What does NAFTA mean?

A Free Trade Area is, by definition, an area where all barriers to trade are lifted.  This is not the case with regards to NAFTA at this point.  Currently most of the trade barriers between the United States and Canada are lifted but those with Mexico have largely been kept in place.  This is an obvious disparity on the part of the Mexican government but is due largely to the proportional loss of income to the governments in each country.  The Gross Domestic Product per individual in Mexico is one seventh of the other two countries.  Therefore, the loss of revenue would have a major impact on the daily life of its population and the operation of the government. Never before has a major economic power like the United States considered a free trade area with an under-developed third world country.

The major difference between a Free Trade Area and Common Market is that a Free Trade Area primarily deals with trade, while a Common

Market has this in addition to no barriers on factors of production and a common external trade policy.

While on the surface it seems that a free trade area would always be a good thing,   it is easier said than done.  The majority of people that oppose NAFTA do so because of the potential for loss of employment.  Mexico with its cheap work force will tend to make manufactures requiring extensive manual labor more likely to move to the lower cost area.   A loss of sovereignty may also be a stumbling block, since some economic policy decisions are taken out of the governing bodies’ hands.

Another factor is the extent of trade creation versus trade diversion.  The difference is if high cost domestic producers are replaced by low cost producers within the trade area then trade creation occurs.  If trade diversion occurs, it would have a major impact on consumer prices.  This practice is evident in the textile industry and will be discussed later.

History of NAFTA

In 1988, the United States and Canada agreed to enter into a free trade agreement.  This went into effect on January 1, 1989 and was widely accepted as a logical course of action.  Canada is a highly developed nation and has a lot in common with the United States.  Its per capita income and hourly wages are equivalent to the U.S. and has long been considered our brother to the north.  Then in 1991, Mexico entered into talks with Canada and the United States that concluded on 17 December 1992.  The treaty was ratified and came into effect on 1 January 1994.  The treaty called for the elimination of all tariffs between the three nations over a ten year time span.  Some of these tariffs are listed below.

Mexico’s turmoil since NAFTA

The political turmoil in Mexico has added a great deal of controversy to the issue. On the same day that NAFTA was implemented, some of the poorest regions of Mexico in the Chiapas highlands revolted.  After twelve days an accord was reached with the rebels.  In March, the Mexican president’s chosen successor was assassinated.  This forced the president to pick Zedeillo who eventually won the race for the Presidency.  Just after the New Year, the peso was allowed to be floated against the dollar causing up to a 40% loss in the value of the peso.  This caused 12% of Mexico’s Foreign Direct Investment to leave the country.  The United States, which holds more than half of all direct investments in Mexico, arranged a peso-rescue package of as much as $13 billion which helped to stop the downward spiral of the peso.  This devaluation should have little direct impact on the United States except that some companies may find Mexico is even more attractive to move to.   Commercial lending rates and credit card interest rates in Mexico have almost doubled and hover around 40% and inflation is expected to reach 20%.  These factors are expected to impact the poor and middle class of Mexico the most and possibly cause more unrest in the already unstable areas (LACAYO AOL).

Facts against NAFTA

National origin is determined by the country in which the product was last substantially transformed.  Trade diversion has occurred in the textile industry due to the triple rule of origin for apparel manufactures.  This rule requires that not only the clothing be sewn in North America but that the yarn the cloth was made from comes from North America. Wool suits are one of Canada’s most successful apparel exports, and since Canadian apparel makers import most of their fabric from Europe, the triple rule of origin will throttle their trade with the United States.  The Caribbean Islands are also large producers of textiles and if tariffs were kept in place on those countries and lifted on our trade partners it could devastate their economies. There would also be increases to the cost to consumers.  The average cotton shirt will increase $12 and a wool skirt could raise $22. (BOVARD 24)

Companies that are labor intensive will tend to move their manufacturing facilities to Mexico.  The overall figures for jobs lost as a result of the free trade accord so far total 42,221, according to the Labor Department.  Another 226,030 jobs have disappeared as result of trade pressures from other parts of the world since Mr. Clinton came into office (Landers AOL).  The following are statements published by Ross Perot’s Afta-NAFTA update: (Jones AOL)

* “Nintendo of America announced on Jan. 10, 1994 that it was moving 136 jobs from its U.S. payrolls to Mexico.  Because of NAFTA provisions, these unemployed workers qualify for federal entitlements, including welfare benefits paid for by U.S. tax dollars”

* “Phillips Lighting laid off 60 workers, including some that had worked for the company for 27 years, as the company moved its operations to Mexico”

The loss of sovereignty issue for Mexico revolves around its oil industry.  This is a nationalized business in Mexico and they do not want Foreign Direct Investment invading it.  This has been addressed by President Clinton with special concessions that are not part of the NAFTA treaty.  The major sovereignty issue for the United States is immigration of Mexican nationals into the United States.  This would cause the eventual lowering of wages in the Border States and higher social system costs.  There is no empirical data to support this claim and I believe the opposite will occur.  The major reason that illegal aliens enter this country is for economic reasons.  With the establishment of new manufacturing facilities and an increase in the standard of living the result should be lowered amounts of illegal immigration (Write AOL).

The environmental concern of pollution overflowing into the United States has been addressed by a supplementary agreement that has been amended to the NAFTA treaty (Levine 6).  This agreement limits the amount of dumping and aids in establishing waste water treatment facilities in Mexico.  I believe the pollution that a country produces is directly related to the standard of living of the people.  If the general population does not have enough food to eat or a place to sleep, they really don’t care about the environment or how their actions affect it.  If you raise the comfort level of the people involved they will naturally evolve to address these higher level concerns.

Facts for NAFTA

The signing of the NAFTA treaty has created a home market base of 360 million consumers.  This in itself has had a tremendous impact on the three countries involved.  One of the greatest fears expressed by NAFTA’s staunchest opponents was that a “giant sucking sound” would result from an unequal trade flow.  Dollars would chase the cheaper Mexican products south.  This would make the peso precious, lessening the pressure to devalue the peso. The United States imports from Mexico did grow by $7 billion to reach an unprecedented $40 billion but United States exports increased $8 billion to $42 billion.  This maintained Mexico’s trade gap which is the reason that the peso plunged (Wright AOL).

To the north, trade between Canada and the U.S. hit $260 billion in 1994, this is up by 50% from 1988, when they first signed a free trade agreement.  This is due largely to the relative cheap Canadian dollar.  In autos, for example, it now costs “20% to 25% less to assemble a car in Canada then in the US.” says David Adams, director of policy for Canada’s Motor Vehicle Manufacture’s Association.  Ford Motor Company alone has spent $2.2 billion to upgrade its car and truck manufacturing plants.  This surge in auto manufacturing has caused a boon for machinery and equipment manufacturers in the United States.  Exports to Canada for this type of equipment have risen 500% in the last decade.  Canadian exports to the U.S. grew by 21% in 1994 and are expected to have another double digit increase this year.  Ontario alone imported more U.S. goods than our second largest trading partner (Symonds AOL).