What Is NAFTA and Why Do We Have It?

What Is NAFTA and Why Do We Have It?
In a 60 Minutes interview back in 2015, Donald Trump called NAFTA “the single worst trade deal ever approved in (the United States).” Fast-forward to today, and it seems President Trump is dead set on renegotiating a new deal that will reduce the American trade deficit and that is “fair for all Americans.”

However, all this recent talk about NAFTA has many confused. What is NAFTA? Why do we have it? And what purpose does it serve?

Here’s a quick overview.

What Is NAFTA?

NAFTA stands for North American Free Trade Agreement. The agreement was signed by Canada, Mexico, and the United States. In Spanish, it is the Tratado de Libre Comercio de América del Norte or TLCAN. In French, it is the Accord de libre-échange nord-américain or ALÉNA.

NAFTA came into force on January 1, 1994, and it essentially creates a trilateral trade bloc in North America. A trade bloc is a type of intergovernmental agreement where barriers to trade (tariffs and others) are reduced or eliminated among the participating nations. NAFTA replaced the Canada-United States Free Trade Agreement that had existed between the US and Canada since 1988.

The History of NAFTA

While NAFTA is commonly associated with President Bill Clinton, who signed the agreement into law, the idea of a “North American common market” actually has its roots in the 1979 Presidential campaign of Ronald Reagan. He made the idea of a free trade zone part of his candidacy, and ultimately won the election.

In 1984, Congress passed the Trade and Tariff Act, which gave the President the authority to “fast track” negotiations for free trade agreements.  In 1988, the Canada–United States Free Trade Agreement (FTA) was signed by the leaders of both nations.

Shortly afterward, President George H.W. Bush, who was then in office, was approached by Mexican President Carlos Salinas de Gortari. Salinas sought to reach a similar agreement between the US and Mexico. Latin America had suffered through a major debt crisis throughout the 1980s, and the Mexican President wanted to bring more foreign investment into his country.

The discussions between the United States and Mexico made the Canadian government uneasy. They felt that any advantages gained through the FTA could be undermined by a US/Mexican agreement. Canadian Prime Minister Brian Mulroney would soon ask to be a part of the talks, and in 1990, negotiations between the three countries began.

On December 17, 1992, the leaders of Canada, the US, and Mexico signed the NAFTA agreement. After much debate and consideration, the agreement was passed by both the House and the Senate in 1993. And NAFTA officially came into effect on January 1, 1994.

Why Do We Have NAFTA?

NAFTA was implemented as a way to provide mutual benefit to the economies of the three major North American countries. While NAFTA has become heavily politicized today, especially in the United States, the consensus among most economists is that the agreement has been beneficial to the North American economies and to the average citizen. At the same time, many have conceded that the agreement has hurt pockets of the American workforce, especially those in industries exposed to trade competition (though some would argue American manufacturing has been in decline since the 1960s).

The United States

For the United States, it seems the effects of NAFTA on the economy have been fairly minimal. While trade with Mexico and Canada has increased, this exchanging of goods only accounts for a small percentage of the total US GDP. In the US, NAFTA has been blamed for the loss of manufacturing jobs to Mexico. However, supporters of NAFTA would argue that without the agreement, more jobs would have been lost to China.

Mexico

For Mexico, many agree that the net results of NAFTA have been positive. The agreement has led to greater growth in non-border metropolitan areas, and has been credited with helping foster a Mexican middle-class. NAFTA also led to growth in the maquiladora sector (these are the assembly plants that take in imported components and produce goods for export). Conversely, the rise of maquiladoras has led to the debate over the loss of jobs in the US. Still, many in Mexico feel NAFTA has helped promote greater cooperation between Mexico and the US, and has made Mexico a truly “North American” country.

Canada

In 2008 alone, Canadian exports to the US and Mexico were at $381.3 billion. Most economists agree that NAFTA has been a net benefit to Canada, with an increase in productivity among many sectors that experienced tariff cuts. Furthermore, unemployment in Canada has fallen since the passing of the agreement.

NAFTA Today

While NAFTA’s overall effects on the United States have been fairly minimal, today, NAFTA remains a very controversial topic.

NAFTA supporters see the agreement as a benefit to all involved. They claim NAFTA has increased trade and economic output, created jobs, lowered prices, and led to more foreign investment. NAFTA detractors claim the opposite. They would assert that NAFTA has hurt blue-collar workers and led to a loss of jobs.

When President Trump took office, he promised to begin NAFTA renegotiations. Both Mexican and Canadian leaders have indicated they are willing to collaborate, but the President has threatened to withdraw from the agreement altogether if those negotiations fall through.

For now, it appears the future of NAFTA will remain uncertain.

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