History of NAFTA and Its Purpose

NAFTA's History began with Reagan
••• Photo by Bob Riha, Jr./Getty Images

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. Review these fast facts about NAFTA to get up to speed on its impact on these three economies in the last 20 years.

History

The impetus for NAFTA began with President Ronald Reagan, according to NaFina’s "NAFTA Timeline." He 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.

Reagan’s successor, President George 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 on December 8, 1993. It entered into force on January 1, 1994. It was a priority of President Clinton's, and its passage is considered one of his first successes. 

Purpose

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

  1. Grant the signatories 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. 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.

Why Trump Renegotiated NAFTA

Trump was responding to the critics of NAFTA. U.S. opponents focus on the first two of NAFTA's six major problems:

  1. Loss of U.S. jobs.
  2. Suppression of U.S. wages.
  3. Mexico's farmers were put out of business.
  4. Not enough environmental protections in Mexico.
  5. Free U.S. access for Mexican trucks.

NAFTA has six major benefits in addition to these problems. All of NAFTA's pros and cons should have been considered before the Trump administration renegotiated the agreement.

USMCA

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.

NAFTA Was an Issue in 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. 

Ross Perot

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.