – of any legal status – living in the U.
S. nearly doubled from 1980 to 1990, when it reached an unprecedented 4.3 million. Boosters argued that uniting the U.S. and Mexican markets would lead to gradual convergence in wages and living standards, reducing Mexicans’ motive to cross the Rio Grande.
Mexico’s president at the time, Carlos Salinas de Gortiari, said the country would “export goods, not people.”Instead the number of Mexican immigrants more than doubled – again – from 1990 to 2000, when it approached 9.2 million. According to Pew, the flow has reversed, at least temporarily: 140,000 more Mexicans left the U.S. than entered it from 2009 to 2014, likely due to the effects of the financial crisis. One reason NAFTA did not cause the expected reduction in immigration was the peso crisis of 1994-1995, which sent the Mexican economy into recession. Another is that reducing Mexican corn tariffs did not prompt Mexican corn farmers to plant other, more lucrative crops; it prompted them to give up farming.
A third is that the Mexican government did not follow through with promised infrastructure investments, which largely confined the pact’s effects on manufacturing to the north of the country.Trade Balance and VolumeCritics of NAFTA commonly focus on the U.S.’s trade balance with Mexico.
While the U.S. enjoys a slight advantage in services trade, exporting $30.
8 billion in 2015 while importing $21.6 billion, its overall trade balance with the country is negative due to a yawning $58.8 billion 2016 deficit in merchandise trade. That compares to a surplus of $1.
7 billion in 1993 (in 1993 USD, the 2016 deficit was $36.1 billion).But while Mexico is “beating us economically” in a mercantile sense, imports were not solely responsible for the 264% real growth in merchandise trade from 1993 to 2016. Real exports to Mexico more than tripled during that period, growing by 213%; imports outpaced them, however, at 317%.The U.S.
‘s balance in services trade with Canada is positive: it imported $30.2 billion in 2015 and exported $57.3 billion. Its merchandise trade balance is negative – the U.S. imported $9.1 billion more in goods from Canada than it exported in 2016 – but the surplus in services trade eclipses the deficit in merchandise trade.
The U.S.’s total trade surplus with Canada was $11.9 billion in 2015.Real goods exports to Canada grew by 50% from 1993 to 2016; real goods imports grew by 41%. It would appear that NAFTA improved the U.S.
‘s trade position vis-à-vis Canada. In fact the two countries had already had a free trade agreement in place since 1988, but the pattern holds: the U.S.’s merchandise trade deficit with Canada was even steeper in 1987 than it was in 1993.GrowthIf NAFTA had any net effect on the overall economy, it was barely perceptible. A 2003 report by the Congressional Budget Office concluded that the deal “increased annual U.S. GDP, but by a very small amount – probably no more than a few billion dollars, or a few hundredths of a percent.
” The CRS cited that report in 2015, suggesting it hadn’t come to a different conclusion. NAFTA displays the classic free-trade quandary: diffuse benefits with concentrated costs. While the economy as a whole may have seen a slight boost, certain sectors and communities experienced profound disruption. A town in the Southeast loses hundreds of jobs when a textile mill closes, but hundreds of thousands of people find their clothes marginally cheaper. Depending on how you quantify it, the overall economic gain is probably greater, but barely perceptible at the individual level; the overall economic loss is small in the grand scheme of things, but devastating for those it affects directly.MexicoFor optimists in Mexico in 1994, NAFTA seemed to be full of promise. The deal was in a fact an extension of the 1988 Canada-U.S.
Free Trade Agreement, and it was the first to link an emerging market economy to developed ones. The country had recently undergone tough reforms, beginning a transition from the kind of economic policies one-party states pursue to free-market orthodoxy. NAFTA supporters argued that tying the economy in with those of its richer northern neighbors would lock in those reforms and boost economic growth, eventually leading to convergence in living standards between the three economies.Almost immediately, a currency crisis struck. Between the fourth quarter of 1994 and the second quarter of 1995, local-currency GDP shrank by 9.5%. Despite President Salinas’ prediction that the country would begin exporting “goods, not people,” emigration to the U.
S. accelerated. In addition to the recession, the removal of corn tariffs contributed to the exodus: according to a 2014 report by the left-leaning Center for Economic and Policy Research (CEPR), family farm employment fell by 58%, from 8.4 million in 1991 to 3.5 million in 2007.
Due to growth in other agricultural sectors, the net loss was 1.9 million jobs.CEPR argues that Mexico could have achieved per-capita output on par with Portugal’s if its 1960-1980 growth rate had held. Instead it clocked the 18th-worst rate of 20 Latin American countries, growing at an average of just 0.
9% per year from 1994 to 2013. The country’s poverty rate was almost unchanged from 1994 to 2012. NAFTA does appear to have locked in some of Mexico’s economic reforms: the country has not nationalized industries or run up massive fiscal deficits since the 1994-1995 recession. But changes to the old economic models were not accompanied by political changes – at least not immediately. Jorge Castañeda, who served as Mexico’s foreign minister during Vicente Fox Quesada’s administration, argued in a December 2013 article in Foreign Affairs that NAFTA provided “life support” to the Institutional Revolutionary Party (PRI), which had been in power without interruption since 1929. Fox, a member of the National Action Party, broke PRI’s streak upon becoming president in 2000.Mexico’s experience with NAFTA was not all bad, however.
The country became a car manufacturing hub, with General Motors Co. (GM), Fiat Chrysler Automobiles N.V. (FCAU), Nissan Motor Co., Volkswagen AG, Ford Motor Co. (F), Honda Motor Co.
(HMC), Toyota Motor Co. (TM) and dozens of others operating in the country – not to mention hundreds of parts manufacturers. These and other industries owe their growth in part to the more than four-fold real increase in U.
S. foreign direct investment (FDI) in Mexico since 1993. On the other hand, FDI in Mexico from all sources (the U.S. is usually the largest contributor) lags behind other Latin American economies as a share of GDP, according to Castañeda.Led by the auto industry, the largest export category, Mexican manufacturers maintain a $58.8 billion trade surplus in goods with the U.
S.; prior to NAFTA there was a deficit. They have also contributed to the growth of a small, educated middle class: Mexico had around 9 engineering graduates per 10,000 people in 2015, compared to 7 in the U.S. Finally, the increase in Mexican imports from the U.
S. has driven consumer goods prices down, contributing to broader prosperity: “if Mexico has become a middle-class society, as many now argue,” Castañeda wrote in 2013, “it is largely due to this transformation.” Yet he concludes that NAFTA “has delivered on practically none of its economic promises.
” He advocates a more comprehensive deal, with provisions for energy, migration, security and education – “more NAFTA, not less.” That seems unlikely today.CanadaCanada experienced a more modest increase in trade with the U.S. than Mexico did as a result of NAFTA, at an inflation-adjusted 63.
5% (Canada-Mexico trade remains negligible). Unlike Mexico, it does not enjoy a trade surplus with the U.S.; while it sells more goods to the U.S. than it buys, a sizable services trade deficit with its southern neighbor brings the overall balance to -$11.
9 billion in 2015.Canada did enjoy a 243% real increase in FDI from the U.S. between 1993 and 2013, and real GDP per head grew faster – just barely – than its neighbor’s from 1993 to 2015, though it remains about 3.2% lower.As with the U.S.
and Mexico, NAFTA did not deliver on its Canadian boosters’ most extravagant promises; nor did it bring about its opponents’ worst fears. The Canadian auto industry has complained that low Mexican wages have siphoned jobs out of the country: when General Motors cut 625 jobs at an Ontario plant to move them to Mexico in January, Unifor, the country’s largest private-sector union, blamed NAFTA. Jim Stanford, an economist working for the union, told CBC News in 2013 that NAFTA had sparked a “manufacturing catastrophe in the country.”Supporters sometimes cite oil exports as evidence that NAFTA has helped Canada: according to MIT’s Observatory of Economic Complexity, the U.S. imported $37.
8 billion worth of crude oil in 1993, with 18.4% of it coming from Saudi Arabia and 13.2% of it coming from Canada. In 2015 Canada sold the U.S. $49.
8 billion, or 41% of its total crude imports. In real terms, Canada’s sales of oil to the U.S. grew 527% over that period, and it has been its neighbor’s largest supplier since 2006.U.S. crude oil imports, 1993: $37.
8 billion current USDU.S. crude oil imports, 2015: $120 billion current USDSource: MITOn the other hand, Canada has long sold the U.S. 99% or more of its total oil exports: it did so even before the two countries stuck a free-trade agreement in 1988. In other words, NAFTA does not appear to have done much to open the U.S. market to Canadian crude.
It was already wide open; Canadians just produced more. Overall, NAFTA was neither devastating nor transformational for Canada’s economy. Opponents of the 1988 free trade agreement had warned that Canada would become a glorified 51st state. While that didn’t happen, Canada didn’t close the productivity gap with the U.S. either: Canada’s GDP per hours worked was 74% of the U.S.
‘s in 2012, according to the OECD.NAFTA a political Weapon?NAFTA was attacked from all sides during the 2008 presidential campaign.Barack Obama blamed it for growing unemployment. He said it helped businesses at the expense of workers in the United States. It also did not provide enough protection against exploitation of workers and the environment along the border in Mexico.Hillary Clinton included the trade agreement in her pledge to strictly enforce all existing trade agreements, as well as halt any new ones.
Both candidates promised to either amend or back out of the agreement altogether. Obama didn’t do anything about these campaign promises when he was president.In 2008, Republican candidate Ron Paul said he would abolish the trade agreement. He said it was responsible for a “superhighway” and compared it to the European Union. But unlike the EU, NAFTA does not enforce a single currency among its signatories.
Paul maintained this position in his 2012 campaign.Republican nominee John McCain supported NAFTA, as he did all free trade agreements. In fact, he wanted to enforce an existing section within it that promised to open up the United States to the Mexican trucking industry. Why USA wants to get out of nafta/renegotiate nafta ?First, it led to the loss of 500,000-750,000 U.S. jobs.
Most were in the manufacturing industry in California, New York, Michigan and Texas. Companies in some industries moved to Mexico because labor was cheap. These industries were automotive, textile, computer and electrical appliance.Second, job migration suppressed wages. Sixty-five percent of companies in the affected industries threatened to move to Mexico. The U.
S. workers remaining in those industries could not bargain for higher wages. Between 1993 and 1995, 50 percent of all companies in the industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate had grown to 65 percent. Current scenarioIn his first 100 days, the U.
S.A president Donald trump threatened to exit NAFTA, if Mexico and Canada were not ready to renegotiate the agreement. They are willing because the agreement is outdated.
For example, it doesn’t address internet commerce. It also needs to incorporate the environmental and labor protections that are in side agreements.Trade deficitOne of the objective of the president of the United States is to reduce the large trade deficit that the U.S.A with both the countries.
In 2016, even though the U.S.A enjoyed a service trade surplus of $9.2 billion, it had a trade deficit of $58.8 billion in merchandise trade with Mexico.The U.
S.A and Canada already had a free trade agreement in 1988, before NAFTA came into place.Therefore the U.S.A trade deficit with Canada was prevalent even before NAFTA.
In, fact the deficit softened after NAFTA was agreed uponIt would appear that NAFTA improved the U.S.’s trade position vis-à-vis Canada. In fact, the two countries had already had a free trade agreement in place since 1988, but the pattern holds: the U.S.
‘s merchandise trade deficit with Canada was even steeper in 1987 than it was in 1993. Currently the U.S’s trade balance with Canada is $5.
62 billion in real terms.JobsWages in Mexico are a fraction of what they are in the United States. According to a Economic Policy Institute estimate in 2014, 851,700 net jobs had been displaced by the U.S.’s trade deficit with Mexico, which amounted to 0.6% of the U.
S. labor force at the end of 2013. In a 2015 report, the Congressional Research Service (CRS) said that NAFTA “did not cause the huge job losses feared by the critics.”NAFTA is believed to have caused a 30% drop in manufacturing employment, from 17.
7 million jobs at the end of 1993 to 12.3 million at the end of 2016.FDIMexico became a car manufacturing hub, with General Motors Co. (GM), Fiat Chrysler Automobiles N.V.
(FCAU), Nissan Motor Co., Volkswagen AG, Ford Motor Co. (F), Honda Motor Co.
(HMC), Toyota Motor Co. (TM) and dozens of others operating in the country and hundreds of parts manufacturers. These and other industries owe their growth in part to the more than four-fold real increase in U.S. foreign direct investment (FDI) in Mexico since 1993. On the other hand, FDI in Mexico from all sources (the U.S. is usually the largest contributor) lags behind other Latin American economies as a share of GDP.
Canada did enjoy a 243% real increase in FDI from the U.S. between 1993 and 2013, and real GDP per head grew faster – just barely – than its neighbor’s from 1993 to 2015, though it remains about 3.2% lower.Trade flow between the three nationsWhy USA wanted mexico in nafta ?Which country benefitted the most ? Role of Obama in naftaOn the campaign trail, Obama had promised to open up NAFTA to renegotiations. But he’s backed off that pledge since taking office, blaming the global economic meltdown. Obama said, quote, “At a time when the economy has been shrinking drastically and trade has been shrinking around the world…we probably want to make the economy more stabilized in the coming months before we have a long discussion around further trade negotiations,” he said.Furthermore, Obama went on with signing Trans Pacific Partnership (TPP) that included 11 other nations.
(these 12 nations contribute to about 25% of global trade volume)Trade flow between the three nationsNAFTA either lowered or eliminated tariffs and reduced some nontariff barriers, such as Mexican local-content requirements. NAFTA spurred a surge in trade and investment. Most of the increase came from U.S. – Mexico trade, which totaled $481.5 billion in 2015, and U.
S.-Canada trade, which totaled $518.2 billion. Trade between Mexico and Canada, totaled just $34.
3 billion.That combined $1.0 trillion in trilateral trade has increased by 258.5% since 1993 in nominal terms. Trade volumes (million USD)Channel20151993Nominal increaseReal increase*U.S.-Canada$518,217$199,184160.2%63.5%U.S.-Mexico$481,543$85,224465.0%255.0%Mexico-Canada$34,344$4,052747.6%432.5%Trilateral$1,034,104$288,460258.5%125.2%*Adjusted for inflation using BLS Core CPI; source: Mexican Embassy in CanadaWhy USA wanted Mexico in Nafta