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What is NAFTA and what's its economic impact

flags of USA, Canada and Mexico, members of NAFTA

NAFTA, a trilateral free-trade deal signed by the US, Mexico, and Canada in 1994, aimed to eliminate most tariffs on products traded among the three nations. While it has boosted trade relations, critics argue that it has failed to generate the promised job growth and deeper regional economic integration. NAFTA has been subject to ongoing debate, with both advocates and critics lobbying for changes. However, momentum has stalled, and attention has shifted to larger trade agreements such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.

In 1994, the North American Free Trade Agreement (NAFTA) was established as a three-way trade agreement between the United States, Mexico, and Canada. Its main objective was to eliminate most tariffs on goods traded among the three countries. The agreement phased out these tariffs gradually, with the final aspects of the deal implemented in January 2008. NAFTA abolished import tariffs in various industries, with a particular focus on agriculture, textiles, and automobiles. Additionally, the agreement introduced intellectual-property protections, established dispute-resolution mechanisms, and implemented regional labor and environmental safeguards, though some experts argue that these measures could be strengthened.

How do economists assess NAFTA's economic impact?

It is challenging for economists to determine the direct impact of NAFTA on economic growth, and impossible to quantify the hypothetical scenarios of trade policy liberalization without NAFTA. While intraregional trade flows have significantly increased, it is unclear how much of this growth can be attributed to NAFTA or other economic forces. Despite early concerns over job losses, the effect on the U.S. labor market has been relatively modest due to the small percentage of the economy accounted for by total trade with Mexico and Canada. While some studies suggest only limited benefits to the agreement, others credit NAFTA with stimulating the development of supply chains, particularly in the auto industry, and reducing costs to improve global competitiveness.

How has NAFTA affected the U.S. labor market?

The impact of NAFTA on the US labor market remains a contentious issue, with varying perspectives among economists and stakeholders. While some proponents of the deal argue that it has created new export-related jobs that pay higher wages than domestic production jobs, others highlight the negative side effects, including stagnant wages and rising income inequality. Opponents of the treaty claim that NAFTA has forced American workers into competition with each other, resulting in fewer rights and protections, and causing the loss of one million US jobs by 2004. However, many economists caution against solely attributing changes in the labor market to NAFTA, pointing to broader economic trends such as the rise of China's economy as significant factors that remain largely unaffected by US policy shifts toward NAFTA.

What has been the impact of NAFTA on Mexico?

Despite the high expectations surrounding the agreement, the promised reduction of the per capita income gap between Mexico, the United States, and Canada has not materialized. While Mexico's per capita income increased by an average of 1.2 percent annually over the past two decades, from $6,932 in 1994 to $8,397 in 2012, the growth has been much slower than in other Latin American countries, such as Brazil, Chile, and Peru. Additionally, the treaty did not effectively discourage Mexican emigration to the United States, and the number of Mexican-born people living in the United States doubled since 1994 to 12 million in 2013. The wealthiest Mexicans in industries excluded from NAFTA, such as telecommunications, television, and transportation, have become even richer, with Carlos Slim Helu now the world's richest man.

While some critics contend that NAFTA has hurt Mexican farming prospects by exposing them to competition from the heavily subsidized U.S. farming industry, economists dispute this assessment. In fact, Mexican farm exports to the United States have tripled since NAFTA's implementation, partly because of reduced tariffs on maize.

Trade liberalization between Mexico and the United States has had positive consequences for Mexicans, in general, according to experts, not just Mexican business interests. For instance, the deal has led to a significant reduction in Mexican prices for clothing, televisions, and food, which helps to offset slow income growth. GEA, a Mexico City-based economic consulting firm, estimates that the cost of basic household goods in Mexico has halved since NAFTA's implementation. Mexican workers in the car manufacturing and aeronautics sectors in northern Mexico have also benefitted from the treaty, helping to expand the country's manufacturing base.

NAFTA has also provided Mexico with an intangible benefit: the country has adopted orthodox economic management practices and is no longer prone to crises. According to Jorge G. Castañeda, a professor at New York University and former foreign minister of Mexico, the agreement "ended up straitjacketing a government accustomed to overspending, overpromising, and underachieving." The government abandoned many protectionist policies and allowed the prices of tradable goods to converge on both sides of the border, reducing deficits and limiting the potential for currency crises.

What impact has it had on Canada?

Canada, the leading exporter of goods to the United States, has benefited significantly from NAFTA, but it is challenging to attribute direct causation. Since 1993, Canada has added 4.7 million new jobs, and U.S. and Mexican investments in Canada have tripled. However, the "productivity gap" between Canada and the U.S. has not narrowed, with Canadian labor productivity standing at 72 percent of U.S. levels in 2012, despite the highly educated workforce. NAFTA has also had a significant impact on U.S.-Canada agricultural trade, with the bilateral flows of agricultural products increasing substantially. The U.S. Department of Agriculture offers a detailed sector-by-sector review of U.S.-Canada trade since NAFTA's implementation, which shows broad increases in trade across multiple sectors. Economists agree that NAFTA has helped promote economic growth and investment from both domestic and foreign sources, as Gary Clyde Hufbauer and Jeffrey J. Schott of the Peterson Institute for International Economics note, "It has worked."

What's next?

In August 2018, after several rounds of negotiations, the United States and Mexico reached a preliminary agreement to update NAFTA. The new agreement, called the United States-Mexico-Canada Agreement (USMCA), includes several changes aimed at modernizing and rebalancing the trade relationship between the three countries.

The USMCA includes provisions for increasing the amount of American content in cars traded within North America, strengthening intellectual property protections, and opening up the Canadian dairy market to American farmers. The agreement also includes provisions on labor rights, environmental protections, and dispute resolution mechanisms.

The USMCA was signed by the leaders of the three countries in November 2018, but still had to be ratified by each country's legislature. The United States ratified the agreement in January 2020, and Mexico followed suit later that same year. Canada ratified the agreement in March 2020, and the USMCA went into effect on July 1, 2020.

The USMCA is expected to have significant impacts on North American trade, though opinions on the agreement are divided. Some economists argue that the USMCA will lead to increased economic growth and job creation, while others are concerned that the new agreement could raise costs for consumers and harm certain industries.

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