NAFTA’s history, purpose, its problems and why it was renegotiated

The North American Free Trade Agreement’s purpose is to reduce trading costs, increase business investment, and help North America be more competitive in the global marketplace. The agreement is between Canada, the United States, and Mexico. Review these fast facts about NAFTA to get up to speed on its impact on these three economies since it was enacted.

History

President Ronald Reagan proposed a North American common market in his 1980 presidential campaign. Europe’s common market, dubbed the European Economic Community, had already been initiated with the Treaty of Rome.

In 1984, Congress passed the Trade and Tariff Act, which itself built upon and amended a prior Trade Act of 1974. The 1984 gave enhanced “fast-track” authority to negotiate bilateral free trade agreements, streamlining negotiations.

In 1985, Canadian Prime Minister Mulroney agreed to begin discussions for the Canada-U.S. Free Trade Agreement. Negotiations began in 1986 and it was signed 1988. It went into effect on January 1, 1989, and remained in force until NAFTA replaced it.

In 1990, Mexican President Carlos Salinas de Gortari requested a free trade agreement with the U.S. In 1991, Reagan’s successor, President George H.W. Bush, began negotiations with President Salinas for a liberalized trade agreement between the two countries. Before NAFTA, Mexican tariffs on U.S. imports were much higherthan U.S. tariffs on Mexican imports. Canada also joined the discussions.

In 1992, NAFTA was signed by outgoing President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney. Earlier that year, the European Union had been created by the Treaty of Maastricht.

Concerns about the liberalization of labor and environmental regulations led to the adoption of two addendums. NAFTA was ratified by the legislatures of the three countries in 1993. The U.S. House of Representatives approved it by 234 to 200 on November 17, 1993. The U.S. Senate approved it by 61 to 38 three days later.

President Bill Clinton signed it into law on December 8, 1993. It entered into force on January 1, 1994.

Purpose

Article 102 of the NAFTA agreement outlines its purpose. There are seven specific goals.

  1. Grant the signatories most-favored-nation status.
  2. Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
  3. Promote conditions of fair competition.
  4. Increase investment opportunities.
  5. Provide protection and enforcement of intellectual property rights.
  6. Create procedures for the resolution of trade disputes.
  7. Establish a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement’s benefits.

NAFTA Fulfilled Its Purpose

NAFTA fulfilled all seven of its goals, establishing the region world’s largest free tradezone in terms of gross domestic product. It increased investment in the three countries. Until the last of its changes came into effect in 2008, it lowered or eliminated tariffs between the three countries and allowed trade to triple. Most important, it increased the competitiveness of the three countries in the global marketplace. 

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Why Trump Renegotiated NAFTA

Trump was responding to the critics of NAFTA. U.S. opponents focus on the first two of NAFTA’s six major problems:

  1. Loss of U.S. jobs.
  2. Suppression of U.S. wages.
  3. Mexico’s farmers were put out of business.
  4. Not enough environmental protections in Mexico.
  5. Free U.S. access for Mexican trucks.

NAFTA has six major benefits in addition to these problems.

USMCA

In August of 2018, Trump and Mexico reached a bilateral trade deal to replace NAFTA, threatening to leave out Canada. Canada joined on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. It must be ratified by each country’s legislature.

The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal changes NAFTA in six areas, including a rule that auto companies must manufacture at least 75 percent of the car’s components in the USMCA’s trade zone or else be subject to tariffs.

NAFTA Was an Issue in the 2008 Presidential Campaign

NAFTA was attacked from all sides during the 2008 presidential campaign. Barack Obama blamed it for growing unemployment. He said it helped businesses at the expense of workers in the United States. It also did not provide enough protection against exploitation of workers and the environment.

During her campaign, Hillary Clinton called the agreement flawed. Both candidates promised to either amend or back out of the agreement altogether. Obama didn’t fulfill these promises. 

In 2008, Republican candidate Ron Paul said he would abolish the trade agreement. He said it would create a “superhighway” and compared it to the European Union, though NAFTA does not enforce a single currency among its signatories. Paul maintained this position in his 2012 campaign.

Republican nominee John McCain supported NAFTA, as he did all free trade agreements.

Ross Perot

In 1992, before the trade agreement was even ratified, Independent presidential candidate Ross Perot famously warned, “You’re going to hear a giant sucking sound of jobs being pulled out of this country.” Ross predicted that the United States would lose 5 million jobs to lower-cost Mexican workers, or 4 percent of total U.S. employment.

Perot’s prediction never happened. While it’s difficult to evaluate the impact of the trade agreement amid other factors, research suggests that NAFTA created more jobs than were lost.

NAFTA’s 6 Negative Effects

NAFTA has been criticized for taking U.S. jobs. While it has also done good things for the economy, the North American Free Trade Agreement has six weaknesses. These disadvantages had a negative impact on both American and Mexican workers and even the environment.

1. U.S. Jobs Were Lost

Since labor is cheaper in Mexico, many manufacturing industries withdrew part of their production from the high-cost United States. Between 1994 and 2010, the U.S. trade deficits with Mexico totaled $97.2 billion. In the same period, 682,900 U.S. jobs went to Mexico. But 116,400 of those jobs were displaced after 2007. The 2008 financial crisis could have caused them instead of NAFTA. 

Almost 80 percent of the losses were in manufacturing. The hardest-hit states were California, New York, Michigan, and Texas. They had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances. 

2. U.S. Wages Were Suppressed

Not all companies in these industries moved to Mexico. But some used the threat of moving as leverage against union organizing drives. When workers had to choose between joining the union and losing the factory, workers chose the plant. Without union support, the workers had little bargaining power. That suppressed wage growth. According to Kate Bronfenbrenner of Cornell University, many companies in industries that were moving to Mexico used the threat of closing the factory. Between 1993 and 1999, 64 percent of U.S. manufacturing firms in those industries used that threat.

By 1999, the rate had grown to 71 percent.

3. Mexico’s Farmers Were Put Out of Business

Thanks to NAFTA, Mexico lost nearly 1.3 million farm jobs. The 2002 Farm Bill subsidized U.S. agribusiness by as much as 40 percent of net farm income. When NAFTA removed trade tariffs, companies exported corn and other grains to Mexico below cost. Rural Mexican farmers could not compete. At the same time, Mexico reduced its subsidies to farmers from 33.2 percent of total farm income in 1990 to 13.2 percent in 2001. Most of those subsidies went to Mexico’s large farms. These changes meant many small Mexican farmers were put out of business by highly subsidized American farmers.

4. Maquiladora Workers Were Exploited

NAFTA expanded the maquiladora program by removing tariffs. Maquiladora is where United States-owned companies employ Mexican workers near the border. They cheaply assemble products for export back into the United States. The program grew to employ 30 percent of Mexico’s labor force. The workers had “no labor rights or health protections,” according to Continental Social Alliance. In addition, the “workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job.” 

5. Mexico’s Environment Deteriorated

In response to NAFTA’s competitive pressure, Mexican agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into marginal land, resulting in deforestation at a rate of 630,000 hectares per year. 

6. NAFTA Called for Free U.S. Access for Mexican Trucks

Another agreement within NAFTA was never implemented. NAFTA would have allowed trucks from Mexico to travel within the United States beyond the current 20-mile commercial zone limit. A demonstration project by the Department of Transportation was set up to review the practicality of this. In 2008, the House of Representatives terminated this project. It prohibited the DOT from implementing it without Congressional approval.

Congress worried that Mexican trucks would have presented a road hazard. They are not subject to the same safety standards as U.S. trucks. U.S. truckers’ organizations and companies opposed it because they would have lost business. Currently, Mexican trucks must stop at the 20-mile limit and have their goods transferred to U.S. trucks.

There was also a question of reciprocity. The NAFTA agreement would have allowed unlimited access for U.S. vehicles throughout Mexico. A similar arrangement works well between the other NAFTA partner, Canada. But U.S. trucks are larger and carry heavier loads. They violate size and weight restrictions imposed by the Mexican government. 

USMCA

Partially because of these disadvantages, the United States, Mexico, and Canadarenegotiated NAFTA on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. It must be ratified by each country’s legislature before going into effect.

The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal changes NAFTA in six areas. The most important is that auto companies must manufacture at least 75 percent of the car’s components in the USMCA’s trade zone.

The original 1994 deal has also been re named, and is now the United States-Mexico-Canada Agreement, or USMCA.

Industries will now be combing through all 34 chapters of the document to see how it affects their segment of the $1.2tn in annual trade between the three partners.

But even at first glance, there are clear winners – and some who will bear the brunt of the concessions.

Car industry

The two most eye-catching changes to the deal could benefit car-manufacturing workers from all three countries and help spur investment in the North American industry.

The first provision requires that 75% – up from 62.5% – of the parts that go into a vehicle be made in the region to qualify for tariff-free treatment, a move intended to boost production in North America.

The second requires 40-45% of a vehicle be made by workers earning at least $16 an hour – a measure aimed at discouraging firms from shifting work to lower-wage Mexico. (In the US, the average hourly pay for auto manufacturing workers was more than $22 as of June.)

The provisions are directed toward blue-collar workers in US manufacturing states, who share Mr Trump’s critique of the deal. But they also offer a win to labourers in Canada and Mexico.

The agreement-in-principle also means Canada will escape potentially devastating national security tariffs on car part imports that have been threatened by President Trump.

Canada’s dairy farmers

There was no doubt Canada’s dairy sector was in the negotiating crosshairs and, in the end, Canada did grant more access to US producers.

The USMCA will grant them a 3.6% slice of Canada’s domestic market. It also scraps a recently implemented milk-pricing policy that had raised the ire of producers in US states like Wisconsin and New York.

The Dairy Farmers of Canada, an industry group, claimed that 220,000 Canadians in the sector were “sacrificed” to secure a deal.

Dairy cows are seen on a farm in Saint-Valerien-de-Milton, Quebec

“The livelihood of these thousands of Canadians and the future generations of dairy producers is seriously at risk,” the group said on Monday.

“The livelihood of these thousands of Canadians and the future generations of dairy producers is seriously at risk,” the group said on Monday.

Still, the concessions were pared down from original demands by the White House.

US negotiators had proposed the dismantling of Canada’s 50-year-old protectionist dairy supply management system entirely over the course of a decade. It remains in place.

Canadian Prime Minister Justin Trudeau has promised dairy farmers will receive compensation for the trade deal.

Tech companies and online shoppers

The new agreement raises duty-free shopping limits to $100 to enter Mexico and C$150 ($115) to enter Canada without facing import duties – well above the $50 previously allowed in Mexico and C$20 permitted by Canada.

That’s good news for online shoppers in Mexico and Canada – as well as shipping firms and e-commerce companies, especially giants like Amazon.

Consumers are also expected to benefit from faster shipping.

Canadian retailers had argued against raising the limits, fearing a more generous exemption could place them at a disadvantage.

Rules over data storage offer another significant win for Amazon.

Steel and aluminium suppliers

In June, the Trump administration imposed tariffs on steel and aluminium imports from key allies in Europe as well as from Canada and Mexico.

The Trump administration had suggested the tariffs against its direct neighbours were tied by to progress achieved on the Nafta negotiations.

Canada's Prime Minister Justin Trudeau meets with steel workers from Stelco Hamilton Works, in Hamilton, Ontario, Canada
Image captionCanada’s Prime Minister Justin Trudeau meets with steel workers

Now those tariffs will be dealt with separately.

The United Steelworkers Canadian director, Ken Neumann, said those in the industry have been “left in the lurch from concessions” made at the bargaining table.

Canada “sold out Canadian steel and aluminium workers. So much for the ‘win-win-win’ deal promised by this government”, he said on Monday.

Mr Trudeau says removing the tariffs remains a priority for both Canada and Mexico.

Big pharma

Pharmaceutical companies won 10 years of protection for patents on certain types of treatments known as biologics, as well as an expanded scope of products eligible for protection.

Canada agreed to extend its monopoly period from eight years to 10 years and Mexico from five to 10 years.

Still, that protection is shorter under current US law, which protects drug patents for 12 years.

There are concerns this part of the agreement will raise the cost of drugs in Canada and affect its national healthcare system. The move has faced opposition from generic manufacturers because it would delay getting their products to market.

Source: BBC, El Financiero, Brookings, The Balance

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