North American Free Trade Agreement is a regional trade agreement that was entered by the United States, Canada and Mexico on January 1, 1994, with the aim of bolstering trade relations and volumes in the region. Just like any other free trade area agreement, NAFTA was intended to reduce the business trading costs amongst the three countries for the benefit of the member states.
This paper discusses the many advantages and positive aspects that have been brought about by this trading block, and the impact that this free trade agreement has had on the economies and citizenry of the company that it operates, with specific interest in United States of America and Canada. Some of the main points that will be discussed in this paper include increased trade volumes as a result of reduced tariffs, creation of employment, bolstering of trade and diplomatic ties, increased foreign direct investments in all the member states as well as increased market for products from all the member states.
Increased trade
NAFTA is credited for having quadrupling trade between the member states, from $297b before the start of the agreement to approximately $1.6trillion in the year 2009.While the 2008 financial crisis had some impact on the trade volumes, it’s evident from statistics available at the Department of Commerce that NAFTA had a major role to play in the stabilization of the economy of the region after the 2008 shake ups (Office of the US Trade Representative, NAFTA). Statistics also show that the US sold 32.2% of her exports to NAFTA partners in the year 2010
The major stimulus for this increased trade has been the reduction or abolishment of trade tariffs and other taxes that had been in the previous periods. This enabled the trading partners to engage more, and to exchange more goods and services as opposed to the previous periods when the inhibitive taxes had hampered trade in the region.
Increase in real wage
According to an article appearing in the Washington post of November 2012, a study conducted by research economists from the federal reserve found out that the was increases in all the three member states had marginally increased, reflecting real benefits to the citizenry. For instance, the US noted an increased wage by about 0.17%, Mexico by close to 1.3% and Canada by 0.96%. While it’s difficult to attribute the increase in real wages to NAFTA solely, it’s evident that there is a significant contribution by NAFTA in these statistics.
Decrease in tariffs/ abolishment
A tariff by definition is a tax that is employed by the government with an intention of controlling the flow of goods from other states/countries, mainly to protect domestic companies or even to punish another country for their foreign trade policy. These tariffs are costs to consumers and normally reduce consumption as the goods involved become expensive. When consumption is discouraged due to high costs of importation as a result of these tariffs, then international or regional trade is minimized. The use of NAFTA to reduce or abolish these trade tariffs and other restrictions not only made the trade volumes among the member states to increase but significantly raised the living standards of the citizenry as they are able to afford most of the merchandise.
Job creation
Data available at the US chamber of commerce indicates that trade volumes as a result of NAFTA support approximately 5 million jobs in the US alone. This is supported by the assertion that before the NAFTA agreement was signed, unemployment rate in the United States stood at about 7.1% but this has since reduced to about 5.1percent. The chamber, however notes that from the year 2008 to 2012, unemployment rate had increased marginally, mainly due to the global financial crisis, but notes that the situation would have been worse, without the input of NAFTA in this regard. Similar statistics from Canadian internal ministry also indicate that the demand for Canadian products in both the US and Mexico has had an impact on the employment rates in the country as the production plants need more labor to meet the demand for the goods outside of Canada.
Increase In farm exports
Before entering into this NAFTA, US agricultural exports were actually insignificant, but statistics now show that agricultural exports to Canada and Mexico which are mainly agriculturally rich nations have increased significantly. In fact, it accounts for about 22percnt of all the US farm exports, which is a significant proportion considering the US total trading volumes. (U.S. Foreign Agricultural Service, NAFTA) Some of the products exported by the US to the other partners include beef, rice corns, beans and apples among others (NAFTA facts, 2008)
Increase in service trade
Service industry accounts for slightly over forty percent of the US GDP, mainly health care and financial services. These are services that cannot easily be transported and therefore, having a ready and close market is of critical essence in ensuring that the revenues from these services are increased. Latest data available from NAFTA facts indicate that services trade has increased by almost four times from the onset of NAFTA agreement in 1994. This is because NAFTA removes all trade barriers in services industry and requires that the government publishes all the costs involved in any trade to avoid hidden costs that affect business operations.
Reduced reliance on oil from the Middle East
The NAFTA has been a very key pillar in the US diplomatic and foreign policy arrangements. Before the onset of NAFTA, the US imported her oil mainly from the Middle East countries of Iran, and Venezuela, Saudi Arabia etc. It’s now particularly important that now the US does not import her oil from these countries with which the US currently has sour diplomatic ties. The US is therefore able to import her oil from Mexico, which is a friendly nation, and therefore reduce the tensions in these other countries. Of important to note is that countries like Venezuela and Iran have even gone ahead to sell their oil in other currencies other than the US dollar and this has led to the loss of value of the US currency. It’s notable too, that NAFTA abolishes tariffs on oil products and therefore oil is cheaper for the US too.
Increased Foreign Direct Investments (FDI)
Normally, international trade, or even regional trade is critical element of foreign direct investment. This is because companies in any of these nations is now free to set up operations in any of the member states and this leads to significant benefits to the nations involved as a result of investments that come into the country.
For instance, since the enactment of NAFTA, foreign direct investments by the US in both Canada and Mexico amounted to $ 357 billion in 2009, from approximately $105 in the earlier year. Canadian and Mexican investments in the us also grew to approximately $237.2 as compared to about $ 219billion reported in 2007, and this explains the growth of these economies in this period.
NAFTA encourages foreign direct investments by reducing the investor’s risks. This is done by guaranteeing them that they will have the same legal rights just as the local investors. In fact, the investors can take legal action against a government that openly discriminates against them or forcefully acquires their property. (USTR, NAFTA Section Index)
Canada
The above discussion has been centered mainly on the impact that NAFTA has had mainly to the United States. The large portion of the remainder of this paper will be centered on the impact that NAFTA has had on the economy of Canada.
Canada boasts o significant benefits that have been as a result of NAFTA arrangement. In summary, Canada has benefited from among others,
- Significant investment by the US in automotive production,
- Increased exports of oil to the United States and the rest of the world
- Increased exports of agricultural and farm products to the other trading partners
- The large US market for beef, agricultural, and paper products as well as wood products in the United States.
These are some of the unique benefits that have accrued to Canada with regard to this trade agreement, in addition to what has been discussed in the first part of this essay. Other benefits that have been as a result of this trade include development of cities such as Ontario, Windsor that have benefited from their proximity to Detroit, the main automotive production city in the United States.
Canada also benefited from the increased traffic in her ports as there was a significant shipment to and from the trading partners and this caused great traffic at the ports and therefore revenues for the country.
US investments also provided higher paying jobs mainly in agribusiness, aerospace, automotive and transportation sector among other industries and this made a significant contribution to the Canadian middle class who are mainly the determinants of consumption and key drivers of economic growth.
Generally, NAFTA demonstrates the tangible benefits that accrue to a region as a result of forming an economic block. Its noted that NAFTA created the largest free trade area in the world, covering well over 426 million people and goods and services worth over $12 trillion and has enabled the partners to engage in a very open and beneficial trading relationship which has clear legal and enforcement framework with a clear goal of economic and regional integration amongst the member states.
Some of the other notable tangible benefits or successes of NAFTA include’
Significant economic growth United states 38%, and Canada 30.9% and Mexico 30% economic growth in the period.
Significant increase in trade volumes with the region and trading partners is also a notable plus factor for NAFTA. It’s important to note that NAFTA represents not less than one third of the worlds GDP, and is even larger than that of the European Union.
The dismantling of all the barriers to trade by this agreement led to opening of new markets and economic growth among the member states as explained above. In fact, there is guaranteed trade of $1.7billion trilateral trade each day, which demonstrates the levels of trade in this region.
Besides the trade aspect of this trade agreement, NAFTA is also lauded for the contribution to environmental conservation. Through the North American Agreement and Environmental cooperation NAFTA has been at the forefront in the enforcement of environmental laws and regulations.
Commission for Environmental Cooperation CEC, A body created by NAFTA, all the member states have benefitted from this cooperation in increasing the effectiveness of conservation efforts in the Northern region.
This has been done through
- Developing their priorities in consideration of the protection of certain plant and animal species.
- Development of North American conservation action plans for the shared marine species for these regions.
- The region has also set up common mechanism for the management and conservation of the ecosystem
- NAFTA has an open and formal policy in which the populace can raise concerns about labor law enforcement directly with their governments. NAFTA partners have also gone to great extends to ensure that all the environmental and labor issues are adequately addressed and enforced in all the member states.
Conclusion
While the overall impact in terms of financial empowerment has been generally positive for the member countries, the proponent of this trading block agree that this has not lived up to the expectations. Critics argue that despite these positive activities and outcomes, there have been quite some negative outcomes from this arrangement. Key among this is the fact that the living standard of some of the people living in some of the member states did not improve even with the arrangement in place, especially those in manufacturing as their salaries have not been increased mainly due to competition with the open market. This has been attributed to the fact that its common knowledge that any drastic market changes that is not dictated by the forces of demand and supply is likely to witness both opportunities as well as losses.
While a lot of thought and studies have gone into the development of the NAFTA framework, few suggestions would help in bettering this trade arrangement for the maximum benefits of all parties involved. First of these suggestions is to have a ceiling of the amount of wages that can be paid to a worker, depending on the task that they perform. This can be made standard for all the three member states. Another suggestion is to have more members to join this arrangement so as to increase the market base, as well as benefit a larger area, and therefore improve the living standards of the citizenry in those areas.
References
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Hufbauer, G. C. & Yee W (2003) security and the economy in the North American context: the road ahead for NAFTA. Canada-United States Law Journal.2003, Vol. 29, p53-69. 17p.
Twenty Years Later, NAFTA Remains a Source of Tension.
Aguilar, J (2012). New York Times.12/7/2012, p25A. 0p. Reading Level (Lexile): 1380.
Regional Business News
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The NAFTA secretariat: Adapted from https://www.nafta-sec-alena.org/Default.aspx
NAFTA: Adapted from: http://www.naftanow.org/
NAFTA Facts (2009)
