North American Free Trade Agreement (NAFTA) | what does NAFTA do


Introduction to North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA) a pact signed by Canada, The US and Mexico to create a trade bloc, the agreement which went into force January 1st, 1994, calls for the reduction or elimination of most trade barriers between the three countries. In 1987, The US and Mexico had no formal agreement that governs trade between the two countries.

In November of that year, they signed an agreement to address trade disputes as well as bring down trade barriers. Two years later an additional legal framework was established which would seek to expand cross-border trade and investment. In 1990, the Mexican government formally merged the idea with the US a forming a free trade era.

So, what is a free trade agreement?

and why was Mexico interested in signing one with u.s. and Canada?North American Free Trade Agreement NAFTA

A free trade agreement is a legal arrangement between at least two countries that eliminate tariffs and non-tariff barriers to the trade of goods and services. The 1980s are often referred to as the lost decade for Latin American countries. Mexico is no exception the country suffered from increasing poverty, slow growth and a high debt burden. 

Signing a free trade agreement would likely bring down inflation, given the increased competition from imported goods, and having duty-free access to the large US and Canadian markets would expand trade possibilities and perhaps increase the productivity of domestic manufacturers and their ability to export in international markets.

Government officials argued that the agreement would also bring increased foreign investment in the country which could increase the country’s technological sophistication as well as raising wages and reduce poverty.

Finally signing NAFTA was good PR for Mexico policymakers were eager to erase. Mexico’s image of a bankrupt poverty-stricken nation and instead craft a new image of a dynamic emerging economy, deserving of investor attention where were some of the key provisions of NAFTA.

When NAFTA called for the immediate removal of tariffs on 70% of US imports from Mexico and 50% of Mexican imports of U.S goods, Other duties were scheduled to be reduced gradually over a 15-year period. Mexico was to stop his import licensing system where manufactured goods could only be imported with the okay of the government.


US firms were also given access to almost all service sectors in u.s. foreign direct investment in intellectual property rights. Other issues included the elimination of export subsidies where governments try to give their domestic manufacturers a leg up in international competition through various measures including low-interest loans tax breaks easy access to foreign exchange.

NAFTA does also try to harmonize quality standards dictating that when one country applies a grading or classification standard to its own goods will provide at least as favourable of a classification for imported goods. Reducing trade barriers on agriculture has proved to be one of the most sensitive issues but as of January 1st, 2008, all agricultural tariffs between the two countries have been phased out.

1/2 of all agricultural trade in terms of value became duty-free when NAFTA was signed, other tariffs were slowly phased out. Another issue that needs addressing in a free trade agreement is origin rules because countries in a free trade bloc don’t have identical external tariffs that other countries can try to exploit this loophole to get around trade barriers.

For example, well Mexico can export t-shirts to u.s. duty-free. A Japanese company has tariffs added to the cost of their t-shirts when they export to the United States to get around that tariff they can manufacture their t-shirts in Mexico and sell them to u.s. duty-free. That’s ok as long as they are truly being manufactured in Mexico. The trouble starts when they’re adding very little value to the product in Mexico and merely using it as a way around the tariff because of that NAFTA has complicated and specific rules of origin about what counts as a Mexican t-shirt to use.

Our example again that is how much of the raw materials had to be produced in Mexico?

How much of the manufacturing of the t-shirt had to take place in Mexico?

Or generally, the guideline is that Goods not or originating from the United States Mexico or Canada must be significantly transformed or processed and one of those countries before they received NAFTA, does lower duties for shipment to one of the two other countries. 

NAFTA  – A brief history

North American Free Trade Agreement (NAFTA) came into force in 1994. It did away with most of the trade barriers that existed between Canada, the United States and Mexico.

Now before NAFTA, there had been a free trade deal just between Canada and the US. Prime Minister Brian Mulroney and President Ronald Reagan have signed that controversial deal six years earlier but then Mexico started pushing for its own trade deal with US and Mulrooney decided Canada had better be at the table.

When people caught wind of NAFTA an even broader trade agreement the debate about whether free trade is good or evil flared up yet again.

Foreign trade is the key to prosperity

Pre-tied will bring on a great depression“, proponents of free trade argued the deal would create jobs and bring prosperity to all three nations. Opponents said it was selling out Canadian sovereignty. Similar debates were happening south of the border.

This was the first time two advanced economies attempted a trade deal with a developing country and there was a lot of fears at low wages in Mexico would steal away jobs, but in the end, the three leaders succeeded in drafting the agreement.

North American Free Trade Agreement NAFTA

Assuring in the North American free trade era, even the election of two NAFTA critics Bill Clinton in 1992 and John Christian in 1993 didn’t derail the deal. Phil and John merely tinkered with it adding minor side deals on environment and labour rights and it wasn’t just about the trading of duty-free goods.

NAFTA also protect intellectual property rights and created an independent body to resolve trade disputes which brings us to the question, has a been a good thing? Most economists would say it works out pretty well for everyone.

Trade between the three countries has almost quadrupled since the deal came into effect. Critics point to lost manufacturing jobs in the US and Canada but that’s largely a result of other factors like China’s rise, technological change and an ageing workforce and most of us seem to approve.

A recent poll found that just 51 % of American and 60% of Mexicans like NAFTA

But Trump threats to tear up NAFTA mean the trade deal is history.

Read more: USA Vs China: Effects Of A Trade War.

The real problem with NAFTA

North American Free Trade Agreement (NAFTA).

What about the competition of foreign labour?

Do US workers lose their jobs when goods are imported these days?, everybody seems to be talking about NAFTA(The North American Free Trade Agreement).

Trump says NAFTA is a rotten deal for the United States wants to fix it. NAFTA before fast forward to now 3.5 billion dollars in trade flows among the three countries. Every single day there was more than 750 billion dollars in trade between Canada and the US. Last year that makes the U.S. by far Canada’s biggest trading partner.

None of this was too controversial until Trump came along, he blamed NAFTA for gutting US manufacturing and said American workers were getting ripped off true to his word. He wants to renegotiate the deal and says that if he doesn’t like it the US will pull out.

He said “We are renegotiating a trade deal that props up hundreds of billions of dollars in trade each year. what can we expect to happen for Canada there are a few sticking points the Americans want to sell more of their dairy products in Canada but that would mean tinkering with Canada’s long-standing measures to protect our dairy industry a system called Supply Management”.

The politicians have repeatedly promised to protect over the year there’s also an American demand to remove an international dispute resolution panel from the agreement so that US companies claiming they’re being mistreated can have their cases heard in an American program.

It’s a complicated thing but the bottom line is this the Canadian government doesn’t want NAFTA to be killed but assuming it survives.

Top 10 NAFTA facts of North American Free Trade Agreement (NAFTA)

Number 10 – NAFTA did not originate with Clinton

Nowadays many people talk as if President Bill Clinton single-handedly made NAFTA happen. In reality, though talk of a trade agreement between the three North American countries goes back to 1979.

When Ronald Reagan announced his presidential candidacy “it’s time we stop thinking of our nearest neighbours as foreigners”, after the signing of a 1988 free trade agreement between Canada and the US.

                                                       Source: ReaganFoundation

Canada made a concerted push for a trilateral agreement in 1991. George HW Bush actually signed the pact in 1992 but it was not approved by Congress until Bush left office. Congress passed the agreement in late 1993 during Clinton’s first term. After which it was signed into law and went into effect early the next year but only after two side agreements were put in place to help protect workers and the environment.

Number 9 – Several Canadian groups challenged part of it

Various sections of North American Free Trade Agreement (NAFTA) have faced criticism but chapter 11 has proven particularly controversial. This is the part which allows a person or a company to sue one of the Pact countries when it does something that restricts profits.

Opponents of this chapter believe that such legal action can force a country to partake in environmentally or socially destructive practices.

well yeah, the frustration is that this is the 82nd pipeline they want permission to build across the border any one of the bills without any problem the 82nd is now the problem. Canada has borne the brunt of this with more than 70% of actions brought against that country.

On more than one occasion Canada has lost and been forced to go against their own environmental policies. As a result, various groups have long denounced chapter 11 as unconstitutional but to no avail.

Number 8 – Mexico imports a lot of USA stuff

As you know Mexico is the second largest buyer of US commodities and manufacturing. Although many opponents of NAFTA talk about perceived US losses under the agreement one area where the US has gained is in its exports to the south.

According to a 2016 report Mexico imports more from the US than do the nations that make up the brick block.

That is to say, Mexico alone is importing more from the US than Brazil, Russia, India and China put together and it’s across a wide range of products from agriculture to auto parts but turnabout is fair play the USA ends up as the target point for 80% of Mexico’s exports.

Number 7 – NAFTA plays to a Canadian strength in jobs

It might go without saying but international trade is a very important component of the Canadian economy. In fact, it’s estimated that about 20% of all Canadian jobs are involved in or related to trade with other countries.

Remember the nature of our economy is changing a little bit we’re moving from a manufacturing economy to a services economy so that it would be normal I think that you’d expect to see that’s where we find the growth in employment.

The services sector, in particular, has benefited over the years since NAFTA began. Canada has gone from importing more high-value services from the US than it exported to the exact opposite. Furthermore, those employed by the oil industry significantly benefit from the increased exportation of that product to the US.

Number 6 – The agreement shifted trade balances

When NAFTA went into effect everyone knew it would result in significant change but predicting exactly what those changes would be was difficult. Certainly many predicted a shift in trade balances but not everyone knew they would be as dramatic.

As they have been for example in 1993, us-Mexico trade resulted in a net trade surplus of roughly five billion dollars for the United States. In 2014 that had changed into a fifty-four billion dollar deficit. Conversely the 1993 trade deficit of nearly three billion dollars u.s. ran with Canada turned into a six billion dollar surplus in 2015.

That’s quite a shift across both borders if lots of people are going to bring money to invest in u.s. that’s going to mean a stronger dollar which is going to mean less competitive manufacturing.

North American Free Trade Agreement NAFTA

Number 5 – Opponents were worried about more than jobs

Well, there’s largely a lack of public awareness of labour conditions of farm workers in Mexico. One of the quoted arguments against North American Free Trade Agreement NAFTA is the potential loss of jobs but in the lead-up to the signing of this agreement.

Opponents voiced a number of other serious concerns beyond job loss. Many people worried about possible worker exploitation pointing to labour conditions in many Mexican factories as being substandard.

Beyond human rights paying less for labour in one country also had the potential to hurt wages in all of the Pact nations in order to stay competitive. Many were also anxious about the environmental effect such as increases in pollution brought about by more manufacturing in areas with lacks environmental safeguards

Number 4 – There’s disagreement about NAFTA’s impact on the US

For decades Washington has allowed other nations to wipe out millions of American jobs through unfair trade practices. NAFTA was presented as a way to generate job growth and economic development for all the countries involved but it’s hard to objectively measure its performance. NAFTA did not occur in a vacuum world events likely affected it in many ways.

Critics cite a loss of as many as seven hundred and fifty thousand manufacturing jobs a depression in manufacturing wages and weakened environmental standards. Well, we really under predicted what the damage would be so there has been a large increase in trade but a lot of it’s been a flood of new NAFTA import. Champions counter with the creation of as many as five million jobs lower prices for consumers and reduced government spending.

One study by the Peterson Institute for International Economics reveals a definite benefit but one that only works out to roughly four hundred dollars per person.

Number 3 – Manufacturing went down wages went up

What the Democrats at that point we’re ready to say and that is that NAFTA was going to cause America to lose millions of jobs. When discussing the impact of NASA there is often a seesaw effect one thing goes down while another goes up and that’s definitely the case here.

The US had already been experiencing a decline in manufacturing before NAFTA but that decline significantly accelerated in the years that followed. On the other hand wages and manufacturing actually went up from 1994 to 2004 pay for manufacturing jobs increased on average from 34%.

So there may have been fewer factory jobs but those that remain paid better ideally, of course, there’d be more jobs and better-paying jobs but nobody ever said NAFTA was ideal.

Number 2 – Those lost jobs might not have been NAFTA fault

One of the most damning accusations flung against NAFTA involves the loss of all those appears mentioned manufacturing jobs. After all, even if jobs are created in other sectors of the economy that doesn’t necessarily help someone whose training hasn’t prepared them for jobs in those sectors.

According to economist Walter Kenzie’s, however, it’s likely that many of those jobs would have been lost even if there had been no NAFTA.

The emergence of China as a major international economic force it’s low-priced manufacturing abilities probably had a greater effect than NAFTA as did technological advances during the period.

Number 1 – Tariffs are not welcome under NAFTA

Certainly, Canada tries to do as much trade as it can in the United States and vice versa but always on the basis of following the rules and not cheating. Tariffs are taxes put on goods that are imported into a country and are typically used to increase sales of homegrown goods but tariffs are a no under NAFTA and under most free-trade agreements.

The playing field is supposed to be levelled and tariffs do the opposite because of a pre-existing agreement there was already tariff-free trade between Canada and the US.

NAFTA immediately removed about 50% of the tariffs with Mexico then removed the rest by 2008. The Restoration of tariffs is sought by some but it’s difficult to make work in the NAFTA.

So, these are the 10 facts of NAFTA.

Now Let us Know in the comment what do you think about this Trade agreement is this agreement good for USA, Mexico and Canada.