NAFTA Pros and Cons

Why Its Six Advantages Outweigh Its Six Disadvantages

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When it was approved in 1993, the North American Free Trade Agreement was the world's most comprehensive free trade agreement, covering the United States, Canada, and Mexico. In 2019, its member economies generated approximately $24.438 trillion in gross domestic product.

NAFTA is also controversial. Politicians don't agree on whether the free trade agreement's advantages outweigh its disadvantages. Here they are so you can decide for yourself.

Key Takeaways

  • Some of the positive effects of NAFTA were increased trade, economic output, foreign investment, and better consumer prices.
  • U.S. jobs were lost when domestic manufacturers relocated to lower-waged Mexico, which also suppressed wages in U.S. manufacturing plants.
  • NAFTA renegotiations in 2018 led to the U.S.-Mexico-Canada Agreement (USMCA) which took effect in July 2020. The USMCA addresses some 21st-century issues like digital trade and the environment.

Pros

NAFTA has six main advantages. According to a Congressional Research Service report prepared in 2017, the act has more than tripled trade between Canada, Mexico, and the United States since it was enacted. The agreement reduced and eliminated tariffs.

Second, greater trade increased economic output. The U.S. International Trade Commission found that that full NAFTA implementation would increase U.S. growth by as much as 0.5% a year.

Third, NAFTA's stronger growth created jobs. According to a 2010 report, U.S. free trade agreements—the lion's share of which stemmed from the NAFTA agreement—directly supported 5.4 million jobs, while trade with these countries supported 17.7 million. 

Fourth, foreign direct investment (FDI) more than tripled. The United States increased FDI in Mexico from $15.2 billion in 1993 to $104.4 billion in 2012, and from $69.9 billion in Canada in 1993 to $352.9 billion in 2015. Mexico ramped up investment in the United States by 1,283% over the same time period, while Canada's FDI increased by 911%.

Fifth, NAFTA lowered prices. U.S. oil imports from Mexico cost less because NAFTA got rid of tariffs. That reduces America's reliance on oil from the Middle East. Low-cost oil reduces gas prices, which reduces transportation costs. Food prices are lower in turn.

Sixth, the agreement helped with government spending. Each nation's government contracts became available to suppliers in all three member countries. That increased competition and lowered costs. 

Cons

NAFTA has six main disadvantages.

First, certain estimates indicate that it led to job losses. A 2011 report from the Economic Policy Institute estimated a loss of 682,900 jobs. California, New York, Michigan, and Texas were among the hardest-hit states. Though the estimated job gains exceed those lost, certain industries were particularly impacted, including manufacturing, automotive, textile, computer, and electrical appliance industries. 

Second, job migration suppressed wages. Companies threatened to move to Mexico to keep workers from joining unions. Without the unions, workers could not bargain for better wages. This strategy was so successful that it became standard operating procedure.

Third, NAFTA put Mexican farmers out of business. It allowed U.S. government-subsidized farm products into Mexico. Local farmers could not compete with the subsidized prices. As a result, 1.3 million farmers were put out of business, according to the Economic Policy Institute. It forced unemployed farmers to cross the border illegally to find work. In 1995, 2.9 million Mexicans were living in the United States illegally. It increased to 4.5 million in 2000, probably due to NAFTA. The recession drove that figure to 6.9 million in 2007. In 2017, it fell to 4.9 million, roughly double where it was before NAFTA.

Fourth, unemployed Mexican farmers went to work in substandard conditions in the maquiladora program. Maquiladora is where United States-owned companies employ Mexican workers near the border. They cheaply assemble products for export back into the United States. Employment in maquiladoras reached 1.2 million in 2006.

Fifth, U.S. companies degraded the Mexican environment to keep costs low. Agribusiness in Mexico used more fertilizers and other chemicals, resulting in increased pollution. Rural farmers were forced into marginal land to stay in business, resulting in increased deforestation rates. That deforestation contributes to global warming.

Sixth, NAFTA allowed Mexican trucks access into the United States. Mexican trucks are not held to the same safety standards as American trucks. This provision was delayed and never fully implemented, though the U.S. did offer a pilot program for Mexican trucks to operate in the U.S. on a temporary basis.

Chart of NAFTA Pros and Cons

List Pros Cons
Trade Increased  
Jobs Created 5 million U.S. jobs 682,900 U.S. manufacturing jobs lost in some states
Wages Average wages increased Some wages suppressed
Immigration   Forced jobless Mexicans to cross the border illegally
Workers   U.S. unions lost leverage while Mexican workers were exploited
Environment   Canada exploited shale fields and Mexican deforestation increased
Oil Costs less in the United States Improved Mexican economy
Food U.S. costs lower Mexican farmers went out of business
Services U.S. finance and health care exports increased Put Mexican companies out of business
FDI Increased
Government Spending More competitive bidding on government contracts  

NAFTA's Pros May Outweigh Its Cons

NAFTA's disadvantages are significant. Can anything justify the loss of entire industries in New York or Michigan? Worker mistreatment in the maquiladora program is also concerning. NAFTA may also be responsible for environmental damage along the border.

However, from an economic perspective, NAFTA could be considered a success. Without it, the impacts of competition from the growing economies of the European Union or China could be felt more acutely. That's critical now that both of these trade regions rank above the United States as the world's largest economies.

Evaluating NAFTA's value is not an easy or simple question. However, many experts believe that free trade agreements are a necessity for the United States when competing in an ever more globalized world. 

USMCA

The United States, Mexico, and Canada renegotiated NAFTA on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. It has been ratified by each country's legislature. Mexico was the first to ratify the agreement in 2019. The U.S. Congress passed the agreement in mid-January 2020; Donald Trump officially signed it on Jan. 29, 2020. Canada ratified it on March 13, 2020.

The Trump administration renegotiated, intending to lower the trade deficit between the United States and Mexico. The new deal is largely similar to NAFTA, but there are some new rules in seven areas:

  • Intellectual property
  • Digital trade
  • De minimis shipment value (the value of goods that can be traded without customs duties)
  • Financial services
  • Currency
  • Labor (including a requirement that at least 40% of auto content be made by workers earning at least $16 per hour)
  • Environment (addressing illegal trafficking of wildlife, timber, and fish)