Introduction

The North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada United States Free Trade Agreement between the U.S. and Canada. In terms of combined GDP of its members, as of 2010 the trade bloc is the largest in the world. NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). As of January 1, 2008, all tariffs between the three countries were eliminated. Between 19932009, trade tripled from $297 billion to $1.6 trillion.

REASONS
The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favored-nation treatment and transparency, are to: a) Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; b) Promote conditions of fair competition in the free trade area; c) Increase substantially investment opportunities in the territories of the Parties; d) Provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; e) Create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and f) Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement.

ESTABLISHMENT
NAFTA was signed by President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992. It was ratified by the legislatures of the three countries in 1993. The U.S. House of Representatives approved it by 234 to 200 on November 17, 1993. The U.S. Senate approved it by 60 to 38 on November 20, three days later. It was signed into law by President Bill Clinton on December 8, 1993 and entered force January 1, 1994.

PROCESS
The impetus for NAFTA actually began with President Ronald Reagan, who campaigned on a North American common market. In 1984, Congress passed the Trade and Tariff Act. This is important because it gave the President "fast-track" authority to negotiate free trade agreements, while only allowing Congress the ability to approve or disapprove, not change negotiating points. Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada-U.S. Free Trade Agreement, which was signed in 1988, went into effect in 1989 and is now suspended due to NAFTA. Meanwhile, Mexican President Salinas and President Bush began negotiations for a liberalized trade between the two countries. Prior to NAFTA, Mexican tariffs on U.S. imports were 250% higher than U.S. tariffs on Mexican imports. In 1991, Canada requested a trilateral agreement, which then led to NAFTA. In 1993, concerns about liberalization of labor and environmental regulations led to the adoption of two addendums to NAFTA.

ADVANTAGES OF NAFTA
NAFTA created the worlds largest free trade area. It allows 450 million people in the U.S., Canada and Mexico to export to each other at a lower cost. As a result, it is responsible for $1.6 trillion in goods and services annually. Estimates are that NAFTA increases the U.S. economy, as measured by GDP, by as much as .5% a year. First, it eliminates tariffs. This reduces inflation by decreasing the costs of imports. Second, NAFTA creates agreements on international rights for business investors. This reduces the cost of trade, which spurs investment and growth especially for small businesses. Third, NAFTA provides the ability for firms in member countries to bid on government contracts. Fourth, NAFTA also protects intellectual properties. Trade between the NAFTA signatories more than quadrupled, from $297 billion in 1993 to $1.6 trillion in 2009 (latest data available). Exports from the U.S. to Canada and Mexico grew from $142 billion to $452 billion in 2007 and then declined to $397 billion in 2009, thanks to the 2008 financial crisis. Exports from Canada and Mexico to the U.S. increased from $151 billion to $568 billion in 2007, then down to $438 billion in 2009. (Source: Office of the US Trade Representative, NAFTA)

DISADVANTAGES OF NAFTA
NAFTA has many disadvantages. First and foremost is, NAFTA made it possible for many U.S. manufacturers to move jobs to lower-cost Mexico. The manufacturers that remained lowered wages to compete in those industries.

The second disadvantage was that many of Mexico's farmers were put out of business by U.S.subsidized farm products. NAFTA provisions for Mexican labor and environmental protection were not strong enough to prevent those workers from being exploited. At a time when globalization and a free world economy are being promoted, NAFTA exposes the hypocrisy of the developed nations which are turning to protectionism and regionalism to secure their own best interests.

Salient Features of the Member nations of NAFTA

The long-time growth in the U.S. trade deficit accelerated dramatically after NAFTA became effective in 1994. According to the Bureau of Labor Statistics, the $30 billion U.S. trade deficit in 1993 increased 281% to an inflation-adjusted $85 billion in 2002. Despite a growing trade deficit, a report from the Office of the U.S. Trade Representative categorizes the trade effects as positive: Between 1993 and 2006, trade among NAFTA partners climbed 197%, from $297 billion to $883 billion. U.S. exports to NAFTA partners grew 157%, versus 108% to the rest of the world in the same period. Daily NAFTA trade in 2006 reached $2.4 billion. U.S. manufacturing output rose 63% from 1993-2006, compared to an increase of 37% from 1980-1993.

A unique aspect of the trade agreement covering Canada, the U.S. and Mexico is the significant differences between the three NAFTA partners. In terms of economic size, the U.S. is clearly dominant, accounting for 88.4 percent of gross domestic product (GDP) in the NAFTA area at US$10.4 trillion. Canada, a little less than one-tenth the size of the U.S., accounts for 6.2 percent while Mexico accounts for 5.4 percent of NAFTA area GDP. When measured by population, the U.S. is still the dominant partner, but not to the same degree as for GDP. The U.S. accounts for just over two-thirds of NAFTA area population at 68.6 percent, compared to 23.9 percent for Mexico

and 7.5 percent for Canada. Mexico also possesses a much younger and faster growing population than its two northern neighbours creating a unique set of opportunities and challenges for that country within North America. Possibly most revealing is the difference in GDP per capita between the three NAFTA partners. Here too, the U.S. stands out. When measured using market exchange rates, the U.S. posts the highest GDP per capita at US$36.2 thousand per person. Canada lags somewhat at US$23.4 thousand, while Mexico trails significantly at US$6.3 thousand per head.. Using a PPP measure of GDP per capita closes the gap between Canada and the U.S. from US$12.9 thousand per person (using market exchange rates) to US$4.7 thousand per person (using PPP exchange rates). Still, Canada's GDP per capita is only 85 percent of U.S. levels and the object of much debate and concern in Canada. The difference is even more dramatic for Mexico, whose GDP per capita measured at market exchange rates is only 17.4 percent of the U.S. level but jumps to 25.7 percent of the U.S. level when measured using PPPs. The sheer size of the U.S. economy makes it less dependent on trade in general, including with its NAFTA partners. Canada has the highest trade-to-GDP ratio at more than 80 percent, and just under 60 percent of Mexico's GDP is traded, while the U.S.'s trade-to-GDP ratio is around onequarter. Furthermore, both Canada and Mexico send more than 80 percent of their exports to NAFTA partners and rely on them for the large majority of their imports. The U.S. however relies on its NAFTA partners for only about 30 percent of its trade.

Impact of NAFTA on USA

The major benefits that US businesses received in general from NAFTA are: larger North American market access New export and investment opportunities Elimination of tariffs; Canadian and U.S. tariffs were eliminated on January 1, 1998; Mexico became duty free by the year 2008 for North American made products Creation of strong "rules of origin" for North American made products Effective procedures to resolve trade disputes Establishment of compatible standards of goods between the three countries Facilitation of cross-border movement of goods and services The specific area that were largely affected by the enforcement of NAFTA are as follows:

Trade Balances
The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4% increase ($25 billion) over 2009. The US goods trade deficit with NAFTA accounted for 26.8% of the overall U.S. goods trade deficit in 2010. The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).

Boosted U.S. Farm Exports:

Agricultural exports to Canada and Mexico grew from 22% of total U.S. farm exports in 1993 to 30% in 2007. To put this into perspective, agricultural exports to Canada and Mexico were greater than exports to the next six largest markets combined. Exports to the two countries nearly doubled, growing 156% compared to a 65% growth to the rest of the world NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for U.S.-grown beef, rice, soybean meal, corn sweeteners, apples and beans. It is the second largest export destination for corn, soybeans and oils. NAFTA has enabled United States agricultural producers and consumers to more effectively use their comparative advantages and to respond more efficiently to changing economic conditions.

Created Trade Surplus in Services:

More than 40% of U.S. GDP is services, such as financial services and health care. These aren't easily transported, so being able to export them to nearby countries is important. NAFTA boosted U.S. service exports to Canada and Mexico from $25 billion in 1993 to $106.8 billion in 2007, which dropped to $63.5 billion in 2009. NAFTA eliminates trade barriers in nearly all

service sectors, which are often highly regulated. NAFTA requires governments to publish all regulations, lowering hidden costs of doing business.

Reduced Oil and Grocery Prices:

The U.S. imported $116.2 billion in oil from Mexico and Canada as shale oil (down from $157.8 billion in 2007). This also reduces U.S. reliance on oil imports from the Middle East and Venezuela. Mexico is a friendly country, whereas Venezuela's president often criticizes the U.S. Both Venezuela and Iran have started selling oil in currencies other than the dollar, contributing to the decline in the dollar's value. Since NAFTA eliminates tariffs, oil prices are lower. The same is true for food imports, which totaled $29.8 billion in 2010 (up from $28.9 billion in 2009). Without NAFTA, prices for fresh vegetables, chocolate, fresh fruit (except bananas) and beef would be higher. (Source: USTR,NAFTA Imports)

Stepped Up Foreign Direct Investment:

Since NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada and Mexico more than tripled to $357 billion in 2009, up from $348.7 billion in 2007. Canadian and Mexican FDI in the U.S. grew to $237.2 billion, up from $219.2 billion in 2007. That means this much investment poured into U.S. manufacturing, finance/insurance, and banking companies. NAFTA reduces investors' risk by guaranteeing 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.

Improved transportation system:

Better transportation became necessary because of the high growth rate in agricultural products. Inorder to do a better job of improving the efficiency of truck and rail freight services and make improvements to supply chain infrastructure, a new report by the Commission for Environmental Cooperation (CEC), a multimodal organization established in 1994 as part of the North American Agreement on Environmental Cooperation, a side agreement to NAFTA. This report was entitled Destination Sustainability: Reducing Greenhouse Gas Emissions from Freight Transportation in North America' the report also calls for the NAFTA partners to form "a ministerial-level forum to foster an integrated, intelligent freight transportation system" and criticizes the condition of a "congested and deteriorating" North American freight transport infrastructure.

Protection of each countrys import-sensitive crops:

NAFTA allowed Mexico and the United States to protect their import-sensitive crops with longer transition periods to eliminate barriers to trade. Import-sensitive product markets would

fluctuate too much if there were no protection. For the United States and Mexico, dairy products, cotton, peanuts and sugar are import-sensitive.

United States employment:

Free trade has caused more U.S. jobs losses than gains, especially for higher-wage jobs. While corporate profits soar, individual wages stagnate, held at least partly in check by the brave new fact of offshoring -- that millions of Americans' jobs can be performed at a fraction of the cost in developing nations near and far. Since labor is cheaper in Mexico, many manufacturing industries moved part of their production from high-cost U.S. states. Between 1994 and 2010, the U.S. trade deficits with Mexico totaled $97.2 billion, displacing 682,900 U.S. jobs. Jobs were moving to Mexico because of NAFTA. In 1991, the average hourly compensation in Mexican manufacturing was only about 14 percent of the U.S. gure: $2.17 in Mexico versus $15.45 for the United States. There was also concern that investment would move from the United States to the Mexican economy, further eliminating U.S. jobs. Nearly 80% of the losses were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances. There has been a substantial decline in employment in the United States textile and apparel sectors. The building of maquiladoras was largely responsible for this decline.

Crisis in the US Textile and Apparel Industry:

The U.S. textile and apparel industry complex is experiencing its worst downturn in over two decades. It is faced with a major crisis that is believed to have been caused by recent global trade liberalization and Asian currency devaluation. Most observers credit policies stemming from global trade liberalization, such as the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA), with contributing to rapid job losses, especially in the rural areas of the Southeast region where the industry complex is disproportionately located. Since 1995 and especially following the 1997-98 global financial crisis, the currencies of the top textile exporting countries in Asia seem to have collapsed causing a shock wave of low-priced textile products in global markets. The value of textile imports from Asia, which had shown relatively little growth over the previous ten years, grew rapidly by about 36 percent (%) from 1995 through 2001 in tandem with a decrease in Asian currencies. Additionally, volatility in the apparels market, fueled by frequent fashion changes, have contributed to exacerbating the economic stress faced by industry participants and rural residents. Therefore, the recent spate of plant closures may seriously impact economic development opportunities that are offered by the industry complex in those rural communities where a majority of plants are located. Canada. To date, trade among the countries is led by industrial and value-added agricultural goods such as textiles and apparel. U.S. yarn and fabric production have become more automated, while apparel production in Mexico is more labor intensive and can be produced at relatively lower wages.

Impact of NAFTA on Mexico

Upon implementation, almost 70% of U.S. imports from Mexico and 50% of U.S. exports to Mexico received duty-free treatment. The remainder of the duties were eliminated over a period of 15 years, after the agreement was in effect. The agreement also contained provisions for market access to U.S. firms in most services sectors; protection of U.S. foreign direct investment in Mexico; and intellectual property rights protection for U.S. companies. At the time that NAFTA went into effect, a number of economic studies predicted that the trade agreement would have a positive overall effect on the Mexican economy, narrowing the U.S.- Mexico gap in prices of goods and services and the differential in real wages.

Economic Effects
A number of studies have found that NAFTA has brought economic and social benefits to the Mexican economy as a whole, but the benefits have not been evenly distributed throughout the country. Most studies after NAFTA have found that the effects on the Mexican economy tended to be modest at most. While there have been periods of positive growth and negative growth after the agreement was implemented, much of the increases in trade began in the late 1980s when the country began trade liberalization measures. Though its net economic effects may have been positive, NAFTA itself has not been enough to lower income disparities within Mexico, or between Mexico and the United States or Canada. A 2005 World Bank study assessing some of the economic impacts from NAFTA on Mexico concluded that NAFTA helped Mexico get closer to the levels of development in the United States and Canada. The study states that NAFTA helped Mexican manufacturers to adopt U.S. technological innovations more quickly and likely had positive impacts on the number and quality of jobs. Another finding was that since NAFTA went into effect, the overall macroeconomic volatility, or wide variations in the GDP growth rate, has declined in Mexico. Business cycles in Mexico, the United States, and Canada have had higher levels of synchronicity since NAFTA, and NAFTA has reinforced the high sensitivity of Mexican economic sectors to economic developments in the United States. Several economists have noted that it is likely that NAFTA contributed to Mexicos economic recovery directly and indirectly after the 1995 currency crisis. Mexico responded to the crisis by implementing a strong economic adjustment program but also by fully adhering to its NAFTA obligations to liberalize trade with the United States and Canada.

NAFTA may have supported the resolve of the Mexican government to continue with the course of market-based economic reforms, resulting in increasing investor confidence in Mexico. The World Bank study estimates that FDI in Mexico would have been approximately 40% lower without NAFTA 1994 2004*

Population (millions) Nominal GDP ($US billions) GDP, PPP** Basis ($US billions) Per Capita GDP ($US) Per Capita GDP in $PPPs Total Merchandise Exports (US$ billions) Exports as % of GDP Total Merchandise Imports (US$billions) Imports as % of GDP Public Debt/GDP

91 422 671

105 677 1,017

4,617 7,351 71 17% 91 22% 32%

6,450 9,680 215 32% 216 32% 23%

Mexican Wages and Per Capita GDP

Any changes in Mexican wages since NAFTA implementation cannot be solely attributable to trade integration. Wages are reflective of a number of economic variables including GDP, productivity, exchange rates, and international trade. Mexican wages have generally followed the cycles of the Mexican economy for many years. Wages increased from the early 1980s until the mid-1990s, when the currency crisis hit when real wages fell by 15.5%. Wages increased after 1996 until 2000 when the percent increase was 10.8% and then stagnated for several years. Wages fell by 3.2% in 2008 and by 5.0% in 2009.

Mexican Productivity, Exports and Prices

With Mexicos entry into NAFTA, the expectation was that relative prices for certain Mexican crops would decrease while prices for other crops would likely remain the same. This was based on the economic expectation that, by removing Mexicos price and trade interventions in basic crops such as grains and oilseeds, prices for the same goods in Mexico and the United States would equalize. Prices for crops that were exported such as fruits and vegetables were expected to stay the same because these had not been subject to major government intervention before or since NAFTA. NAFTA and Mexicos internal reforms were expected to

lead to the law of one price for all agricultural goods produced in North America. This meant that prices for basic crops such as grains and oilseeds produced in Mexico, which previously had fixed prices by the government, would decline as these goods faced competition from U.S. goods. NAFTA and agriculture reform measures were also expected to increase efficiency in Mexicos agricultural production as farmers adjusted to competition from lower cost imports. Production in agricultural sectors that had prior price and trade interventions was expected to decrease as lower-priced imports from the United States entered the market, while production in exportoriented sectors, mainly fruits and vegetables, was expected to increase. As a result of these shifts, employment was expected to increase in some areas, but, according to one study, the increase was not expected to be large enough to absorb all the workers who would be displaced by reduced production in other sectors. After NAFTA, Mexican prices of basic crops such as maize dropped and, subsequently, Mexican imports of those crops increased. Mexican agricultural production, however, did not decrease after NAFTA. The Mexican governments unilateral liberalization of corn and NAFTA were both factors in declining prices of corn in Mexico. In 1993, the price of corn in Mexico was $4.84 per bushel; the price fell to $3.65 per bushel in 1997 and has remained at about the same level ever since.43 Mexican corn production, however, increased despite the decline in prices. Total production of maize increased from an annual average of 12.5 million metric tons during the 1983-1990 period to an annual average of 17.7 million metric tons, representing an increase of 41%, during the post-NAFTA period of 1994-2001.44 Mexican corn production yields were a fraction of U.S. corn production yields in 2003, but in spite of the low yields, Mexican corn production increased after NAFTA. Between 1990 and 2003, Mexican corn production increased 44%, a faster rate of growth than U.S. corn production which increased by 27% during the same time period.45 Most of the effects from NAFTA likely took place within the first ten years of implementation. From 1993 to 2003, Mexican exports to the United States in agricultural products increased from $2.7 billion in 1993 to $6.3 billion in 2003, while Mexican exports to Canada increased from $136 million to $409 million over the same time period. Mexican imports from the United States also increased during this time period, from $3.6 billion in 1993 to $7.9 billion in 2003. Mexican exports to the United States sharply increased in the following categories: sugar and related products (595%), beverages excluding fruit juices (584%), and grains and feeds (328%). U.S. foreign direct investment in the Mexican food processing industry more than doubled from $2.3 billion in 1993 to $5.7 billion in 2000

Devastating Mexicos Rural Peasants

Prior to NAFTA, small plots of land were permanently deeded to Mexicos peasant farmers. In preparation for NAFTA, Mexico was required to change its constitution to allow foreign

ownership of this land and allowed these plots to be sold or seized by creditors. In addition, NAFTA opened the door for the dumping of large amounts of subsidized U.S. agricultural goods on the Mexican market lowering prices and endangering the livelihood of peasant farmers. For example: Corn is the primary crop in Mexico, but post-NAFTA farmers received 70% less for their harvests because U.S. corn imports into Mexico more than quadrupled since 1993. Unable to compete with U.S. prices and with no employment prospects in their rural communities, more than 2 million Mexican farmers have been forced off their land since NAFTA was enacted. These disenfranchised farmers have migrated to the already overcrowded and heavily polluted cities and manufacturing zones of Mexico, worsening existing environmental and health conditions. It is estimated that NAFTA created only 700,000 manufacturing jobs in Mexico - far too few to absorb the 2 million displaced farmers and the 130,000 jobs lost in domestic manufacturing due to the replacement of formerly domestically produced goods by imports. 13 Mexican farmers have called for a suspension of NAFTA tariff reductions, and a re-negotiation of NAFTAs agriculture provisions, but to no avail. With no employment prospects and worsening living conditions, many farmers believe their only option to earn a living is to attempt the perilous crossing into the United States.

Impacts on Mexicos Natural Resources

The weakening of environmental standards by NAFTA has also caused the increased use of chemical intensive production methods in Mexicos large commercial farms. These methods include the use of harmful pesticides and fertilizers that pollute land and water resources. Specifically, they contribute to high soil salinity, ground-level ozone, lake and river acidification, and the disruption of natural forest processes. The change in land ownership and the more export oriented farming system in Mexico have also led to a dramatic loss of forests and the unique biodiversity they sustain. Peasant farmers who were driven off their lands were forced to clear forestland for farming and fuel. Since the implementation of NAFTA the annual rate of deforestation in Mexico has risen to 1.1 million hectares practically doubling the prior rate of 600 thousand hectares. 15 This places Mexico second behind Brazil in the rate of deforestation

Effects on Employment
While official unemployment rates in Mexico are lower now than they were before NAFTA, there has been an increase in underemployment, as well as an increase in low-pay jobs and low-productivity jobs. Therefore, even though unemployment has decreased, the incomes of the employed have actually fallen.

Quality of Life
There have been some improvements to Mexican quality of life due to NAFTA. According to several speakers at a NAFTA conference, health care for the citizens of Mexico has improved due to the import of U.S. health services and technology. However, there is still room for improvement, because the wide range in differing income levels, as well as differences in the level of health care facilities, is affecting the availability and delivery of quality health care to all Mexican citizens.

Maquiladora Workers Were Exploited:

NAFTA expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico's labor force. These workers have "no labor rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job," according to Continental Social Alliance.

Mexico's Environment Deteriorated:

In response to NAFTA competitive pressure, Mexico agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into more marginal land, resulting in deforestation at a rate of 630,000 hectares per year.

NAFTA Called for Free Access for Mexican Trucks:

Another agreement within NAFTA has not been implemented. NAFTA would have allowed trucks from Mexico to travel within the United States beyond the current 20-mile commercial zone limit. A demonstration project by the Department of Transportation (DoT) was set up to review the practicality of this. In 2008, the House of Representatives terminated this project, and prohibited the DoT from allowing this provision of NAFTA to ever be implemented without Congressional approval. Congress was concerned that Mexican trucks would have presented a road hazard. They are not subject to the same safety standards as U.S. trucks. In addition, this portion of NAFTA was opposed by the U.S. truckers' organizations and companies, who would have lost business. Currently, Mexican trucks must stop at the 20-mile limit and have their goods transferred to U.S. trucks.

Impact of NAFTA on Canada

Canadas NAFTA exports have grown substantially, and have been particularly successful in high valueadded sectors such as automotive equipment (trucks, cars and parts), machinery and parts and industrial goods. In 1998, total threeway trade among Canada, Mexico and the United States rose to about $752 billion, with CanadaU.S. and CanadaMexico trade accounting for $484 billion (Sources: Statistics Canada, U.S. Department of Commerce and SECOFI). Since the implementation of the NAFTA, Canadas trade with the United States has risen 80%, while trade with Mexico has doubled. Canada & US Goods & Services

Canada and the U.S. enjoy the world's largest bilateral trading relationship. Nearly $1.9 billion in goods and services cross the border each and every day. Canada-U.S. trade has grown considerably since the Canada-U.S. Free Trade Agreement came into force in 1989. Between 1989 and 2002, Canadian exports to the U.S. grew at an average annual rate of 9.3 percent while imports grew at 7.5 percent. Canada's trade surplus with the U.S. also increased tremendously, from $4.4 billion in 1989 to a peak of $90.7 billion in 2001 before falling off somewhat to $86.4 billion in 2002.

Canada's Trade in Goods and Services with the U.S. Millions of current dollars CAGR*, % 1989 1994 2002 1989- 19941994 2002 * Compound annual Source: Statistics Canada, Balance of Payments back Exports 119,820 199,864 382,101 10.77 8.44 Imports 115,381 182,574 295,734 9.61 6.21 Balance 4,439 17,290 86,367 N/A N/A

19892002 growth 9.33 7.51 N/A

Share of World, %5 1989 1994 2002 rate

71.43 76.60 80.85 68.62 72.37 69.89 (1,109.7) 200.30 174.42

Since the implementation of the Canada-U.S. Free Trade Agreement in 1989 and the North American Free Trade Agreement in 1994, there has been a dramatic increase in two-way interdependence between the two economies. As can be seen from the adjacent chart, U.S. exports bound for Canada increased from $US 93.4 billion in 1989 to $US 184.9 billion in 2002 - an increase of almost 100 percent. Similarly, U.S. imports from Canada increased from $US 99.0 billion to $US 232.4 billion between 1989 and 2002. Millions of current US$ 1989 1994 2002 U.S. Exports to Canada Goods and 93,415 132,076 Services Goods 79,888 114,650 Services 13,527 17,426 U.S. Imports from Canada Goods and 98,982 141,497 Services Goods 89,944 131,149 Services 9,038 10,348 CAGR *, % 198919941994 2002 4.30 4.33 4.11 6.40 6.26 8.08 Share of World, % 1989 1994 2002

19892002 5.39 5.53 4.53 6.79 6.86 6.00

184,929 7.17 160,879 7.49 24,050 5.20 232,421 7.41 213,151 7.83 19,270 2.74

19.18 18.76 19.03 22.20 22.80 23.57 10.64 8.67 8.31 17.06 17.67 16.51 18.83 19.61 18.27 8.82 7.85 8.01

Most Canada-U.S. trade is merchandise trade. Merchandise trade accounted for 87.0 percent of total U.S. exports to Canada in 2002 and 91.7 percent of total imports from Canada in that year. Merchandise trade growth between the two countries also outpaced growth in services trade, albeit by a small margin. Canada-U.S. trade is much more dependent on merchandise trade than the U.S's trade with other countries, as is shown by Canada's low share of U.S. services trade - 8.3 percent for exports in 2002, compared to 23.6 percent of merchandise trade. A similar trend is observed for imports where Canada accounts for only 8.0 percent of U.S. services imports 18.3 percent for merchandise. Tourism

Furthermore, Canadians are an important source of tourism revenue for the U.S. They spent US$ 6.2 billion on travel in the U.S. in 2002, or 8.5 percent of total foreign travel spending in the U.S. that year. Commodity

Canada is also an important source for U.S. imports used in the production process or directly consumed. Just under one-fifth of total U.S. imports come from Canada. Over 60 percent of U.S. Wood & Paper imports came from Canada in 2002, despite the softwood lumber dispute between the two countries. Canada is the most important source of U.S. imports in seven out of the eleven major commodity groupings and ranks among the top five sources in the remaining four commodity groups.

These trade numbers also reflect the high degree of integration between Canadian and U.S. industry. Over 40 percent of U.S. trade with Canada is intra-firm - trade occurring between parts of the same firm operating on both sides of the border. The automotive industry is a prime example of this type of trade. Every vehicle assembled in North America now contains nearly US$ 1,250 of Canadian made parts. Energy

Canada is also the U.S.'s most important source of energy imports. Canada is undoubtedly the dominant source of Electricity and Natural Gas imports, accounting for 100 percent of U.S. electricity imports, and 93.5 percent of natural gas imports. But, even for oil combining crude and non-crude oil, the U.S. imports more from Canada than from any other country.

Investment

Canada-U.S. economic linkages extend beyond trade. As already mentioned, many firms operate on both sides of the border with activities that are often tightly integrated. Canada is one of the most important destinations for U.S. investment abroad. 10.1 percent of U.S. direct investment assets abroad were located in Canada in 2001. There are just under 2,000 U.S. affiliates operating in Canada that generate US$ 2.9 trillion in sales annually.

Canadians are also among the largest investors in the U.S., accounting for 8.2 percent of all foreign direct investment in that country in 2001. Canadian companies own US$ 434 billion in assets in the U.S., generating US$ 168 billion in sales and employing 643 thousand people and returned US$4.4 billion in income to Canadians. Canada & Mexico Canada-Mexico trade has accelerated rapidly over the past decade, with exports more than doubling. The largest increase, however, came from imports, which jumped nearly five-fold. And, while Canadian exports to Mexico remain relatively small, at only $3.2 billion in 2001, or 0.7 percent of our total exports, Mexico has emerged as one of our most important sources of imports at $13.1 billion, or 3.1 percent of our total imports. Goods & Services

Canada appears to have a large and growing trade deficit with Mexico, reaching $9.9 billion in 2001, more than four times the value of our exports to Mexico. It is important to note, however, that the merchandise portion of Canada-Mexico trade statistics may suffer significantly from a transshipments problem. Goods and Services Trade, Canada Mexico Millions of current CAGR*, % dollars 1989 1994 2002 198919941994 2002 Exports 733 1,269 3,208 11.59 14.17 Imports 2,042 4,983 13,067 19.53 14.76 Balance (1,309) (3,715) (9,860) N/A N/A Merchandise Trade

Share of World, % 19892002 13.09 16.73 N/A 1989 1994 2002

0.44 0.49 0.67 1.21 1.98 3.13 327.25 (43.04) (15.78)

Agricultural products account for the largest share of Canada's exports to Mexico at 31.3 percent in 2002; they have also been the fastest growing among those products that are exported in a significant quantity to Mexico. Agriculture, along with Transportation Equipment, is the only major category of exports to see its share increase from 1989. Machinery & Electronics and Transportation Equipment, combined, accounted for nearly three quarters of our imports from Mexico in 2002, up from just over 65 percent in 1989. Most of this increase came from Transportation Equipment which saw its share rise from 17.7 percent in 1989 to 29.3 percent in 2002 and was second only to Misc. Manufactures in terms of overall growth. Canada and Mexico trade in many of the same product categories (at the aggregate level) such as Agriculture, Metals & Minerals, Machinery & Electronics and Transportation Equipment. It is interesting to note that, in this context, a trade deficit is recorded with Mexico in each of these categories with the exception of Agriculture. It is also interesting to note that only in Agriculture does Mexico account for more than one percent of Canada's total exports (at 3.5 percent in 2002), whereas Mexico accounts for more than one percent of our imports in 7 out of 11 categories, and a relatively high share of two categories of imports that are considered 'hightech', namely Machinery & Electronics and Transportation Equipment, as well as the catch-all category of Miscellaneous Manufactures. At a more disaggregated level, significant differences in the types of products coming from Canada and Mexico can be observed. For example, there is considerable trade in both directions between Canada and Mexico in Automotive products. At the 6-digit HS level, 43.2 percent of Canada's imports fall under HS 870223 (Automobiles with engines displacing between 1500 and 3000cc) while 22.9 percent of our exports fall under the same HS category. This is likely due to different models of cars being produced in each country with Volkswagen, for example, producing only in Mexico and exporting to Canada.

Service trade

Unlike Canada's service exports to the U.S., services account for a relatively large and growing share of Canada's exports to Mexico. In 2001, 14.1 percent of Canada's exports to Mexico were services, up from 13.0 percent in 1989. The opposite is true for imports, however, with the share of services falling almost 9.0 percentage points between 1989 and 2001 and now accounting for only 7.2 percent of our total imports from Mexico. It was more the result of a rapid increase in merchandise imports from Mexico over this period, rather than slow growth of services, that contributed to this observed decline.

In dollar terms, both imports and exports have increased tremendously. Exports more than quadrupled since 1989, to reach $453 million in 2001, while imports more than doubled to $950 million. As has been reported throughout this report, Canada still imports far more than it exports to Mexico with our trade deficit in 2001 exceeding our exports. Overall, Canada's services trade with Mexico outpaced that with other countries as can be seen from Mexico's rising share of our total services trade.

Similar to trends in trade with other countries, Commercial services is the fastest growing and largest sector of Canada's services exports to Mexico, accounting for 39.7 percent of our total services exports in 2001, up from about one-third in 1989. On the import side, however, Travel accounts for nearly four-fifths of Canada's services imports from Mexico. Investment

Canada's foreign direct investment (FDI) linkages with Mexico have grown rapidly, particularly since the North American Free Trade Agreement (NAFTA) came into effect in 1994.

As can be seen from the table below, Mexican inward FDI to Canada stood at $83 million in 2002, representing only 0.02 percent of total FDI in Canada. Because of the relatively small amount of Mexican FDI in Canada, little can be said about trends or its industrial distribution. Canadian FDI in Mexico outstrips Mexican FDI in Canada by a factor of forty-to-one. Canadian FDI in Mexico accelerated dramatically since the NAFTA came into effect in 1994 as is illustrated in the adjacent graph. Canadian FDI in Mexico increased fourteen-fold since 1989, and Mexico's share of total Canadian outward FDI nearly tripled from 0.3 percent in 1989 to a still modest 0.8 percent in 2002. Canadian FDI stock in Mexico is down from its peak in 2000, but this factor is more likely due to the global economic slowdown and to a decline in M&A activity. There is surprisingly little evidence of a dramatic impact of the 1994 Mexican Peso crisis on Canadian FDI in Mexico. Table 3.4.1 Canada's Direct Investment Position (Stock) with Mexico Millions of current CAGR*, % dollars 1989 1994 2002 198919941994 2002 Outward 237 1,073 3,344 35.26 15.27 Inward 12 177 83 71.30 -9.03 Balance 225 896 3,261 N/A N/A

Share of World, % 19892002 22.58 16.04 N/A 1989 1994 2002

0.26 0.73 0.77 0.01 0.11 0.02 (0.69) (10.82) 3.96

Below figure shows that the biggest investments occurred in the Finance & Insurance industry, which accounted for 36.0 percent of Canadian FDI in Mexico in 2001, while not even registering in 1989. In fact, this industry accounted for 38.3 percent of the growth in Canadian FDI in Mexico since 1989.

The next two largest sectors for Canadian FDI in Mexico are 'Other Industries' which includes everything from the telecommunications industry to Textiles & Clothing and the Food & Beverage industry; and Energy & Minerals, a traditionally strong industry for Canadian investment in developing countries. It is interesting to note that, in 1989, 25.7 percent of Canadian FDI in Mexico was in the Machinery & Transportation Equipment sector, but this share had fallen to 6.0 percent in 2001.

NAFTA in a Global Context

Measured by gross domestic product (GDP) the NAFTA area is the world's largest trading bloc, representing 32.7 percent of world GDP or US$11.4 trillion. The E.U., at 25.8 percent of global economic output, lags considerably. Even with the addition of ten new members next year, the E.U. GDP will increase from its current US$7.9 trillion to US$8.3 trillion, still well behind the NAFTA region. Asia, although not a formal trading bloc, has many trade linkages as shown by its high level of intra-regional trade comparable to that of formal trading blocs, and accounts for another 23.0 percent of global output4. This triad combined accounts for 85.9 percent of global output. Measured by trade volumes, the E.U. dominates: it accounts for 36.8 percent of global exports and 34.8 percent of imports, compared to 18.8 percent and 24.8 percent for NAFTA. NAFTA ranks second, behind the E.U. for imports, but ranks third, only marginally above the rest of the world (ROW) for exports, a reflection of the U.S.'s huge current trade deficit. Using total trade, however, somewhat overstates the size of the E.U. and other regions relative to NAFTA. With only three member countries, much of NAFTA's exchanges occur within countries (mostly in the U.S.) and are therefore not considered trade. As can be seen from the chart below, this fact is reflected in the much higher share of intra-E.U. trade compared to NAFTA: 60.7 percent v. 46.3 percent. By using only external exports, the NAFTA region is the world's largest importer but comes after the E.U. and Asia in terms of exports.

Share of Exports, Percent Destination Exporter NAFTA EU Asia ROW

Share of Imports, Percent Source Importer NAFTA EU Asia ROW

Data: IMF, Direction of Trade Statistics NAFTA EU Asia 56.0 10.9 26.3 14.6 17.4 12.0 61.0 7.2 20.9 14.7 48.1 10.9

Data: IMF, Direction of Trade Statistics NAFTA EU Asia 38.1 8.1 13.7 17.6 31.5 12.8 58.9 12.0 21.0 12.1 56.3 18.0

Measured by global foreign direct investment (FDI), NAFTA ranks number two behind the E.U. for both inward FDI - 23.9 percent of global FDI stocks in 2001 v. the E.U.'s 38.7 percent - and even further behind for outward FDI - 25.0 percent compared to the E.U.'s 52.5 percent. Similar to trade, however, these numbers should be interpreted carefully, as a considerably larger share of investment qualify as FDI within the fifteen E.U. countries while most U.S. investment is consid-ered domestic.

Impact of NAFTA on India

Indias Trade with NAFTA in 2005-2006
Indias Export to NAFTA in 2005-2006 Total USD 18,817.71 million Indias Import from NAFTA in 2005-2006 Total USD 10,472.22 million

Loss of Indias Textiles Trade Share

After the formation of NAFTA (North American Free Trade Agreement) in 1994, USA's imports of textiles and clothing items have clearly shown a trend in favor of the Latin American suppliers, particularly Mexico, which is a member of NAFTA. Though India maintains a very low share in the global textiles trade (3%), it is one of the major items in India's export basket. However, India's position as a major supplier of textiles and clothing items to USA market has been sliding since 1994. It was at 7th position in 1995 and came down to 11th position in 2001. On the other hand, Mexico has improved its position from 7th in 1993 to 2nd just after China, in 2001. The direction of trade reveals that India has been losing much of its share due to USA's specific arrangements with countries under CBI (Caribbean Basin Initiative) and NAFTA. The decline of exports to USA is a warning signal of increasing competition from NAFTA-empowered Mexico. There are particularly two categories, i.e., cotton yarn and woven apparel group, where India has been affected, and this may be a result of the trade diversionary effects due to Mexico.

India signs BIPA with Mexico

India and Mexico signed a bilateral investment protection agreement (BIPA) in 2007 that enabled India Inc to access North American Free Trade Agreement (NAFTA). The agreement was signed by Finance Minister P Chidambaram and the visiting Mexican Finance Minister M Eduardo Sojo Garza-Aldape. Mexico, being part of Nafta and having a large number of

important partners including the EU, offered a good opportunity to Indian companies and enhanced market access through investments and joint ventures. This agreement was possible because over the years, India had maintained good relations with Mexico. Bilateral trade between the two countries has increased to USD 1.5 billion in 2007 from USD 251 million in 1999. Among others, Indian exports to Mexico are engineering goods, chemicals and pharmaceuticals, gems and jewellery, and textiles, while Mexican exports to India are dominated by crude and petrochemicals. Investors of Indian origin have pumped in over USD 1.6 billion over 60 business ventures in Mexico, apart from recent joint ventures in pharmaceuticals and IT sectors by Indian companies.

Indian Exports and Imports with members of NAFTA

Each table below gives a list of important items of export and import between India and USA, Canada and Mexico respectively. Indias Trade with USA Exports Precious Stones Diamond and Gold Jewellery Woven Apparel Knit Apparel Fish and Seafood Iron/Steel Products Organic Chemicals Indias Trade with Canada Exports Readymade Garments Gems, jewellery and precious stones Engineering Goods Iron & Steel articles Coffee Spices Organic Chemicals Indias Trade with Mexico Exports Transport Equipment Drugs, Pharmaceutical Readymade Garments Inorganic/organic chemicals Machinery & Instruments Electronic Goods Dyes and intermediaries

Imports Sophisticated Machinery Electrical Machinery Medical & Surgical Equipment Aircrafts, space crafts Plastic Wood Pulp Metals Imports Newsprint in rolls or sheets Copper ores concentrates Peas dried and shelled Iron scrap, potash, copper Wood Pulp Minerals Industrial Chemicals Imports Articles of iron and steel Iron and steel Plastic articles Nuclear reactor Medical or surgical equipments Ores, slag and ash Organic chemicals

Indias exports to NAFTA countries (USA, Canada & Mexico) showed a positive growth in 20032004. Indian exports to USA from January to October 2003 grew by 11.5% as compared to the year before. Although global imports to Canada from January to October 2003 declined by 3.28%, Indiaian exports showes a growth of 9-10% as compared to the year before. Indian exports also showned a healthy growth of 22% to Mexico from January to September 2003, period as compared to the year before. USA: USA is Indias largest trading partner and foremost export destination, accounting for about 22% of Indias global exports. The year 2003 was a good year for Indian exports to USA, having grown by 11.55% for January October 2003. The global imports of USA had also increased by 8.8%. India is now the 18th largest supplier of goods to USA (was 19th in 2002). Substantial increases had been registered in the exports of pharmaceutical products (85.14%), electrical machinery (55%), organic chemicals (37%), misc. textile articles (19%), fish and seafood (12.79%). Knit apparels, leather articles, iron and steel and edible fruits & nuts are the sectors where the growth has been negative. Exports of USA to India had also shown a strong growth, registering an increase of 25.36% to reach US $ 4.15 billion during the ten-month period in 2003. Among its 25 large export destinations (India is 24th), the growth rate in exports to India continued to be the highest, more than even China. Several sectors like electrical machinery, other machinery, chemical products, aircraft and parts, cotton yarn and fabrics, plastics and mineral oil had shown positive growth. Fertilisers exports of USA had also grown significantly to US $ 87.9 million during January October 2003, as against only US $ 34.2 million for the same period in 2002. CANADA: Indian exports to Canada had increased by 9.1% during January October 2003 compared to the same period last year. The growth had been remarkable since the global imports of Canada had declined by 3.2% during this period. Nine out of top ten exports products of India had shown a positive growth except cotton yarn and fabric. Organic chemicals had shown a growth of 35.67% closely followed by iron & steel products. Preserved food, plastics and man-made filament had also shown remarkable growth during this period. Indian exports are presently valued at US $ 1222 million and India is the 21stlargest exporter of goods to Canada. It comprises just 0.43% of Canadas global imports (was 0.38% in 2002). The Canadian exports had declined by 3% globally but had shown a healthy growth of 7.5% to India during January October 2003. In 2003, India was the 18th largest export destination of Canadian goods. Paper and paperboard had shown massive growth of 136%, followed by aircraft and inorganic chemicals. MEXICO: Indian exports to Mexico for the period January September 2003 were valued at US $ 398 million showing a positive growth of 22%, against the global Mexican import growth rate of 0.4%. Indias market share had risen to 0.32% up from 0.26% in 2002. Amongst the top 30 exporting countries to Mexico, only 8 had registered a growth of over 20% in their exports and India was one of them.

Mexican exports to India had also grown substantially by 83% during the period January September 2003 valued at US $ 318 million. Indias share in total Mexican exports was 0.26% (up from 0.14% in 2002).

Recent Events & Future Prospects of NAFTA

The TTC:
The Trans-Texas Corridor (TTC) is no ordinary highway. The toll road would be four football fields wide. It includes separate lanes(up to six for automobiles, four for large trucks), plus tracks for freight trains, separate tracks for high-speed and commuter rail, also space for oil and gas pipelines, electricity wires, and broadband transmission cables. The implications of this scheme are staggering. Some experts say that up to a million people in Texas stand to lose their homes and 584,000 acres of rich farm and ranchland are to be destroyed, all for a privately funded highway.

Peru, Columbia & Panama

The Bush administration in 2007 created an agreement to extend the provisions and boundaries of NAFTA to Peru, Columbia & Panama. They intended to fast track the approval with the Senate & Congress. However, this has not yet happened to date leaving the number of countries that are members of NAFTA at 3 founding members as of now.

The US Elections Obamas Position on NAFTA

During the US elections, both Democratic candidates i.e. Barack Obama as well as Hillary Clinton, fiercely opposed NAFTAs provisions and made stringent promises to renegotiate the agreement. However, today, President Obama seems to have taken a complete u-turn claiming that not all the provisions of NAFTA are bad and there seems to be no reason to renegotiate the agreement in a unilateral manner. President Obama wants a trade policy that shifts the benefits of globalization more in favor of labor, and argues that there are both economic and ethical considerations behind renegotiating NAFTA. Doing so, he argues, would help level the playing field by making it easier to eliminate practices like child labor and lax environmental regulation in foreign countries, both of which put American workers at a disadvantage.

The Chapter 11 Provisions Debate

Fifteen years ago the North American Free Trade Agreement (NAFTA) entered into force and became the first regional trade agreement between a developing country (Mexico) and two developed nations (Canada and the United States of America). While a number of criticisms and controversies have arisen with respect to different aspects of NAFTA, there can be little doubt that one of the most contentious features of the agreement has been Chapter 11; a chapter which contains obligations that each NAFTA Party must respect when dealing with the investors of other NAFTA Parties and their investments.

From its inception, NAFTA Chapter 11 has drawn a number of concerns with respect to its scope and operation. Some argue that the Chapter is overly protective of investors and, as a result, inappropriately infringes on a states ability to regulate investment within its borders. Others argue that the Chapter has had a positive influence on international investment law by, for example, allowing for more transparent arbitration proceedings.

TPP: The logical progeny of NAFTA?

The Trans-Pacific Partnership (TPP) is a secretive, multi-nation trade agreement that threatens to extend restrictive intellectual property laws across the globe. The nine nations currently negotiating the TPP are the U.S., Australia, Peru, Malaysia, Vietnam, New Zealand, Chile, Singapore, and Brunei Darussalam. However, Canada and Mexico has also been invited to join the negotiations so it is very likely they will do so. The TPP will contain a chapter on Intellectual Property (copyright, trademarks, patents and perhaps geographical indications) that will have a broad impact on citizens rights, the future of the Internets global infrastructure, and innovation across the world. A leaked version of the February 2011 draft U.S. TPP Intellectual Property Rights Chapter [PDF] indicates that U.S. negotiators are pushing for the adoption of copyright measures far more restrictive than currently required by international treaties, including the controversial Anti-Counterfeiting Trade Agreement (ACTA). The TPP will rewrite the global rules on IP enforcement. All signatory countries will be required to conform their domestic laws and policies to the provisions of the Agreement. In the U.S. this is likely to further entrench controversial aspects of U.S. copyright law (such as the Digital Millennium Copyright Acts broad ban on circumventing digital locks and frequently disproprotionate statutory damages for copyright infringement) and restrict the ability of Congress to engage in domestic law reform to meet the evolving IP needs of American citizens and the innovative technology sector. The recently leaked U.S. IP chapter also includes provisions that appear to go beyond current U.S. law. This raises significant concerns for citizens due process, privacy and freedom of expression rights.

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