NAFTA Pros and Cons in 2021: What Works and what doesn’t

NAFTA pros and cons
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NAFTA, the North American Free Trade Agreement, eliminated many tariffs and other limitations to trade between the U.S., Mexico, and Canada. Since then, trade between the three countries has seemed seamless. But not everyone has lauded this development. Let’s take a look at the pros and cons of NAFTA. 

Before we go on to list the pros and cons of NAFTA, we’ll give you a brief background of what NAFTA represents. Carefully read through!

What is NAFTA?

The North American Free Trade Agreement (NAFTA) was a treaty between Canada, Mexico and the United States that eliminated most trade tariffs between the countries. It went into effect on January 1, 1994.

The introduction of NAFTA spelled the first time two developed nations signed a trade agreement with an emerging market country. 

Through NAFTA, the three signatories agreed to exclude trade barriers between them. By eliminating tariffs, NAFTA increased investment opportunities

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What Is The Purpose Of NAFTA?

The North American Free Trade Agreement (NAFTA) came into realization in order to promote trade between the U.S., Canada, and Mexico. The agreement eliminated most tariffs on trade between the three countries.

The agreement was installed to eliminate trade limitations to agricultural, manufacturing, and other services. It also removed investment restrictions and protected intellectual property rights.

Small businesses and startups benefitted highly from the elimination of trade barriers as business transactions between Mexico, Canada, and the United States became less expensive and seamless.

Numerous tariffs–particularly those related to agriculture, textiles, and automobiles–were gradually phased out between January 1, 1994, and January 1, 2008.

Article 102 of the NAFTA agreement lists its purpose. There were/are seven specific goals.

  • Grant the signatories a “most-favored-nation” status.
  • Erase barriers to trade and facilitate the cross-border movement of goods and services.
  • Promote conditions of fair competition.
  • Increase investment opportunities.
  • Provide protection and implementation of intellectual property rights.
  • Create procedures for the resolution of trade disputes.
  • Create a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement’s benefits

The Benefits of the North American Free Trade Agreement (NAFTA)

Over time, NAFTA achieved six things for the participating countries. First, NAFTA granted most-favored-nation status to all co-signers. This entails that each of the member countries had a mutual relationship with none giving more attention to domestic investors than foreign ones. In the same light, they couldn’t offer a better deal to investors from non-member countries as contracts were shared amongst themselves.

Second, NAFTA scrapped many tariffs on imports and exports existing between the three member countries. This elimination of taxes on foreign goods helped reduce the cost. In addition, NAFTA created specific rules to regulate trade in farm products, automobiles, and clothing.

Third, the introduction of NAFTA led to the introduction of Certificates of Origin to waive tariffs amongst member nations. This entails that a product made in Peru but shipped from Mexico will still pay tariffs before or on entering the United States or Canada.

Fourth, NAFTA established regulations and procedures to resolve disputes. This helped the three countries stay out of lawsuits in local courts as matters were settled internally.

Fifth, all NAFTA countries were required to respect patents, trademarks, and copyrights. At the same time, the agreement ensured that these intellectual property rights didn’t interfere with trade.

Sixth, the agreement allowed business travelers easy access throughout all three countries. 

What Are The Pros and Cons of NAFTA?

Despite the excitement that followed suit after the introduction of NAFTA in 1994, time and tales gave rise to contradicting views and murmurs that expressed discomfort while exposing the loopholes in the trade agreement. Let’s take a quick look at the pros and cons of NAFTA.

PROSCONS
The agreement reduced and eliminated tariffs amongst member-countries.NAFTA led to the loss of U.S. manufacturing jobs.
NAFTA led to increased economic output.Job migration and suppressed wages
NAFTA improved foreign direct investmentNAFTA put Mexican farmers out of business
The introduction of NAFTA ushered in a reduction in the price of goods.NAFTA suppressed wages for non-college-educated workers in the U.S.
NAFTA improved diplomatic relations amongst member-countries.The farmers were made to work to work in substandard conditions in the maquiladora program.
NAFTA increased exports and created regional production blocs.U.S. companies degraded the Mexican environment to keep costs low.

Pros explained

#1 The agreement reduced and eliminated tariffs amongst member-countries:

The NAFTA agreement reduced and eliminated certain tariffs from transactions involving the three countries.

#2 NAFTA led to increased economic output:

The U.S. International Trade Commission found that that full NAFTA implementation would increase U.S. growth by as much as 0.5% per year.

#3 The introduction of NAFTA led to a reduction in the price of goods:

The lowered tariffs led to a decrease in the price of goods. As such, the average American benefitted from the tide. Lower prices are good for Americans’ budgets and increase our purchasing power.

#4 NAFTA improved diplomatic relations amongst member-countries:

The introduction of NAFTA promoted and strengthened the diplomatic relationship between the three-member nations. This is said to be so because of the existing economic relationship that seems to favor the three countries.

#5 NAFTA improved foreign direct investment

According to data from thebalance.com, foreign direct investment (FDI) more than tripled. The United States increased FDI in Mexico from $15.2 billion in 1993 to $104.4 billion in 2012, and from $69.9 billion in Canada in 1993 to $352.9 billion in 2015. Mexico ramped up investment in the United States by 1283% over the same time period, while Canada’s FDI increased by 911%.

#6 NAFTA increased exports and created regional production blocs.

According to thebalance.com, nearly 200,000 export-related jobs are created annually. Those jobs pay between 15-20% more than the manufacturing jobs that moved out of the U.S. post-NAFTA. And even in manufacturing, NAFTA led to cooperation between countries, creating new, regional industries, where different parts are made in the different signatory countries. This, in turn, some analysts say, has helped North America compete with Asian manufacturing powerhouses.

Cons explained

#1 NAFTA led to the loss of U.S. manufacturing jobs

Certain estimates indicate that it led to job losses. A 2011 report from the Economic Policy Institute estimated a loss of 682,900 jobs. Other estimates estimate a loss of 500,000-750,000 U.S. jobs. Most were in the manufacturing industries in California, New York, Michigan, and Texas. Though the estimated job gains top those lost, certain industries were particularly impacted, including manufacturing, automotive, textile, computer, and electrical appliance industries.

#2 Job migration and suppressed wages

Job migration suppressed wages. Companies were eager to move to Mexico to keep workers from joining unions. Without the unions, workers could not bargain for better wages. This strategy was so successful that it became standard operating procedure. Between 1993 and 1995, 64% of all companies used it. By 1999, that rate had grown to 71%. 

#3 NAFTA put Mexican farmers out of business

NAFTA sent a lot of Mexican farmers out of business. It allowed U.S. government-subsidized farm products into Mexico. Local farmers could not compete with subsidized prices. As a result, 1.3 million farmers were put out of business, according to the Economic Policy Institute.

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#4 NAFTA suppressed wages for non-college-educated workers in the U.S.

While the manufacturing sector of the U.S. economy suffered the heaviest job losses in the wake of NAFTA, wages decreased in many other sectors that don’t require workers to have a college degree. Competition from workers in Mexico, who earn lower wages than U.S. workers on average, exerted downward pressure on U.S. wages, too.

#5 The farmers were made to work to work in substandard conditions in the maquiladora program

Unemployed Mexican farmers were forced to work in unfavorable conditions in the maquiladora program. Maquiladora is where the United States-owned companies employ Mexican workers near the border. Employment in maquiladoras rose 120,000 in 1980 to 1.2 million in 2006

Final Thoughts

While there were good and bad outcomes from the creation of free trade agreement between the United States, Canada, and Mexico, NAFTA created a solid framework that transformed the trade relationship between the member nations.

Nonetheless, USMCA was introduced as an upgrade in a bid to modify the trade agreement to suit recent times. Therefore, this article is of the view that trade agreements should be renegotiated on a progressive basis to sustain relevance.

References

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