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 between Canada, the United States, and Mexico. It has since been replaced by the United States-Mexico-Canada Agreement (USMCA).
Learn more about NAFTA and its impact on these three economies since it was enacted in 1994.
- NAFTA’s history began in the 1980s when the Trade and Tariff Act of 1984 opened the door for bilateral trade agreements between the U.S., Canada, and Mexico.
- NAFTA’S purpose included seven goals, from establishing “most-favored-nations” statuses to eliminating border barriers.
- The agreement created the region’s largest free trade zones with respect to gross domestic product.
- NAFTA was replaced by the United States-Mexico-Canada Agreement by 2020.
The History of NAFTA: The 1980s
President Ronald Reagan proposed a North American common market in his 1980 presidential campaign. Europe's common market, known as the European Economic Community, had already been initiated with the Treaty of Rome in 1957.
Congress passed the Trade and Tariff Act in 1984, which built upon and amended the prior Trade Act of 1974. The act gave enhanced "fast-track" authority to negotiate bilateral free trade agreements, streamlining negotiations.
Canadian Prime Minister Brian Mulroney agreed to begin discussions for the Canada-U.S. Free Trade Agreement in 1985. Negotiations began in 1986, and the agreement was signed in 1988. It went into effect on January 1, 1989 and remained in force until NAFTA replaced it.
The History of NAFTA: The 1990s
In June 1990, Mexican President Carlos Salinas de Gortari requested a free trade agreement with the U.S. Reagan’s successor, President George H.W. Bush, began negotiations with President Salinas in September 1990. The goal was a liberalized trade agreement among Mexico, Canada, and the U.S.
NAFTA was signed by outgoing President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992. The European Union had been created by the Treaty of Maastricht earlier that year.
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.
The Purpose of NAFTA
Article 102 of the NAFTA agreement outlines its purpose. There are seven specific goals:
- Grant the signatories (the countries that signed it) a "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.
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.
NAFTA had lowered or eliminated tariffs among the three countries and allowed trade to triple by the time the last of its changes went into effect in 2008. It increased the competitiveness of the three countries in the global marketplace.
NAFTA Debated in 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.
President Obama, Paul Ryan, and the other candidates continued their debate over NAFTA throughout the 2012 presidential election. Donald Trump and Hillary Clinton continued the arguments during the 2016 election.
The Renegotiation of NAFTA
- 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
The United States-Mexico-Canada Agreement (USMCA)
President Trump and Mexico reached a bilateral trade deal to replace NAFTA on Aug. 27, 2018, threatening to leave Canada out. Canada joined on Sept. 30, 2018. An agreement was reached by the three countries on Nov. 30, 2018.
This deal is 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 Jan. 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 deal attempted 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. There are both good and bad outcomes from the creation of the free trade agreement, but 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.
Frequently Asked Questions
Did NAFTA cause job losses?
Unions took the position that NAFTA forced auto manufacturing plants to close when they were required to build plants in Mexico under the terms of the agreement.
Did NAFTA target any specific industries?
Agriculture and textiles were largely impacted by NAFTA, as well as the automotive industry.