The NorthAmerican free trade agreement (NAFTA) is a trade agreement between the United States, Canada and Mexico. Effected in the year 1994, the agreement substituted the former Canada-United States free trade agreement which only involved the two countries.
This paper seeks to discuss how the formation of the North American free Trade Agreement affected politics and economies of the three countries: Canada, Mexico and the United States. The paper will discuss the backgroundto the formation of the agreement, its terms and the effects that the agreement has impacted in the politics and the economies of three member countries.
Background of NAFTA
Prior to the formation of the North American Free Trade Agreement, there existed a trade agreement between the United States and Canada. The agreement that seemed to isolate Mexico saw the country of Mexico adjust its structures and systems towards international trade in order to resolve its economic crisis due to destabilized oil prices and overwhelming foreign debts that Mexico had been experiencing since the 1980s.Being drawn to international trade and the move that saw Mexico join the General Agreement on Tariffs and Trade (GATT) forced Mexico to review its regulations and terms to international trade. The economic reforms done through reduction of trade barriers, in a bid to comply with the globalization wave, motivated Mexico to trade agreements besides the normal international trade. This consequently led to the readiness of Mexico to forge an economic bloc with the already established Canada- United States free trade agreement.
This led to the formation of the North American Free Trade Agreement that was established in the year 1992 (Kehoe 1).
Terms of the North American Free Trade Agreement
The free trade agreement made between the three countries had provisions to help achieve theobjectives of a free trade bloc and regulations to help protect industries in the countries in terms of competitive advantage. The agreement had provisions to protect patent rights and curb production of counterfeit goods.
Generally, the aim of the agreement was to improve trade among the three countries by total removal of tariffs and other limitations to international trade such as international trade formalities and requirements. One of the provisions of the trade agreement was that the trade among the three countries was to be free from government policies which control international trade. It also provided for freedom to “cross boarder services rules” (Trade1). This meant that companies and organizations within the three countries had the freedom to choose their trade locations free from control by any of the governments. The agreement also provided for universal access to governments’procurement processes in the three countries to enable suppliers bid for any public tenders in any of the countries without limitations. The agreement also provided for the adoption and use of similar customs rules in the three countries. In its terms, the North American Free Trade Agreement provided “protection against unjustified actions” (Trade1) by any country against traders from other member countries. It also ensured provisions for “fairness for investors” among its member states.
Under these provisions, the modes for undertaking a “safeguard action” was outlined with a further provision that any such actions required compensation to any member country affected by the action. The terms of the agreement also provided for “environmentally sound investments” (Trade1), protection to service providing companies and protection to “intellectual rights” among others (Trade1).
Economic Impacts of NAFTA on its Member Countries
The formation and implementation of the North American Free Trade Agreement had economic impacts on the countries owing to the fact that barriers to trade were eliminated increasing the volume of trade among the three countries.
Mexico and NAFTA
With consideration to the trade activities between the United States and Mexico, there were significant impacts in the Mexican economy derived from the liberalized trade.
In general terms, the trade agreement brought significant benefits to the Mexican economy. In a research conducted by the World Bank in the year 2005, it was realized that in its contribution to the Mexican economy, the North American Free Trade Agreement improved the development levels in Mexico. The study actually compared the developments in Mexico at the time to that of the United States.
This can be viewed as boost to the Mexican economy taking into consideration that Mexico was in an economic crisis two decades earlier. The liberalized trade, according to the World Bank study, improved the technology in the Mexican industrial sector.The subsequent expansion of the sector together with the improved technology improved the “number and quality of jobs”(Villareal 17). The trade liberalization also exposed the three member states to the sensitivity to each other’s economies. The free transfer of goods and services among the countries has the impact of transferring economic implications together with the flow of goods and services. An increase in the price of raw materials in one country will impact on the price of the end product of the resource.
This will be transferred to the other countries inducing its impact in the destination country. It has also been established that the trade agreement was fundamental in the Mexican economic recovery that was realized in the year 1995. Through the terms of the trade agreement, Mexico reformed its economic policies. This move boosted the confidence of foreign investors and as a result attracted investments into the country. With respect to the reports from World Bank, Mexico has overwhelmingly experienced economic developments and the improved economic status is attributed to the North American Trade Agreement. The trade agreement also contributed to average change in the wages in Mexico.
It is noted that with the enactment of the North American Free Trade Agreement, the wage rate offered in Mexico increased steadily between the years 1990 and 2000. The wage rate has since then been fluctuating along a mean rate (Villareal 18).Mexico has particularly been on the receiving end of the trade agreement. As a result of the increased international trade due to the NAFTA trade agreement, the Mexican international trade increased from about thirty five percent to over sixty percent in a span of eight years. Exports in the industrial sectors have, for example, increased by about three hundred percent due to the trade liberalization induced by the trade agreement on the Mexican economy (Vazqueze and Chen 3).
The United States and Canada
Though more significantly felt in Mexico as compared to the United States and Canada, the North American Free Trade Agreement has had economic impacts among all its three member states. The effect of the agreement increased trade in the region and globally by not shifting business activities from other regions to the North America, but by creating more opportunity for business. The United States for example found a rich market for its products in Mexico.
The effects of the agreement are also seen to have caused a change in employment systems in theUnited States and Canada. The change in trade patterns and the business activities due to the liberalized arrangement led to a shift from “blue collar jobs” to “white collar jobs”. This shift in the employment structure has a neutralizing effect of loss of employment opportunities in one profession and a subsequent creation of jobs in another sector of the economy.
There will still be a net effect resulting from this shift in employment structure since the remuneration rates in these types of jobs are relatively different (Laursen 54).
The General Impact
NAFTA can be claimed to have “succeeded in boosting the three member states economic performance” (Chambers and Smith 244). There have been increased levels of international trade among the three member countries. The sensitivity created by the trade liberalization among the three countries also led to improvement of international trade between the countries and the rest of the world. Mexico, for example, adjusted from its former restrictive policies that limited international trade to economic policies that are more tolerable to international trade. The NorthAmerican Trade Agreement is also noted to have induced a generally negative impact on the trend of employment rates among the member countries. A study of the employment data trend in Mexico indicates that the job creation in Mexico that is attributed to the trade agreement affected the Mexicans in a rather negative way. The agreement,however, affected the flow of workers from the United States into Mexico; Americans are said to have flooded Mexico.
This had the implication of increased competition for jobs hence displacing Mexicans from their jobs and increasing unemployment rates. A similar threat to employmentsecurity was observed in Canada on the onset of the former trade agreement between Canada and the United States. In the arrangements Canada opened its industrial sector to the more developed United States industries. The consequence was the closure of some industries in Canada in response to the competitive environment that the trade liberalization exposed the domestic industries to. These closures were consequently followed by loss of employment for the workers of the closed industries. Another impact of the regional trade liberalization was the ease of mobility of factories. This led to movement of some factories from one country to another. The significant mobility of factories would mean loss of jobs especially to the employees who for one reason or another, could not move along with the factory mobility to its new country of location(Chambers and Smith 245).
Political Impacts of the Creation of NAFTA
The formation of the trade agreement called for the grass root support from the three member states. With this respect, there were movements across the three countries with differing motives. There was a move to support the establishment of the trade agreement on one side and another movement to oppose the same on the other side. The idea of establishing the agreement generated a regional political momentum that combined the three countries: Mexico, Canada and the United States. The pro trade agreement side, for example, located their office in Washington to manage the campaigns for the support of the establishment of the North American Free Trade Agreement. In the United States, for example, U.S.
-NAFTA coalition was formed to unite parties that were supporting the establishment of the trade agreement. The process of establishing the agreement was itself a politicized move that saw the two camps transverse the region in search of support to either oppose or spearhead the establishment of the trade agreement. The governments of the three countries into the agreement were also actively involved in the process of establishment the agreement. The government of Mexico, for example, provided support to the pro-NAFTA camp by giving information and other forms of support to the group. The process itself also involved politicians by the fact that the governments played a role in the establishment. This is because governments are headed by political leaders (Levi, Bruhn and Zebadua 254).
The relationship between Mexico and the United States which was cemented by the North American Free Trade Agreement plays an important role in the democratization of the Mexican politics. It was noted by Levi, Bruhn and Zebaduathat a number of groups in the United Statesplays a significant role in the politics of Mexico.
The vested interest in the trade established by the agreement has induced the interest of the United States to protect its market. With this respect, Levi, Bruhn and Zebaduaexpressed the view that the significant interest that the United States has in the Mexican politics is more of a move to ensure economic stability rather than political democracy. With this respect, trade agreement is seen to have induced a political impact on the two countries with Mexico being on the receiving end of the political influence by the United States.
TheUnited States, therefore, manipulates or influences Mexican politics towards the economic stability of Mexico (Levi, Bruhn and Zebadua29). The political impacts of the trade agreement were anticipated long before the agreement was enforced. Cameron Maxwell and Wise Carole indicated that both the opponents and the proponents of the North American Trade Agreement had different opinions over the political impacts that the agreement would have on the three countries with specifications to Mexico being on the receiving end of political influence from both Canada and the United States. Those who supported the agreement saw the political influence as an opportunity to enhance democracy in Mexico through the influence of its two economic partners. Those who opposed the formation of the trade agreement however argued that the economic relationship will subject Mexico to being ruled by the two nations: Canada and the United States. The later election that was held in the year 2000 in Mexico, however, indicated a level of improved democracy giving credit to the argument of the proponents of the NAFTA regarding democratization of Mexico by the establishment of the trade agreement (Cameron and Wise 301).
The North American Free Trade Agreement (NAFTA) is an economic agreement that was made by Canada, Mexico and theUnited Statesand was finalized in the year 1992.
The economic agreement was intended to eliminate all trade barriers among the three countries. The establishment of the trade agreement has both economic and political effects among the three countries. The economic effects included increased international trade among the countries as well as changing employment trends in the countries. The political effects included political influence among the member states with the aim to safeguard the economic stability in the region.
Cameron, Maxwell and Wise, Carole.The Political impacts of NAFTA on Mexico.
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