NAFTA (North America Free Trade Agreement) is an agreement signed by the United States, Canada, and Mexico creating a trilateral trade coalition in North America. The agreement was envisaged no less than 30 years ago to increase business investment, decrease trading costs and help North America to be more competitive in the Global Marketplace. (Pavey & Williams, 2003)
The idea of economic integration in North America was not a new one at the time NAFTA negotiations begin. Back in 1911, President William Howard Taft consented to a joint trade agreement with Canadian Prime Minister Sir Wilfred Laurier. But after a bitter election, Canadians discarded free trade and expelled Prime Minister Laurier, thus finishing the agreement. Later in 1965, Canada and the United States consented to the U.S.-Canada Automotive Products Agreement that eases up the trade-in of trucks, cars, tires, and automotive parts between the two countries. The Auto Pact was certified as an initiative in creating an integrated North American automotive sector. In 1988, Canadian Prime Minister Mulroney signed an agreement with Reagan to initiate negotiations for the Canada-U.S. Free Trade Agreement that went into execution in 1989 and does not exist now since NAFTA.
Meanwhile in Mexico, since the mid-1980s and before NAFTA, the government of Mexico had been executing reform measures to liberalize its economy. The movement for NAFTA truly starts with President Ronald Reagan, who campaigned on a North American common market, based on which congress passed the Trade and Tariff Act in 1984. This initiative proves to be of great importance as it has given the president “fast-track” authority that allows him to negotiate free trade agreements, whereas merely permitting Congress the authority to disapprove or approve. In the late 1980s, Mexican President Salinas and President Bush initiated negotiations for a liberalized trade between the two countries. Before NAFTA came into existence, Mexican tariffs on U.S. imports were 250% greater than U.S. tariffs on Mexican imports. Canada applies for a trilateral agreement in 1991 that later led to NAFTA.
Initially, NAFTA was signed by President George H. W. Bush on December 17, 1992, and was accepted by the legislatures of the three countries on November 20, 1993. The North American Free Trade Agreement (NAFTA) Implementation Act officially came into existence on January 1, 1994, when it was signed into law by President William J. Clinton on December 8, 1993. Since then, NAFTA persists to be of greater attention for Congress for the reason that it is playing an important role in making Canada and Mexico U.S. trading partners, as well as because of the implications NAFTA has for U.S. trade policy. (CBP.Gov, 2016)
THE U.S.-CANADA FREE TRADE AGREEMENT BEFORE NAFTA
The first Free Trade Agreement between the United States and Canada was signed in 1987. This Free Trade Agreement was the first economically major bilateral FTA signed by the United States. Then, it perhaps was the most wide-ranging bilateral FTA that was negotiated and approved internationally and comprises of numerous revolutionary provisions. (Amadeo, 2016). This Free Trade Agreement
- Removes all tariffs by 1998. Several were eradicated straight away, while the left-behind tariffs were eliminated in 5-10 years.
- Offering national treatment for enclosed services suppliers and liberalized financial services trade. This agreement also makes cross-border travel easy for business professionals.
- Sustained the 1965 U.S.-Canada Auto Pact, however, squeeze its regulations of origin. Few Canadian auto sector practices not covered by the Auto Pact were ended by 1998.
- Stretched out the size of federal government procurement markets offered for competitive bidding from suppliers of the other country.
- Was dedicated to offering potential national treatment for investments originating in the other, even if established derogations from national treatment for instance for national security or prudential causes were permitted to persist. This agreement also prohibits the burden of performance requirements, like import substitution, local content, or local sourcing requirements.
- Offers an obligatory bi-national platform to resolve disagreement occurring from the agreement.
- Forbidden the majority export and import limitations on energy products, embracing the lowest export prices.
Several of these requirements were integrated into or were extended in NAFTA. Yet, the Free Trade Agreement did not incorporate, or particularly exempt, several concerns that appear in NAFTA are:
- Intellectual Property Rights (IPR): NAFTA was the first Free Trade Agreement to include significant regulations on Intellectual Property Rights. The Free Trade Agreement before NAFTA did not include language on intellectual property rights.
- Cultural Exemption: The Free Trade Agreement exempts the film, broadcasting, and publishing segments that continue in NAFTA as well.
- Transportation Services and Investment in the Canadian energy sector was barred from the FTA. These exemptions were limited in NAFTA.
- Trade Remedies: The implementation of trade remedy actions (countervailing duty, safeguards, or anti-dumping) against the other was neither ended in the FTA nor by NAFTA. For Canada, this was a major goal of the Free Trade Agreement. However, NAFTA did make a proper dispute resolution system to adjudicate trade remedy clashes, but this system has not been adopted by other FTAs.
- Agricultural Supply Management: The United States was able to eliminate some products from liberalization obligations under the FTA and NAFTA. Canada too succeeded in exempting its agricultural supply management system, even though it was committed to permit a little increase in imports of poultry, eggs, and dairy that were carried over into the NAFTA.
TRADE LIBERALIZATION EFFORTS IN MEXICO BEFORE NAFTA
Before the beginnings of NAFTA negotiations, Mexico was under the process of the liberalization of its protectionist trade and investment policies that had been prepared for years. In the mid-1980s, Mexico took its first steps of opening its closed economy keeping the high focus on reforming its import substitution policies. Later, reforms were formed in 1986, at the time when Mexico was elected as a member of the General Agreement on Tariffs and Trade (GATT). Being a member of GATT, every country including Mexico has to fulfill its obligation of lowering its utmost tariff rates to 50%. Although Mexico had been lessening its trade and investment limitations since 1986, yet, there are numerous other barriers for U.S. exports that were considered high at the time of the NAFTA negotiations. (Gale., 2008)
Besides, there was a long way to go for Mexico as it yet needs import licenses on 230 products from the United States, affecting about 7% of the value of U.S. exports to Mexico. Besides, Mexico had several other non-tariff barriers, for instance, “official import prices,” the name given to an arbitrary customs valuation system that increases duty assessments.
For Mexico, A Free Trade Agreement with the United States indicates a way to lock in the reformation of its market-opening plans from the mid-1980s. This step needs to be taken to change the previously statist economy of Mexico after the upsetting debt disaster of the 1980s.
One of the main goals of the Mexican government was to increase investor confidence to attract greater flows of foreign investment and spur economic growth. Since the entry into force of NAFTA, Mexico has used the agreement as a basic model for other FTAs Mexico has signed with other countries. (Luz & Miller, 2012)
HOW NAFTA INVOLVE
NAFTA indicates to be an opportunity for the United States to expand its increasing export market to the south. Also, it was a means of political opportunity for Mexico and the United States to collaborate in resolving few pressures in the bilateral relationship. Having a Free Trade Agreement with Mexico would assist U.S. businesses to expand their exports to an emerging market of approximately 100 million people. Moreover, it was as well discovered by the U.S. officials that imports from Mexico would possibly consist of higher U.S. satisfaction than imports from Asian countries. Besides, NAFTA does not just offer trade and investment opportunities, but, having an agreement with Mexico would be a method to sustain the growth of political pluralism and intensification of democratic processes in Mexico. Furthermore, NAFTA offered an opportunity for the United States to drive the slow growth on the Uruguay Round of multilateral trade negotiations.
At the moment when NAFTA was applied, the U.S.-Canada Free Trade Agreement was already in operation; while on the other hand, U.S. tariffs on the majority of Mexican goods were low. NAFTA inaugurates the U.S. market to increase the imports from Mexico and the Mexican market to Canada and the United States, making it one of the leading single markets around the globe. Some of the noteworthy provisions of NAFTA are tariff and nontariff trade liberalization, services trade, intellectual property rights protection, dispute resolution, rules of origin, foreign investment, and government procurement. Later, Environmental and Labor provisions were stated in separate NAFTA side agreements. The following section presents an overview of the major provisions of NAFTA. (Villarreal & Fergusson, 2015) These are:
TRADE BARRIERS REMOVAL
After the official implementation of NAFTA, the market-opening provisions of the agreement steadily eradicated all tariffs, and the majority of non-tariff barriers on goods formed and traded within North America for a time frame of 15 years. Some tariffs were eradicated instantly, whereas others were planned and implemented in a variety of schedules of 5 to 15 years. U.S. import-sensitive segments, for example, footwear, ceramic tile, and glassware took longer phase-out schedules. NAFTA offers the selection of speeding up tariff reductions on the agreement of all the countries involved. The agreement embrace safeguard provisions under which the importing country has the advantage of increasing its tariffs, or imposing quotas in some cases, on imports for the duration of a changeover period if domestic producers faced severe damage in consequence of the increased imports from another NAFTA country.
As the U.S.-Canada FTA previously existed, a large number of the market opening measures came out with the elimination of Mexican trade barriers related to imports from the United States and Canada and U.S. tariffs and quotas related to imports from Mexico. At the moment that NAFTA went into operation, approximately 40% of U.S. imports from Mexico entered duty-free and the rest faced duties of equal to 35%, with a trade-weighted average rate of approximately 7%. The average tariff on U.S. agricultural products trade in Mexico weighted around 11%. Besides, the U.S. – Mexico trade was influenced by both countries’ phytosanitary rules, U.S. marketing orders, and Mexican import licensing requirements.
TEXTILES AND APPAREL INDUSTRIES
Some of the additional significant transformations occurred in the automotive, apparel, textiles, and agricultural industries. NAFTA terminates all duties on apparel and textile goods within North America meeting particular NAFTA rules of origin over a period of 10 years. Before NAFTA came into effect, 65% of U.S. apparel imports from Mexico enter quota-free and duty-free, while the left behind 35% faced an average tariff rate of 17.9%. In Mexico, the average tariff on U.S. textile and apparel products was 16%, which at times when combined with other duties reached as high as 20% on some products.
NAFTA eliminated Mexico’s restrictive auto decree. It eradicated all U.S. tariffs imports from Mexico and Mexican tariffs on U.S. and Canadian products only if they abide by the rules of origin requirements of 62.5% North American content for light trucks, autos, transmissions, and engines; and 60% for other vehicles and automotive parts. Several tariffs were removed right away, whereas others were demolished within a time frame of 5 to 10 years.
Before NAFTA, the United States reviewed the tariffs on imports from Mexico and found the following tariffs:
- 5% on automobiles
- 25% on light-duty trucks
- a trade-weighted average of 3.1% for automotive parts.
While Mexican tariffs on U.S. and Canadian automotive products were:
- 20% on automobiles and light trucks
- 10%-20% on auto parts.
NAFTA started individual bilateral undertakings on cross-border trade in agriculture, one between Mexico and the United States, and the other between Canada and Mexico. At a broader scale, U.S.-Canada Free Trade Agreement provisions continued to apply to trade with Canada. Concerning the U.S.-Mexico agriculture trade, NAFTA eradicated the majority of non-tariff barriers in agricultural trade, either through their transfer to tariff-rate quotas (TRQs) or ordinary tariffs. Tariffs were abolished for a time frame of 15 years with sensitive products for instance corn and sugar getting the longest weed out phase. About 50% of U.S.-Mexico agricultural trade turns out to be duty-free when the agreement went into effect. Before NAFTA, most tariffs in agricultural trade between Mexico and the United States were quite low although several U.S. exports to Mexico faced tariffs even up to 12%. However, around 25% of U.S. agricultural exports to Mexico were the victims of restraining import licensing requirements.
SERVICES TRADE LIBERALIZATION
A set of basic rules and obligations were established by NAFTA services provisions for the services trade among partner countries. The agreement was extended on measures taken for the U.S.-Canada FTA and the Uruguay Round of multilateral trade negotiations to produce disciplines that are acceptable internationally but under the government regulation of trade in services. The agreement allows services provider-specific rights relating to unbiased conduct, cross-border entry and sales, investment, and right of use to information. Still, there were some reservations and eliminations by each country, like film and publishing (Canada), oil and gas drilling (Mexico), and maritime shipping (United States). Even though NAFTA liberalized various service segments in Mexico, specifically financial services that intensely changed its banking sector, still other sectors were hardly influenced.
Concerning the telecommunications services sector, NAFTA partners collectively decided to forbid the provision of basic telecommunications services, while not prohibiting the use of telecommunication services. NAFTA settled a “bill of rights” for the users and suppliers of telecommunications services, consisting of access to public telecommunications services; link to private lines that reveals economic costs and are accessible on a flat-rate pricing base strategy; and the rights to select, buy or lease terminal equipment that is considered appropriate according to their needs. Nevertheless, NAFTA did not demand the parties to empower a person of another NAFTA country to supply or control telecommunications transport networks or services.
Other than market-opening initiatives by eliminating tariff and non-tariff barriers, NAFTA integrated several other provisions that include intellectual property rights (IPR), foreign investment, government procurement, and dispute resolution.
INTELLECTUAL PROPERTY RIGHTS (IPR)
NAFTA was created upon the then enduring Uruguay Round negotiations that create the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement in the World Trade Organization and on a range of accessible worldwide intellectual property treaties. The agreement embarks particular enforceable obligations by NAFTA parties concerning the protection of patents, trade secrets and trademarks, and copyrights among other provisions.
NAFTA’s uninvolved major investment barriers, guarantee fundamental protections for NAFTA investors and present a system for the resolution of the disagreement between a NAFTA country and investors. NAFTA offers “non-discriminatory treatment” for foreign investment by NAFTA parties in specific segments of other NAFTA countries. The agreement integrated clear country- explicit liberalization obligations and exemptions to national treatment. Exceptions from NAFTA investment provisions consist of the energy sector in Mexico in which the Mexican government reserved the right to prohibit foreign investment.
DISPUTE SETTLEMENT PROCEDURES
NAFTA’s provisions for preventing and resolving disputes were created upon provisions in the U.S.-Canada FTA. NAFTA formed a method of negotiation for resolving disagreements that integrated primary consultations, taking the matter to the NAFTA Trade Commission, or leaving through arbitral panel dealings. NAFTA incorporated separate dispute settlement provisions for dealing with disputes over antidumping and countervailing duty determinations.
NAFTA opened up an important part of federal government procurement in each country on an unbiased basis to suppliers from other NAFTA countries for goods and services.
NAFTA AND GLOBALIZATION
NAFTA has amplified the competitiveness of the three countries incorporated (Canada, the United States, and Mexico) on the global market. This thing made the region the world’s largest free trade area. This has become chiefly significant with the economic growth of China and the opening of the European Union and other emerging market countries.
NAFTA regulations comprise of the following concepts, documents, and rules.
Annex 401 of NAFTA provides the specific rule of origin that is applied to determine whether a good qualifies as an originating good according to NAFTA.
These procedures are used by importers, exporters, or producers of goods to request a second review of NAFTA decisions given by the customs administrations.
Certificate of Origin
This is a trilaterally agreed upon form used by Canada, Mexico, and the United States to certify that goods qualify for the preferential tariff treatment accorded by NAFTA. The Certificate of Origin must be completed by the exporter. A producer or manufacturer may also complete a certificate of origin in a NAFTA territory to be used as a basis for an Exporter’s Certificate of Origin. To claim NAFTA preference, the importer must possess a certificate of origin at the time the claim is made. (Rugman & Kirton, 2015)
Claiming Preferential Treatment
A claim for preferential treatment is usually made at the time of importation on the customs document used by the importing country. The Agreement allows NAFTA claims up to one year from the date of importation. The procedures for presenting a NAFTA claim are different in Canada, Mexico, and the United States.
Denial of Benefits
Under NAFTA, the importing country has the right to deny NAFTA benefits if you do not follow the NAFTA regulations. Benefits may also be denied if it is determined that an imported good does not qualify as originating in one of the NAFTA countries.
Determinations are issued by the customs administrations as a result of NAFTA verification. Determinations are binding on the exporter and/or producer and may be appealed.
Duties (Tariff Elimination) and Fees
Goods brought into Canada, Mexico and the United States are subject to customs duties and taxes. Each country has its own rate of duties. The amount of duties charged is based on the harmonized tariff system classification number of the good, value, and origin. A customs user fee is an amount of money charged for processing goods through customs. NAFTA allows the Parties to maintain existing merchandise processing fees; however, no Party may adopt customs user fees for originating goods.
The following Canadian goods may be subject to a reduced tariff rate quota (TRQ): sugar, beef, dairy, peanut butter and paste, cotton, apparel, and cotton. The following Mexican goods may be subject to a reduced tariff rate quota (TRQ): beef, apparel, fabric, and yarn.
NAFTA Verification/Audit Manual
The NAFTA Verification/Audit Manual is developed to support the verification of goods for which NAFTA preferential tariff treatment has been claimed comply with the rules of origin. This trilateral guide details the recommended technical verification framework to be observed by each Party when conducting NAFTA verifications. This trilaterally agreed-upon manual also provides significant automobile information.
ASSESSMENT OF RESULT ACHIEVED
Some trade policy experts and economists give credit to NAFTA and other free trade agreements (FTAs) for enhancing economic linkages between countries, increasing the availability of lower-priced consumer goods, improving living standards and working conditions, and creating more efficient production processes. NAFTA influenced other FTAs that the United States afterward negotiated and also influenced multilateral negotiations. NAFTA initiated a new generation of trade agreements in the Western Hemisphere and other parts of the world, influencing negotiations in areas such as market access, rules of origin, intellectual property rights, foreign investment, dispute resolution, worker rights, and environmental protection. (URATA, 2002)
Over 39 million NAFTA-related jobs have been created and the benefits of expanding trade have flowed to businesses, farmers, workers, and consumers all over the region. From 1993 to 2008, trade among the NAFTA countries more than tripled, from $288 billion to $902 billion. On average, each one of the NAFTA countries conducts nearly $1.9 billion in daily trilateral trade.
NAFTA has made a positive contribution to growth in output and employment in the region over the past fifteen years. Calculating the impact is an analytic confront, but be adequate to say that NAFTA like any trade agreement is a small driver of national growth. The US and Canadian economies have performed well during the NAFTA period, increasing by average annual rates of 3.0% and 3.1%, correspondingly.
Compared, Mexican real GDP growth has averaged only 2.9% per annum since 1994 well less than its capacity and quite below what it needs to achieve to deal with the substantial economic and social problems in Mexican society. fraction of the problem stems from the deep recession that Mexico endured soon after NAFTA took effect, though Mexico’s relatively rapid recovery clearly benefited from the open access to the US market. Mexico’s adjustment burden was substantial and the government response inadequate. Its nascent democratic regime has been unable to produce tax and energy reforms that would generate new resources to fund investments in physical infrastructure and social services, including education. These factors have limited Mexico’s ability to take full advantage of NAFTA and have put Mexican industries at a competitive disadvantage against foreign firms, chiefly from China.
NAFTA has been good for Mexico but so it has been for the United States. Although the U.S. goods trade deficit with NAFTA was $95 billion in 2010, U.S. goods and services trade with NAFTA totaled $1.6 trillion in 2009. In particular, trade in services with NAFTA, an important sector for the US totaled $99 billion in 2009. Services imports were $35.5 billion. Services exports were $63.8 billion. The U.S. services trade surplus with NAFTA was $28.3 billion in 2009. As of 2010, the United States had $918 billion in total goods trade with NAFTA countries. Goods exports totaled $412 billion, while goods imports totaled $506 billion.
An interesting success story for the United States is the role that NAFTA has played in making US agricultural goods more competitive. From the 1990s up until recently, the US share of world agricultural trade had been slipping. Thanks to NAFTA that slippage was reduced as Canada and Mexico´s demand for US agricultural goods increased. As a result, 37% of the total growth of U.S. agricultural exports since 1993 came from NAFTA and the share of US products in Canada’s agricultural imports has climbed to 65 percent, while that of Mexico reached 75 percent. This means 75 cents of every dollar’s worth of Mexican imports of agricultural products comes from the United States. Today, Mexico is the US’s top export destination for beef, rice, soybean meal, corn sweeteners, apples, and dry edible bean exports, the second for corn, soybeans, and oils, and the third for pork, poultry, eggs, and cotton.
U.S. investors have also found NAFTA an attractive destination for their businesses. Direct US investment in the manufacturing, finance, insurance, and mining sectors of its NAFTA partners reached $357.7 billion in 2009, up 8.8% from 2008. In turn, NAFTA partners FDI in the United States was $237.2 billion in 2009, up 16.5% from 2008.
Looking at all the progress achieved in the past ten years, one is forced to agree that NAFTA works and increases employment and competitiveness in the region. NAFTA´s progress and results underline the advantages that a fuller integration would bring to all of us living in the North American region.
But the experts look to build on NAFTA’s momentum to improve trade relations and economic integration within the region. However, labor groups and some consumer-advocacy groups argue that the agreement has had negative effects. They maintain that the agreement resulted in outsourcing and lower wages that have hurt the U.S. economy and that it has caused job dislocations in Mexico, especially in agriculture.
CRITICISM FACED BY NAFTA
Although NAFTA has played a significant role in the economic growth of the three countries, yet many FTAs were criticized because of the unsatisfactory employment trends, a turndown in U.S. wages, and for not having done sufficient to develop labor standards and environmental conditions overseas.
NAFTA did not offer a course of action for the allocation within each country of the gains from closer incorporation. Economic integration creates losers and winners, and it is also true that not every worker or community gets high payback. Whilst NAFTA optimized the structural reform of the three economies, yet, it left the task of managing the 4 alteration process to each government, and national adjustment programs have been normally restricted and underfunded that result in the contribution of workers discontent. Additionally, NAFTA was not planned to heal many of the harms of every society, like trafficking of illegal drugs, high rate of illegal immigration, and increasing income inequality within countries. Income inequalities between southern and northern Mexican states are predominantly evident. Few of these problems are an association of economic integration, even if NAFTA is just a tiny section of the whole story.
Despite its critics, NAFTA’s record is cleared. By lowering trade barriers, the agreement has expanded trade, increased employment, provided more choices for consumers at competitive prices, and increased prosperity for all three countries. NAFTA created the world’s largest free trade area with about 450 million people and $17 trillion worth of goods and services.
Clearly stated, despite a decade of progress, the three NAFTA partners still have a lot of work to do together to address new economic and political challenges that threaten to impede future benefits from regional economic integration. There are many specific areas of friction among the three countries; some problems remain intractable such as illegal immigration, and others, like trucking and sugar, involve strong political constituencies.
I believe that NAFTA could benefit from some updating, for three reasons:
- Some items were excluded from NAFTA coverage (including some farm products, energy investment in Mexico, rules on subsidies and dumping, and migration).
- Some NAFTA provisions were weakly constructed and should be recast (including the labor and environmental side accords, and some dispute-settlement procedures and definitions).
- Changing conditions in the global environment in which NAFTA operates were not on the radar screen of the original drafters (especially border security and climate change). (Derbez, 2011)
Amadeo, K. (2016, September 8). History of NAFTA and Its Purpose. the balance.
CBP.Gov. (2016). North American Free Trade Agreement (NAFTA). US Custom and border connection.
Derbez, L. E. (2011). Advantages, Disadvantages, and the Future of NAFTA. Colorado: School of Law of the University of Colorado.
Gale., T. (2008). North American Free Trade Agreement. In International Encyclopedia of the Social Sciences.
Luz, M. A., & Miller, C. M. (2012). Globalization and Canadian Federalism: Implications of the NAFTA’s Investment Rules. MCGILL LAW JOURNAL, 47.
Pavey, B., & Williams, T. (2003). THE NORTH AMERICAN FREE TRADE AGREEMENT. Science and Technology Division.
URATA, S. (2002). Globalization and the Growth in Free Trade Agreements. Asia-Pacific Review, 9(1), 20-32.
Villarreal, M. A., & Fergusson, I. F. (2015). The North American Free Trade Agreement. Congressional Research Service.