Six Advantages of NAFTA
The Hidden Benefits of NAFTA
The North American Free Trade Agreement created the world’s largest free trade area of 450 million people. It's an economic powerhouse of $23.46 trillion in gross domestic product. It links the economies of the United States, Canada, and Mexico. The U.S. economy is worth $19. 3 trillion; Canada, $1.76 trillion; and Mexico, $2.4 trillion. NAFTA's trade area produces more than the 28 countries in the European Union.
1. Quadrupled Trade
Between 1993 and 2017, trade between the three members quadrupled from $297 billion to $1.17 trillion. That boosted economic growth, profits, and jobs for all three countries. It also lowered prices for consumers.
During that time, the United States increased its exports of goods to the other two from $142 billion to $525 billion. That's a third of its total exports. Canada, with exports at $282 billion, and Mexico, at $243 billion, were the top two U.S. export markets in 2017. Imports from Canada worth $300 billion and Mexico at $314 billion increased from $151 billion in 1993 to $614 billion. That's 26 percent of total U.S. goods imports.
NAFTA boosted trade by eliminating all tariffs between the three countries. It also created agreements on international rights for business investors. That reduced the cost of commerce. It spurs investment and growth, especially for small businesses.
2. Lowered Prices
That's especially important for oil prices since America's largest import is oil. The United States imported $144.2 billion in oil from Mexico and Canada. Thanks to greater U.S. shale oil production, this figure was down from $157.8 billion in 2007. NAFTA reduced U.S. reliance on oil imports from the Middle East and Venezuela. It was especially important when the United States banned oil imports from Iran. Why? Mexico and Canada are friendly countries. Other oil exporters, such as Venezuela and Iran, use oil as a political chess piece.
For example, both started selling oil in currencies other than the petrodollar.
NAFTA lowered food prices in much the same way. Food imports totaled $39.4 billion in 2013, up from $28.9 billion in 2009. It lowered the prices of fresh vegetables; chocolate; fruit, except bananas; and beef.
3. Increased Economic Growth
NAFTA boosted U.S. economic growth by as much as 0.5 percent a year. The sectors that benefited the most were agriculture, automobiles, and services.
U.S. farm exports to Canada and Mexico grew 156 percent. That's compared to a 65 percent increase in farm exports to the rest of the world. Farm exports to Canada and Mexico alone were greater than exports to the next six largest markets combined. Total farm exports were $39.4 billion in 2015.
NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for U.S. beef, rice, soybean meal, corn sweeteners, apples, and beans. It is the second largest export destination for corn, soybeans, and oils.
NAFTA modernized the U.S. auto industry by consolidating manufacturing and driving down costs. Most cars made in North America now have parts sourced from all three countries. The increase in competitiveness allows the industry to fend off Japanese imports. Mexico exports more cars to the United States than Japan. Before the 2008 recession, Japan exported twice as many as Mexico. By 2020, Mexico will manufacture 25 percent of all North American cars.
NAFTA boosted U.S. service exports to Canada and Mexico from $25 billion in 1993 to a peak of $106.8 billion in 2007. The recession hit financial services hard, so services haven't quite recovered. By 2009, they had only risen to $63.5 billion. By 2012, service exports had improved to $88.6 billion.
More than 40 percent of U.S. GDP is services, such as financial services and healthcare. NAFTA eliminates trade barriers in most service sectors, which are regulated. NAFTA requires governments to publish all regulations, lowering hidden costs of doing business.
4. Created Jobs
NAFTA exports created 5 million new U.S. jobs. Most of those jobs went to 17 states, but all states saw some increases. U.S. manufacturers added more than 800,000 jobs between 1993 and 1997. Manufacturers exported $487 billion in 2014. It generated $40,000 in export revenue for each factory worker.
Even imports from NAFTA partners created jobs. That's because almost 40 percent of U.S. imports from Mexico originated with American companies. They designed the products domestically, then outsourced some portion of the process in Mexico. Without NAFTA, they would have gone to China. They may not have been created at all.
5. Increased Foreign Direct Investment
Since NAFTA was enacted, U.S. foreign direct investment in Canada and Mexico has more than tripled. It reached $452 billion by 2012, year of the latest available statistics. That boosted profits for U.S. businesses by giving them more opportunities to develop and markets to explore.
Canadian and Mexican FDI in the United States grew to $240.2 billion, up from $219.2 billion in 2007. That’s additional investment which went mostly to U.S. manufacturing, insurance, and banking companies.
NAFTA protected intellectual properties. It helped innovative businesses by discouraging pirating. It boosted FDI because companies know that international law will safeguard their rights. NAFTA reduced investors' risk by guaranteeing they will have the same legal rights as local investors. Through NAFTA, investors can make legal claims against the government if it nationalizes their industry or takes their property by eminent domain.
6. Reduced Government Spending
NAFTA allowed firms in member countries to bid on all government contracts. That created a level-playing field for all companies within the agreement's borders. It cut government budget deficits by allowing more competition and lower-cost bids.
Despite these advantages, the United States, Mexico, and Canada renegotiated NAFTA on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. It must be ratified by each country's legislature. As a result, it wouldn't go into effect before 2020.
The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal changes NAFTA in six areas. The most important is that auto companies must manufacture at least 75 percent of the car's components in the USMCA's trade zone.