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Pros and Cons of NAFTA

by Suleman

Our modern society has been dealing with ever-increasing levels of globalization and economic integration, especially since our economy shifted from an agriculturally focused organization to a mostly industrialized global economy. Economic integration through the unification of economic policies between competing countries has been an economic policy pursued by the majority of the world’s industrialized nations. Trade agreements promote and encourage trade between countries through the full or partial removal of unfair trade tariffs. Another main objective of economic integration is to increase industrial efficiency through “economies of scale” which relate to increased levels of productivity due to increased levels of production consequently, all the Member States of the Economic Union are contributing to lower costs and higher efficiency. Some of the different stages of economic integration between countries are (Tutor2u, 2012):

  1. Trade agreements – are formal negotiations between two or more countries where they negotiate lower import tariffs and work to facilitate the bureaucracy and paperwork involved in the export and import of goods and services between member countries.
  2. Trade Liberalization (Free Trade Agreements) – In principle, it eliminates barriers to free trade by removing unfair tariffs and entry barriers between member states or nations. It further establishes standard import tariffs for non-member country imports into the free trade zone. During the last two decades, there has been significant growth in international trade agreements, specifically “Regional Trade Agreements”, most of them have been free trade agreements with a focus in reducing tariffs and other artificial barriers of trade between participants. The North American Free Trade Area (NAFTA) and the European Free Trade Area (EFTA) are both excellent examples. ASEAN (Association of South East Nations), and Mercosur are two additional examples.
  3. Custom Union – Some agreements are more encompassing and sophisticated such as the European Union (EU) where not only is trade policy regulated, but it establishes standard external tariffs for non-union members. It also controls and oversees the regional rules concerning flows of capital, agreements on financial strategy, competition, environmental regulations, practices and movement and regulation of labour.
  4. Common Market – Where, a community of countries, all its members are united into a single global market. Free movement of capital, labour and services among members is the trademark of individual markets.
  5. Single Currency (Monetary Union) – The European Union, by adopting an economic model of a Customs Union with a single shared currency the Euro, is a perfect example of a highly integrated regional economy.
  6. Economic Union – (combines Custom Union/Common Market)

Pros and Cons of NAFTA

There are both pros and cons to free trade agreements. Free trade will help promote healthy competition between companies, thereby bringing better goods and better prices to the customer base. Trade deals will help provide a competitive advantage for countries where they can specialize in the goods and services that they manufacture and export most effectively. It has been argued that increased productivity only applies to the increased aggregate wealth and not how somewhat increased income will be distributed among its participants (White, 2012). It has been suggested that free trade should be a mechanism that helps to promote peace between nations through functional and economic interdependence, as well as providing a basis for healthy trade for the overall economic growth of all countries involved.

Free Trade agreements also tend to negate the practice of economic protectionism, which is widely practiced by many countries to protect their economies when Free Trade Agreements are not enacted between countries. Stated the host country imposes high import tariffs and other unfair trading regulations on foreign competing products or services which by limiting the consumer markets this practice tends to create higher prices and less variety for consumers in general. It also has the secondary ripple effect of effectively hurting their economy and creating a hostile trading environment since competing countries are going to use the same type of protectionist measures against the other countries imports. On the other hand, protectionism can help protect domestic companies from unfair competition and increase the local company’s profits, albeit at the expense of the general consumer. Free Trade Agreements can also hurt new emerging industries in the host country by not providing adequate protection against unfair competition from established foreign companies. Although proponents of free trade debate that such agreements eventually lead to higher employment and productivity especially in jobs involving imports and exports, others argue a secondary effect is an increase in overall unemployment as many manufacturing jobs can be displaced to countries with cheaper labour and business costs which can drive total working wages downward offsetting the increased productivity and job creation caused by such trade agreements.

In the case of the United States NAFTA was first drafted over 20 years ago between USA, Mexico and Canada, and signed in 1994 making it the world’s largest free trade area. The goals of this historical trade agreement were to help reduce trading costs to increase economic and capital investment between countries and increase the global competitiveness of all parties involved. The U.S. Farming industry has seen overall exports to Mexico, and Canada increases from 22% in 1993 to over 30% of total farming output. The service industry accounts for over 40% of annual GDP, NAFTA created some significant increases in some service industries such as healthcare and financial services which the U.S. provides to Canada and Mexico from $25 billion in 1993 to over $106 billion in 2007, which dropped to $63.5 billion in 2009 (Amadeo, 2012).

One main advantage of NAFTA is that it has effectively linked over 450 million people and over 17 trillion dollars in traded goods and services produced annually by these three countries. NAFTA has effectively eliminated all tariffs for member countries since January 1, 2008, and it has boosted trade for all goods and services from 297 billion in 1993 to over 1.6 trillion by 2009 (About, 2012). Since labour is cheap and business and environmental regulations are lax in Mexico, many U.S. manufacturers have moved production down south where it has caused the U.S. Trade deficit to grow up to $97.2 trillion from 1994-2010. The move has forcefully displaced over 682,900 jobs (nearly 80% in manufacturing) from the U.S. to Mexico, mostly in high paying blue-collar jobs (Amadeo, 2012). Another consequence has been that without union support and the highly competitive market created by NAFTA has caused wages in the U.S. to be suppressed for most American, particularly among middle-class families. Some industries have disappeared from American soil forever since intensive labour industries benefit from cheaper labour locations.

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