North American Free Trade Agreement

A trilateral agreement signed in 1992 in which Canada, Mexico, and the United States pledged to eliminate barriers to trade among the three countries.

Several factors made the North American Free Trade Agreement (NAFTA) desirable to the United States. By the 1980s, global competition, which the United States had initially encouraged at Bretton Woods (1944) and through the General Agreement on Tariffs and Trade (GATT), had led to U.S. economic problems as Asian and European competitors, most notably Japan and Germany, became more competitive in traditional industries such as steel, textile, electronics, and automobiles. U.S. producers also accused Japan of hindering U.S. exports through unfair practices. The United States, however, remained competitive in newer sectors such as telecommunications, computer technology, and pharmaceutical products, as well as within its own hemisphere. A regional trade agreement encompassing all sectors of the U.S. economy, if accompanied by clauses ensuring fair competition, thus played to U.S. strengths.

During the late 1980s, Mexico also embraced free trade and economic liberalization, partly because international lenders, who owned much of Mexico’s large debt, insisted on it. Mexico joined GATT in 1986 and proceeded to reduce its tariffs. Other contemporary regional trade agreements include the Caribbean Basin Initiative (1984), the Asia Pacific Economic Cooperation forum (1989), the Mercado Comun del Cono Sur (Southern Cone Common Market) (1991), and the European Economic Community’s Single Market (1993).

NAFTA’s negotiation and ratification followed several steps. In 1989, the United States and Canada negotiated, signed, and ratified the Free Trade Agreement (FTA). In 1990, the United States started negotiations for Mexico to enter the FTA. Mexican president Carlos Salinas de Gortari, Canadian prime minister Brian Mulroney, and U.S. president George H.W. Bush signed the ensuing NAFTA treaty on December 17, 1992. U.S. president Bill Clinton, who took office in January 1993, supported the agreement. The House of Representatives (234–200) and the Senate (60–38) voted in favor of ratification in November 1993. Because of strong reservations among labor and environmental activists, the Clinton administration negotiated two side agreements: the North American Agreement on Labor Cooperation and the North American Agreement on Environmental Cooperation (1993). NAFTA took effect on January 1, 1994.

Under NAFTA, the three parties immediately eliminated nontariff barriers to trade. Most tariffs between Canada and the United States were set to disappear by 1998, while most tariffs between the United States and Mexico and between Canada and Mexico would follow suit by 2008. The agreement also protected intellectual property rights, promoted foreign investments, allowed fair competition, and encouraged future regional cooperation. A NAFTA secretariat handles trade disputes. If successful, NAFTA will create a unified market of 400 million consumers with a combined annual gross domestic product of $9.5 trillion.

NAFTA proved highly successful in increasing trade within the region at a rapid rate. By 1999, 85 to 90 percent of Canada’s and Mexico’s trade was NAFTA related; trade with NAFTA countries represented 36 percent of U.S. trade. The 1994– 1995 peso crisis in Mexico did not halt the growth in trilateral trade. By 2000, U.S. exports to Canada reached $180 billion and to Mexico $114 billion, up 116 percent and 303 percent since 1990, respectively, compared with a mere 59 percent rise in trade with the European Union over the same period. An even faster growth in imports created a ballooning U.S. deficit with Mexico and Canada of $34 billion and $73 billion in 2000, respectively.

The growing imbalance between exports from the United States and Canadian and Mexican exports to the United States gave credence to criticisms that the agreement was economically detrimental to the United States. Reliable statistics on job losses directly linked to NAFTA are impossible to come by, but there is ample statistical evidence that the Canadian and U.S. manufacturing sectors, including the textile and automobile industries, lost jobs to Mexico. The overall U.S. unemployment rate, however, decreased sharply during the 1990s, to less than 5 percent. Critics also argue that job flight to Mexico helped U.S. and Canadian companies benefit from more lenient labor and environmental regulations and depressed wages. The growing number of trucks and trains crossing the U.S.-Canadian and U.S.-Mexican borders makes it more difficult to monitor the drug trade and illegal immigration.

During the December 1994 Miami Summit of the Americas, the Clinton administration proposed to create a hemisphere-wide free-trade area of the Americas by 2005. The U.S. Congress did not vote on the resulting Export Expansion and Reciprocal Trade Agreements Act of 1997 and refused to renew the president’s fast-track negotiating authority, hindering efforts to conclude an agreement. Chile, the most likely candidate for NAFTA expansion, signed an association agreement on trade with the European Union in April 2002.

Philippe R. Girard

See also: General Agreement on Tariffs and Trade; United States.

Bibliography

Cameron, Maxwell A., and Brian W. Tomlin. The Making of NAFTA: How the Deal Was Done. Ithaca: Cornell University Press, 2000.

Rosenberg, Jerry Martin. Encyclopedia of the North American Free Trade Agreement, the New American Community, and Latin-American Trade. Westport: Greenwood, 1995.