The North American Free Trade Agreement

Outline

1. Introduction

2. About NAFTA

3. Expectations and Fears

4. Winners and Losers in Mexico
4.1. Growth of Trade and Financial Flows
4.2 Employment
4.3 Conclusion

5. Winners and Losers in the United States
5.1 Employment
5.2 Conclusion

6. Conclusion

7. Literaturverzeichnis

1. Introduction

In the wake of globalization, many countries are reducing trade barriers and tariffs, resulting in a rise of free-trade areas in which the participating countries trade freely among each other without any restrictions. The goal of these agreements is the increase of wealth in each nation’s economy. To reach this goal, the USA, Canada and Mexico negotiated the North American Free Trade Agreement (NAFTA) which came into effect on January, 1st 1994. It was the world’s largest free-trade area with a combined population of over 360m people and a total GDP of 6$ trillion. Today, the NAFTA area comprises a 12.5$ trillion economy and a 430m strong population. For the first time, two highly industrialized, rich countries affiliated themselves with a poorer, newly industrialized country.

At the time of its ratification, the agreement was extremely controversial in all three member states and opinions in political camps differed vastly. Supporters of the contract were mostly big companies and investors who were hoping that it would loosen restrictions and barriers on the capital market. Opponents of the agreement were trade unions which, especially in the United States, railed heavily against it. They feared outsourcing and massive job displacements to Mexico, a country in which labor is incredibly cheap and environment protection laws are lax or do not even exist. In Mexico, landowners were skeptical of NAFTA because they feared unfair competition with US-American farmers who are still to this day greatly subsidized by the government.

Even after more than a decade of statistics, data and hindsight impacts on the countries’ economies, the political debate over NAFTA remains emotional and divisive. US-American politicians, among them mostly Democrats including a presidential candidate for the party, are condemning the agreement and even calling for its abolition.

The goal of NAFTA is the elimination of all trade barriers between the three member states over a 15-year period, to be completed in 2009. The agreement also includes substantial reductions in non-tariff trade barriers like import quotas and licensing agreements but does not demand the complete elimination of these.

This paper about the North American Free Trade Agreement deals with the historical context, its development and eventual ratification process, the expectations and fears of supporters and opponents in the United States and Mexico, and finally the situation today, after 13 years of the agreement coming into effect.

2. About NAFTA

After Mexico entered the General Agreement on Trade and Tariffs (GATT) and opened up its market to foreign investors and financiers, then-President Carlos Salinas de Gortari announced in 1990 his intentions to negotiate a free trade agreement with the world’s biggest economy, the United States of America. He was hoping that such an agreement would benefit the Latin-American country enormously due to an anticipated rise of direct investment from US-American companies. Therefore until the ratification of NAFTA, Mexico was the driving force behind it.

In the United States, President George W.H. Bush was NAFTA’s strongest supporter but his Democratic rival in the 1992 election, Bill Clinton, was generally supportive of the free trade agreement as well. The strongest attacks, however, came from third-party politicians, such as Ross Perot and Ralph Nader, environmental groups and the US-American trade union AFL-CIO. Ross Perot’s infamous allegation of NAFTA causing a “giant sucking sound” by jobs and US capital fleeing to cheap Mexico was only one example of the virulent campaign against NAFTA during the US presidential election.

For the Democratic Party, NAFTA posed a challenge but presidential candidate Bill Clinton used his support of the contract to his advantage, promising side agreements on workers’ rights and environmental protection. He was therefore able to unite the Democrats under the banner of “free but fair trade”.

Like all trade agreements, the North American Free Trade Agreement is the outcome of an intensely complex negotiation process within and between all three nations. It took 14 months of bargaining and dealing and resulted in more than 100 pages of restrictive rules of origin which are both free trade-restraining and protectionist. The Mexican state argued for the retention of its state-owned oil company, Petróles Mexicanos (Pemex) which many Mexicans saw as a symbol of national sovereignty. The agricultural sectors of the United States and Canada remained heavily protected and subsidized by their governments and important farm products were excluded from free trade obligations.

The ultimate goal of the free trade agreement was the increase of economic growth in all member states by eliminating restrictions on the economic markets. Contractually agreed on aims is the creation of a free trade area, the reduction if not removal of tariff barriers and the increase of investment opportunities. The contract parties grant each other inland treatment^[1], meaning that goods from a NAFTA country have to be treated equally to goods from domestic producers and companies.

Even though the markets have been liberalized for most goods in the first couple of years of NAFTA, there are still temporary restrictions on many agricultural products such as maize, sugar and beans. The agreement did not include the free movement of workers however since the US-Americans public feared a wave of immigrants from Mexico to the States. Unlike other free trade agreements, NAFTA even contained regulations on cross-border services, such as financial services, in the energy sector and for the protection of intellectual property rights. After Bill Clinton took office in 1992, he fulfilled his campaign promise and attached two side agreements to NAFTA, one dealing with the workers’ rights (The North American Agreement on Labor Cooperation) and the other one with environmental protection (The North American Agreement on Environmental Cooperation).

In the years before the NAFTA negotiations, Mexico continued to liberalize its market and open it to foreign investors, especially US-American. So-called Maquiladora factories along the US-Mexican border were created due to special regulations on foreign investment and tariffs. These factories were able to import materials and equipment duty- and tariff-free for manufacturing and re-exporting the assembled product. After NAFTA was ratified, the expansion of maquiladora factories accelerated not only among the border but throughout the entire Mexican state.

Since 1974, Mexican companies were already allowed to export particular goods tariff-free to the United States under the Generalized System of Preferences and in 1993 half of the Mexican exports were delivered without any trade barriers. Since Mexico’s tariffs on foreign goods were substantially higher than those of the other two member countries, it implemented the largest reductions in tariff rates – from an average of 12 percent in 1993 to 1.3 percent in 2000. Mexican exports entering the United States considerably increased after 1994 as well from approximately 50 percent in 1993 to 85 percent in 2001 of the overall duty free US imports.

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^[1] Schirm, Stefan A. Globale Märkte, nationale Politik und regionale Kooperation – in Europa und den Amerikas –, Nomos Verlagsgesellschaft Baden-Baden, 1999, p. 164