North American Free Trade Agreement NAFTA Essay

North American Free Trade Agreement: NAFTA Essay, Research Paper

North American Free Trade Agreement: NAFTA

Introduction

I believe that the North American Free Trade Agreement was an inevitable

step in the evolution of the United States economic policy. The globilization

of the world economy due to technological advances in computers and

communications have shrunk the world to the point where no single country acting

alone can effectively compete on the foreign market. Even the United States,

with its vast resources, can not have an absolute advantage in all thing that it

produces. It does not have unlimited factors of endowments and must do its best

to make these available to the companies within its borders.

There are two basic sides to the argument over the North American Free

Trade Agreement. The Pro-NAFTA side views the treaty as a way to provide a

large, efficient production base for the entire geopolitical area. This would

result in lower cost to consumers and an increase in exports to Mexico and

Canada. The multiplier effect would then take place producing growth in all

areas. The Anti-NAFTA group feels that Mexico will be an unequal partner due

to the lower wage rates of the Mexican populace, causing the loss of

thousands of jobs in the United States and Canada. Environmentalist fear that

pollution will spread across the continent. Farmers fear that produce grown in

Mexico will be contaminated from pesticides banned in the United States. These

are but a few of the arguments for and against NAFTA.

What does NAFTA mean

A Free Trade Area is, by definition, an area where all barriers to trade

are lifted. This is not the case with regards to NAFTA at this point.

Currently most of the trade barriers between the United States and Canada are

lifted but those with Mexico have largely been kept in place. This is an

obvious disparity on the part of the Mexican government but is due largely to

the proportional loss of income to the governments in each country. The Gross

Domestic Product per individual in Mexico is one seventh of the other two

countries. Therefore, the loss of revenue would have a major impact on the

daily life of its population and the operation of the government . Never before

has a major economic power like the United States considered a free trade area

with an under-developed third world country.

The major difference between a Free Trade Area and Common Market is

that a Free Trade Area primarily deals with trade, while a Common Market has

this in addition to no barriers on factors of production and a common external

trade policy.

While on the surface it seems that a free trade area would always be a

good thing, it is easier said then done. The majority of people that oppose

NAFTA do so because of the potential for loss of employment. Mexico with its

cheap work force, will tend to make manufactures requiring extensive manual

labor more likely to move to the lower cost area. A loss of sovereignty may

also be a stumbling block, since some economic policy decisions are taken out of

the governing bodies’ hands.

Another factor is the extent of trade creation versus trade diversion.

The difference is if high cost domestic producers are replaced by low cost

producers within the trade area then trade creation occurs. If trade diversion

occurs, it would have a major impact on consumer prices. This practice is

evident in the textile industry and will be discussed later.

History of NAFTA

In 1988, the United States and Canada agreed to enter into a free trade

agreement. This went into effect on January 1, 1989 and was widely accepted as

a logical course of action. Canada is a highly developed nation and has a lot

in common with the United States. Its per capita income and hourly wages are

equivalent to the U.S. and has long been considered our brother to the north.

Then in 1991, Mexico entered into talks with Canada and the United States that

concluded on 17 December 1992. The treaty was ratified and came into effect on

1 January 1994. The treaty called for the elimination of all tariffs between

the three nations over a ten year time span. Some of these tariffs are listed

below.

Mexico’s turmoil since NAFTA

The political turmoil in Mexico has added a great deal of controversy to

the issue. On the same day that NAFTA was implemented, some of the poorest

regions of Mexico in the Chiapas highlands revolted. After twelve days an

accord was reached with the rebels. In march, the Mexican president’s chosen

successor was assassinated. This forced the president to pick Zedeillo who

eventually won the race for the Presidency. Just after the new year, the peso

was allowed to be floated against the dollar causing up to a 40% loss in the

value of the peso. This caused 12% of Mexico’s Foreign Direct Investment to

lea

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