North American Free Trade Agreement - Article Example

Report on the North American Free Trade Agreement Table of Contents 1. Historical Background 2. Conception and Formation of the Agreement 3. The Contents of the Agreement (Objectives, Terms and Implementation Schedule) 4. Development over the years 5. Current Status 6. Future Prospects 7. Performance Indicators (Quantitative and Qualitative) 8. Works Cited 1. Historical Background The North American Free Trade Agreement (NAFTA) is the trade bloc in North America consisting of the United States, Canada and Mexico which came into effect on January 1, 1994. The NAFTA has two supplementary co-operations, the North American Agreement of Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC) (Hufbauer and Schott). According to Trefler, historically, the NAFTA can be noted as an expansion of the earlier Canada-US Free Trade Agreement of which was signed on January 2, 1988. The practice of free trade in the US has long been a controversial issue especially when it is in relation to Canada. Economic advisors have criticized Canada as trying to encourage a political “takeover” by the US when they were actually trying to forge closer economic relations. But the issue of free trade goes as far as 1855 where the Reciprocity Treaty was created to limit free trade between British colonies in North America and the US. In 1866, the US Congress cancelled the treaty. The Liberal Party of Canada has traditionally supported free trade and in 1911, free trade became an electoral issue but over the next few decades, the issue was never resolved. From 1935 to 1980, the number of trade agreements between the US and Canada reduced the tariffs in both countries, leading to the 1960 Canada-United States Automotive Agreement (AutoPact) and by the 1980s, both the US and Canada proved to be each other’s largest trading partners. In 1985, a Royal Commission on the economy issued a report to the Canadian government advocating free trade with the US and then US president Ronald Reagan welcomed the Canadian move and the United States Congress gave the green light for a free trade agreement to be signed with Canada. The Canada-US Free Trade Agreement included points such as the removal of most remaining tariffs, access to Canada’s energy and cultural industries as well as Canada’s protection of sectors such as education and healthcare (Hufbauer and Schott). The agreement led to a rapid increase of trade between both countries. Canada’s Gross Domestic Product (GDP) for exports jumped from 25% to 40%. Some areas were unresolved including areas of lumber as the Canadians have blamed the US of violating the agreement via protectionist policies. Thus, to overcome these problems, the NAFTA was signed between the US and Canada and it was also expanded to include Mexico. 2. Conception and Formation of the Agreement As noted earlier, NAFTA was pursued by governments both in the US and Canada in support of free trade. Led by US President George H.W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas de Gortari, the three countries signed the NAFTA in December 1992 but the agreement only came into effect on January 1, 1994. There was opposition in all three countries including the US. The US House passed the NAFTA by 234-200 votes (Final Vote Results for Roll Call 575) whereas the US Senate passed it by 61-38 (U.S. Senate Roll Call Votes 103rd Congress). The NAFTA, as the previous Canada-US Free Trade Agreement, took away the majority of tariffs between the US, Canada and Mexico, with phasing out of the other tariffs gradually. Sectors such as the motor vehicle industry, information technology and agriculture had their restrictions removed. In addition to this, the agreement also allowed the protection of intellectual property rights. Investments between all three countries were also allowed freely and equally in all sectors except agriculture. Supplemental agreements added on issues of worker rights and environmental protection (Hufbauer and Schott). In addition to the NAFTA, the NAAEC was also signed. This agreement was signed after pressure from environmental groups noted that pollution would be worse if all the three countries in the agreement did not have proper environmental regulation. However, the NAAEC does not force each country to have a standard form of environment protection, but only to further regulate and enforce their own environmental protection laws. A supplementary body of the NAAEC called the North American Commission for Environmental Cooperation (NACEC) was formed which served to offer financial assistance in regards to reducing pollution via the usage of technology (Saunders). The NAALC was also signed as a supplement of the NAFTA, and this agreement served to create further cooperation between all three countries in regards to labor problems. As all three countries have various forms of labor unions and workers’ rights, the agreement allowed the flow of ideas and plans in order to offer better labor rights as well as more conducive working environments (Otero 637-662) . 3. The Contents of the Agreement (Objectives, Terms and Implementation Schedule) The objectives of the NAFTA as stated in Article 102 are to: eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; promote conditions of fair competition in the free trade area; increase substantially investment opportunities in the territories of the Parties; provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement In regards to the terms of the NAFTA, all chapters which include the national treatment and market access for goods, rules of origin, customs procedures, energy and basic petrochemicals, agriculture and sanitary and phytosanitary measures, emergency action, standards-related measures, government procurement, investment, cross border trade in services, telecommunications, financial services, competition policy, monopolies and state enterprises, temporary entry for business persons, intellectual property, publication, notification and administration of laws, review and dispute settlement in antidumping and countervailing duty matters, institutional arrangements and dispute settlement procedures have their terms defined (Foreign Affairs and International Trade Canada, The North American Foreign Trade Agreement). In addition to the individual terms per chapter, general terms of the NAFTA include its relation to environmental and conservation issues. For example, in the event of any inconsistency between the NAFTA and the specific trade obligations set out in the Convention on International Trade in Endangered Species of Wild Fauna and Flora, the Montreal Protocol on Substances that Deplete the Ozone Layer and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, each country has to choose the modality which suits that of their country best. All three countries too have to ensure that all necessary measures are taken in order to give effect to the provisions of the agreement including their observance. Implementation wise, as noted earlier, the NAFTA was implemented on January 1, 1994 and is expected to be completed in 2008. Under the agreement, all tariffs in regards to the agriculture sector between the US and Mexico would be eliminated immediately and the other tariffs would be phased out over the next 5 to 15 years by 2008. Between the US and Canada, all tariffs with a few exceptions would be removed by 1998. In regards to Mexico and Canada, tariffs between these two countries would be removed over 5, 10 or 15 year phases depending on the complexity of the sector (Foreign Affairs and International Trade Canada, The North American Foreign Trade Agreement). On January 1, 2005, the 12th round of tariff cuts were carried out, opening the market to more US products under NAFTA which include corn, poultry and potatoes. This was in line with the total elimination of tariffs by 2008. All non-tariff measures between the US and Mexico were dropped out as the agreement came into affect on January 1, 1994 which included Mexico’s import licensing system. However, as these sectors were more complex, a longer transition period was needed in order for a smooth transition (United States Department of Agriculture, North American Free Trade Agreement). For import-sensitive crops, NAFTA opened up the market for all these products when previously, the practice was to charge a higher tariff for any sales over the small duty-free quota which Mexican exporters were allowed to sell. These included 10 years for the transition of daily products, sugar containing products and cotton as well as 15 years for peanuts. During the first six years of the agreement, the US reduced its tariffs on sugar from Mexico by 15% with the intention of a full elimination at the end of the agreement. Mexico on the other hand also changed its tariff practice to suit that of the US and from the seventh to the fourteenth year of the agreement, a ceiling of 250000 tons of sugar will be placed on Mexican sugar export to the US (United States Department of Agriculture, North American Free Trade Agreement). 4. Development over the years Due to the NAFTA, Canada and Mexico became the US’s first and second largest export markets in agricultural products and from 1992-2005, US agricultural exports climbed 46% worldwide as international markets saw the benefits of working with a stable and systematic agriculture system. Within the partnership itself, the food and farming industry enjoyed a growth of 128%. Prior to the conception of NAFTA, the competition and growth of the local Mexican market caused the US to loose its footing in Mexico. By trading with Mexico, the US food and farming industry exports grew by 46%, translated in monetary terms of $3.7 billion to $9.4 billion. Other exports such as dairy products and meat also set new highs and US exports made up 71% of Mexico’s total agricultural imports in 2005. Even when Mexico went through a devaluation of the peso, the NAFTA managed to cushion the downturn and sped the recovery process as there was now a local preference for US based products. In Canada, US food and farming exports reached a new record of $10.6 billion in 2005, an increase of 81% since 1990. New records continued to be set in regards to vegetable oils, sugars and drinks. All the tariffs eventually were eliminated by January 1, 1998 (United States Department of Agriculture, North American Free Trade Agreement). Over the years, the NAFTA also provided towards sanitary and phytosanitary measures, export subsidies, internal support as well as grading and quality standards. The development and enforcement of sanitary and phytosanitary measures ensure that not only human but also animal and plant life is protected from any environmental or biological pitfalls. Although the agreement states that trade is its main function, each country has to be protected against all forms of unsafe products or by-products. However, the agreement on this is not rigid and each country is allowed to freely adopt its own international and national standards. This practice has further increased international trust towards products from all three NAFTA member countries. The US, Canada and Mexico are also working towards creating an export-subsidy free world. Currently within the agreement itself, the US and Canada are allowed to provide export subsidies into Mexico. With the huge amount of trade involved, all three countries too have internal support which serve to ensure the smooth running of all transactions and to minimize economic inactivity. The grading and quality standards agreement states that all member countries have to have a proper method of classifying their products or if a raw material was imported for processing in another member country, similar standards should be applied (United States Department of Agriculture, North American Free Trade Agreement). 5. Current Status Today in 2007, we can see that the benefits in terms of economic value within the US, Canada and Mexico due to the NAFTA are clear. The series of phasing out of tariffs has allowed the creation of one of the world’s largest area of free trade. In Mexico, labor intensive organizations flourished as cheaper imports arrived from the US and were later on exported as completed products not only to the US and Canada but globally. The growth of these labor intensive organizations directly increased the number of jobs, thus reducing unemployment rates. In 1993, the unemployment rate in Mexico was 2.9% but by 2000, it had dropped to 1.9%. Although some parties may argue that the reason why these labor intensive organizations grew was because of cheaper imported raw materials and there was not a need to pay tariffs, the NAFTA has also allowed this growth due to an effective division and management of labor (Fugate). Prior to the signing of the NAFTA, the growth of the GDP of Mexico was at a rate of 3%, below that of a favorable rate, but after the signing, the GDP doubled with a high of 7%. Translated into monetary terms, the expansion of exports in Mexico grew from $39.9 billion in 1993 to $134.7 billion in 2002. As the NAFTA encouraged the sharing and development of technology and skills, it provided many companies in Mexico with better facilities via research and development programs with counterparts in the US and Canada. This has led to an increased productivity of up to 7.5% (Fugate). In regards to agriculture, agricultural imports from the NAFTA have increased by almost 800% since 1980. Mexico and Canada who both rely on imports from the US have expanded the US agriculture economy as well as increased the production of meat in Mexico. US agriculture exports to Mexico have tripled since the signing of NAFTA to about $10.6 billion whereas the exports to Canada have double to $11.9 billion in 2006 (Smith). Before the end of the NAFTA next year, all three countries are finalizing the agreement. There still exist some trade restrictions, for example corn from the US to Mexico. The benefits of the agreement can be seen not only in national terms but also for the daily consumer who enjoy lower costs. 6. Future Prospects As the NAFTA comes to an end next year in 2008, there have been no plans so far for a new agreement at the scale of the NAFTA involving the trilateral relationship between Canada, the US and Mexico. In March 2005, these three countries signed the Security and Prosperity Partnership of North America (SPP) which serves for future cooperation in order to form a more resilient economy. All three countries have also signed agreements with other countries to form free trade areas, for example with Chile (Smith). Thus, future prospects after the NAFTA may include an agreement which governs the labor force, correcting any flaws of the previous agreement and regulating trade. Certain areas for example agriculture (fresh fruits and vegetables) as well as issues on food safety should be tackled (Smith). The US and Mexico should also address issues of immigration and labor as these two factors are an integral part of trade. In addition to this, stronger stances on environmental issues as well as technology-based techniques to fight pollution should be shared between all three countries (Fernandez-Kelly, 6-19) . 7. Performance Indicators (Quantitative and Qualitative) As the NAFTA is coming to an end, the analysis of it is best done after 2008. This is because the effect of certain trade agreements or decisions can only be seen much later, and short term fluctuations should not reflect the success or failure of an agreement. This is more so for Mexico as it is a nation which is still taking huge strides towards becoming an industrialized nation which is based on technology and trade. In order to indicate whether the NAFTA is a success or failure, we can look at certain parameters, both quantitative and qualitative. Quantitative measures which have been mentioned can be analyzed via percentages/monetary terms including import-export rates the growth of individual industries, the GDP, employment rates, investment rates as well as the share of the countries in the global market. The strength of the US dollar, the Canadian dollar as well as the Mexican peso can also offer a glimpse into the country’s economic strength. Qualitative parameters would include aspects of environmental conditions (air and water quality, protection of rivers, filtering and processing of wastes), transportation and communication for the industries as well as the general population, training and incentives within the work force, the population’s perception of the country’s economic and political stability, occupational health and healthcare as a whole. 8. Works Cited Hufbauer, Gary and Schott, Jeffrey. NAFTA Revisited, Institute for International Economics, Washington D.C. 2005   Otero, Joaquin. "The North American Agreement on Labor Cooperation: An Assessment of Its First Year's Implementation." Columbia Journal of Transnational Law 33, 1995 (3): 637-662. Fernández-Kelly, Patricia. NAFTA and Beyond: Alternative Perspectives in the Study of Global Trade and Development. The ANNALS of the American Academy of Political and Social Science.2007; 610: 6-19 Foreign Affairs and International Trade Canada. The North American Foreign Trade Agreement. 1993 (Accessed November 4, 2007) Fugate, Jeff. NAFTA: A Recipe for Success. Yale Economic Review. Spring 2005 (Accessed November 5, 2007) Saunders, Owen. “NAFTA and the North American Agreement on Environmental Cooperation: A New Model for International Collaboration on Trade and the Environment,” Colorado Journal of International Environmental Law and Policy 5(2), 1994. Smith, Ron. 15 years later NAFTA providing trade benefits. Southwest Farm Press. May 2007. (Accessed November 4, 2007) Trefler, Daniel. The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Paper, May 2001 United States Department of Agriculture (Foreign Agriculture Service) North American Free Trade Agreement. 2006 (Accessed November 4, 2007) United States. U.S. House. Final Vote Results for Roll Call 575. North American Free Trade Agreement Implementation Act. 1993 (Accessed November 4, 2007) United States. U.S. Senate Roll Call Votes 103rd Congress. A bill to implement the North American Free Trade Agreement. 1993 (Accessed November 4, 2007) Read More