The North American Free Trade Agreement (NAFTA) created the world’s largest free trade area of 454 million people. It links the economies of theUnited States, Canada, and Mexico. In 2018, the U.S. GDP was $20.5 trillion. Canada's was $1.8 trillion, and Mexico's GDP was $1.2 trillion. NAFTA's trade area has a higher GDP than the $18.8 trillion produced by the 28 countries in the European Union.
1. Quadrupled Trade
Between 1993 and 2019, trade among the three membersquadrupled from $290 billion to $1.23 trillion. That boostedeconomic growth, profits, and jobs for all three countries. It also lowered prices for consumers.
During that time, the United States increased its exportsof goods to the other twofrom $142 billion to $549 billion. That's 33% of its total exports, making Canada and Mexico its top two export markets. It shipped $293 billion to Canada and $256 billion to Mexico.
U.S. imports from its NAFTA partners were $678 billion. That's 27% of total U.S. imports. It's also more than quadruple the $151 billion imported in 1993. Mexico shipped $358 billion to the United States, and Canada shipped $320 billion.
NAFTA boosted trade by eliminating alltariffsamong the three countries.It also created agreements on international rights for business investors. That reduced the cost of commerce. It spurs investment and growth,especially for small businesses.
|2019 NAFTA Trade in Goods|
|(In Billions of US$)||Mexico||Canada||NAFTA Partners|
|U.S. Exports to:||$256.6||$292.6||$549.2|
|U.S. Imports from:||$358.0||$319.4||$677.4|
|Total U.S. Trade:||$614.6||$612.0||$1,226.6|
2. Lowered Prices
Lower tariffs also reduced importprices. That lessened the risk ofinflationand allowed the Federal Reserveto keep interest rates low.
That's especially important for oil pricessince America'slargest import is oil.The U.S. Census reports that Mexicoshipped $15billion in oil and petroleum products in 2017. Thanks to greater U.S. shale oil production, this figure wasdown from $24 billion in 2009.Canada shipped $75 billion. That's up from $49 billion in 2009. Canada also boosted its production of shale oil.
NAFTA reducedU.S. reliance on oil imports from the Middle East andVenezuela.It was especially important when the United States banned oil imports fromIran. Why? Mexico and Canada arefriendly countries. Other oil exporters, such as Venezuela and Iran, use oil as a political chess piece. For example, both started selling oil in currencies other than the petrodollar.
NAFTA loweredfood pricesin much the same way.In 2017, food imports from Mexico were $26billion and from Canada were $24 billion, to total $50 billion. That's a 67% increase from the $30 billion imported in 2008. Without NAFTA, it's estimated that the food industry would have to pay $2.7 billion more annually to import goods—a cost that would likely be passed on to consumers in the form of raised prices.
3. Increased Economic Growth
NAFTA boosted U.S. economic growthby as much as 0.5% a year.The sectors that benefited the most were agriculture, automobiles, and services.
U.S. farm exportsto Canada and Mexico quadrupled from $11 billion in 1993 to $43 billion in 2016. It made up 25% of total food exports and supported 20 million jobs. This trade leveraged another $54.6 billion in business investment.
NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for U.S. beef, rice, soybean meal, corn sweeteners, apples, and beans. It is the second-largest export destination for corn, soybeans, and oils.
NAFTA modernized the U.S. auto industry by consolidating manufacturing and driving down costs.
Most cars made in North America now have parts sourced from all three countries. The increase in competitiveness allows the industry to fend off Japanese imports. Mexico exports more cars to the United States than Japan. Before the 2008 recession, Japan exported twice as many as Mexico.
NAFTA boosted U.S. service exports to Canada and Mexico from $25 billion in 1993 to a peak of $106.8 billion in 2007. The recession hit financial services hard. By 2009, they had only risen to$63.5 billion. By 2018, service exports had improved to$95.9 billion.That includes $34.1 billion to Mexico and $61.8 billion to Canada.
An estimated 80% of U.S. GDP is comprised of services, such asfinancial servicesand health care. NAFTA eliminates trade barriers in most service sectors, which are regulated. NAFTA requires governments to publish all regulations, lowering the hidden costs of doing business.
4. Created Jobs
Some sources say that NAFTA exports created 5 million net new U.S. jobs.Most of those jobs went to17 states, but all states saw some increases.U.S. manufacturers added more than 800,000 jobs between 1993 and 1997. Manufacturers exported $487 billion in 2014. It generated $40,000 in export revenue for each factory worker.
Even imports from NAFTA partners created jobs. Almost 40% of U.S. imports from Mexico originated from American companies. They designed the products domestically, then outsourced some portion of the process in Mexico. Without NAFTA, they would have gone to China. They may not have been created at all.
5. Increased Foreign Direct Investment
Since NAFTA was enacted, U.S. foreign direct investment(FDI) in Canada and Mexico has more than tripled to $500.9 billion. In 2017, U.S. investors poured $391.2 billion into Canada and $109.7 billion into Mexico. That boosted profits for U.S. businesses by giving them more opportunities to developand markets to explore.
Canadian and Mexican FDI in the United States grew to $471.1 billion. Canadian investors sank $453.1 billion while Mexican companies invested $18 billion. That's up from $219.2 billion in 2007. That’s an additional investment that went mostly toU.S. manufacturing, insurance, and banking companies.
NAFTA protected intellectual properties. It helped innovative businesses by discouraging pirating. It boosted FDIbecause companies know that international law will safeguard their rights.NAFTA reduced investors' risk by guaranteeing that they will have the same legal rights as local investors. Through NAFTA, investors can make legal claims against the government if it nationalizes their industry or takes their property by eminent domain.
6. Reduced Government Spending
NAFTA allowedfirms in member countries to bid on all government contracts. Thatcreated a level-playing field for all companies within the agreement's borders. It cut governmentbudget deficitsby allowing more competition and lower-cost bids.
Despite these advantages, the United States, Mexico, and Canada renegotiated NAFTA on Nov. 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. (USMCA) Mexico ratified the agreement in 2019. The agreement was signed by Donald Trump on Jan. 29, 2020. Canada's Parliament ratified it on Mar. 13, 2020.
The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal changes NAFTA in six areas. The most important is that auto companies must manufacture at least 75% of the car's components in the USMCA's trade zone.
Frequently Asked Questions (FAQs)
Who signed NAFTA?
President Bill Clinton signed the North American Free Trade Agreement Implementation Act in December 1993. This bill, passed by Congress, enacted NAFTA for the U.S. It came after government representatives from all three countries negotiated the details of the plan.
What are the benefits of NAFTA for Mexico?
NAFTA increased foreign direct investment in Mexico. It also boosted wages for Mexican workers, although those wage increases primarily benefited industrial workers in Northern Mexico.
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The Purpose of NAFTA
Eliminate barriers to trade and facilitate the cross-border movement of goods and services. Promote conditions of fair competition. Increase investment opportunities. Provide protection and enforcement of intellectual property rights.
NAFTA has six main advantages. According to a Congressional Research Service report prepared in 2017, the act has more than tripled trade between Canada, Mexico, and the United States since it was enacted. The agreement reduced and eliminated tariffs. Second, greater trade increased economic output.What is the most important purpose of NAFTA? ›
The agreement came into force on January 1, 1994. The goal of NAFTA is to eliminate all tariff and non-tariff barriers of trade and investment between the United States, Canada and Mexico.What are some advantages of NAFTA quizlet? ›
What are the pros of NAFTA? Increased trade, Boosted U.S. farm exports, Created trade surplus in services, reduced oil and grocery prices, and it Stepped up foreign direct investment.What are the five main points of NAFTA? ›
Expanded telecommunications trade. Reduced textile and apparel barriers. More free trade in agriculture. Mexican import licenses were immediately abolished, with most additional tariffs phased out over a 10-year period.Who benefits most from NAFTA? ›
Although some economists might think that the United States benefited the most from NAFTA, Mexico can be seen to have gained the most benefits by having industrialized while many of the United States factories closed in the aftermath of NAFTA.Did NAFTA only have positive impacts? ›
NAFTA went into effect in 1994 to boost trade, eliminate barriers, and reduce tariffs on imports and exports between Canada, the United States, and Mexico. According to the Trump administration, NAFTA has led to trade deficits, factory closures, and job losses for the U.S.Has NAFTA been successful? ›
The North American Free Trade Agreement (NAFTA) was created over 20 years ago to expand trade between the United States, Canada, and Mexico. Its secondary purpose was to make these countries more competitive in the global marketplace. It has been wildly successful in achieving both goals.What 3 countries benefited from NAFTA? ›
The North American Free Trade Agreement (NAFTA), which was enacted in 1994 and created a free trade zone for Mexico, Canada, and the United States, is the most important feature in the U.S.-Mexico bilateral commercial relationship.What were two original goals of NAFTA? ›
The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico. The implementation of NAFTA on January 1, 1994, brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico.
NAFTA Benefits for the US
Increased Export: since the implementation of NAFTA, US exports have risen from $142 billion to well over $500 billion. US exports to Mexico and Canada rose 156% during this period, while US exports to the rest of the world grew only 65%.
NAFTA was a landmark trade deal between Canada, Mexico, and the United States that took effect in 1994. It contributed to an explosion of trade between the three countries and the integration of their economies, but was criticized in the United States for contributing to job losses and outsourcing.Why is NAFTA so important to Mexico? ›
NAFTA, which stands for the North American Free Trade Agreement, created the world's largest tariff-free zone, allowing for free trade between the three countries and modernizing Mexico's economy in the process. Section 321 de minimis is one example of how NAFTA continues to positively impact Mexico's trade economy.What are the advantages of NAFTA for the United States quizlet? ›
Terms in this set (16)
Why was NAFTA started? What are the pros of NAFTA? Increased trade, Boosted U.S. farm exports, Created trade surplus in services, reduced oil and grocery prices, and it Stepped up foreign direct investment.
As figures from the U.S. Chamber of Commerce show, there are an estimated total of almost 5 million jobs in the country which are supported by trade with Canada and Mexico attributable to NAFTA. The states benefiting the most are California, Texas and New York.Why is NAFTA important to the United States? ›
NAFTA's purpose was to encourage economic activity among North America's three major economic powers: Canada, the U. S., and Mexico. Proponents of the agreement believed that it would benefit the three nations involved by promoting freer trade and lower tariffs among Canada, Mexico, and the United States.