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The North American Free Trade Agreement (NAFTA)

In January 1994, the United States, Mexico, and Canada implemented the North American Free Trade Agreement (NAFTA), forming the largest free trade zone in the world. 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. 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.

These requirements necessitated investors to export a set level of goods and services, utilize domestic goods and services, and transfer technology to competitors. Under NAFTA, investors no longer need government approval to invest and are treated as domestic investors. NAFTA has also increased intellectual property rights and allowed companies to obtain patents in Mexico and Canada. In the past, companies were hesitant to export research and development intensive goods; with increased intellectual property protection, however, exports of these goods have shown a definite increase.

As a result of better trading conditions, exports and imports of most other goods have increased along with the research and development intensive goods. 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. trade 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. Therefore it becomes less expensive for U. S. firms to supply goods to Canada and Mexico as the supply curve shifts upward. In order to meet the new demand, the firms must hire new workers and increase investment. Between 1994 and 1997, 90 to 160 thousand jobs were created in the U. S. due to the increase of trade with Mexico, and 2. million jobs were dependent upon trade with Mexico and Canada (Harbrecht 12). The increase in employment and investment then leads to increased national income. 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.

In 1994, a Canada-based entrepreneur invested four million dollars in a metal-stamping plant. The plant is now a major material suppler for Volkswagen although it was originally intended to employ only 130 people. The plant currently employs 1,300 workers and generates 57 million dollars in sales each year (Ebrahim 24). 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 de Mexico have increased from 350 million to 2 billion dollars in five years and the increased exports have created over 270 jobs (Ebrahim 26).

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. mills 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. percent in ’99 (Harbrecht 35).

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. for 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.

With all the good effects of NAFTA unfortunately there is some negative effects. One of the greatest impacts on Canadian and United States economies has been loss of jobs and decreased wages. Even though NAFTA has created jobs in the export sector, other production industries have moved their facilities to Mexico where wages are lower and operating costs are lower. Also, wages in Canada and the United States have been held in check and in some cases lowered by the threat of job loss associated with companies moving to Mexico if employees were not willing to work for less benefits or wages.

On a whole, it is perceived that workers rights have diminished somewhat because employers now can hire “cheaper labor”. In the United States and Canada some wages are stagnating if not declining somewhat. In addition, many border workers on the United States and Mexican sides have lost their employment when factories were relocated to other areas where lower wages helped decrease production costs and increase profits. In essence, the larger corporations and businesses have benefited from NAFTA while smaller companies have been effectively erased from the economic equation.

The influx of immigrants from Mexico has increased even though some see this as only temporary but nonetheless has also led to loss of jobs or wages for some Americans because the immigrants will work for minimum wage more readily and generally do not have the “power heavy” unions to protect them. The agricultural sector from all sides has seen various adverse effects of NAFTA. United States and Canadian exports are increasing in the agricultural sector but the value of the exports has decreased due to competition from the “south”(Dentzer 82).

Mexican farmers have also seen increased exports but have lost their government subsidies, which effectively negates the gains from increased exports. There are many benefits of NAFTA, which are increased employment, raised national income, higher productivity, and lower consumer prices. The negative effects are increased pollution, loss of U. S. jobs, and unfair treatment and unsafe conditions for Mexican workers. The benefits definitely outweigh the negative effects in the long run because improved economies will raise the standard of living and promote better overall economic growth in all of North America.

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