North American Free Trade Agreement NAFTA Essay

North American Free Trade Agreement: NAFTA Essay, Research Paper

North American Free Trade Agreement: NAFTA


I believe that the North American Free Trade Agreement was an inevitable

step in the evolution of the United States economic policy. The globilization

of the world economy due to technological advances in computers and

communications have shrunk the world to the point where no single country acting

alone can effectively compete on the foreign market. Even the United States,

with its vast resources, can not have an absolute advantage in all thing that it

produces. It does not have unlimited factors of endowments and must do its best

to make these available to the companies within its borders.

There are two basic sides to the argument over the North American Free

Trade Agreement. The Pro-NAFTA side views the treaty as a way to provide a

large, efficient production base for the entire geopolitical area. This would

result in lower cost to consumers and an increase in exports to Mexico and

Canada. The multiplier effect would then take place producing growth in all

areas. The Anti-NAFTA group feels that Mexico will be an unequal partner due

to the lower wage rates of the Mexican populace, causing the loss of

thousands of jobs in the United States and Canada. Environmentalist fear that

pollution will spread across the continent. Farmers fear that produce grown in

Mexico will be contaminated from pesticides banned in the United States. These

are but a few of the arguments for and against NAFTA.

What does NAFTA mean

A Free Trade Area is, by definition, an area where all barriers to trade

are lifted. This is not the case with regards to NAFTA at this point.

Currently most of the trade barriers between the United States and Canada are

lifted but those with Mexico have largely been kept in place. This is an

obvious disparity on the part of the Mexican government but is due largely to

the proportional loss of income to the governments in each country. The Gross

Domestic Product per individual in Mexico is one seventh of the other two

countries. Therefore, the loss of revenue would have a major impact on the

daily life of its population and the operation of the government . Never before

has a major economic power like the United States considered a free trade area

with an under-developed third world country.

The major difference between a Free Trade Area and Common Market is

that a Free Trade Area primarily deals with trade, while a Common Market has

this in addition to no barriers on factors of production and a common external

trade policy.

While on the surface it seems that a free trade area would always be a

good thing, it is easier said then done. The majority of people that oppose

NAFTA do so because of the potential for loss of employment. Mexico with its

cheap work force, will tend to make manufactures requiring extensive manual

labor more likely to move to the lower cost area. A loss of sovereignty may

also be a stumbling block, since some economic policy decisions are taken out of

the governing bodies’ hands.

Another factor is the extent of trade creation versus trade diversion.

The difference is if high cost domestic producers are replaced by low cost

producers within the trade area then trade creation occurs. If trade diversion

occurs, it would have a major impact on consumer prices. This practice is

evident in the textile industry and will be discussed later.

History of NAFTA

In 1988, the United States and Canada agreed to enter into a free trade

agreement. This went into effect on January 1, 1989 and was widely accepted as

a logical course of action. Canada is a highly developed nation and has a lot

in common with the United States. Its per capita income and hourly wages are

equivalent to the U.S. and has long been considered our brother to the north.

Then in 1991, Mexico entered into talks with Canada and the United States that

concluded on 17 December 1992. The treaty was ratified and came into effect on

1 January 1994. The treaty called for the elimination of all tariffs between

the three nations over a ten year time span. Some of these tariffs are listed


Mexico’s turmoil since NAFTA

The political turmoil in Mexico has added a great deal of controversy to

the issue. On the same day that NAFTA was implemented, some of the poorest

regions of Mexico in the Chiapas highlands revolted. After twelve days an

accord was reached with the rebels. In march, the Mexican president’s chosen

successor was assassinated. This forced the president to pick Zedeillo who

eventually won the race for the Presidency. Just after the new year, the peso

was allowed to be floated against the dollar causing up to a 40% loss in the

value of the peso. This caused 12% of Mexico’s Foreign Direct Investment to

leave the country. The United States, which holds more than half of all direct

investments in Mexico, arranged a peso-rescue package of as much as $13 billion

which helped to stop the downward spiral of the peso. This devaluation should

have little direct impact on the United States except that some companies may

find Mexico is even more attractive to move to. Commercial lending rates and

credit card interest rates in Mexico have almost doubled and hover around 40%

and inflation is expected to reach 20%. These factors are expected to impact

the poor and middle class of Mexico the most and possibly cause more unrest in

the already unstable areas (LACAYO AOL).

Facts Against NAFTA

National origin is determined by the country in which the product was

last substantially transformed. Trade diversion has occurred in the textile

industry due to the triple rule of origin for apparel manufactures. This rule

requires that not only the clothing be sewn in North America but that the yarn

the cloth was made from comes from North America. Wool suits are one of

Canada’s most successful apparel exports, and since Canadian apparel makers

import most of their fabric from Europe, the triple rule of origin will throttle

their trade with the United States. The Caribbean Islands are also large

producers of textiles and if tariffs were kept in place on those countries and

lifted on our trade partners it could devastate their economies. There would

also be increases to the cost to consumers. The average cotton shirt will

increase $12 and a wool skirt could rise $22. (BOVARD 24)

Companies that are labor intensive will tend to move their manufacturing

facilities to Mexico. The overall figures for jobs lost as a result of the free

trade accord so far total 42,221, according to the Labor Department. Another

226,030 jobs have disappeared as result of trade pressures from other parts of

the world since Mr. Clinton came into office (Landers AOL). The following are

statements published by Ross Perot’s Afta-NAFTA update: (Jones AOL)

* “Nintendo of America announced on Jan. 10, 1994 that it was moving 136 jobs

from its U.S. payrolls to Mexico. Because of NAFTA provisions, these unemployed

workers qualify for federal entitlements, including welfare benefits paid for by

U.S. tax dollars”

* “Phillips Lighting laid off 60 workers, including some that had worked for the

company for 27 years, as the company moved its operationss to Mexico”

The loss of sovereignty issue for Mexico revolves around its oil

industry. This is a nationalized business in Mexico and they do not want

Foreign Direct Investment invading it. This has been addressed by President

Clinton with special concessions that are not part of the NAFTA treaty. The

major sovereignty issue for the United States is immigration of Mexican

nationals into the United States. This would cause the eventual lowering of

wages in the border states and higher social system costs. There is no

empirical data to support this claim and I believe the opposite will occur. The

major reason that illegal aliens enter this country is for economic reasons.

With the establishment of new manufacturing facilities and an increase in the

standard of living the result should be lowered amounts of illegal immigration

(Write AOL).

The environmental concern of pollution overflowing into the United

States has been addressed by a supplementary agreement that has been amended to

the NAFTA treaty (Levine 6). This agreement limits the amount of dumping and

aids in establishing waste water treatment facilities in Mexico. I believe the

pollution that a country produces is directly related to the standard of living

of the people. If the general population does not have enough food to eat or a

place to sleep, they really don’t care about the environment or how their

actions affect it. If you raise the comfort level of the people involved they

will naturally evolve to address these higher level concerns.

Facts For NAFTA

The signing of the NAFTA treaty has created a home market base of 360

million consumers. This in itself has had a tremendous impact on the three

countries involved. One of the greatest fears expressed by NAFTA’s staunchest

opponents was that a “giant sucking sound” would result from an unequal trade

flow. Dollars would chase the cheaper Mexican products south. This would make

the peso precious, lessening the pressure to devalue the peso. The United States

imports from Mexico did grow by $7 billion to reach an unprecedented $40 billion

but United States exports increased $8 billion to $42 billion. This maintained

Mexico’s trade gap which is the reason that the peso plunged (Wright AOL).

To the north, trade between Canada and the U.S. hit $260 billion in 1994,

this is up by 50% from 1988, when they first signed a free trade agreement.

This is due largely to the relative cheap Canadian dollar. In autos, for

example, it now costs “20% to 25% less to assemble a car in Canada then in the

US.” says David Adams, director of policy for Canada’s Motor Vehicle

Manufacture’s Association. Ford Motor Company alone has spent $2.2 billion to

upgrade its car and truck manufacturing plants. This surge in auto

manufacturing has caused a boon for machinery and equipment manufacturers in

the United States. Exports to Canada for this type of equipment has risen 500%

in the last decade. Canadian exports to the U.S. grew by 21% in 1994 and are

expected to have another double digit increase this year. Ontario alone

imported more U.S. goods than our second largest trading partner (Symonds AOL).

More jobs have been created than lost as a result of NAFTA. According

to the



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