NAFTA

Origins, Purpose, and Impact of U.S. Withdrawal

Written by SMM Approval
February 23, 2017

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. Article 102 of the NAFTA agreement outlines its purpose. There are seven specific goals:

  1. Grant the signatories Most Favoured Nation status.
  2. Eliminate barriers to trade.
  3. Facilitate the cross-border movement of goods and services.
  4. Promote conditions of fair competition.
  5. Increase investment opportunities.
  6. Provide protection and enforcement of intellectual property rights.
  7. Create procedures for the resolution of trade disputes.

While the objective of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico, most economic analyses indicate that the agreement has delivered a small net positive for the United States, a large net positive for Mexico and had an insignificant impact on Canada.

Specifically, the implementation of NAFTA brought the immediate elimination of tariffs on more than one-half of Mexico’s exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty-free. NAFTA also sought to eliminate non-tariff trade barriers and to protect the intellectual property rights on traded products.

A range of trade experts have said that pulling out of NAFTA as President Trump has proposed would have a range of unintended consequences for the U.S., including reduced access to U.S. biggest export markets, a reduction in economic growth, and increased prices for gasoline, cars, fruits, and vegetables. The Wall Street Journal has reported on the adverse economic consequences that ripping up NAFTA would have on the cotton and clothing sectors in U.S. border states.

According to Chad P. Bown (senior fellow at the Peterson Institute for International Economics): “A renegotiated NAFTA that would re-establish trade barriers is unlikely to help workers who lost their jobs — regardless of the cause — take advantage of new employment opportunities.” And Harvard economist Marc Melitz stated: “Recent research estimates that the repeal of NAFTA would not increase car production in the United States.” This, in turn, would cost manufacturing jobs.

Mexico is currently the United States’ 3rd largest goods trading partner with $531 billion in total (two way) goods traded during 2015. Goods exports totaled $236 billion; goods imports totaled $295 billion. Accordingly, the U.S. goods trade deficit with Mexico was $58 billion in 2015, and that’s what the fuss is all about.