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The North American Free Trade Agreement
Since the birth of this great nation in 1776, the United States has remained a dominant world power in many aspects. The American standard of living has been the envy of the world, powered by an economy rivaled by nearly no one. Our economy continues to be the rock with which the global economy can lean on, as evidenced by nations that rely on huge reserves of the dollar because of its stability as a means of settling international debts. Unfortuneatly, despite the solidity that our economy is so often associated with, we have accumulated a 5 trillion dollar (that's 9 zeros) national debt. Something has to be done about this colossal problem to ensure that the United States retains its status as a world power in the global economy. One vital catalyst to help promote growth and neutralize the massive account deficit and foreign debts is the North American Free Trade Agreement. NAFTA, for short, is one positive effort that not surprisingly, has met with the opposition of many. In light of this opposition, it is evident that NAFTA is accomplishing its primary goals and encouraging the growth of the American economy.
NAFTA negotiations began on June 11, 1990 when former President George Bush and Mexican President Carlos Salinas de Gurtari met to discuss the possibility of revising current trade policies. The thing that set the NAFTA apart from other trade agreements historically was that it was to be the first trade agreement entered into between two industrial countries and a developing country. By much of the world the NAFTA is often viewed upon as North America's answer to the European trading bloc. Many provisions of the NAFTA take their roots in the Canada-U.S. Free Trade Agreement which became operational January 1, 1989. A target objective was to create free trade between the United States, Mexico, and Canada rather than a comprehensive economic union such as that of the European Community. Whereas the EC dealt with monetary exchange rate issues by implementing a standard in currency called the "Euro-Currency", the NAFTA would be off limits to such control. Like many issues today, this topic was hotly debated. Many people vehemently argued that job loss and low wages would plague the United States and Canada inflicting more damage on these two already struggling economies. The pro-NAFTA big business sector reportedly coughed up between 20 and 30 million dollars for lobbying. This seems to make sense considering that 86% of the companies listed on Fortune magazine's top 500 list has operations in Mexico. With the support of current president, Bill Clinton, the NAFTA passed through Congress late in 1993.
The 2,000 page NAFTA plan details many things, one of the most important clauses being the reduction of tariffs. Over the next 15 years all internal tariffs will be reduced to zero for trade amongst the United States, Canada, and Mexico. Tariffs on "sensitive" goods such as agricultural products that require a longer adjustment period will remain in place for the full 15 years, while being subjected to incremental decreases each year. All in all there are 4 tariff classes, quite cleverly lettered A, B, C, and C+, to be reduced to zero eventually. Tariffs for the "A" class were void as of January 1, 1994. The "B" category will diminish at a rate of 20% for five years, the "C" class at a rate of 10% a year for 10 years, and finally the "C+" category which will stretch tariff reductions out over the full 15 years. Other than tariffs, NAFTA also eliminates things such as the costly need to convert drivers as merchandise rolls over the borders of a neighboring country.
What all of this could do for the United States is quite clear. The most important objective is to improve the efficiency and productivity of the member countries to more effectively compete against foreign suppliers at home and abroad. The NAFTA imparts an export-led growth strategy to help solve the United States' account deficits. The premise behind the whole thing is quite simple. Once our nation experiences the expected increase in productivity, which in turn forces prices down, exports would ultimately increase. NAFTA will undoubtedly contribute to economic growth in Mexico, which will also increase the demand for U.S. goods and services in our neighbor to the South. A prosperous Mexico, which is already this country's third largest trading partner, would become a thriving market for U.S. exports. Another promising goal of the NAFTA is the amount of jobs it will create, not lose, in the American workforce.
According to the book North American Free Trade, U.S. jobs are assumed to be created at the rate of 14.5 thousand new jobs per billion dollars of net improvement in the U.S. trade balance. The employment impact of the NAFTA will vary across the country but never be too significant in one area. It seems that the rationale of the typical NAFTA critic is that a wave of American jobs will be lost as companies make a run for the border or imports flood our market. This is not the case. It is estimated that perhaps 100,000 American jobs will be lost over the next 10 years due to NAFTA. Naturally, workers will be needed to fill all the jobs in our booming export sectors and the government is prepared to retrain these individuals to succeed in areas of the workforce such as this. If anything, the burden will fall primarily on the low-wage workers rather than the skilled, higher-wage workers. Evidence of this burden has yet to surface, this supported by a statement in the economic magazine appropriately titled The Economist proclaiming that some 3.5 million more American jobs have been created than lost since the NAFTA was put into operation.
One more important effect that the NAFTA could encourage is a slowing of the flood of illegal immigrants that enter our country, with Mexico understandably being the largest contributor. At present this is a formidable problem in our country. The extreme number of immigrants surfacing in our country, approximately 1.8 to 3 million from Mexico alone put a huge strain on our economy. The main cause of this problem is the relentless search for higher paying jobs which leads Mexicans to stray across the border into this country, that or the new value menu at Taco Bell. By encouraging the Mexican economy to grow, the United States can focus less on harsh immigration policies such as California's Proposition 187 and more on correcting the problem currently at hand.
Once this economy in Mexico begins to establish itself and experience any growth, labor laws and regulations will become increasingly more enforceable. Despite what may be thought by many Americans, The labor laws of Mexico nearly parallel those of the U.S. and in some instances exceed them, but without the funds or manpower to back them up, they are as worthless as the paper that they are written on. Keep in mind though, that sharp decreases in illegal immigration are not expected immediately, rather within the next two decades will the influx of these people be reduced significantly.
Since NAFTA passed in late 1993 and took effect, it has lived up to it's promises. Ross Perot and his cohorts can gloat about the fact that U.S. imports from Mexico increased by about $6 billion dollars, but conversely U.S. exports to Mexico increased by $8 billion. If you get out your calculator and do the math, you can see that the U.S. is left with a $2 billion dollar net improvement in their trade balance with Mexico. North to Canada, our exports increased by 12.7% in the first 10 months that NAFTA has been functioning. If the Big Three automakers are any barometer of what is to come from NAFTA, this has been one of the wisest economic trade alliances this country could have entered into. According to the Commerce Department, Big Three automobile exports from the U.S. and Canada to Mexico for the first quarter of 1994 reached 9,925 units, compared with 9,479 during all of 1993. In addition, Chrysler, Ford, and GM are expecting a combined 55,000 cars and trucks to be delivered to Mexico in ‘94. As for the warning that auto industry jobs would be lost to the Mexican market, it is not foreseen anytime in the near future as a car manufactured in Detroit is now $600 dollars than it's equivalent counterpart manufactured south of the border due to the reduction in tariffs. The Commerce Department also backs this up by proclaiming that 130,000 American jobs have been secured.
What needs to be understood is that there will always be two sides to this issue. Each faction will take and exploit a given statistic any way that they can to try and fortify their position. When separating the carefully gathered facts from the fiction, it is hard to see how the NAFTA has had any seriously detrimental effects has on the U.S. This trade agreement is certainly still very young, but apparently is reaching higher and higher levels as it boosts the economies of the member nations.
As aforementioned, NAFTA was the focal point of heated debates for nearly 14 months, and during that period, the plights of many people began to surface, environmentalists included. Once again, the target for enraged environmentalists was the less developed Mexico. At present their ecological system is in shambles when compared to that of the other countries participating in NAFTA. When you look at it from the perspective of the nature buffs, you end up with a worst case scenario of sorts. They feel, if NAFTA remains intact, that a reduction in trade restrictions and the newfound competition will destroy the already damaged environment. Forced to be efficient and throw the occasional barrel of toxic waste into the groundwater supply or face bankruptcy, companies may resort to "environmentally unfriendly" means of dumping wastes. While stingy environmental standards remain in the U.S. and Canada, Mexico, which can escape such restrictions due simply to a lack of enforcement, will push itself up in the market costing American jobs. On the homefront, this also means that vegetables from Mexico may have a tendency to end up on our tables pesticide ridden as long as the trade laws permit them to be.
In response to the pleas from groups such as the Audubon Society and Friends of the Earth, George Bush put environmental concerns front and center. He implemented the "Gephardt-Rostenkowski Resolution" which keyed on the environment and forces the president to report to Congress on progress toward meeting the objectives of an action plan. In essence, there is only so much that the U.S. can do to persuade Mexico to clean up it's act because provisions in NAFTA pertaining to environmental standards are not feasible at this point. Of late, Mexico has put forth an honest effort, as they enter the third year of a plan utilizing nearly $800 million dollars for projects such as nature preserves, solid waste disposal, and the cleaning up of the Mexico-U.S. border. Another government agency that has been receiving a significant increase in funds is the Mexican equivalent of the United States' EPA. Provisions concerning the environment and industry standards may escape NAFTA, but due to mounting pressure, they will not escape serious revamping at the national level.
In conclusion, NAFTA, the brainchild of George Bush and Salinas de Gurtari, has many positive aspects that with a little ironing out could prove to be a dynamic economic catalyst for this country. By using this export-led growth strategy centered around a reduction in tariffs over a 15 year period, the member nations can achieve all that they hoped to. After about 2 years of NAFTA, the U.S. has shown formidable gains in it's economy. To avoid problems that critics argue such as job loss and depletion of the environment, the U.S., Canada, and Mexico can create policies on the national level to curb such things as these from happening. All in all, granted support from the constituencies of the member nations, NAFTA should be around for a while.BACK TO DIRECTORY | BACK TO SUB DIRECTORY: ECONOMICS
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