The North American Free Trade Agreement was signed in 1994 to lift restrictions that imports and exports faced in the US, Mexico, and Canada. These three nations make up the majority of the continent, so allowing trade to flow freely made sense for everyone involved. It has been a 20+ year process of implementation, however, so there have been certain advantages seen with this agreement and some disadvantages that have occurred as well.
Is NAFTA still beneficial to all parties involved? Here is a look at the pros and cons of this free trade agreement.
What Are the Pros of NAFTA?
1. It reduces or completely eliminates certain tariffs.
Imported goods from these three neighboring countries have seen pricing advantages because the import tariffs have been altered. In 2008, all agricultural tariffs were completed eliminated between the US and Mexico. Canada has followed suit with many of their products as well, though dairy, eggs, and sugar are still taxed as imports. The reduced tax load makes trade easier, prices friendlier, and ultimately consumers happier.
2. It encourages domestic production.
Because the tariffs are removed or reduced because of NAFTA, the various domestic industries are encouraged to ramp up production because their free trade zone includes all three primary nations of North America. The existing tariffs still exist for other nations, which means the first choice will often be goods created in the US, Canada, or Mexico before other nations.
3. Border states are able to economically flourish.
Since the beginning of NAFTA, Texas has seen a 13% annual growth in certain industries because of their border location. The same can be said for imports and exports that occur along all of the border states in Canada and Mexico. Every business owner has the chance to reach out to a new customer demographic, expand their incoming revenues, and ultimately achieve a better profit profile thanks to the lesser restriction amounts.
4. The GDP is enhanced for all 3 nations.
Consumer spending is one of the primary components of the GDP for all 3 nations. Because the restrictions on spending are loosened and the cost of spending has been reduced, all three countries are able to enhance their GDP numbers because of NAFTA. For the US, this means a stronger dollar and a more competitive interest rate.
What Are the Cons of NAFTA?
1. It has created job losses.
Mexico just doesn’t have the environment to compete agriculturally with the US or even with Canada to some extent. This means that Mexican farmers are at a large disadvantage, especially since there is no incoming taxation for US agricultural goods that can allow their own pricing to be competitive. The end result has been job losses that are estimated to be above 1 million in Mexico in this industry.
2. It sets the foundation of illegal immigration.
If people are out of work and don’t have the ability to earn a livable wage, then they are going to go some place where this can happen. If 1 million farmers are out of work in Mexico, but there are livable wages being paid in the US, then it becomes a profitable venture to cross the border immediately to begin working instead of waiting for the official paperwork to come through.
3. It creates pockets of economic decline.
NAFTA might provide a huge economic impact for the border states, but the end result is that the interior states of the US or the northern Canadian provinces or southern Mexican states don’t get to see these positive results. Many of them, in fact, show pockets of economic decline in certain industries because there isn’t the same access to a continental customer base that border industry providers are able to access.
4. It increases trade deficits.
One of the unanticipated side effects of NAFTA is that it has allowed freedom of movement for many industrial sectors so that goods can be produced on foreign soil instead of domestically. This is often seen with US and Canadian businesses moving to Canada to pay cheaper, but still locally fair, wages to workers. The result is an increased trade deficit, especially in the US, as outsourcing and relocating become cheaper to do than provide local jobs.
How Do You Feel About NAFTA?
The North American Free Trade Agreement has certainly helped many households, but some of its disadvantages have also brought the potential for harm as well. By weighing all of the NAFTA pros and cons, we can effectively monitor this agreement to ensure it provides benefits that outweigh its disadvantages.