Six Advantages of NAFTA

The Hidden Benefits of NAFTA

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The North American Free Trade Agreement created the world’s largest free trade area of 450 million people. It's an economic powerhouse of $23.72 trillion in gross domestic product. It links the economies of the United States, Canada, and Mexico. As of 2017, the U.S. economy was worth $19.49 trillion; Canada, $1.77 trillion; and Mexico, $2.46 trillion. NAFTA's trade area produces more than the 28 countries in the European Union

1. Quadrupled Trade

Between 1993 and 2018, trade between the three members quadrupled from $297 billion to $1.23 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 $564 billion. That's 34% of its total exports, making Canada and Mexico its top two export markets. It shipped $299 billion to Canada and $265 billion to Mexico.

U.S. imports from its NAFTA partners were $665 billion. That's 26% of total U.S. imports. It's also more than triple the $151 billion imported in 1993. Mexico shipped $346 billion to the United States and Canada shipped $319 billion.

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

Lower tariffs also reduced import prices. That lessened the risk of inflation and allowed the Federal Reserve to keep interest rates low.

That's especially important for oil prices since America's largest import is oil. The U.S. Census reports that Mexico and Canada shipped $115 billion in oil and petroleum products in 2017. Thanks to greater U.S. shale oil production, this figure was down from $154 billion in 2008. 

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. The U.S. Census reports that food imports totaled around $50 billion in 2017, up from $33 billion in 2008. As a result, NAFTA lowered the prices of food imports by $5.3 billion annually.

3. Increased Economic Growth

NAFTA boosted U.S. economic growth by as much as 0.5% a year. The sectors that benefited the most were agriculture, automobiles, and services.

U.S. farm exports to Canada and Mexico quadrupled from $11 billion in 1993 to $43 billion in 2016. It made up 25% of total food exports and supported 20 million jobs. This trade leveraged another $54.6 billion in business investment.

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% 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% 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 net 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% 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. 

USMCA

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% of the car's components in the USMCA's trade zone.