The North American Free Trade Agreement (NAFTA) was a treaty between Canada, Mexico, and the United States that aimed to eliminate most tariffs between the countries. It was replaced by the United States-Mexico-Canada Agreement (USMCA) on July 1, 2020.
Definition of the North American Free Trade Agreement (NAFTA)
NAFTA was the largest free trade agreement in the world when it came into effect on January 1, 1994, between Canada, the United States, and Mexico. It was the first time a trade agreement was signed between two advanced nations and an emerging country.
Through NAFTA, the three countries agreed to remove trade barriers between them. By eliminating tariffs, investment opportunities increased under NAFTA.
How the North American Free Trade Agreement (NAFTA) Worked
NAFTA achieved six different things for the participating countries. First, NAFTA granted Most-Favored-Nation status to all signatories of the agreement. This meant that each country treated the other two fairly and could not provide better treatment to local investors compared to foreigners. They could not offer better deals to investors from non-NAFTA countries, and they had to offer government contracts to companies in the three countries.
Second, NAFTA called for the elimination of many tariffs on imports and exports between the three countries. Tariffs are taxes that are used to make foreign goods more expensive. NAFTA established specific rules to regulate trade in agricultural products, automobiles, clothing, for example.
Third, exporters were required to obtain certificates of origin for tariff elimination. This meant that exports had to originate from the United States, Canada, or Mexico. For example, if a product was produced in Peru and shipped from Mexico, it would be subject to a tariff upon entering the United States or Canada.
Fourth, NAFTA created procedures for resolving trade disputes. Parties start with a formal discussion, followed by a discussion at a Free Trade Commission meeting if necessary. If the dispute is not resolved, a team reviews the dispute.
Fifth, all three countries in NAFTA were required to respect patents, trademarks, and copyright. At the same time, the agreement ensured that these intellectual property rights did not interfere with trade.
Sixth, the agreement allowed commercial travelers easy access to all three countries.
Advantages and Disadvantages of the North American Free Trade Agreement (NAFTA)
Advantages
– Lower food prices: Food prices in the United States decreased due to tariff-free imports from Mexico.
– Lower fuel prices: The import of oil from Canada and Mexico prevented fuel prices from rising.
– Increased trade and growth: Easing tariff restrictions and lower prices on many goods led to increased trade and economic growth for the three countries.
Disadvantages
– Decrease in manufacturing jobs: Some consider NAFTA to have led to the transfer of many manufacturing jobs from the United States to Mexico due to lower labor costs there.
– Decrease in wages: American workers who kept their jobs in these industries had to accept lower wages.
– Exploitation of labor in Mexico: Mexican workers suffered from poor working conditions in maquiladora programs. A maquiladora is a low-cost manufacturing process or factory owned by the United States operating in Mexico, usually near the border between Mexico and the United States.
Notable Events
– It took three U.S. presidents to put NAFTA together. President Ronald Reagan began in 1979 during his presidential campaign announcement. He wanted to unify the North American market to compete better.
– In 1984, Congress passed the Trade and Tariff Act, which granted the president the authority to fast-track negotiations for free trade agreements. It allowed Congress only the ability to approve or reject it, and it could not change negotiating points.
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In 1992, President George H.W. Bush signed NAFTA before leaving office shortly thereafter. It then returned to the legislation of the three countries for ratification. In 1993, President Bill Clinton signed it. NAFTA went into effect on January 1, 1994.
– On November 30, 2018, the United States, Mexico, and Canada renegotiated NAFTA. The new deal is called the United States-Mexico-Canada Agreement (USMCA). The implementing legislation was ratified by the House of Representatives in December 2019 and the Senate in January 2020, and it was signed by President Trump on January 29, 2020. It was ratified in Mexico in June 2019 and in Canada in March 2020. The United States-Mexico-Canada Agreement went into effect on July 1, 2020.
– Some key differences between NAFTA and the United States-Mexico-Canada Agreement (USMCA) are:
- The requirement that 75% of automotive components be manufactured in North America, up from 45% in NAFTA.
- Reducing tariffs and restrictions on products that help American farmers.
- Reducing tariffs and taxes on cross-border shipping.
Frequently Asked Questions (FAQs)
– Was NAFTA bad for the environment? In Mexico, changes in agriculture brought about by NAFTA increased the use of chemical pesticides and fertilizers for farming, as well as desertification so farmers could stay in business and remain competitive. These changes led to environmental degradation.
– What is the difference between NAFTA and the European Union? NAFTA was a free trade agreement between the United States, Mexico, and Canada. It was designed to increase economic growth and investment by removing trade barriers between the three countries. The European Union (EU) is a coalition of European countries that eliminates border controls between member states. It established a single currency and allowed people and goods to move freely.
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Source: https://www.thebalancemoney.com/nafta-definition-north-american-free-trade-agreement-3306147
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