North American Free Trade Agreement Summary

  • Last updated on November 10, 2022

The North American Free Trade Agreement reduced barriers to the flow of goods, services, and investment among Canada, Mexico, and the United States.

Summary of Event

Approval of the North American Free Trade Agreement (NAFTA) in 1993 was one in a long series of policy actions reflecting a commitment by the United States government to relatively unrestricted international trade and finance. This commitment began in 1934, when, in the depths of the Great Depression, the United States adopted a policy of reciprocal trade agreements. Agreements were negotiated whereby the United States reduced tariffs on the products of other countries that agreed to the do the same for U.S. products. This helped trade to expand and gave each country an opportunity both to sell more exports and to buy more imports. At the end of World War II, this policy was extended by the formation of the General Agreement on Tariffs and Trade General Agreement on Tariffs and Trade (1947) (GATT), which involved many countries negotiating at once. GATT negotiations involved a series of “rounds,” with the Uruguay round ending in new agreements in 1994. North American Free Trade Agreement (1993) Trade agreements [kw]North American Free Trade Agreement (Nov. 20, 1993) [kw]Free Trade Agreement, North American (Nov. 20, 1993) [kw]Agreement, North American Free Trade (Nov. 20, 1993) North American Free Trade Agreement (1993) Trade agreements [g]North America;Nov. 20, 1993: North American Free Trade Agreement[08760] [g]United States;Nov. 20, 1993: North American Free Trade Agreement[08760] [c]Trade and commerce;Nov. 20, 1993: North American Free Trade Agreement[08760] [c]Diplomacy and international relations;Nov. 20, 1993: North American Free Trade Agreement[08760] [c]Economics;Nov. 20, 1993: North American Free Trade Agreement[08760] Bush, George H. W. [p]Bush, George H. W.;North American Free Trade Agreement Clinton, Bill [p]Clinton, Bill;North American Free Trade Agreement Perot, H. Ross Salinas de Gortari, Carlos

Policy toward international trade has always been controversial. Most economists argue that relatively free international trade encourages each country to specialize in the products it can produce most efficiently. Advocates claim that competition is intensified and innovation encouraged, allowing consumers to benefit from lower prices and higher productivity. Such benefits were evident in products such as automobiles (after the 1950’s) and electronic products (after the 1970’s). However, within each country there are industries that believe they would not be able to compete with imports. U.S. companies producing clothing and shoes, for example, have complained that they are undersold by imports from low-wage countries such as China. One reason that wages are low in China, however, is that labor productivity has typically also been low there.

As NAFTA was being developed, many firms and labor unions opposed the liberalization of trade, arguing that competition from imports would reduce job opportunities. These issues were strongly debated in the presidential election of 1992. President George H. W. Bush had initiated and encouraged the formulation of NAFTA, and Democratic candidate Bill Clinton supported it, but independent candidate H. Ross Perot strongly opposed NAFTA. He claimed there would be a “giant sucking sound” as U.S. jobs were transferred to Mexico. Many environmentalists also opposed NAFTA, arguing that Mexican products had another unfair advantage because requirements for environmental protection were lax in Mexico. Some libertarian groups opposed NAFTA on the basis that it did not really provide free trade, because of the substantial bureaucratic involvement required to carry out its many complex provisions.

Supporters of NAFTA argued that many U.S. business firms would gain by improved access to Mexican markets. For example, privatization of the Mexican telephone system in 1991 created profit opportunities for U.S. firms that were among the world leaders in this high-tech sector. U.S. firms producing motion pictures, recorded music, television programs, and computer software received much revenue from sales to other countries and often were damaged by intellectual piracy. NAFTA offered them the prospect of improved protection of their intellectual property rights. Pro-NAFTA forces also argued that the treaty would increase the prosperity of the Mexican economy, increasing wage levels and decreasing the large flow of Mexican immigrants across the southern border of the United States. They also pointed out that the economies of Canada and Mexico were far smaller than that of the United States, and thus were unable to flood U.S. markets with goods.

NAFTA initialing ceremony, October, 1992. From left to right (standing): Mexican president Carlos Salinas de Gortari, U.S. president George H. W. Bush, and Canadian prime minister Brian Mulroney. Seated: Jaime Serra Puche, Carla Hills, and Michael Wilson.

(George Bush Presidential Library and Museum)

The treaty was first approved in Canada, where it was supported by the ruling Progressive Conservative Party, completing legislative approval on June 23, 1993. In the U.S. Congress, there was considerable opposition, but strong lobbying by President Clinton secured the treaty’s approval on November 20, 1993. In Mexico, support by the dominant Institutional Revolutionary Party of President Carlos Salinas de Gortari assured relatively easy approval on November 22, 1993.

As finally approved, the agreement was a long and complex document. It had four major types of provisions. First, NAFTA reduced, and promised to eliminate, all tariffs (taxes on imports) and most nontariff barriers (such as quantitative quotas on imports) among the three countries. These liberalizations were to be spread over fifteen years, but two-thirds of Mexican imports to the United States and half of U.S. exports to Mexico were duty-free or became so immediately. Government contracts were to be open to competitive bidding by firms from all three countries.

Second, NAFTA provided rules to protect investment and intellectual property rights. NAFTA expanded Canadian and U.S. companies’ ability to set up or buy a business in Mexico and made it easier for them sell out if they wanted to quit. U.S. and Canadian banks were given greater freedom to invest in Mexican banks. Restrictions on bringing profits back were removed. Protection of intellectual property rights involved patents, copyrights, trademarks, and computer software. U.S. firms strongly desired protection against people copying books, records, videotapes and audiotapes, and software without permission or payment of royalties. This had been more of a problem in Mexico than in Canada.

Third, NAFTA reduced barriers to trade in services, such as banking and finance, transportation, telecommunications, and audiovisual activities. Mexico extended temporary work permits to service providers from Canada and the United States.

Finally, NAFTA provided administrative procedures to settle disputes over the way each country applied the rules. Special commissions were created to exert influence over environmental policies and over labor market conditions.

Significance

NAFTA did not have a large immediate impact on economic relations between the United States and Canada, since their trade, services, investment, and intellectual property conditions were already on a relatively harmonious basis. For the first year after NAFTA’s adoption, both the United States and Mexico appeared to benefit. U.S. export sales to Mexico and imports from Mexico increased substantially. Mexico benefited from substantial capital inflow, increased production capacity, and improved technology. In December, 1994, however, Mexico Mexican peso crisis was hit by a financial crisis that resulted in a devaluation of the Mexican peso by about one-half. The International Monetary Fund International Monetary Fund attributed the panic to a reaction by Mexican investors to a large government deficit and declining foreign reserves. Inflation in Mexico had been running at a rate of nearly 200 percent per year. Feeling the peso was overvalued, investors sold Mexican securities and used the proceeds to buy dollars and other foreign currency.

Previous NAFTA opponents pointed to the panic as justification for their views, although the panic could not be traced directly to NAFTA. The panic led to severe economic depression in Mexico. As Mexican prices and incomes fell, Mexicans reduced their purchases of imports and U.S. export sales to Mexico fell by 40 percent in the spring of 1995. NAFTA did help cushion the impact of the crisis on the Mexican economy. Export-oriented areas, such as the city of Juarez, found their sales to the United States greatly increased. In 1995, there was a large inflow of direct investment by U.S. firms eager to buy or build factories and take advantage of the momentarily inexpensive Mexican property, labor, and materials.

Controversy over the impact of NAFTA has continued since its inception, with labor and liberal interests generally against the agreement and conservative interests generally for it. In 2001, the Economic Policy Institute, a nonprofit think tank devoted to “the economic condition of low- and middle-income Americans,” founded by academicians including economist Lester Thurow and former U.S. secretaries of labor Ray Marshall and Robert Reich, noted that all fifty U.S. states had experienced a net loss of more than 766,000 “actual and potential jobs” under NAFTA as of the year 2000. At the same time, U.S., Canadian, and Mexican government officials continued to hail the agreement as a success in lowering labor costs and increasing returns to companies and their investors. While the long-term effects on the economies of these nations remained to be seen, it appeared at the beginning of the twenty-first century that the agreement placed individual workers at a disadvantage when it came to job security and collective bargaining. The debate over NAFTA’s impact formed only part of a much larger discussion that had begun in 1994 at the Summit of the Americas. Summit of the Americas (1994) At that meeting, the heads of state of thirty-four democracies of the Western Hemisphere proposed the Free Trade Area of the Americas, an agreement to unite the economies of the Western Hemisphere into a single free trade zone by progressively removing all barriers to trade and investment. North American Free Trade Agreement (1993) Trade agreements

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Belous, Richard S., and Jonathan Lemco, eds. NAFTA as a Model of Development. Washington, D.C.: National Planning Association, 1993. Collection of twenty-one conference papers presents a good variety of viewpoints, including several from the perspective of Canada and Mexico.
  • citation-type="booksimple"

    xlink:type="simple">Cameron, Maxwell A., and Brian W. Tomlin. The Making of NAFTA: How the Deal Was Done. Ithaca, N.Y.: Cornell University Press, 2000. Provides some background on the diplomatic process and then presents a full account of the negotiations that resulted in the agreement. Includes chronology, bibliography, and index.
  • citation-type="booksimple"

    xlink:type="simple">Deere, Carolyn L., and Daniel C. Esty, eds. Greening the Americas: NAFTA’s Lessons for Hemispheric Trade. Cambridge, Mass.: MIT Press, 2002. Collection of essays focuses on the environmental impacts of NAFTA. Includes an appendix that lists the environmental provisions of the agreement.
  • citation-type="booksimple"

    xlink:type="simple">Grayson, George W. The North American Free Trade Agreement: Regional Community and the New World Order. Lanham, Md.: University Press of America, 1995. Presents a narrative history of the debates and negotiations surrounding NAFTA. Ends with the approval of the treaty.
  • citation-type="booksimple"

    xlink:type="simple">Kingsolver, Ann E. NAFTA Stories: Fears and Hopes in Mexico and the United States. Boulder, Colo.: Lynne Rienner, 2001. Presents a wide variety of viewpoints about NAFTA as revealed in stories told by people from many different backgrounds. Includes illustrations, bibliography, and index.
  • citation-type="booksimple"

    xlink:type="simple">Weintraub, Sidney, ed. NAFTA’s Impact on North America: The First Decade. Washington, D.C.: Center for Strategic and International Studies, 2004. Collection of essays examines the political, social, and nontrade influences of NAFTA in its first ten years and offers opinions regarding its likely impacts in the future.

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