In January 1994, the United States, Mexico, and Canada implemented the North American Free Trade Agreement (NAFTA). The goal of NAFTA is to create better trading conditions through tariff reduction, removal of investment barriers, and improvement of intellectual property protection. NAFTA continues to gradually reduce tariffs on set dates and aims to eliminate all tariffs by the year 2004. All tariffs on goods originating in Canada, Mexico, and the United States either were eliminated immediately or will be phased out over five or ten years. Tariffs on certain politically or economically sensitive items will be phased out over fifteen years.
There are comprehensive rules for determining the country of origin of goods so that free trade status is effective among the NAFTA countries. Ideally, the governments of Canada, the U. S. and Mexico believed that breaking the trading barriers would increase jobs and other things as it strengthened each of their economies. Before NAFTA was established, investing in Mexico was a difficult process. Investors needed the Mexican Government’s approval and were also required to meet specific investment guidelines. Under NAFTA, investors no longer need government approval to invest and are treated as domestic investors.
NAFTA has also increased intellectual property rights and has allowed companies to obtain patents in Mexico and Canada. As a result of better trading conditions, exports and imports of most other goods have increased. In Mexico, the elimination of investment barriers has allowed investment to expand. Increased trading and investment has then created many jobs, raised the Gross Domestic Product, and lowered consumer prices.
The free trade that NAFTA has established among the United States, Mexico, and Canada has greatly benefited the U. S. economy. During the years from 1994 to 1997, U. S. ade with Mexico and Canada rose 44 percent. This extensive growth is accredited primarily to the reduction of tariffs.
As tariffs were lowered, U. S. goods became cheaper and more competitive in Mexican and Canadian markets, and at this lower price level the quantity demanded of U. S. goods increased. The work of NAFTA has also served to benefit Mexico’s economy; in accordance with the United States’ economy, Mexico’s exports have increased, more than doubling since 1993. The elimination of investment barriers has caused a dramatic rise in foreign investment from four billion in 1993 to ten billion dollars in 1998.
NAFTA has enabled Volkswagen, IBM, and the textile industry to seek labor and materials in Mexico. . NAFTA has also allowed IBM to create plants in Guadalajara that would otherwise have been built in Asia. As a result, the exports of IBM in Mexico have increased from 350 million to 2 billion dollars in five years and the increased exports have created over 270 jobs. Mexico’s textile industry, too, has grown as a result of NAFTA, in 1996 overtaking China to become the largest supplier of textiles to the United States.
U. S. lls invest hundreds of millions of dollars to build plants in Mexico as an effect of the reduced tariffs and shipping time. It takes only eighteen hours to ship goods to the Mexican border, while it takes twenty-one hours to China. Increased investment and exports have created jobs and increased GDP. In 1998, Mexico’s economy grew 4. 5 percent and economists predict that it will grow an additional 2. 5 percent in 1999. Free trade under NAFTA has also encouraged international specialization, the production of only the goods that a particular economy can produce most efficiently.
If the U. S. r example, is efficiently manufacturing cars and Mexico, producing corn, then the U. S. should produce only cars and Mexico, only corn. They are more efficient if they each produce at their highest output, and trade for other goods. International specialization increases efficiency, lowering consumer prices; consumers no longer have to pay for inefficiently produced goods. The benefits of NAFTA are therefore, increased employment, raised national income, and lower consumer prices. NAFTA also will offer Americans cheaper goods, and increase U. S. exports by making them more affordable for the rest of the world.
Moreover, it will create an estimated 200,000 new jobs for Americans, reduce illegal immigration from Mexico, help tackle drug trafficking, strengthen Mexican democracy and human rights, and serve as a model for the rest of the world. Goals of NAFTA as mentioned in the preamble of the NAFTA agreement are as To strengthen bonds of friendship and cooperation As a catalyst to international cooperation To create, expand, and secure future markets To ensure a predictable framework for business planning To enhance firms competitiveness in foreign markets To foster creativity and innovation To create new employment opportunities To strengthen environmental regulations The biggest complaint about NAFTA is how jobs, mainly blue-collar jobs, will all be lost to Mexico because labor is so cheap in Mexico. What is true is that Mexican labor is cheaper than American labor.
The average U. S. worker makes $10. 97/hour while the average Mexican worker makes $1. 85/hour. Originally, the Department of Labor believed that 170,000 jobs would be created in the U. S. by 1995. This was on the assumption that the U. S. trade surplus with Mexico would increase from $1. 7 billion/yr. to $8. 5 billion/yr. d that every $1 billion in surplus would create 20,000 jobs. Unfortunately, the trade surplus has dropped far below expectations, and has, in fact, become a trade deficit.
Opponents of NAFTA argue that environmental standards will not be enforced in Mexico, which would give Mexico an extra advantage beyond its labor cost advantage. One concern raised by opponents of NAFTA was that increased trade would lead to further environmental degradation in Mexico, as companies would move their operations to Mexico to avoid strict environmental enforcement in the United States.
The Top Five Leading Imports into the U. S. are: Motor Vehicles, Oil/Natural Gas, Motor Vehicle Parts, Semiconductors, and Electronic Parts. All of these imports are very labor intensive and thus it is cheaper to import from a country with lower wages than producing it internally. The Top 10 U. S. Exports are: Aircraft, Electronic Computing Equipment, Motor Vehicle Parts, Motor Vehicles, Semiconductors, Aircraft/Space/Missile Parts, Chemicals, Plastics, Airplane Engines/Parts, and Refined Petroleum Products. Generally, these items are more technologically based and require a better educated population to produce – a fact that gives the U. S. a comparative advantage for these types of industries.
Before NAFTA many corporations operated in Mexico by building facilities called maquiladoras. Maquiladoras are manufacturing plants that export raw materials and equipment into Mexico, process the raw materials into finished goods and then export those products to the United States or other countries. Cost savings is the primary reason that most manufacturers open their maquila operations. The maquiladoras are generally owned by non-Mexican corporations. The cooperative effort between the U. S. and Mexico is known by several names.
The terms “Border Industrialization Program” and “Maquiladora Program” are most frequently used. The program is also known as the “In-bond Industry” in Mexico, referring to the fact that goods are shipped “in-bond” from the U. S. to Mexico and back. Finally, the term “twin plants” depicts a relationship between an assembly plant on the Mexican side and a smaller processing and distribution facility on the American side. The number of companies registered under the Maquiladora Program has increased from 2,122, at the time of NAFTA’s implementation in January 1994, to 2,985, during the first quarter of 1998.
More than 3,000 maquiladora operations are currently in operation along the 2,000 mile border that stretches from California to Texas — and their numbers continue to grow. The Mexican government has been very supportive of the maquiladora program, requiring mainly that maquiladoras operate within the framework of Mexican laws. Recognizing the benefits that maquiladoras bring to Mexico, especially in alleviating unemployment, the Mexican government places few restrictions on NAFTA has helped to strengthen the U. S. economy.
During NAFTA’s first five years, U. S. goods exports to our NAFTA partners combined increased by about $93 billion, or 66 percent, to about $235 billion. If we look at the countries individually, U. S. exports to Canada, our largest trading partner, increased by about $55 billion or 55 percent to $156 billion. U. S. exports to Mexico increased by about $37 billion or 90 percent to $79 billion. Total exports from the Tar Heel State alone to our NAFTA partners increased 93 percent over the last five years, reaching $5. 8 billion in 1998.
U. S. employment has dropped from 6. 7 percent in January 1993 to 4. 2 percent here in America in March 1999 – a lower rate than that of any other industrial nation. A lot goes into that figure, but NAFTA and its facilitation of trade opportunities are part of it, everywhere in the country. On the whole, the record since NAFTA’s passage – declining unemployment, rising wages, rapid growth and the world’s most competitive large economy for 5 years as judged by independent experts – speaks for itself. The bottom line on NAFTA? It has helped our country prosper.