Focus: Nafta : Terms Of Trade

14 Years On

With Nafta once again coming to the forefront of water-cooler discussions as a result of the political ping-pong between Democratic presidential hopefuls in the US, we look back at the development of the ground-breaking free trade agreement and examine whether it has reached its goals.


Former presidents Gerald Ford, Jimmy Carter and George W. Bush and president Bill Clinton at the signing ceremony for the side agreements for the North American Free Trade Agreement at the White House on September 14, 1993.

The North American Free Trade Agreement (Nafta) has always been controversial. Although in the minds of many the relative benefits are outweighed by the problems, 14 years on—and with the final tariffs having been removed in January this year—from a purely corporate perspective most agree that the benefits have held sway.

However, Nafta continues to be a political hockey puck, with the latest debate coming in the US presidential race. As the Democratic hopefuls bat it around in the hopes of scoring a goal with voters, whether it really has achieved both its stated and its implied goals is a central discussion point for the industries and individuals most affected, as well as for economists and academics.

The regional agreement among the governments of Canada, the United Mexican States and the United States of America that went into force on January 1, 1994, was intended to implement a free trade area among the three countries and to set up infrastructure to manage it. The goals of Nafta were manifold: to eliminate barriers to trade and assist the cross-border movement of goods and services, to create an environment of fair competition, to increase investment opportunities, to offer protection and enforcement of intellectual property rights, to develop and enforce successful procedures for implementing, administering and enforcing the agreement, and to develop a framework for further agreements.

“Nafta expanded on bilateral agreements with Canada set up in 1989,” says one US trade official. “What is notable is that Nafta took a broad agreement between two developed countries and added a developing country to an existing trade agreement.” It also opened up some areas that did not have trade liberalization under the 1989 Canada-US Free Trade Agreement. “It came along because it wasn’t clear that there would be a World Trade Organization agreement, and the three countries wanted an agreement in place in case that fell through,” says Robert Paterson, professor of law at the University of British Columbia.

The agreement set out trade rules, reduced or removed tariffs for importation and exportation of many goods and services and put in place an infrastructure to handle disputes arising as a result of those rules, including anti-dumping and countervailing rules and the agencies responsible for administering dispute settlement provisions—namely, the Nafta Secretariat. The Nafta Secretariat is the independent agency responsible for dispute resolution and includes a Canadian, a Mexican and a US section. It is accountable to the Nafta Free Trade Commission, which is made up of ministers responsible for international trade in each of the three Nafta countries.

“Another advantage is the provisions of Nafta that give corporates the extraordinary power to sue governments for actions that undercut their profit potential,” says Jeff Faux, founding president and distinguished fellow at the Economic Policy Institute in the US. “And we have seen suits in all three countries,” he adds.

Small Steps, Big Results
In many ways Nafta was not all that radical, according to Paterson. “It wanted to solidify gains already made, and from a Canadian perspective one of the big things was to confirm and solidify the auto pact. Before that, every time the markets favored Canada, a US congressman would say the auto pact was a bad idea and should be pulled, and when it favored the United States, then they thought it was okay. Canadian politicians wanted to firm up the auto pact so the US congress couldn’t easily undermine it,” Paterson explains.

The main purpose from a US perspective was to provide cheaper labor and opportunities for American investors, especially in the finance sector. Once implemented, it opened up access to cheaper labor, and, for many industries and sectors, it opened up the markets in a way that had not been seen before. In particular, it opened the Mexican financial system to ownership by American and international investors.

Mexico’s banking system had previously been 100% Mexican-owned, and now it is almost 100% foreign-owned, primarily by American and Spanish firms. The investment and financial services side in Mexico has opened up beyond what is required by Nafta, driven largely by the financial crisis in 1995 and the desire to avoid a recurrence in the future.

“Many people thought when Nafta was first signed that this would be a way for American firms to better compete against the Asians—that Mexico would be a place of inexpensive labor helping US firms compete,” says Faux.

For the Mexican market, the promise of huge growth in foreign investment and job creation was a big pull. Trade growth was expected to completely change the perspective for individuals and industries in Mexico. And much of that came true. By 2004, after 10 years under Nafta, Mexican exports had grown three-fold, from $52 billion to $161 billion, and per capita income rose by almost a quarter to just over $4,000.

Upon ratification of the agreement, innumerable US companies and international companies with US operations immediately moved parts of production to Mexico—including Matsushita, Sara Lee, Woolrich, Zenith, Canon Business Machines, A&W; Brands, Kyocera International, American Metal Products, Plantronics, Bluestone and Hughes Aircraft. Since then that list has only grown.

Faux says that Nafta has been beneficial for most companies. “For corporations that are tri-national or have the reach to go across boundaries, it has been a net plus. Especially for corporates in manufacturing who outsource, Nafta has been a positive development. I was a critic of Nafta, and I still am. But from the point of view of the corporate class, I think it was a success,” he says.

The big disadvantages of Nafta in the US and Canada have been felt by individuals losing jobs and by small and mid-size businesses. “For many small and medium-size firms and for at-risk industries, it has been a disaster,” says Faux. “In the US, plants have closed down, and businesses in those communities have folded. Suppliers for manufacturing in the auto, appliance and telecom industries have also been hard hit. Those that have been supplying firms producing the final products have lost because a lot of parts and components manufacturers have shifted suppliers to Mexico. In some cases suppliers have simply gone to Mexico, too.”

The promise was that there would be net new jobs for Americans, Faux adds. “And that was based on the projection that the US trade surplus with Mexico would grow. Instead, the US trade surplus with Mexico turned into deficit, and we have seen a net loss of jobs to Mexico with Nafta,” he points out.

Some in Mexico say that the distribution of income and wealth among people and among regions of Mexico has become unbalanced. While industries along the US-Mexico border have prospered, it has intensified poverty in other parts of the country as industry has focused on that northern border region. In addition, with the opening of the US markets to China, many of the advantages for Mexico have declined. Chinese imports have undercut demand for Mexican manufacturing.

However, the US trade official believes that the benefits are clear. “The primary benefit of trade agreements is not what people think or complain about or run for president on the basis of, but rather that they set up a predictable set of rules governing trade,” he says. The biggest benefit of Nafta is that we have seen a more stable Mexico since 1994, says the trade official. “This is largely as a result of their desire for strong economic policies, but Nafta also contributed to that by reducing the likelihood of crises and providing a huge and stable trading partner—the United States. And this also means that Mexico is a much more reliable and successful trade partner for the US,” he says.

Michael Hart, the Simon Reisman chair in trade policy at the Norman Paterson School of International Affairs at Carleton University in Ottawa, says that the agreement did what it was expected to do. “It included some things that people don’t like, but the goal was to create open markets, and that requires some adjustment,” he explains.

Nafta also became a model for trade agreements between a developed and developing country. The US and Canada have each used this model in subsequent trade agreements with developing countries—for example, in US agreements with Chile, Central America, Peru and Korea and in Canadian bilateral trade agreements with Chile.

The success of Nafta has also helped spark interest in further large-scale trade agreements, such as the Free Trade Agreement of the Americas (FTAA). However, the FTAA has not yet become a reality and has been put on the back burner as a result of political disagreements on how it should be sculpted between the US and Canada, and the US and Brazil, in particular.

“Waiting for Conservative Trade Policy,” a report by Bill Dymond and Michael Hart at Carleton University in Ottawa, explains the situation: “US political realities assigned high political costs and low political or economic gain to an FTAA that opened the US market further to competitive Latin American agriculture and other products.”

According to the report: “While some countries—Venezuela, Bolivia and, potentially, Ecuador and Peru—are veering off into nationalist adventures uncongenial to trade liberalization, others are seeking and obtaining bilateral free trade agreements with the United States. In these circumstances, the prospects of breathing life into the FTAA are virtually non-existent.”

Denise Bedell