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The Impact of the North American Free Trade Agreement (NAFTA): An Institutional Analysis of Global and Regional Trade
The North American Free Trade Agreement (NAFTA) is a trade-related framework to ensure the flow of trade and investments between countries. NAFTA is the world’s largest trade agreement involving the United States (U.S.), Canada, and Mexico which promotes free duty rates for imports among the three countries. It should be stated that NAFTA isn’t only perceived as a formal trade agreement; it is also seen as a global business strategy that has developed free trade relations worldwide. The reasons to implement NAFTA were many. However, since its inception, the effects of the Agreement have been controversial in regard to the impact on economic and social development in the U.S., Canada, and Mexico. At the conclusion of this paper we will have a better understanding as to whether this trade agreement is to the betterment or detriment of American interests.
I. State of Affairs of U.S., Canada, and Mexico pre-NAFTA
Prior to NAFTA, the U.S. and Canada had already established a trade relationship through the U.S.-Canada Automotive Products Agreement of 1965 and the U.S-Canada Free Trade Agreement (FTA) of 1989. The U.S.-Canada Automotive Products Agreement removed tariffs on cars, trucks, buses, tires, and auto parts between the two countries. The U.S-Canada FTA of 1989, signed on October 3, 1987, was the first economically significant FTA signed by the U.S. (Villarreal, Fergusson, 2). Prior to this signing, the only bilateral agreement involving the U.S. had been with Israel (Villarreal, Fergusson, 2). The U.S.-Canada FTA became effective on January 1, 1989 with the two countries agreeing that key elements of their FTA include eliminating tariffs, reducing non-tariff barriers, and addressing service goods. The FTA also had in a place a formal dispute settlement protocol for the fair and swift resolutions to trade disputes (Canada-U.S. Free Trade Agreement).
Historically, Mexico has depended on its trade protectionism policies and investment policies which limited unfair competition from foreign countries. Through its trade protectionism policies, Mexico hoped to cultivate domestic growth and protect themselves from a perceived risk of foreign domination. Unfortunately, these hopes never came to fruition and failed to achieve the growth they desired. This protectionism mindset came into effect after Mexico’s revolutionary period and remained until the 1980s when faced with a debt crisis. Due to this economic instability, Mexico was left with no choice but to modify its restrictive trade policy to what is now considered one of the most open in the world. One way of restructuring their economy occurred in 1986 when Mexico became a member of the General Agreement of Tariffs and Trade (GATT). GATT, a multilateral trading system, was created in 1948 for the purpose of lowering trade barriers. A condition of participating as a GATT member was that Mexico had to agree to lower their highest tariff rate. Even though Mexico lowered their tariff rate, there were still many restrictions in the form of import licenses on all imports (www.crs.gov, R42965). As a result, Mexico’s participation in GATT strengthened ties with the U.S.
According to M. Angeles Villarreal, “Mexico now has 12 FTAs involving 46 different countries.”(Villarreal, 3). These FTAs, the majority of them being with Western Hemisphere countries, now give Mexico the opportunity to increase trade with those countries and not be as heavily dependent on the U.S. as its main exporter. One of the earliest FTAs that Mexico participated in was with Chile. The Mexico-Chile FTA was enacted in Chile in July 1999 and in Mexico in August 1999. This FTA was designed to strengthen the trade relationship and improve the bilateral investment opportunities in both countries (Villarreal, 3).
Regional trade agreements (RTAs) have been steadily increasing worldwide since the early 1990s. The World Trade Organization (WTO) was established in Geneva, Switzerland January 1, 1995 to serve as a forum for trade negotiations where one can resolve tariff disputes among countries worldwide. The WTO consists of 164 countries to include the U.S., Canada, and Mexico (Villarreal, 4). This figure represents over 98% of world trade with over 20 countries seeking to join the WTO (WTO, 2). Multilateral negotiations in the WTO can be a tedious and time consuming process which may factor into why Mexico has a numerous FTAs.
II. Historical Aspects of NAFTA
An offshoot of an RTA is a regional economic alliance in which member countries, linked by their mutual interest of economic gain, work together. This type of alliance, characteristic of a global strategy, is what NAFTA represents. Global strategy is comprehensive, encompassing an all-around understanding of culture, politics, history, etc.
Examples of globalizing include foreign direct investments which are acquisitions, ventures, foreign subsidiaries. There are also market entry strategies which are global sourcing, exporting/importing, and licensing.
The planning of NAFTA, from conception to enactment, spanned over the course of three presidential administrations. NAFTA was originally proposed by Ronald Reagan in 1978 as one of his campaign platforms, suggesting that this agreement could be beneficial for the U.S., Canada, and Mexico for moving goods across borders. Negotiations continued through the Reagan administration and were finalized under the administration of President George H.W. Bush.
President Bush signed the agreement on December 17, 1992, and it was approved by Congress on November 20, 1993. The NAFTA Implementation Act was signed into law by President William J. Clinton on December 8, 1993. NAFTA finally entered into force on January 1, 1994.
The U.S., Canada, and Mexico each had their reasons on why they wanted to enter into an FTA. The U.S. looked at it both from an economic and political standpoint. An FTA would strengthen Mexico’s recent trade policy modifications and help stimulate their economic growth by not having barriers or taxes on trade. It was anticipated that as Mexico’s economy grew then illegal immigration to the U.S. from Mexico would decrease, thus creating political stability for the U.S. Canada on the other hand, had reservations about joining an FTA; however, they weren’t going to step aside while the U.S. and Mexico worked out their own deal. If Canada were to step aside then the U.S. would be the only country out of the three who would be in a win-win situation because of their easy access to Canada and Mexico’s market. According to Chapman, “Such a trading arrangement has been referred to as “hub-and-spoke,” since one country (the hub) has preferential access to both of the other countries’ markets (the spokes) but the spoke countries have free access only to the hub country’s market (Chapman, 6). In this case, the “hub” is the U.S. with the “spokes” being Canada and Mexico. Lastly, Mexico’s rationale for entering into this FTA was solely for economic reasons. Entering into this agreement would not only maintain Mexico’s export-import alliance with the U.S., it would also increase Mexico’s opportunities for foreign direct investment. (Chapman, 7).
NAFTA is touted as being the most comprehensive FTA negotiated at the time because of several groundbreaking provisions (NAFTANOW.ORG). One such provision is the “rules of origin, which simply stated, would dictate where a product came from. Simple in theory, however, as globalization becomes more complex, assigning an origin to a product becomes more challenging. Other highlights of NAFTA provisions include:
- Elimination of duties and phasing in of tariff reduction which would provide greater market access for goods. Non-tariff barriers, the biggest obstacle to conducting business in Mexico for small businesses, were to be eliminated by 2008.
- A formal and transparent mechanism in place for dispute resolution to resolve differences that protect foreign investment and shows a commitment to treating all parties involved fairly
- Increased protection of Intellectual Property Rights (IPR); examples of intellectual property are patents, trademarks, copyright, industrial designs, computer software, etc. This increased protection would safeguard and ensure no other country could create their own version of a product.
- Easier access for business professionals to travel worldwide where their interests lie
- Access to government procurement opportunities at the Federal level in the U.S., Canada, and Mexico
- U.S., Canada, and Mexico agreed to establish tougher standards for health, safety, and industrial areas
- Increased free trade in agriculture which meant Mexico’s import licenses had to be abolished;
- “National Goods” status provided to products imported from other NAFTA countries which meant no government could impose taxes or tariffs on those goods (NAFTA, www.inc.com).
In addition to the above highlights, NAFTA also had supplemental side agreements on labor and the environment, issues which were not included in NAFTA but were of some concern at the time. These issues included worker rights protection and available resources in Mexico if there was the economic growth that was anticipated.
Under President Clinton, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC) entered into force the same day as NAFTA, January 1, 1994 (Villarreal and Fergusson). These side agreements were groundbreaking as well, “NAFTA marked the first time that labor and environmental provisions were associated with an FTA. For many, it represented an opportunity for cooperating on environmental and labor matters across borders and for establishing a new type of relationship among NAFTA partners.” (Woodrow Wilson International Center for Scholars, NAFTA at 10: Progress, Potential, and Precedents, pp. 20-30).
To take the environmental concerns one step further, the U.S. and Mexico created a bilateral agreement wherein they agreed to work together on developing environmental infrastructure projects along the U.S./Mexico border to address problems that may arise in anticipation of the economic growth.
For the remainder of this paper, we will discuss the impact NAFTA has had on the U.S., Canada, and Mexico in areas such as the economy, socio-cultural, environment, and legal/political, as well as, NAFTA today and potential renegotiations under the Trump administration.
III. Economic Analysis of NAFTA on its Three Member Countries
The North American Free Trade Agreement was signed into law in 1994 for the purpose of eliminating trade barriers and tariffs between the United States, Canada, and Mexico, and as a result fostering economic growth and creating jobs. At the time, the trade agreement was unprecedented, as it involved two developed countries (the United States and Canada) entering into an agreement with a developing country with a much smaller economy (Mexico). At the time, many economists and opponents of NAFTA felt that the United States and Canada had nothing to gain from integrating with Mexico. However, for the three member countries, the mission was clear; trade liberalization would foster economic growth in Mexico, which would in turn discourage illegal immigration. The goal was that Mexico would benefit from technology and investment from both the United States and Canada, and the U.S. and Canada would benefit from Mexico’s cheap skilled labor pool (Carbaugh, 281). In this section, we will attempt to determine NAFTA’s overall economic impact, and analyze whether ultimately NAFTA succeeded or failed in stimulating trade and investment and creating jobs.
NAFTA has had the most significant impact on Mexico, since its economy was much smaller than those of the other member nations. Prior to NAFTA’s inception, the economic and political environment of Mexico was highly unstable. Mexico had significant levels of underemployment that resulted in illegal immigration to the United States. They also experienced a severe recession in late 1994, in the wake of the assassination of presidential candidate Luis Donaldo Colosio. This tragedy was a catalyst for the “Mexican peso crisis” – investor confidence in Mexico fell, weakening their economy and cutting the value of the peso in half (Pereznieto, 8).
Despite this turbulence, Mexico began to experience economic growth in the months and years following NAFTA. One reason for this was that Mexico possessed a comparative advantage over other United States trade partners because of its large, low-wage workforce. NAFTA enabled Mexico to become one of the principal exporters of manufactured products, processed foods, and other agricultural products to the United States (Carbaugh, 281-282). NAFTA facilitated U.S. investment, providing Mexico with better infrastructure and technology, and as a result, higher quality jobs. NAFTA also assisted Mexico’s economic recovery after the 1994 peso crisis. A World Bank study estimated that FDI in Mexico would have been 40% lower without NAFTA (Villarreal, 2010, 7). According to M. Ayhan Kose of the World Bank Group, macroeconomic volatility in Mexico also declined in the years following NAFTA, falling more than 40% percent between 1996 and 2002 (Kose, 18). While all these economic changes cannot be ascribed solely to NAFTA, we can still draw the conclusion that NAFTA ultimately helped Mexico become a more developed country. The effects of the trade agreement still benefit Mexico to this day; more than 80% of Mexico’s exports went to the United States in 2015, and these exports accounted for 37.5% of Mexico’s total GDP (He, 1)
Despite these positive changes, public opinion on NAFTA within Mexico is mixed. One of the more controversial aspects of NAFTA has been its effect on the agricultural sector of Mexico; Mexican farmers claim they have been devastated by U.S. competition, and cannot compete with the cheaper and higher-quality imports from the United States. “They earn in 4 months what we earn in a year”, says Dionisio Garcia, a Mexican farmer from the small state of Tlaxcala (The Economist, 1). According to a study done by the Institute for International Economics, the number of Mexicans employed in rural agriculture dropped from 8.1 million in 1993, to 6.8 million in 2003 (Villarreal, 2010, 14). As previously stated, these changes cannot be attributed solely to NAFTA. Robert Carbaugh, an economics professor from Central Washington University, warns against the fallacy of believing these shortcomings are all NAFTA’s fault:
“Trade and investment can only do so much. Since the beginnings of NAFTA, the government of Mexico has struggled to deal with problems of corruption, poor education, red tape, crumbling infrastructure, lack of credit, and a tiny tax base. These factors greatly influence a country’s economic development. For Mexico to become an economically advanced nation, it needs a better educational system, cheaper electricity, better roads, and investment incentives for generating growth – things that NAFTA cannot provide.”(Carbaugh, 282-283)
Another school of thought is that the more developed a country becomes, the less reliant they are on agriculture to supplement their economy. In essence, because of technological innovations and increased efficiency of agricultural production, many Mexican farmers were likely to lose their jobs anyway (Villarreal, 2010, 14).
Compared to Mexico, NAFTA’s impact on the United States has been much less pronounced. During the 1992 election, presidential candidate and outspoken NAFTA opponent Ross Perot famously stated that there would be a “giant sucking sound” of jobs moving from the United States to Mexico because of NAFTA. To some extent, Perot was correct; The U.S. auto industry has lost 350,000 jobs since 1994, as many American firms found it more cost-effective to relocate to Mexico to manufacture their automobiles (McBride, 2). Unskilled workers in the U.S. are also negatively affected, as they cannot compete with Mexicans who are willing to do the same job for significantly less money (Carbaugh, 283). While critics cite these job losses as proof that NAFTA is harming the U.S. economy, others believe these losses would have happened even without NAFTA. Mauro Guillen, of the Wharton School of Business, feels that if NAFTA did not exist, many of the jobs that were lost during this period would have been outsourced to China; “Perhaps NAFTA accelerated the process, but it did not make a huge difference.” (Knowledge, Wharton, 1) In fact, some evidence suggests that NAFTA actually helped the U.S. auto sector compete with China. Gordon Hanson, an economics professor from UC San Diego, elaborates; “By contributing to the development of cross-border supply chains, NAFTA lowered costs, increased productivity, and improved U.S. competitiveness” (McBride, 1). Dr. Hanson goes on to say that the decline in the U.S. job market had less to do with NAFTA and more to do with China’s accession to the World Trade Organization in 2001. “China is at the top of the list in terms of the employment impacts that we found since 2000, with technology second, and NAFTA far less important” (McBride, 1).
Overall, NAFTA has had a minor, but positive, impact on the U.S. economy as a whole. According to the Peterson Institute for International Economics, the United States has been $127 billion richer each year thanks to “extra” trade growth fostered by NAFTA ([email protected], 1). The same study concluded that although approximately 15,000 U.S. jobs are lost per year due to NAFTA, the economy actually gains about $450,000, due to higher employee productivity and lower prices ([email protected], 1). Trade between the U.S. and Mexico and the U.S. and Canada has increased significantly. From 1994 to 1998, the flow of U.S. imports from Canada increased by more than 1 trillion dollars because of NAFTA, with $384 billion of that money representing imports that previously came into the United States from other countries, but now came from Canada (Carbaugh, 285). NAFTA has resulted in increased trade between all three countries, but since the United States economy is many times the size of Mexico’s, their gains were much more modest relative to Mexico’s.
Canada has also experienced moderate economic growth resulting from NAFTA. Complicating the matter is the fact that Canada and the United States had a bilateral trade agreement already in place that preceded NAFTA, the Canada-U.S. Free Trade Agreement (or CUSFTA for short). While it is difficult to determine which trade agreement was more conducive to stimulating Canada’s economic growth, the fact remains that U.S.–Canada trade increased significantly from 1994 on. Canada’s agricultural trade more than tripled since 1994, and Canadian exports to the U.S. increased from $110 billion to $346 billion (McBride, 1). Canada is also one of the largest oil exporters to the U.S. According to MIT’s Observatory of Economic Complexity, in 1993 the U.S. imported $37.8 billion worth of crude oil, with 13.2% of it coming from Canada – in 2014 Canada sold the U.S. $85.6 billion, or 33.8% of $253 billion in total crude imports (Floyd, 1). Canada has also enjoyed a significant increase in foreign direct investment – the United States invested $352.9 billion of FDI in 2015, which makes up 49.4% of total FDI in Canada from global investors (Ferguson, 24).
While Canada had initially hoped to stimulate trade with Mexico as well, this has not come to fruition; there is still not a great deal of Canada-Mexico trade. Canada-US trade totaled $760 billion ($580 billion) in 2015, compared to only $26 billion with Mexico (Ljunggren, 1).
IV. Socio-Cultural Aspects of NAFTA
When NAFTA was signed in December of 1993, President Bill Clinton stated, “The environment and labor side agreements negotiated by our administration will make this agreement a force for social progress as well as economic growth,” (“NAFTA’s Impact,” 2016). Today, the American people, as well as citizens of the other two countries, have mixed reviews on the impact of NAFTA, and it was highly debated during the 2016 Presidential Election cycle. Over 14 million jobs in the U.S. rely on this trade with Canada and Mexico – six million just from U.S.-Mexican trade alone. The economic payoff from NAFTA is around $400 per person per year. While the “costs” of NAFTA are concentrated in a few industries (ex: car manufacturing), the benefits (ex: lower prices for imported electronics) are felt nationwide. Around 850,000 U.S. jobs have been lost from NAFTA trading. About 15,000 net jobs are lost each year. However, the U.S. economy gains roughly $450,000 for every one of these net jobs lost. This is a result of more productivity, lower prices, and having a wider range of products. Even critics of the deal believe some of the jobs losses, stemming from a growth in imports, would’ve happened regardless. As these old jobs are lost, 200,000 export-related jobs are created in the process. These new jobs pay an average of fifteen to twenty percent more than the jobs that were lost (“NAFTA’s Impact,” 2016).
Studies have shown that feelings toward free trade in general in the U.S. greatly vary by age. According to a YouGov poll from May 2016, forty-eight percent of millennials support free trade while only twelve percent oppose it. This is ironic because Senator Bernie Sanders, who openly opposes free trade, was very popular with this age group during the 2016 Democratic primaries for his socialist ideas. Meanwhile, Americans aged sixty-five and up were the most skeptical of free trade. Only twenty-three percent support it while thirty-nine percent are opposed. Overall, thirty-two percent of Americans think free trade has created lower prices but twenty-seven percent think it has had the opposite effect. Forty-five percent of Americans say free trade is “bad for workers”, thirty-six percent say it’s “bad for the environment”, and fifty percent think it has led to a “[lower] quality of product available,” (Bentley, 2016).
Poll from 2016 actually suggested that sixty-nine percent of millennials support free trade. In addition, over fifty percent say they personally have benefitted from free trade. Investor’s Business Daily suggests that this is “perhaps because they buy so much stuff abroad,” (2016). With all this being said, both major political parties have faced recent pressure not to support free trade. Many union backers have pressured Democratic officials on the issue, and President Donald Trump has also tried to take the GOP – normally very much in favor of free trade – in a different direction. These pressures from both the left and the right are partially responsible for the collapse of the proposed Trans Pacific Partnership (TPP) trade agreement.
Before Clinton signed NAFTA into law in 1993, most Democrats in Congress actually opposed the bill because they thought it fell short on workers’ rights and environmental standards. Democrats also had a concern that high productivity and low wages for Mexican workers would tempt U.S. production companies to move to Mexico. Even the threat of this would hurt American workers. This is exactly what ended up happening. The labor rights for Mexican workers declined. They were producing eighty percent more but earning twenty percent less from 1994 to 2011. To add to that, Mexican auto workers earn just fourteen percent of what U.S. autoworkers do, and auto part workers earn just $2.40 per hour (Levin, 2017).
Some assume that low wages in Mexico are inevitable, but it’s more due to government and corporate regulations that intentionally aim to keep wages down and attract more investments. Congressman Sander Levin (2017) of Michigan stated, “We strongly believe in the benefits of trade, competitiveness, and engaging the global economy. Competitiveness, however, needs to be based on innovation, productivity, and quality, not who has the fewest rights.” After World War II, strong unions in the U.S. created a link between increasing productivity and increasing wages. Shaiken claims that it is almost “impossible to form independent unions in the export sector,” (Shaiken, 2017). This grew the economy rapidly and the middle class benefitted. Shaiken adds, “President Trump has stated often that inept negotiators made Mexico a winner and the U.S. a loser during the writing of NAFTA. The reality is that NAFTA provided considerable benefits to investors and transnational firms on both sides of the border while gains bypassed Mexican workers and the fallout damaged workers and communities in both countries.” Many feel these labor issues are at the core of NAFTA’s problems and should be taken into consideration when renegotiating.
Women’s rights have also been an issue that doesn’t necessarily get talked about as much, but it is very important. Women have been impacted more by NAFTA’s shortcomings because they often work in industries such as textile and apparel. Whenever U.S plants leave the country or shut down, women have a harder time finding a new job that pays as well. A survey from 1999 suggested that almost two-thirds of NAFTA-Trade Adjustment Assistance were female workers. In addition, the majority of people who work on small farms around the world are women. In Mexico, small farmers are often forced off their land as big agricultural businesses take over. These women are then forced to move to cities with their families to seek out new work. Another issue involves factories. Female workers in many Mexican factories often face job discrimination, sexual harassment, violence, and even mandatory pregnancy testing (“Women’s Issues,” 2002). However, there aren’t many women’s groups advocating for women on these very issues. Still, a Pew Research Poll from last year suggests fifty-four percent of women agree that free trade between the U.S. and other countries has had a positive impact on the country while thirty-four feel the opposite way (Stokes, 2016).
When NAFTA was under debate, there was not a clear stance on the trade agreement from black political leaders, leading to some frustration within the black community. At the time, one-third of black Americans were living in poverty, and the black unemployment rate was up to twelve percent. Some black leaders worried job loss would hit the black community the hardest while others predicted black Americans would actually gain 15,000-20,000 net jobs. Most members of the Congressional Black Caucus came out against the bill, also citing that this could have a negative impact on black-owned businesses. Supporters included Colin Powell, Barbara Jordan, and Eddie N. Williams. Williams stated about NAFTA, “It represents the boldness and confidence with which we must engage the future. And it promises to open wider the doors of economic opportunity for all Americans, including black Americans,” (Gilliam, 1993).
In 2015, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) and the United Steelworkers came out against the TPP, claiming it would hurt black Americans living in urban areas. Back in the 1950s, Baltimore was an area where a lot of manufacturing and shipping occurred. However, by 2000 over 73,000 of those manufacturing jobs were gone. Many blacks moved to Baltimore during the Great Migration to escape the enhanced racism in the South where they had faced much greater institutionalized discrimination. Yet, the employment rate for black men in Baltimore went from seventy-three percent in 1970 to just fifty-eight percent in 2010. By 2013, only 8.6 percent of black Americans had jobs in manufacturing. Some speculate the most recent manufacturing job loss could be a result of the sometimes-violent protests after the death of Freddie Gray (Marans, 2015). However, there is not much substantiated evidence to back this suggestion at the moment. Still, a Pew Research Center poll from last year suggests that fifty-five percent of blacks agree that free trade between the U.S. and other countries has had a positive impact on the country (Stokes, 2016).
V. Environmental Impact of NAFTA
Even though NAFTA is considered one of the most successful trade agreements in history, its overall impact on the environment was harmful. Although notable improvements were made after signing in NAFTA, a great deal of evidence also shows the negative side effects it has created. Mexico was a closed country in their economy and had an individualistic independent policy. President Carlos Salinas realized that in order for Mexico to grow and promote active economic development, and to make the country move to liberalization, he had to support NAFTA. Due to the poor regulations and policies in Mexico, some argue that they could have accomplished the expansion of their economy without entering into NAFTA; because of the environmental damages it ultimately caused the country. NAFTA did not strengthen the protection of Mexico’s environmental standards within the region. In fact, the Mexican government had ignored and dismissed important environmental protections, and had poorly funded these laws which induced pollution. Conversely, because of stricter laws and regulations concerning the environment in both the United States and Canada, both countries had implemented rules that were solid and unbreakable, so they have not been harmed in this regard, Mexico was the only counterpart that suffered. (The environmental effect of free trade. 2000, October).
Whenever a country experiences change in its economic growth, there must be an influence on the environment. After just a few years of NAFTA, environmentalists have declared that there are severe impacts on the environment in Mexico. Environmental laws and policies in Mexico are significant, but only in books. They are not applying the system effectively, and because of their weak enforcement on these laws, problems manifest. Various negative impacts on Mexico’s environment appeared since NAFTA was founded back in 1994. In his article published in opencanda.com, Dr. Raul Vega stated, “Mexico environmental policy appears fragmented, contradictory with itself and much talk with very little action” (Vega, 2014). The harmful impacts include increasing the use of chemicals to enhance large productions in commercial farms and the use of pesticides and fertilizers that pollute water sources and land. All of these negative impacts can be attributed to NAFTA weakening the environmental standards. The unrestricted use of chemicals contributes to river and Lake Acidification, high soil salinity, ground-level ozone and disruption of natural forest processes. As a result, the unique biodiversity of forests is diminishing in Mexico. Since the implementation of NAFTA, Mexico’s deforestation rate has doubled from 600 thousand hectares to almost 1.1 million hectares, which leaves it after Brazil in the first place (NAFTA’s Impact on Mexico. n.d.).
Another main negative effect of implementing NAFTA is the devastation of Mexico’s rural peasants. Lands and plots were sold by creditors and foreign ownerships, which produced the issue of decreasing the harvest of corn. Corn is considered the main crop in Mexico. By that time, corn imports from the United States had quadrupled, and sold in Mexican lands, so farmers received 70% less of agricultural subsidies for their harvest and they found themselves unable to make a living. (Pardon,n.d) “Before NAFTA, everybody here grew corn. People didn’t make much money, but nobody went hungry.” says Mendoza, a 23 yr old, coming from farming family (Darlington, 2017). In addition, genetically modified corn coming into the country created another problem for Mexican farmers, as the modified corn coming from the U.S. drove out native species of corn. It becomes a problem when modified corn pushes out the biodiversity of native species. As a consequence, farmers were forced to abandon their lands and migrate to crowded and polluted Mexican cities. The overcrowding in some cities and towns that are linked to the maquiladoras are struggling serious basic waste and sewage disposal scarcity. (NAFTA’s Impact on Mexico. n.d.).
By increasing the trade between the three countries of NAFTA, traffic has increased as well. Because of the high number of manufacturers, transporting and truck traffic, producing toxic emissions and particulate matter by transportation and trucks that are considerably high, the level of the emissions coming from trucks that does not meet the environmental standards had led to air pollution. Unfortunately, in some cities of Mexico, the air is polluted 100 times more than the regular rates (The principal problems now facing Mexico City, 2012). With this amount of pollution, health hazards become more obvious and visible. The rate of Hepatitis A infections rose in Mexico, and the pollution increases the chances of developing diseases such as asthma, birth defects, and even cancer. Between 1997 and 2001, over 36,000 children were taken to the emergency room in the border town of Ciudad Juarez because of breathing problems that were caused by toxins coming from maquiladora factories that were leaking into their lands, air and drinking water with high levels (NAFTA: 20 Years of Costs to Communities and The Environment 2014). It also had much worse repercussions, such as death of children under five years old. If looking at this from a financial perspective, the cost of damage that was created by NAFTA to the environment was nearly $47 billion in 1999, according to the Mexican government. (NAFTA’s Impact on Mexico. n.d.).
Governments should stop and not even negotiate trade agreements if it means having negative impacts on any field in the region, especially environment. Eventually, it will impact the air we breathe, the land we live on, and the water we drink. Workers and communities are the most affected. “If only NAFTA countries could learn from the fiasco, but they are busy signing more NAFTA-like deals around the world, further taking away our ability to protect the environment and merely crossing their fingers that our ecosystems can sustain all this new growth,” said Alejandro Villamar, a trade policy analyst with Red Mexicana de Acción Frente al Libre Comercio (Maculiff, 2014). As trade rose in Mexico, environmental degradation has become worse. If such compacts of trade liberalizations are done, significant principles and adoption of improved rules should be more accurate and applied to illuminate the wastage of natural resources, damage to the environment, and the sacrifice a country has to go through. Funding is necessary to increase awareness and make sure those basics are utilized. Monitoring the effects of such agreements is essential to ensure the enforcement of rules, regulations and standards that assures civil rights (Maculiff, 2014).
VI. Future State of NAFTA
The 2016 U.S. election gave birth to an era of protectionism and putting the American worker interests at the heart of the 2016 campaign. President Donald Trump ran his campaign on a “Make America Great Again” and “America Comes First” attitude attracting almost 60 million voters who elected him as the 45th President. In addition to opposing membership in the TPP that both candidates vouched withdrawal from, Trump also added NAFTA to the table for consideration. During a debate with his opposing candidate, Trump was quoted saying, “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” Critics of NAFTA argue the true purpose of the trade agreement was to “free American corporations from U.S. laws protecting workers and the environment” (Faux, 2013). Since the President’s inauguration, discussions pertaining to NAFTA have been increasing as the first 100 days came to an end. Often coined as the “presidential honeymoon” chapter, this period is crucial as “influence during this period is demonstrably higher than later on in the administration” (Azari, 2017), therefore, the pressure to get the ball rolling on NAFTA discussions were in high demand. But why terminate or renegotiate the trade agreement?
According to Trump, NAFTA is the “single worst trade deal” that has “led to terrible losses of manufacturing production and jobs” (Tyson, 2017). As a result of NAFTA, corporate utilization of Maquiladora Programs has risen. These programs are Mexican assembly plants that receive raw materials from U.S. companies which then export back to the U.S. as finished products. These programs attract U.S. companies by offering low-cost labor and NAFTA provides additional cost savings by fostering a free trade zone. Companies that participate in the Maquiladora Programs include large automobile manufacturers such as Ford, Honda, BMW, Nissan, and Chrysler. Other non-auto manufacturers who partake include Sony, General Electric, IBM, Philips, Toshiba, Motorola and many more. According to an article from the Economic Policy Institute, NAFTA “caused the loss of some 700,000 jobs as production moved to Mexico” (Faux, 2013). California, Texas, and Michigan are just a few states that were directly affected by relocation of jobs to Mexico. Although there was a decline in manufacturing jobs, “supporters of NAFTA estimate that some fourteen million jobs rely on trade with Canada and Mexico, while the nearly two hundred thousand export-related jobs created annually by the pact pay 15 to 20 percent more on average than the jobs that were lost” (McBride, Sergie, 2017). Other supporters of NAFTA state the emergence of the Chinese market as well technological advancements have made a much larger impact on the U.S. jobs than NAFTA (Autor, Dorn, Hanson, 2016). As mentioned in the socio-cultural section of this paper, supporters argue that NAFTA has actually helped the U.S. auto industry in particular to compete with China as China grows. The NAFTA agreement clearly presents benefits as well as negative side effects but determining the weight of pros and cons is highly complex. According to a study performed in 2013 by Hufbauer, Cimino-Isaacs and Moran, NAFTA may annually cause 15,000 job losses but in return, the “economy gains roughly $450,000 in the form of higher productivity and lower consumer prices” (McBride, Sergie, 2017).
In most recent events, the milk industry has been affected by the ineffectiveness and loopholes of NAFTA. Particularly in Wisconsin and New York, farmers have been informed that their business will no longer be needed by the Canadian as a result of Canada purchasing the dairy product locally. (Yu, 2017).
The lumber industry was soon placed on the table for serious discussion following the milk dispute. It has been an ongoing issue for several previous U.S. presidencies but not one addressed the concern until Trump’s recent push to impose a 20% tariff on Canadian lumber imports. Currently, the assertion states the Canadian lumber industry is subsidized by multiple government agencies. As a result, the subsidy creates unfair competition for U.S. lumber industries which are not subsidized. In a fair market under the WTO, Canadian lumber would be subject to countervailing duties (CVDs) which is a tax that nullifies the subsidy inequality (Lee, 2017). These are two pertinent issues not included in NAFTA, therefore, creating disputes. Up to this point, Trump has targeted Mexico as the concern, however, these recent events are swaying attention up north now.
Measuring direct success or negative impacts of NAFTA is grossly difficult with extensive research and data coming from both supporters and opponents of the pact. Many external factors contribute to calculation that measure data which can be skewed to favor either side. Although difficult to determine outcomes of NAFTA, it is clear that renegotiation efforts are indeed needed. NAFTA is outdated and requires a facelift. The recent milk and lumber issues previously mentioned are perfect examples of NAFTA’s ineffectiveness. The U.S. Commerce Secretary, Wilbur Ross, was quoted commenting on the recent issues stating, “If NAFTA were functioning properly you wouldn’t be having these sorts of very prickly, very unfortunate developments back to back. In that sense, it shows that NAFTA has not worked as well as it should” (Tobin, 2017).
Although Trump is feeling the pressure to act on the foundation of his campaign (to pull out of NAFTA), he has recently softened his aggressive stance on the matter. As of April 27, 2017, Trump has verbally agreed to not pull out of NAFTA entirely but has made it clear that if the renegotiation efforts do not result in a fair deal for the U.S. then he still maintains the right to withdraw (Wiseman, 2017). Trump’s renegotiation efforts reside in bringing jobs back into the U.S. but specific details on how to attain that goal have been unclear thus far. In order to proceed, the Trump Administration will need to draft and finalize a detailed proposal. Once submitted, Congress requires a 90-day consultation period for review. Timing of these efforts will determine the success of the renegotiation efforts. With the Mexican elections coming up in July 2018, the Trump Administration will need to act swiftly as the current Mexican President can no longer run again due to term limits next year. Time is of the essence. It will now be left to the current administration to renegotiate NAFTA that benefits all three countries involved, the U.S., Canada, and Mexico.
In today’s global environment, it is crucial for managers to understand NAFTA, as trade agreements can impact the way international corporations do business. A business’s practices and behaviors are ultimately influenced by the general environment. The world of international commerce is complex, and the environment is constantly changing. As mentioned earlier, NAFTA renegotiations may be coming sooner than we think, and these changes may have tremendous ramifications for the economic, political, environmental, and sociocultural environments. Successful managers must possess the ability to monitor the environment, adapt to these changes, and shift their corporate goals accordingly.
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