History of NAFTA and Its Purpose
The North American Free Trade Agreement's history began in 1980. Its 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. For more details, see NAFTA Fast Facts.
The impetus for NAFTA began with President Ronald Reagan, who proposed a North American common market in his campaign. In 1984, Congress passed the Trade and Tariff Act. That gave the president "fast-track" authority to negotiate free trade agreements. It removes Congressional authority to change negotiating points. Instead, it allows Congress only the ability to approve or disapprove the entire agreement. That makes negotiation much easier for the administration. Trade partners don't have to worry that Congress will nitpick specific elements.
Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada-U.S. Free Trade Agreement. It was signed 1988 and went into effect 1989. NAFTA has now replaced it. (Source: "NAFTA Timeline," NaFina.)
Regan’s successor, President H.W. Bush, began negotiations with Mexican President Salinas for a liberalized trade agreement between the two countries. Before NAFTA, Mexican tariffs on U.S. imports were 250 percent higher than U.S. tariffs on Mexican imports. In 1991, Canada requested a trilateral agreement, which then led to NAFTA. In 1993, concerns about the liberalization of labor and environmental regulations led to the adoption of two addendums.
In 1992, NAFTA was signed by President George H.W. Bush, Mexican President Salinas and Canadian Prime Minister Brian Mulroney. It was ratified by the legislatures of the three countries in 1993. The U.S. House of Representatives approved it by 234 to 200 on November 17, 1993. The U.S. Senate approved it by 60 to 38 on November 20, three days later.
President Bill Clinton signed it into law December 8, 1993. It entered force January 1, 1994. It was a priority of President Clinton's, and its passage is considered one of his first successes. (Source: "NAFTA Signed Into Law," History.com, December 8, 1993.)
Article 102 of the NAFTA agreement outlines its purpose. There are seven specific goals.
- Grant the signatories most favored nation status.
- Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
- Promote conditions of fair competition.
- Increase investment opportunities.
- Provide protection and enforcement of intellectual property rights.
- Create procedures for the resolution of trade disputes.
- Establish a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement's benefits. (Source: "FAQ," NAFTA Secretariat.)
Has It Fulfilled Its Purpose?
NAFTA fulfilled all seven of its goals. That's made it the world’s largest free trade area in terms of gross domestic product.
Most important, it increased the competitiveness of the three countries in the global marketplace. This has become critical since the launch of the European Union. It's helped overcome the economic growth of China and the rise of other emerging market countries. In 2007, the EU replaced the United States as the world's largest economy. In 2015, China replaced both and took the top spot.
Trump's Renegotiation of NAFTA
NAFTA has received a lot of criticism for taking U.S. jobs. While it has also done good things for the economy, the North American Free Trade Agreement has six weaknesses. These disadvantages had a negative impact on both American and Mexican workers and even the environment.
1. 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. The 2008 financial crisis could have caused them instead of NAFTA.
Almost 80 percent 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.
2. 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 or losing the factory, workers chose the plant. Without union support, the workers had little bargaining power. That suppressed wage growth. Between 1993 and 1995, 50 percent of U.S. manufacturing companies in industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate grew to 65 percent.
3. Mexico's Farmers Were Put Out of Business
Thanks to NAFTA, Mexico lost 1.3 million farm jobs. The 2002 Farm Bill subsidized U.S. agribusiness by as much as 40 percent 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 percent of total farm income in 1990 to 13.2 percent 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.
4. Maquiladora Workers Were Exploited
NAFTA expanded the maquiladora program by removing tariffs. Maquiladora is where United States-owned companies employ Mexican workers near the border. They cheaply assemble products for export back into the United States. The program grew to employ 30 percent of Mexico's labor force. The workers had "no labor rights or health protections," according to Continental Social Alliance. In addition, the "workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job."
5. Mexico's Environment Deteriorated
In response to NAFTA’s competitive pressure, Mexico 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.
6. NAFTA Called for Free U.S. Access for Mexican Trucks
Another 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. A demonstration project by the Department of Transportation was set up to review the practicality of this. In 2008, the House of Representatives terminated this project. It prohibited the DOT from implementing it without Congressional approval.
Congress worried that Mexican trucks would have presented a road hazard. 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 20-mile limit 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 other NAFTA partner, Canada. But U.S. trucks are larger and carry heavier loads. They violate size and weight restrictions imposed by the Mexican government.
On September 30, 2018, the United States, Mexico, and Canada renegotiated NAFTA. 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.
The 2008 Presidential Campaign
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 exploitation of workers and the environment along the border in Mexico.
Hillary Clinton included the trade agreement in her pledge to strictly enforce all existing trade agreements, as well as halt any new ones. Both candidates promised to either amend or back out of the agreement altogether. Obama didn't do anything about these campaign promises when he was president.
In 2008, Republican candidate Ron Paul said he would abolish the trade agreement. He said it was responsible for a "superhighway" and compared it to the European Union. But unlike the EU, NAFTA does not enforce a single currency among its signatories. Paul maintained this position in his 2012 campaign.
Republican nominee John McCain supported NAFTA, as he did all free trade agreements. In fact, he wanted to enforce an existing section within it that promised to open up the United States to the Mexican trucking industry.
Despite NAFTA's benefits, it has remained highly controversial. Its disadvantages are usually pointed out during presidential campaigns. In 1992, before the trade agreement was even ratified, Independent presidential candidate Ross Perot famously warned, "You're going to hear a giant sucking sound of jobs being pulled out of this country." Ross predicted that the United States would lose 5 million jobs to lower-cost Mexican workers. That would be a whopping 4 percent of total U.S. employment.
Perot’s prediction never happened. Mexico entered a recession and the United States entered a period of prosperity. True, American workers were displaced by low-cost Mexican imports. But research showed it was more like 2,000 per month. Find out more about NAFTA Pros and Cons. (Source: "Jobs and NAFTA," Brad DeLong.)