NAFTA's Purpose and Its History

Image by Lara Antal © The Balance 2019 

The North American Free Trade Agreement's purpose is to reduce trading costs, increase business investment, and help North America be more competitive in the global marketplace.

The agreement is between Canada, the United States, and Mexico. Review these facts about NAFTA to get up to speed on its impact on these three economies since it was enacted.

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

In 1985, Canadian Prime Minister 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 1990, Mexican President Carlos Salinas de Gortari requested a free trade agreement with the U.S. In 1991, Reagan’s successor, President George H.W. Bush, began negotiations with President Salinas for a liberalized trade agreement between 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 and the U.S. House of Representatives approved it 234–200 on November 17, 1993. The U.S. Senate approved it 61–38 three days later.

President Bill Clinton signed it into law on December 8, 1993. It became active on January 1, 1994.

Purpose

Article 102 of the NAFTA agreement outlines its purpose. There were/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 investments in the three countries.

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

NAFTA Attacked Through 3 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 called the agreement flawed. Both candidates promised to either amend or back out of the agreement altogether. Mr. Obama didn't fulfill these promises. 

In 2008, 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.

Obama, Paul and the other candidates of the 2012 presidential election continued their debate over NAFTA, with Donald Trump and Mrs. 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 Maquiladora
  • Mexico's farmers were put out of business
  • Not enough environmental protections in Mexico
  • Free U.S. access for Mexican trucks

NAFTA has six major benefits that oppose these six problems.

USMCA

In August of 2018, Trump and Mexico reached a bilateral trade deal to replace NAFTA, threatening to leave out Canada. Canada joined on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement and must be ratified by each country's legislature.

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 the car's components in the USMCA's trade zone or be subject to higher tariffs.

Final Thoughts

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 freed trade agreement, one cannot dispute the increase in trade across borders.

There isn't much that can remain relevant over long periods of time—trade agreements should be renegotiated on a continuing basis to remain relevant to the times. There is always room for improvement in any legislation—especially in a time when technology is advancing as quickly as it is.