The History of NAFTA and Its Purpose

Image by Lara Antal © The Balance 2019 

The purpose of the North American Free Trade Agreement (NAFTA) was to reduce trading costs, increase business investment, and help North America be more competitive in the global marketplace. The agreement was among Canada, the United States, and Mexico.

Learn more about NAFTA and its impact on these three economies since it was enacted—though it has since been replaced by the United States-Mexico-Canada Agreement (USMCA).

History—The 1980s

President Ronald Reagan proposed a North American common market in his 1980 presidential campaign. Europe's common market—dubbed the European Economic Community—had already been initiated with the Treaty of Rome in 1957.

In 1984, Congress passed the Trade and Tariff Act, which itself built upon and amended the prior Trade Act of 1974. It act gave enhanced "fast-track" authority to negotiate bilateral free trade agreements, streamlining negotiations.

In 1985, Canadian Prime Minister Brian Mulroney agreed to begin discussions for the Canada-U.S. Free Trade Agreement. Negotiations began in 1986, and it was signed in 1988. It went into effect on January 1, 1989, and remained in force until NAFTA replaced it.

History—The 1990s

In June 1990, Mexican President Carlos Salinas de Gortari requested a free trade agreement with the U.S. In September 1990, Reagan’s successor, President George H.W. Bush, began negotiations with President Salinas for a liberalized trade agreement among Mexico, Canada, and the U.S.

In 1992, NAFTA was signed by outgoing President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney. Earlier that year, the European Union had been created by the Treaty of Maastricht.

Concerns about the liberalization of labor and environmental regulations led to the adoption of two addendums. NAFTA was ratified by the legislatures of the three countries in 1993. President Bill Clinton signed it into law on December 8, 1993; it took effect on January 1, 1994.

Purpose of NAFTA

Article 102 of the NAFTA agreement outlines its purpose. There are seven specific goals:

  1. Grant the signatories (the countries that signed it) a "most-favored-nation" status.
  2. Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
  3. Promote conditions of fair competition.
  4. Increase investment opportunities.
  5. Provide protection and enforcement of intellectual property rights.
  6. Create procedures for the resolution of trade disputes.
  7. Establish a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement's benefits.

NAFTA Fulfilled Its Purpose

NAFTA fulfilled all seven of its goals, establishing the region's largest free trade zone in terms of gross domestic product. It also increased foreign investment in the three countries.

By the time the last of its changes went into effect in 2008, NAFTA had lowered or eliminated tariffs among the three countries and allowed trade to triple. Most importantly, it increased the competitiveness of the three countries in the global marketplace. 

NAFTA Attacked Through Three Elections

NAFTA was attacked from all sides during the 2008 presidential campaign. Barack Obama blamed it for growing unemployment. He said it helped businesses at the expense of workers in the United States. It also did not provide enough protection against the exploitation of workers and the environment.

During her campaign, Hillary Clinton considered the agreement flawed. Both Clinton and Obama promised to amend NAFTA.

Republican candidate Ron Paul said he would abolish the trade agreement. He said it would create a "superhighway" and compared it to the European Union, though NAFTA does not enforce a single currency among its signatories.

In the 2012 presidential election, President Obama, Paul, and the other candidates continued their debate over NAFTA, with Donald Trump and Clinton continuing the arguments during the 2016 election.

The Renegotiation of NAFTA

President Donald Trump responded to critics of NAFTA by initiating renegotiations in 2017. U.S. opponents focused on the first two of NAFTA's six major problems:

  • Loss of U.S. jobs
  • Suppression of U.S. wages
  • Worker exploitation in Maquiladoras
  • Mexico's farmers being put out of business
  • Not enough environmental protections in Mexico
  • Free U.S. access for Mexican trucks

Note

NAFTA had six major benefits that opposed these six problems.

The United States-Mexico-Canada Agreement

On August 27, 2018, President Trump and Mexico reached a bilateral trade deal to replace NAFTA, threatening to leave Canada out. Canada joined on September 30, 2018. On November 30, 2018, an agreement was reached by the three countries.

The new deal is called the United States-Mexico-Canada Agreement (USMCA), and it has been ratified by each country's legislature. Mexico ratified the USMCA on June 19, 2019; the U.S. ratified it on January 29, 2020; and Canada ratified it on March 13, 2020.

The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal attempts to change NAFTA in six areas, including a rule that auto companies must manufacture at least 75% of a car's components in the USMCA's trade zone or be subject to higher tariffs.

The USMCA took effect on July 1, 2020, as a renegotiation of NAFTA.

The Bottom Line

In the end, NAFTA created the framework for trading throughout the North American countries. While there are good and bad outcomes from the creation of the free trade agreement, the increase in trade across borders is indisputable. It can be difficult for older agreements to remain relevant over long periods of time, and NAFTA was eventually renegotiated with the goals of improving the trade agreement, which made way for the USMCA.