North American Free Trade Agreement (NAFTA)

views updated May 17 2018

North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed between the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day, the three countries became the largest free market in the worldthe combined economies of the three nations at that time measured $6 trillion and directly affected more than 365 million people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and services; to remove investment restrictions; and to protect intellectual property rights. This was to be done while also addressing environmental and labor concerns (although many observers charge that the three governments have been lax in ensuring environmental and labor safeguards since the agreement went into effect). Small businesses were among those that were expected to benefit the most from the lowering of trade barriers since it would make doing business in Mexico and Canada less expensive and would reduce the red tape needed to import or export goods.

Highlights of NAFTA included:

  • Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism.
  • Elimination of nontariff barriers by 2008. This includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced.
  • Establishment of standards. The three NAFTA countries agreed to toughen health, safety, and industrial standards to the highest existing standards among the three countries (which were always U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The speed of export-product inspections and certifications was also improved.
  • Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution, special side agreements were included in NAFTA. Under those agreements, the three countries agreed to establish commissions to handle labor and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently. Environmental and labor groups from both the United States and Canada, however, have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced.
  • Tariff reduction for motor vehicles and auto parts and automobile rules of origin.
  • 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.
  • Expanded trade in financial services.
  • Opening of insurance markets.
  • Increased investment opportunities.
  • Liberalized regulation of land transportation.
  • Increased protection of intellectual property rights. NAFTA stipulated that, for the first time, Mexico had to provide a very high level of protection for intellectual property rights. This is especially helpful in fields such as computer software and chemical production. Mexican firms will no longer be able to steal intellectual property from companies and create a "Mexican" version of a product.
  • Expanded the rights of American firms to make bids on Mexican and Canadian government procurement contracts.

One of the key provisions of NAFTA provided "national goods" status to products imported from other NAFTA countries. No state, provincial, or local governments could impose taxes or tariffs on those goods. In addition, customs duties were either eliminated at the time of the agreement or scheduled to be phased out in 5 or 10 equal stages. The one exception to the phase out was specified sensitive items, for which the phase-out period would be 15 years.

Supporters championed NAFTA because it opened up Mexican markets to U.S. companies like never before. The Mexican market is growing rapidly, which promises more export opportunities, which in turn means more jobs. Supporters, though, had a difficult time convincing the American public that NAFTA would do more good than harm. Their main effort centered on convincing people that all consumers benefit from the widest possible choice of products at the lowest possible pricewhich means that consumers would be the biggest beneficiaries of lowered trade barriers. The U.S. Chamber of Commerce, which represents the interests of small businesses, was one of the most active supporters of NAFTA, organizing the owners and employees of small and mid-size businesses to support the agreement. This support was key in countering the efforts of organized labor to stop the agreement.


Analysts agree that NAFTA has opened up new opportunities for small and mid-size businesses. Mexican consumers spend more each year on U.S. products than their counterparts in Japan and Europe, so the stakes for business owners are high. (Most of the studies of NAFTA concentrate on the effects of U.S. business with Mexico. Trade with Canada has also been enhanced, but the passage of the trade agreement did not have as great an impact on the already liberal trade practices that America and its northern neighbor abided by.)

Some small businesses were affected directly by NAFTA. In the past, larger firms always had an advantage over small ones because the large companies could afford to build and maintain offices and/or manufacturing plants in Mexico, thereby avoiding many of the old trade restrictions on exports. In addition, pre-NAFTA laws stipulated that U.S. service providers that wanted to do business in Mexico had to establish a physical presence there, which was simply too expensive for small firms to do. Small firms were stuckthey could not afford to build, nor could they afford the export tariffs. NAFTA leveled the playing field by letting small firms export to Mexico at the same cost as the large firms and by eliminating the requirement that a business establish a physical presence in Mexico in order to do business there. The lifting of these restrictions meant that vast new markets were suddenly open to small businesses that had previously done business only in the United States. This was regarded as especially important for small businesses that produced goods or services that had matured in U.S. markets.

Still, small firms interested in conducting business in Mexico have to recognize that Mexican business regulations, hiring practices, employee benefit requirements, taxation schedules, and accounting principles all include features that are unique to that country. Small businesses, then, should familiarize themselves with Mexico's foundation of business rules and traditionsnot to mention the demographics culture of the marketplacebefore committing resources to this region.


Much organized opposition to NAFTA centered on the fear that the abolishment of trade barriers would spur U.S. firms to pack up and move to Mexico to take advantage of cheap labor. This concern grew during the early years of the 2000s as the economy went through a recession and the recover that followed turned out to be a "jobless recovery." Opposition to NAFTA was also strong among environmental groups, who contended that the treaty's anti-pollution elements were woefully inadequate. This criticism has not abated since NAFTA's implementation. Indeed, both Mexico and Canada have been repeatedly cited for environmental malfeasance.

Controversy over the treaty's environmental enforcement provisions remained strong in the late 1990s. In fact, North American business interests have sought to weaken a key NAFTA side accord on environmental protections and enforcement. This accordone of the few provisions welcomed by environmental groupsallows groups and ordinary citizens to accuse member nations of failing to enforce their own environmental laws. A tri-national Commission for Environmental Cooperation is charged with investigating these allegations and issuing public reports. "That process is slow, but the embarrassment factor has proven surprisingly high," noted Business Week. As of 2005, the U.S. government has expressed opposition to revisions in the NAFTA agreement. But the Canadian government and many businesses in all three countries continue to work to change this accord.


Since NAFTA's passage, American business interests have often expressed great satisfaction with the agreement. Trade has grown sharply between the three nations who are parties to NAFTA but that increase of trade activity has resulted in rising trade deficits for the U.S. with both Canada and Mexicothe U.S. imports more from Mexico and Canada than it exports to these trading partners. Critics of the agreement argue that NAFTA has been at least partially responsible for these trade deficits as well as the striking loss of manufacturing jobs experienced in the U.S. over the last decade. But, manufacturing jobs began to decline before the NAFTA agreement. The debate about NAFTA continues.

Isolating the effects of NAFTA within the larger economy is impossible. It is difficult, for example, to say with certainty what percentage of the current U.S. trade deficitwhich stood at a record $65,677 million at the end of 2005is directly attributable to NAFTA. It is also difficult to say what percentage of the 3.3 million manufacturing jobs lost in the U.S. between 1998 and 2004 are the result of NAFTA and what percent would have occurred without this trade agreement. It is not even possible to say with certainly that the increased trade activity among the NAFTA nations is entirely the result of the trade agreement. Those who favor the agreement usually claim credit for NAFTA for the increased trade activity and reject the idea that the agreement resulted in job losses or the rising trade deficit with Canada and Mexico, ($8,039 million and $4,263 million respectively in December 2005). Those who are critical of the agreement usually link it to these deficits and to job losses as well.

What is clear is that NAFTA remains a lightening rod for political opinions about globalization and free trade generally. Opposition to NAFTA has grown and has made it far more difficult, politically, to pass other similar free trade agreements. This was demonstrated clearly in the summer of 2005 when the Central American Free Trade Agreement (CAFTA) was stalled in Congress for lack of support. Two journalists, Dawn Gilbertson and Jonathan J. Higuera, writing in the Arizona Republic at the ten year anniversary of NAFTA, summed things up this way: "The Reality of NAFTA at 10 is this: a still-developing story of winners and losers, split largely by where you work and what you make." The same may be said about the effects of NAFTA on small businesses. For some it has been an opportunity to grow and for others a challenge to be met.

see also Globalization


Barreto, Hector V. "New Trade Opportunities a Boon to Small Biz." San Diego Business Journal. 13 June 2005.

Gilbertson, Dawn, and Jonathan J. Higuera. "Decade of NAFTA Brings Pains, Gains." The Arizona Republic. 18 June 2003.

"A Green Thumb in NAFTA's Eye?" Business Week. 12 June 2000.

Hagenbaugh, Barbara. "U.S. Manufacturing Jobs Fading Away Fast." USA Today 12 December 2002.

Jette, Julie. "NAFTA at Ten: Did It Work?" Harvard Business School Working Knowledge. 12 April 2004.

Rowe, Claudia. "Ten Years Later, A Look at NAFTA's Promise, Flaws." Seattle Post-Intelligencer. 6 January 2004.

U.S. Department of Commerce. Bureau of the Census, Foreign Trade Statistics. "New 2005 Data Updates." Available from Retrieved on 17 April 2006.

U. S. Federal Reserve Bank of Dallas. Canas, Jesus, and Roberto Coronado. "U.S.Mexico Trade: Are We Still Connected?" Available from Retrieved on 18 April 2006.

                                Hillstrom, Northern Lights

                                 updated by Magee, ECDI

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United States International Trade Commission