The North American Free Trade Agreement (NAFTA) was replaced by the United States-Mexico-Canada (USMCA) agreement as of July 1, 2020. While it accomplished some good things for the economy, NAFTA also had six major weaknesses. These disadvantages had a negative impact on both American and Mexican workers and even the environment.
U.S. Jobs Were Lost
Since labor is cheaper in Mexico, many manufacturing industries withdrew part of their production from the high-cost United States. Between 1994 and 2010, the U.S. trade deficits with Mexico totaled $97.2 billion. In the same period, 682,900 U.S. jobs went to Mexico. But 116,400 of those jobs were displaced after 2007, meaning the 2008 financial crisis may have played a role.
Almost 80% of the losses were in manufacturing. The hardest-hit states were California, New York, Michigan, and Texas. They had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances.
U.S. Wages Were Suppressed
Not all companies in these industries moved to Mexico, but some used the threat of moving as leverage against union-organizing drives. When workers had to choose between joining the union and losing the factory, workers chose the plant. Without union support, the workers had little bargaining power. That suppressed wage growth.
According to Kate Bronfenbrenner of Cornell University, many companies in industries that were moving to Mexico used the threat of closing the factory. Between 1993 and 1999, 64% of U.S. manufacturing firms in those industries used that threat. By 1999, the rate had grown to 71%.
Mexico's Farmers Were Put Out of Business
Due to NAFTA, Mexico lost nearly 1.3 million farm jobs from 1994 to 2004. The 2002 Farm Bill subsidized U.S. agribusiness by as much as 40% of net farm income. When NAFTA removed trade tariffs, companies exported corn and other grains to Mexico below cost. Rural Mexican farmers could not compete.
At the same time, Mexico reduced its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001. Most of those subsidies went to Mexico's large farms. These changes meant many small Mexican farmers were put out of business by highly subsidized American farmers.
Maquiladora Workers Were Exploited
NAFTA expanded the maquiladora program by removing tariffs. This program allows United States-owned companies to employ Mexican workers near the border. They cheaply assemble products for export back into the United States. The program grew to employ 30% of Mexico's labor force. These worksites were known for abusing worker rights, with reports of workdays lasting 12 hours or more and women being subjected to pregnancy test when they applied for jobs.
Mexico's Environment Deteriorated
In response to NAFTA’s competitive pressure, Mexican agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into marginal land, resulting in deforestation at a rate of 630,000 hectares per year.
NAFTA Called for Free U.S. Access for Mexican Trucks
Another harmful agreement within NAFTA was never implemented. NAFTA would have allowed trucks from Mexico to travel within the United States beyond the current 20-mile commercial zone limit. The Department of Transportation (DOT) was set up a demonstration project to review the practicality of this. In 2009, the House of Representatives terminated this project, prohibiting the DOT from implementing it without Congressional approval.
Congress worried that Mexican trucks would have presented a road hazard because they are not subject to the same safety standards as U.S. trucks. U.S. truckers' organizations and companies opposed it because they would have lost business. Currently, Mexican trucks must stop at the commercial zone limit (usually no more than 20 miles in) and have their goods transferred to U.S. trucks.
There was also a question of reciprocity. The NAFTA agreement would have allowed unlimited access for U.S. vehicles throughout Mexico. A similar arrangement works well between the U.S. and its other NAFTA partner, Canada. However, Mexican trucks can be significantly heavier than American trucks, and many use a heavy-duty walking-beam suspension system, potentially making them more damaging to American roads.
Partially because of these disadvantages, the United States, Mexico, and Canada began renegotiating NAFTA on August 16, 2017. Negotiations among the three countries concluded on September 30, 2018. The new deal is called the "United States-Mexico-Canada Agreement." The U.S. Congress finished passing the agreement on January 16, 2020, and two weeks later President Donald Trump signed it. The agreement officially took the place of NAFTA on July 1, 2020.
The Trump administration wanted to lower the trade deficit between the United States and Mexico. The USMCA changes NAFTA in six areas. The most important change is that auto companies must now manufacture at least 75% of the car's components in the USMCA's trade zone.
Frequently Asked Questions (FAQs)
When was NAFTA signed?
In the U.S., NAFTA was signed by President George H.W. Bush on December 17, 1992. Congress approved the agreement on November 20, 1993. NAFTA officially took effect on January 1, 1994.
Why was NAFTA created?
The goal of NAFTA was to open free trade among the U.S., Canada, and Mexico by eliminating tariffs and other trade barriers.
What is the difference between NAFTA and the USMCA?
The USMCA changes NAFTA in many key areas, including auto manufacturing, dairy, truck standards, intellectual property, pharmaceuticals, and dispute resolution. Overall, the new agreement is designed to create a more modern trade arrangement that addresses issues like digital trade, modern agricultural trade, and automobile origins. According to its U.S. supporters, the USMCA is supposed to create more balanced trade to benefit American workers.