Introduction to NAFTA

Twenty years after its implementation, the North American Free Trade Agreement,
or NAFTA, has helped boost intraregional trade between Canada, Mexico, and the
United States, but has fallen short of generating the jobs and the deeper regional
economic integration its advocates promised decades ago. Trade relations have
broadened substantially, and U.S. manufacturers created supply chains across
North America that have made companies more globally competitive. These
factors may have stimulated economic growth; Canada has expanded at the fastest
average rate and Mexico at the slowest. But economists still debate NAFTA's
direct impact, given the many other economic forces at play and the possibility that
trade liberalization might have happened even without the agreement. Both
advocates and critics of the treaty have lobbied for changes to NAFTA, but
momentum has stalled and is likely to be overtaken by larger trade agreements
under negotiation such as the Trans-Pacific Partnership and the Transatlantic Trade
and Investment Partnership.

The North American Free Trade Agreement was signed by the United States,
Canada and Mexico in 1992 and put into effect in 1994. It removes tariffs and
other trade restrictions between the countries, effectively creating the world's
largest open economic market (the other large market, the European Economic
Community, also went into effect in 1994).
Workers in the United States had concerns as they feared jobs they held would be
moved to Mexico where pay is much less. Some companies had concerns about
losing business to lower priced Mexican companies who, in addition to paying
lower wages, also have less stringent environmental regulations to comply with.
On the plus side, the move opened up previously protected markets such as those
for electronics, automobiles and food, to American and Canadian companies. The
long term effects remain to be completely seen, but are probably less significant
than originally feared.

The North American Free Trade Agreement (NAFTA) is an international

agreement among the United States, Canada, and Mexico. Much has changed in
the years since NAFTA took effect on January 1, 1994. The biggest effect of
NAFTA has been on trade volumes. From 1993 to 1997, US.-Canadian trade
increased more than 80 percent and U.S.-Mexican trade increased more than 90
percent. Mexico is now the second-largest trading partner of the United States,
being second only to Canada.
NAFTA phases out tariffs among the three countries over a period ending in 2009,
and it liberalizes rules related to investment in Mexico. NAFTA's adoption was
supported strongly by most businesses and investors in the United States. Many
other citizens, however, opposed its adoption and continue to be wary of its
consequences. Debate continues as to whether NAFTA's effects have been negative
or positive. Labor representatives say that NAFTA has encouraged more U.S.
companies to move their operations to Mexico, where wages are lower than in the
United States, workers receive fewer protections in terms of occupational safety
and health, and enforcement of environmental laws is less stringent in many, but
not all, cases.
Many, but not all, environmental groups opposed NAFTA prior to its adoption, and
such opposition continues. As a result of opposition prior to Congress's approval of
NAFTA, side agreements on labor, the environment, and import surges were
negotiated. Following heated debate and serious concern about whether NAFTA
would be approved, NAFTA and the side agreements were approved by the U.S.
Congress in November 1993. As we enter the 21st century, environmentalists
allege that increased trade resulting from NAFTA has led to further degradation of
the environment in Mexico and the Southwest United States.

NAFTA is the world's largest free trade agreement. It took three Presidents to
implement it. The original purpose was to help the United
States, Canada and Mexico compete with the European Union. It has tripled trade,
but also been criticized for outsourcing U.S. jobs and exploiting Mexico's farmers.
Here's the facts about its history, purpose, pros, and cons.

Facts About NAFTA

NAFTA, or the North American Free Trade Agreement, was created 20 years ago
to expand trade between the U.S., Canada and Mexico. It's secondary purpose was

to make these countries more competitive in the global marketplace. It has been
wildly successful in achieving this. NAFTA is now the largest free trade agreement
in the world.
Why, then, is NAFTA so severely criticized? This success has come with a cost.
One of the problems with NAFTA is that it's reduced U.S. jobs. A second
disadvantage is that it has exploited Mexico's farmers and its environment? Find
out more about the how and why was NAFTA created, and whether it has
successfully fulfilled its purpose.
NAFTA is a trilateral free-trade deal that came into force in January 1994, signed
by U.S. president Bill Clinton, Mexican president Carlos Salinas, and Canadian
prime minister Jean Chrtien. The central thrust of the agreement is to eliminate
most tariffs on products traded among the United States, Mexico, and Canada. The
terms of the agreement called for these tariffs to be phased out gradually, and the
final aspects of the deal weren't fully implemented until January 1, 2008. The deal
swept away import tariffs in several industries: agriculture was a major focus, but
tariffs were also reduced on items like textiles and automobiles. NAFTA also
implemented intellectual-property protections, established dispute-resolution
mechanisms, and set up regional labor and environmental safeguards, though some
critics now lobby for stronger measures on this front.

Aside from movement of jobs and changing of markets, prices may also rapidly
change. If a company has little competition, then its price may be "all the market
can bear". If it all of a sudden has a foreign competitor with substantially lower
prices, then a period of adjustment will ensue, with changes occurring for both
companies. This happened in the auto industry in the 1970s, for example.
It is also helpful to compare the US, Canadian and Mexican economies in some
basic areas as they have some fundamental differences in terms of magnitude:

GDP (billions)
population (millions)
per capita GDP

US

Canada

Mexico

$5,465
250
$22,000

$513
26.6
$21,500

$187
86
$2,500

In this project, we examine how price stabilization in the NAFTA era may be
mathematically studied using work originally developed by Nobel Prize winner
Wassily Leontief.

History of NAFTA

NAFTA is the North American Free Trade Agreement. It was envisioned at least 30
years ago to reduce trading costs, increase business investment, and help North
America be more competitive in the global marketplace.

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 since it's no longer needed.
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.
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 finally signed into law by President Bill on December 8, 1993 and entered
force January 1, 1994. Although it was signed by President Bush, it was a priority
of President Clinton's, and its passage is considered one of his first successes.
(Source: History.com, NAFTA Signed into Law, December 8, 1993)

What Is Its Purpose?

Article 102 of the NAFTA agreement outlines its purpose:
Grant the signatories Most Favored Nation status.
Eliminate barriers to trade and facilitate the cross-border movement of
goods and services.
Promote conditions of fair competition.
Increase investment opportunities.
Provide protection and enforcement of intellectual property rights.
Create procedures for the resolution of trade disputes.
Establish a framework for further trilateral, regional and multilateral
cooperation to expand the trade agreement's benefits. (Source: NAFTA
Secretariat, "FAQ")

Has It Fulfilled Its Purpose?

NAFTA has eliminated trade barriers, increased investment opportunities, and
established procedures for resolution of trade disputes. Most important, it has
increased the competitiveness of the three countries involved - Canada, the U.S.
and Mexico - on the global marketplace. That's made it the worlds largest free
trade area (in terms of GDP).
This has become especially important with the launch of the European Union and
the economic growth of China and other emerging market countries. In 2007, the
EU replaced the U.S. as the world's largest economy.
Despite NAFTA's benefits, it has remained highly controversial. Disadvantages are
usually pointed out during Presidential campaigns. In 1992, before the trade
agreement was even ratified, Independent Presidential candidate Ross Perot
famously warned that "You're going to hear a giant sucking sound of jobs being
pulled out of this country." Ross predicted that the U.S. would lose 5 million jobs
-- a whopping 4% of total U.S. employment -- to lower-cost Mexican workers. In
fact, this never happened as Mexico entered a recession and the U.S. entered a
period of prosperity. True, American workers were displaced by low-cost Mexican

imports. But research showed it was more like 2,000 per month. (Source: Brad
DeLong, "Jobs and NAFTA")

The 2008 Presidential Campaign

NAFTA was attacked from all sides during the 2008 Presidential campaign. Barack
Obama blamed it for growing unemployment. He said it helped businesses at the
expense of workers in the U.S. It also did not provide enough protection against
exploitation of workers and the environment along the border in Mexico. Hillary
Clinton included the trade agreement in her pledge to strictly enforce all existing
trade, as well as halt any new ones. Both candidates promised to either amend or
back out of the agreement all together. However, Obama hasn't done anything
about these campaigns promises since becoming President. For more, see Has
Obama Forgotten His Promise?
In 2008, Republican candidate Ron Paul said he would abolish the trade
agreement. He said it was responsible for a Superhighway and compared it to the
European. However, unlike the EU, NAFTA does not enforce a single currency
among its signatories. Paul has maintained this position in his 2012 campaign.
Republican nominee John McCain supported NAFTA, as he did all free trade
agreements. In fact, he wanted to enforce an existing section within it that
promised to open up the U.S. to the Mexican trucking industry. Article updated
February 6, 2015.

Provisions of NAFTA
NAFTA liberalizes rules for investment by businesses from one NAFTA country in
another NAFTA country. It also eliminates tariffs and other barriers to trade among
the United States, Canada, and Mexico over a 15-year period that began January 1,
1994. Thus, it creates what some commentators are calling "the world's largest
trading bloc." As of December 31, 1993, there were tariffs on approximately 9,000
products being traded between the United States and Mexico. Approximately 4,500
tariffs were eliminated on January 1, 1994, and by 1999 tariffs remained in effect
on only about 3,000. The remaining tariffs will be gradually phased out, with the
last of them being terminated by the year 2009. NAFTA is a two-volume document
covering more than 1,200 pages with extremely detailed, complex provisions
specifying how tariffs and other barriers for a multitude of different industries will
be altered. The following description of NAFTA summarizes some of its salient
provisions with respect to selected sectors of the economy.

REMOVAL OF BARRIERS TO INVESTMENT.

NAFTA removes certain investment barriers, protects NAFTA investors, and

provides process for settlement of disputes between investors and a NAFTA
country. Coverage includes anticompetitive practices, financial services,
intellectual property, temporary entry for businesspersons, and dispute settlement
procedures. One of the most significant aspects of NAFTA is that it minimizes or
eliminates many requirements of foreign government approval, which formerly
posed significant barriers to investment.
NAFTA includes provisions on anticompetitive practices by monopolies and state
enterprises as well as on such practices by privately owned businesses. It also sets
out principles to guide regulation of financial services. Under NAFTA, financial
service providers from one NAFTA country may establish banking,
insurance, securities operations, and other types of financial services in another
NAFTA country. The advantage of this for investors is that they are able to use the
same financial service providers for both domestic and international transactions.
NAFTA provides U.S. and Canadian firms with greater access to Mexico's energy
markets and energy-related services. Pursuant to NAFTA, U.S. and Canadian
energy firms are now allowed to sell their products to PEMEX, Mexico's stateowned petroleum company, through open, competitive bidding. Under NAFTA, for
the first time Mexico is allowing foreign ownership and operation of selfgeneration, cogeneration, and independent power plants.

Transportation among the three countries is becoming more efficient and less
costly due to changes in investment restrictions. Pursuant to NAFTA, Mexico is
removing its restrictions on foreign investment for trucking firms. Since 1995,
U.S., Mexican, and Canadian trucking companies have been allowed to establish
cross-border routes. Bans on such routes prior to NAFTA made shipping across the
U.S.-Mexican border costly and inefficient; goods had to be unloaded from one
truck and put onto another truck as they were moved from Mexico to the United
States, or vice versa. As we enter the 21st century, trade is flowing more freely
between the United States and Canada for a variety of reasons. For example, as of
January 1999, a driver-record database is available for use by law enforcement
officers in each of the three NAFTA countries. But crossing procedures at the U.S.Mexican border continue to be inefficient. In January 1996, an agreement was to
take effect that would allow U.S. and Mexican carriers to pick up and deliver
international shipments in states adjacent to the U.S.-Mexican border, but the
agreement was blocked by the United States. Commentators believe that the
decision was based on organized labor's opposition to NAFTA. In addition, the
United States and Mexico are still working to harmonize safety standards for motor
carriers.
Under NAFTA, Mexico's pharmaceutical market is being opened to U.S. investors.
Mexico has removed its import restrictions on pharmaceutical products, and it will
phase out tariffs on such products by 2004. Mexico has opened its government
procurement contracts for pharmaceuticals to bids from U.S. and Canadian
companies.
NAFTA builds on the work of the General Agreement on Tariffs and
Trade (GATT), providing substantial protection for intellectual property. Covered

are copyrights , including sound recordings; patents and trademarks; plant

breeders' rights; industrial designs and trade secrets; and integrated circuits
(semiconductor chips). NAFTA includes details regarding procedures for
enforcement of intellectual property rights and for damages in the event of
violations of such rights. Mexico divides its intellectual property laws into two
areas: intellectual property and industrial property. Mexico adopted its new
Industrial Property Law as of 1994 and its new Federal Copyright Law took effect
in 1997. Mexico has a history, however, of weak enforcement of intellectual
property rights, and this area of law is developing slowly.
NAFTA does not create a common market for movement of labor. Thus, provisions
in NAFTA deal with temporary entry of businesspeople from one NAFTA country
into another. On a reciprocal basis, each of the three countries admits four
categories of businesspersons: (1) business visitors dealing with research and
design, growth, marketing and sales, and related activities; (2) traders and
investors; (3) intracompany transfereesprovided that such transferees are
employed in a managerial or executive capacity or possess specialized knowledge;
and (4) specified categories of professionals who meet minimum educational
requirements or possess specialized knowledge.

ELIMINATION OF TARIFFS.
NAFTA's provisions on farm products were of great concern to agriculture
businesspeople in the United States. Pursuant to NAFTA, tariffs on all farm
products will be phased out, but producers of certain "sensitive" products will be
allotted extra time to adjust gradually to competitionfrom products of other
NAFTA countries. Tariffs for those sensitive products will be phased out over a
period of 15 years ending in 2009. "Sensitive products" receiving such treatment
include corn and dry beans for Mexico, and sugar, melons, asparagus, and orange
juice concentrate for the United States.
Provisions related to the automobile industry were also of special concern in the
United States. Pursuant to formnulas set out in NAFTA, as of 1995, cars must
contain 50 percent North American content to qualify for duty-free treatment. By
2002, they will be required to contain 62.5 percent North American content to
receive such treatment. Also, U.S. automobile manufacturers have gained greater
access to Mexican markets. During a transition period, limits on numbers of
vehicles imported to Mexico are being phased out, as are duties on automobiles,
light trucks, and automobile parts. As of 1999, according to Brenda M. Case," The
auto industry is already one of the great success stories of the Mexican economy,
and most of the world's auto makers have plans to make it bigger and better. Auto
plants, suppliers, and dealers make up 20 percent of Mexico's exports and 2.5
percent of its gross domestic product (GDP)."

Mexico's telephone system was severely underdeveloped prior to NAFTA. Prices

were high, service was irregular, and private customers often waited for years to
get telephones installed. As of NAFTA's effective date, Mexico abolished tariffs on
all telecommunications equipment except telephone sets and centralswitching
equipment, and tariffs on even those products were phased out by 1998. Now, U.S.
companies compete for certain contracts for Mexico's telephone system. In
addition, foreign investors are allowed to form joint ventures with Mexican
companies in the area of telecommunications, although foreign participation in
telecommunications is limited to 49 percent in most cases. As a result of the new
joint ventures and lowered tariffs, the quality of telephone service in Mexico has
improved tremendously.

DISPUTE RESOLUTION.
Administration of NAFTA is handled by a commission composed of ministers
(cabinet-level officers) designated by each NAFTA country. A secretariat serves the
commission and assists with the administration of dispute resolution panels.
Whenever a dispute arises with respect to a NAFTA country's rights under the
agreement, a consultation can be requested at which all three NAFTA countries can
participate. If consultation does not resolve the dispute, the commission will seek
to settle the dispute through mediationor similar means of alternative dispute
resolution procedures. If those measures are unsuccessful, a complaining country
can request that an arbitration panel be established. The panel is composed of five
members selected from a trilaterally agreed upon list of trade, legal, and other
experts. After study, the panel issues a confidential initial report. After receiving
comments from the parties, a final report will be prepared and conveyed to the
commission. If the panel finds that a NAFTA country violated its NAFTA
obligations, the disputing parties have 30 days to reach an agreement. If none is
reached, NAFTA benefits may be suspended against the violating country in an
amount equivalent to the panel's recommended penalty until the dispute is resolved

Background
Section 8.5 of Kolman, linear economic models. We assume the reader is familiar
with this material, particularly page 465.
Here we assume that there are three countries, the United States, Canada, and
Mexico, in that order. Further, A denotes the 3x3 exchange matrix(nonegative,
columns add up to one).
Next, suppose that p = (y1,y2,y3)t is a 3x1 column vector where yi is the price that
nation #i charges for Its goods, as a group, that are exchanged on the open market
between the three nations. Following Kolman, the linear combination
a11y1 + a12y2 + a13y3
is the monetary sum of goods sold within the United States and
total imports bought by the United States from Canada and Mexico. Similarly,
a21y1 + a22y2 + a23y3
is the sum Canada receives from sales within Canada (a22y2) and exports to the US
and Mexico. Finally,
a31y1 + a32y2 + a33y3
is the sum Mexico receives from sales within Mexico (a33y3) and exports to the US
and Canada.
In matrix terms, the column vector produced by the product Ap, represents income
for each of the nations (recall p = (y1,y2,y3)t ). Now in a state of perfect equilibrium,
the income for each nation would equal what it spent so no one would have a trade
imbalance (especially a trade deficit). This would be represented, as in Kolman, by
the matrix equation
Ap = p.

However, the prices, not being under anyone's control, cannot guarantee this. Thus
one has
Ap p.
(where by "not equal", for matrices, it means that at least one component does not
match up).
Now nations do not desire trade imbalances, so prices change over time. For the
remainder of this project, we will let p(k) denote the price vector after k months of
time have elapsed, indicating that we now have a dynamic situation.
The question we are interested in is: is this a stable or unstable economic situation?
Will prices stabilize as a group, or will some grow or decline indefinitely? In the
latter case, there are many negative ramifications. Finally, if they stabilize, can we
predict what they will stabilize to?
In mathematical terms, we are interested in the existence and value of

In order to begin to answer this, we first need to know how the prices change over
time. We will assume that at the end of each month, all nations agree to adjust
prices so that their prices for the upcoming month equals their income from the
current month. Mathematically, this means that
p(k+1) = Ap(k)
If we denote the origin prices by p0 , then one may solve this equation (which we
have seen in a number of other situations) and find that
p(k) = Ak p0

What are some of the key goals of the NAFTA?

to reduce barriers to trade

 to increase cooperation for improving working conditions in North America

to create an expanded and safe market for goods and services produced in
North America
to establish clear and mutually advantageous trade rules
to help develop and expand world trade and provide a catalyst to broader
international cooperation

Why should consumers care about the NAFTA?

U.S. consumers participate in international trade each day as they purchase goods
and services that cross international borders. Therefore, they are affected daily by
what they pay for the products and how safe they are.
Trade is considered "free" or "open" when goods and services can move into
markets without restrictions, and prices are determined by supply and demand.
Nations sometimes erect barriers to this free movement of goods and services, such
as quotas limiting the quantity of products imported, or non-tariff barriers, such as
registration or labeling requirements, that create obstacles to selling foreign goods.
These barriers can significantly increase the cost of the product.

What are the benefits of the NAFTA for U.S. consumers?

more free trade resulting in greater choices in goods and services
lower prices and improved quality products
stronger health and safety standards
improved economic stability in the U.S. marketplace

 a marketplace that is increasingly driven more by supply and demand than

by barriers to commerce

What are the benefits of the NAFTA for U.S. business?

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 will be 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

What is the NAFTA's impact on U.S. jobs?

The NAFTA has created jobs for American workers by expanding access to U.S.
goods and services in the Mexican and Canadian markets. In 1996, jobs supported
by the export of U.S. goods to Mexico and Canada increased by an estimated
311,000 to 2.3 million from 1993 (pre-NAFTA). In addition, export-supported
jobs, which are in the higher productivity, export-oriented sectors of the economy,
pay 13% to 16% more than the average U.S. wage.

What are some of the industries that are experiencing significant benefits as a
result of the NAFTA?
Agricultural Trade: The United States is the world's largest and most competitive
exporter of agricultural commodities. The NAFTA has reinforced the trend toward
greater integration of the North American agricultural marketplace and a more
productive and efficient American agricultural sector. U.S. consumers are
benefiting from more open access to wider sources of supply. U.S. agricultural
exports to North America have grown rapidly since the NAFTA went into effect,
and, if recent trends continue, could reach $30 billion per year by 2005--up from
$11.6 billion in 1996.
Automotive Industry: Prior to the NAFTA, U.S. motor vehicle exports to Mexico
faced restrictive trade balancing and local content requirements, as well as tariffs
of 20 %. With the reduction/elimination of these trade barriers, liberalized
investment rules and preferential rules of origin, U.S. parts and vehicle
manufacturers have become more efficient and competitive in the North American
market. In 1996, the U.S. exported 51,000 new cars and 31,500 new trucks to
Mexico alone for a value of $1.2 billion.
Textiles and Apparel: The NAFTA has increased economic activity and enhanced
export prospects for textile and apparel producers in the United States. To be
internationally competitive in the global marketplace, U.S. producers of textiles
and apparel have improved their productivity and concentrated on specialized
products. The NAFTA has enabled U.S. producers to optimize production and
manufacturing investment in North America, resulting in a shift of production from
the Far East to North America, strengthening the industry's worldwide position.
Textile and apparel trade among the three NAFTA partners has nearly doubled
since the NAFTA took effect, increasing from $6.4 billion in 1993 to $12.4 billion
in 1996.

How does the NAFTA affect the environment?

North American consumers will benefit from various initiatives being undertaken
by the NAFTA partners to strengthen and protect the North American environment.
The NAFTA Commission for Environmental Cooperation (CEC) has deepened
trilateral cooperation on a broad range of environmental issues, including illegal
trade in hazardous wastes, endangered wildlife, and the elimination of certain toxic
chemicals and pesticides. Through the CEC, Mexico has agreed to join the United
States and Canada in banning the pesticides DDT and chlordane, ensuring that
these long-lived toxic substances no longer cross our border. The United States and
Mexico have also launched a Border XXI program establishing five-year
objectives for achieving a clean border environment and a blueprint for meeting
these objectives.

Problems

Suppose in what follows that the exchange matrix is

Write out your interpretation of all nine entries in the exchange matrix A.
In general, how can we use the model to tell if a nation has a trade deficit or
surplus?

Suppose initially we take p0 = (5465,513,187)t (units of billions of dollars). What

does the model predict that each nation will have for an imbalance of trade in 5
years? Assume in each case that their GDP increases annually by 2%. Be sure an
indicate if the imbalance is a net surplus or deficit in each case.
If you were to write to your congressman and tell him whether you wanted him to
support NAFTA or not, what would you tell him?
How does the Leontief model compare with the Markov chain model?
What effect does the act of devaluing a currency have on the situation?
References
1. Lustig, Bosworth, Lawrence, eds., North American Free Trade Assessing the
Impact. 1992. Washington D.C. The Brookings Institution.

How do economists assess NAFTA's economic impact?

It is difficult to determine causality between NAFTA's implementation and

economic growth, and it is impossible to quantify the counterfactualhow trade
policy might have liberalized without NAFTA. Intraregional trade flows have
increased significantly over the treaty's first two decades, from roughly $290
billion in 1993 to more than $1.1 trillion in 2012. Cross-border investment and

travel have also surged. The United States trades more in goods and services with
Mexico and Canada than it does with Japan, South Korea, Brazil, Russia, India,
and China combined. Much of this growth has been due to increased trade between
the United States and Mexico, where the trade balancethe difference between
exports and importsswung from a $1.7 billion U.S. surplus in 1993 to a $61.4
billion deficit in 2012.

"NAFTA was designed to promote economic growth by spurring competition in

domestic markets and promoting investment from both domestic and foreign
sources. It has worked," write Gary Clyde Hufbauer and Jeffrey J. Schott, experts
at the Peterson Institute for International Economics and the authors of NAFTA
Revisited: Achievements and Challenges.

Originally, critics of NAFTA focused on labor-market dislocations, and warned

that the United States would experience sharp job losses as companies moved
production to Mexico to lower costs. But this effect has proven to be modest for
the United States because total trade with Mexico and Canada account for a small
percentage of the U.S. economy.
Many trade experts say that in the long term, free-trade deals such as NAFTA
produce benefits despite some painful short-term costs such as the movement of
some jobs and industries across borders. But according to at least one major study,
the benefits are limited.

The Congressional Budget Office attempted a full-scale examination of NAFTA's

economic consequences in 2003, and concluded that:

U.S. trade with Mexico was growing before NAFTA's implementation, and
would likely have continued to grow with or without the deal on a scale that
"dwarfs the effects" of NAFTA itself;

the direct effect of NAFTA on U.S.-Mexico trade is fairly small, and thus the
direct impact on the U.S. labor market is also small; and

overall, the NAFTA deal has only expanded U.S. gross domestic product
(GDP) "very slightly," with a similarly small and positive effect on the Canadian
and Mexican economies.

Source: Congressional Research Service

Some studies overlook the effect of the development of supply chains, which has
been credited to NAFTA. Companies in the three countries, especially U.S. auto
manufacturers but also North American makers of electronics, machinery, and
appliances, have benefitted from spreading production lines across each country to
reduce costs and become more globally competitive, a tactic that would be more
difficult without the tariff reductions of NAFTA. Economists estimate that 40
percent of the content of U.S. imports from Mexico and 25 percent of the content
of U.S. imports from Canada are of U.S. origin [PDF]. U.S. imports from China,
by comparison, only contain 4 percent U.S. content. "Ignoring these input-output
linkages could underestimate potential trade gains," noted a Congressional
Research Service report.

How has NAFTA affected the U.S. labor market?

Wide disagreement persists on how and to what degree NAFTA accounts for
changes in net employment from adjustments in the labor market. Supporters of
NAFTA, and many economists, see a positive impact on U.S. employment and
note that new export-related jobs in the United States pay 15 to 20 percent more on
average than those focused on domestic production. But side effects of the treaty
should not be ignored. Edward Alden, a senior fellow at the Council on Foreign
Relations, notes that wages haven't kept pace with labor productivity and that
income inequality in the United States has risen in recent years, in part due to
pressures on the U.S. manufacturing base. To some extent, he says, trade deals
have hastened the pace of these changes in that they have "reinforced the
globalization of the American economy."

Opponents of NAFTA take a starker position. Thea M. Lee, the deputy chief of
staff at the AFL-CIO, which opposes NAFTA and lobbies against other free-trade
agreements unless they include provisions that raise labor and environmental
standards, said that NAFTA forced "workers into more direct competition with
each other, while assuring them fewer rights and protections." Public Citizen, the
left-leaning Washington nonprofit consumer rights organization, said in a report
that the "grand promises made by NAFTA's proponents remain unfulfilled" [PDF]
twenty years after implementation and resulted in the loss of one million U.S. jobs
by 2004.
But most economists say it is a stretch to blame these shifts on NAFTA.
Manufacturing in the United States was under stress decades before the treaty, and
job losses in that sector are viewed as part of a structural shift in the U.S. economy
toward light manufacturing and high-end services. Alden says that broader
economic trends affecting U.S. employment, such as China's economic rise,
wouldn't be substantially altered by U.S. policy shifts toward NAFTA.
What impact has NAFTA had on Mexico?

One lofty, unrealized promise of NAFTA was that the treaty would narrow the gap
between the per capita incomes of Mexico, the United States, and Canada. Per
capita income in Mexico rose at an annual average of 1.2 percent over the past two
decades, from $6,932 in 1994 to $8,397 in 2012, far slower than Latin American
countries such as Brazil, Chile, and Peru. NAFTA was also expected to discourage
Mexican emigration to the United States, yet despite the 20072009 recession and
increased deportations, Mexican-born people living in the United States doubled
since 1994 to 12 million in 2013, writes Jorge G. Castaeda, a professor at New
York University and former foreign minister of Mexico. Industries excluded from
NAFTAsuch as telecommunications, television, and transportationallowed
Mexico's wealthiest to become even richer; the country now claims the world's
richest man, Carlos Slim Helu.

Some critics single out Mexico's farm industry, saying NAFTA has crippled
Mexican farming prospects by opening competition to the heavily subsidized U.S.
farm industry. Economists dispute this assessment. The Economist notes that
despite increased competition, Mexican farm exports to the United States
have tripled since NAFTA's implementation, in part because of reduced tariffs on
maize.
Experts say trade liberalization between Mexico and the United States has had
positive consequences for Mexicans generally, not just Mexican business interests.
For instance, the deal has led to a dramatic reduction in Mexican prices for clothes,
televisions, and food, which helps offset slow income growth. GEA, a Mexico
City-based economic consulting firm, estimates that the cost of basic household
goods in Mexico has halved since NAFTA's implementation. Mexican workers in
the car manufacturing and aeronautics sectors of northern Mexico have benefitted
from the treaty and helped expand the country's manufacturing base.
And Mexico has enjoyed an intangible benefit of NAFTA: The country has
adopted orthodox economic management practices and is no longer prone to crises.
"The agreement ended up straitjacketing a government accustomed to
overspending, overpromising, and underachieving," wrote Castaeda. The
government abandoned many protectionist policies and allowed the prices of
tradable goods to converge on both sides of the border, which reduced deficits
and limited the potential for currency crises, he added.

FACTORS AFFECTING CONTINUING

DEVELOPMENT OF TRADE WITH AND
WITHIN MEXICO

NAFTA does not represent a blessing for Mexico's unskilled workers and their
families. Workers are obtaining employment at low wages in new manufacturing
facilities. Their wages, however, are not sufficient to enable them to purchase
decent housing, clothing, and good food for their families. Due to a lack of potable
water, inadequate sewage facilities, inadequate or unavailable electricity, and other
inadequate or unavailable services in the areas around new industrial facilities, life
for workers and their families is often a miserable existence. Diseases and illness
due to a lack of sanitary facilities and due to industrial pollution are prevalent and
are increasing.
There have been scandals within Mexico's government. On March 23, 1994, Luis
DonaldoColosio, the leading candidate for election to Mexico's presidency,
was assassinated during a political rally. In August 1994, Ernesto Zedillo was
elected to the presidency. His election was reassuring to investors who were
awaiting the results of the election, because he advocated economic and political
policies similar to those of former President Carlos Salinas, who led Mexico in
approving NAFTA. During 1995, however, there were additional scandals within
Mexico's government. The brother of former President Salinas was arrested in
March 1995 and convicted in 1998 of planning the murder of Jose Francisco Ruiz,
who had been governor of the Mexican state of Guerrero from 1987 to 1993. In the
aftermath of his brother's arrest, and accusations Salinas himself embezzled
millions of dollars, he left Mexico and went into exile in Europe.
In addition, on January 1,1994, the effective date of NAFTA, there was an uprising
in Chiapas, Mexico, led by Zapatista rebels. (The rebels take their name from the
early 20th-century Mexican revolutionary leader Emiliano Zapata [1879-1919].)
After the initial fighting, which resulted in at least 145 deaths, the rebellion has

continued to simmer, with occasional armed conflicts, for over six years. The
Zapatistas are protesting political injustices, extreme poverty, and ethnic
oppression of the indigenous people of Chiapas. They are also protesting NAFTA
and the environmental degradation resulting from increased industrialization of
Mexico.
Foreign investments in Mexico have been stemmed by Mexico's financial crisis of
1995-96 and its continuing financial problems since then. In November 1994, the
Mexican peso was trading for slightly over three pesos per U.S. dollar. But the
exchange rate had dropped to a low of 7.7 pesos per dollar as of March 9, 1995.
Further, inflation in Mexico reached an annualized rate of 64 percent as of
February 1995. In March 1995, the United States extended $20 million
in loans and loan guarantees to Mexico. In return, Mexico instituted an economic
plan that included sweeping budget cuts, increased taxes, and approved provisions
allowing the United States to oversee Mexico's handling of its economy. The loans
have been repaid, but the agreement caused Mexican citizens accuse President
Zedillo of" trading his nation's sovereignty" for American dollars.
Meanwhile, Mexico's response to the debt crisis included creation of an
official bank bailout program called Bank Fund for Savings
Protection (FondoBancario para Proteccin de Ahorro also known
as Profoba or Fobaproa). But, according to Angelo Young, the program has been
plagued by scandal and allegations of illegal practices. In early 1999, the Mexican
Congress passed a set of reforms to replace Profoba with a new Bank Savings
Protection Institute (IPAB) that is modeled after the Federal Deposit Insurance
Corporation in the United States. IPAB is charged with administering a debt-relief
package that will discount amounts owed on loans from 16 percent to 60 percent,

depending on the type of loan. It is expected that business, agricultural, and small
domestic debtors will benefit from the plan.

What impact has it had on Canada?

If anything, Canada has seen the strongest gains among the three NAFTA
countries, though, again, it is difficult to attribute direct causation, particularly
given that Canada and the United States had a free-trade deal that predated
NAFTA. Canada is the leading exporter of goods to the United States, U.S. and
Mexican investments in Canada have tripled, and Canada has added 4.7 million
new jobs since 1993. Canadian manufacturing employment held steady, though the
"productivity gap" between the Canadian and U.S. economies wasn't narrowed:
Canada's labor productivity stood at 72 percent of U.S. levels in 2012 despite
Canada's highly educated work force.

"NAFTA was designed to promote economic growth by spurring competition in

domestic markets and promoting investment from both domestic and foreign
sources. It has worked." Gary Clyde Hufbauer and Jeffrey J. Schott, Peterson
Institute for International Economics
One of NAFTA's biggest economic effects on U.S.-Canada trade has been to
increase bilateral agricultural flows. Canada is the leading importer of U.S.
agricultural products, and U.S. agricultural exports to Canada roughly doubled
between 1994 and 2003. The U.S. Department of Agriculture offers a sector-bysector review of U.S.-Canada trade since NAFTA's implementation, which shows
broad increases in trade in several sectors.

Advantages and Disadvantages of NAFTA

Anytime a major alteration is made in the way a country does certain things, eye
brows should be raised. It is very important to understand the impact that the
changes will have on our economy and country as a whole. Executed on January 1,
1994, the NAFTA, which stands for North American Free Trade Agreement, is not
an exception.
Understanding the advantages and disadvantages of NAFTA should help you
realize whether it is truly beneficial for the people or not.

Advantages of NAFTA
NAFTA created the worlds largest free trade area, which benefits the 450 million
people within its borders. It created an economic powerhouse of $20.08 trillion, as
measured by Gross Domestic Product (GDP).
That's because it linked the economies of the United States
($16.72 trillion), Canada($1.518 trillion) and Mexico($1.845 trillion). This trade
area is greater than the economic output of the 28 countries in the entire European
Union.
How NAFTA Provides Benefits
How does NAFTA boost trade? First, it eliminated all tariffs between the three
countries in January 2008. This reducesinflation by decreasing the costs ofimports.
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
ongovernment contracts. This creates a level-playing field for all companies within

its borders. It also helps to cut government budget deficits by allowing more
competition and lower-cost bids.
Fourth, NAFTA protects intellectual properties. This boosts profits for innovative
businesses by discouraging pirating. It also promotes foreign direct investment,
because companies know that their rights will be protected by international law.
Benefits All Three Countries Enjoy
Between 1993-2014, trade between the three members quadrupled, from $297
billion to $1.2 trillion.
This boosts economic growth, profits, and jobs for all three countries. It also
allows lower prices for consumers.
U.S. exports grew from $142 billion to $552.3 billion, making Canada ($312
billion) and Mexico ($240.3 billion) the top two U.S. export markets in 2014. That
means 34% of all U.S. exports went to these two countries alone. Imports from
Canada ($346.1 billion) and Mexico ($294.2 billion) increased from $151 billion to
$646 billion, or 27% of total U.S. imports. (Source: Year to Date Total Trade,
United States Census)
Benefits to the United States
NAFTA boosts U.S. economic growth by as much as .5% a year. Here's
five specific benefits that Americans enjoy:
1. Boosts U.S. Farm Exports - U.S. farmers were really helped by NAFTA. Food
exports to Canada and Mexico grew 156%, compared to an increase of 65% to the
rest of the world. To put this into perspective, farm exports to Canada and Mexico
alone were greater than exports to the next six largest markets combined. It totaled
$39.4 billion.
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. (Source: U.S. Foreign Agricultural Service, NAFTA)

2. Creates Trade Surplus in Services - NAFTA boosted U.S. service exports to

Canada and Mexico from $25 billion in 1993 to a peak of $106.8 billion in 2007.
However, the recession hit financial services hard, so services haven't quite
recovered. By 2009, they had only risen to $63.5 billion. By 2012, service exports
had improved to $88.6 billion. (Source: USTR, Quantification of NAFTA
Benefits; NAFTA)
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 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.
3. Lowers Oil Prices - The U.S. imported $144.2 billion in oil from Mexico and
Canada. Thanks to greater U.S. production of its own shale oil, this figure is down
from $157.8 billion in 2007.
Since NAFTA eliminates tariffs, oil prices are lower. This also reduces U.S.
reliance on oil imports from the Middle East and Venezuela.
It's especially important now that the U.S. no longer imports oil from Iran. Why?
Mexico and Canada are friendly countries. Other oil-exporters, such as Venezuela
and Iran, don't think twice about using oil as a political chess piece. For example,
both have started selling oil in currencies other than the petro-dollar, contributing
to the decline in the dollar's value.
4. Lowers Food Prices
NAFTA lowers food prices in much the same way. Imports totaled $39.4 billion in
2013 (up from $28.9 billion in 2009). This particularly helps lower the prices
of fresh vegetables, chocolate, fresh fruit (except bananas) and beef. (Source:
USTR,NAFTA Imports)
5. Steps Up Foreign Direct Investment - Since NAFTA was enacted, U.S. foreign
direct investment (FDI) in Canada and Mexico more than tripled to $452 billion in

2012. This helps boost profits of U.S. businesses by giving them more
opportunities to develop, and markets to explore.
Canadian and Mexican FDI in the U.S. grew to $240.2 billion, up from $219.2
billion in 2007. That means this much investment poured into U.S. manufacturing,
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. (Source: USTR, NAFTA Section Index) Article updated July 15, 2015

ADVANTAGES OF NAFTA
NAFTA Reduced Tariffs
A tariff is the tax placed by the national government on an exported or imported
service or good to discourage or encourage trade. The reduced trade restrictions
introduced by NAFTA enabled the Americans easy purchasing of Mexican and
Canadian goods. Particularly, the United States acquires much of its vehicles, gold,
crude oil and machinery from the two countries. This is along with its fresh
products, red meat, live animals, snack foods, and frozen and chilled foods.
The Three Countries Take Advantage Of Real Income Increases
Based on the article of Washington Post, a study conducted by three economists of
Federal Reserve demonstrated that NAFTA boosted incomes within the United
States by 0.17 percent, in Mexico by 1.3 percent and in Canada by 0.96 percent.
Increased Of Trade Between, Canada, Mexico and the United States
NAFTA has been recognized for hugely increasing trade between Canada, Mexico
and the United States. Trade of services and goods between these three countries
has elevated from $337 billion during the year 1993 up to $1.182 trillion during the
year 2011.

Provided More Employment Opportunities for the US Workers

Based on the Chamber of Commerce of the United States, the increased trade
because of NAFTA supports nearly five million jobs in the United States alone.
DISADVANTAGES OF NAFTA
Less Benefits To Mexican Workers Than Expected
Though NAFTA encouraged huge US investments within Mexico, much of it has
been used to establish factories in which Mexican workers offer cheap employment
to make US goods. The agreement has failed in its aim of increasing the middle
class size of Mexico since Asian labor proves to be more affordable.
Increased Tariffs Yet Not Regulations
NAFTA might have removed tariffs between the three nations, yet it did not do
away with the number of customs regulation which might stifle trade. Origin
regulations rule decide if a good is qualified for trade under the guidelines of
NAFTA, while exporters should accomplish origin certificate paperwork. In simple
words, even with less or no tariffs, still there are a number of government-imposed
obstructions to trade.
By weighing properly the advantages and disadvantages of NAFTA, you should
have a better insight of where you should stand. The information mentioned above
should be helpful.
Disadvantages of NAFTA:
NAFTA has many disadvantages. First and foremost, is that 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'sfarmers 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.

Disadvantages of NAFTA
Disadvantages of NAFTA:
NAFTA has many disadvantages. First and foremost, is that 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.
U.S. Jobs Were Lost:
Since labor is cheaper in Mexico, manymanufacturing 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. (However,
116,400 occurred after 2007, and could have been a result of the financial crisis.)
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. (Source: Economic Policy Institute,
"The High Cost of Free Trade," May 3, 2011)
U.S. Wages Were Suppressed:
Not all companies in these industries moved to Mexico. The ones that used the
threat of moving during union organizing drives. When it became a choice between
joining the union or losing the factory, workers chose the factory. Without union
support, the workers had little bargaining power.

This suppressed wage growth. Between 1993 and 1995, 50% of all companies in
the industries that were moving to Mexico used the threat of closing the factory. By
1999, that rate had grown to 65%.
Mexico's Farmers Were Put Out of Business:
Thanks to NAFTA, Mexico lost 1.3 million farm jobs. The 2002 Farm
Bill subsidized U.S. agribusiness by as much as 40% of net farm income. When
NAFTA removedtariffs, corn and other grains were exported to Mexico below cost.
Rural Mexican farmers could not compete. At the same time, Mexico reduced
its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001.
Most of those subsidies went to Mexico's large farms, anyway.(Source:
International Forum on Globalization, Exposing the Myth of Free Trade, February
25, 2003; The Economist, Tariffs and Tortillas, January 24, 2008)
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. (Source:
Worldpress.org, Lessons of NAFTA, April 20, 2001)
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. (Source: Carnegie Endowment, NAFTA's Promise and
Reality, 2004)
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,
theHouse 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.
There was also a question of reciprocity. The NAFTA agreement would also have
allowed unlimited access for U.S. trucks throughout Mexico. A similar agreement
works well between the other NAFTA partner, Canada. However, U.S. trucks are
larger and carry heavier loads. This violates size and weight restrictions imposed
by the Mexican government.

SIDE AGREEMENT ON LABOR

The North American Agreement on Labor Cooperation, commonly known as the
"Labor Side Agreement," was negotiated in response to concerns that NAFTA itself
did little or nothing to protect workers in Mexico, the United States, or Canada.
U.S. labor groups have maintained their opposition to NAFTA even with the
addition of the Labor Side Agreement. Representatives of labor groups assert that
the Labor Side Agreement does little to protect workers in the United States,
Canada, or Mexico. The structure and provisions of the Labor Side Agreement
parallel those of the Environmental Side Agreement. Included are a preamble,
objectives of the agreement, and obligations of the parties. There are also
provisions for a Commission for Labor Cooperation, dispute resolution

mechanisms, and sanctions against a NAFTA country found to be in violation of

the agreement's provisions.
The preamble affirms the three parties' desire to create new employment
opportunities and to protect, enhance, and enforce basic workers' rights while, at
the same time, affirming their respect for each party's constitution and laws.
Part one lists the objectives of the agreement. Its basic goals include the desire to
improve labor conditions and encourage compliance with labor laws. Another goal
is to encourage open sharing of information (transparency) among the three
countries regarding their respective labor laws and their enforcement of those laws.
Part two of the Labor Side Agreement discusses the obligations of the parties. Each
party is responsible for enforcement of its own labor laws, but the parties agree that
proceedings dealing with enforcement of labor laws will be "fair" and tribunals
will be "impartial." Labor laws and information about their enforcement are to be
made public, and public education will be promoted.
Part three establishes a Commission for Labor Cooperation. It will consist of a
council and a secretariat. The council meets at least once a year or upon the request
of one of the parties. Its primary tasks are to oversee implementation of the Labor
Side Agreement and to promote cooperation among the parties on various labor
issues.
The secretariat is headed by an executive director, and that position is rotated
among the three countries. The secretariat's tasks are to assist the council, make
public the labor policies of each country, and prepare studies requested by the
council.

The United States, Mexico, and Canada have each established a National
Administrative Office (NAO) led by a secretary. NAOs are responsible for
gathering information within their respective countries and conveying it to the
secretariat and the other two NAFTA parties. In addition, the Labor Side
Agreement allows the NAOs in each country to review each other's labor laws (and
enforcement) in response to complaints from workers.
In the event of a dispute related to the Labor Side Agreement, the leader of one of
the NAFTA parties may request a meeting with another leader to attempt to resolve
the dispute. The allegation cannot be based on a single failure to enforce its own
laws. Instead, any complaint must be based on a "persistent pattern of failure by
the Party complained against to effectively enforce its occupational safety and
health, child labor, or minimum wage technical labor standards." All three NAFTA
parties are allowed to participate in such a meeting. If the matter is not resolved by
those leaders, a party-country may request that an Evaluation Committee of
Experts (ECE) be established. The ECE will study the matter and submit a report
to the council. The purpose of this report is to allow a party to obtain information
about the practices and enforcement of labor laws by another NAFTA party.
After the ECE's report is presented, the parties will try to resolve any dispute
between themselves. If this fails, the council may attempt to assist the parties in
resolving the dispute. Finally, if the matter is not resolved, the council may
convene an arbitration panel, chosen from a roster of 45 people chosen pursuant to
qualifications outlined in the Labor Side Agreement. The panel convenes, receives
input from each of the disputing party-countries, and prepares an initial report.
After reviewing comments from each of the parties, a final report is prepared. If it
is found that a party "persistently failed" to enforce its laws, the disputing parties

will prepare an action plan. If the parties do not agree or if the plan is not fully
implemented, the panel can be reconvened. If the panel finds that the plan was not
implemented, the offending party can be fined. If the fine is not paid, NAFTA trade
benefits can be suspended to pay the fine. As of 1999, however, such a sanction has
not been ordered.
Thus, the Labor Side Agreement provides a mechanism for dealing with a partycountry that shows a "pattern of practice" of failing to enforce its occupational
safety and health, child labor, or minimum wage technical labor standards. The
Labor Commission is supposed to pressure NAFTA countries into enforcing their
own labor laws, but it lacks a meaningful method for punishing them. For example,
managers at the ITAPSA brake parts factory in the State of Mexico, Mexico, fired
assembly-line workers in retaliation for voting for an independent union. The U.S.
and Canadian NAOs issued reports recommending that the former workers be
restored to their jobs, but, according to Robert Donnelly, that has not happened.
As we enter the 21st century, organized labor in the United States continues to
oppose NAFTA; labor representatives view the Labor Side Agreement as an
ineffective mechanism that is unenforceable. The most significant achievement of
the Labor Side Agreement to date is similar to that of the Environmental Side
Agreement: complaints before the Labor Commission and the NAOs of the three
countries have attracted media attention. And that media attention, in turn, may be
compelling countries to enforce their own labor laws to a greater extent than might
otherwise occur.

Whats next for NAFTA?

During the 2008 U.S. presidential election, many Democrats called for an
amendment of NAFTA to include additional labor and environmental standards.
Renegotiation of NAFTA was floated, but the idea was abandoned after the
campaign and wasn't a factor in the 2012 election. With jobs as a perennial political
issue, many economists who broadly support NAFTA say that reforms to the Trade
Adjustment Assistance (TAA) program could help quell anger directed at trade
liberalization. Experts including Alden note that positive long-term economic
change often is accompanied by job-market turbulence, though the ability of TAA
to address these challenges is limited. While some Democrats want the program
expanded, many Republicans favor its elimination. One component of an expanded
TAA could be wage insurance, which a 2007 Council Special Reportargued would
protect workers who face sustained long-term wage losses.

Robert Pastor, the late Latin America specialist and American University professor,
noted in a 2013 Policy Innovation Memorandum that trade growth under NAFTA
was much faster between 1993 and 2001 than in subsequent years. He attributed
part of the decline to post-9/11 border restrictions and rising Chinese exports after
Beijing joined the World Trade Organization, but placed most of the blame on the
"failure of leaders in the three countries to build on NAFTA's foundation and create
a seamless market." Pastor argued for deeper North American integration under
NAFTA to invigorate the three economies and make them more competitive.
Both critics and proponents of NAFTA have proposed changes that would improve
trade and economic relations in North America. A 2013 Congressional Research
Service . report on NAFTA notes that some of these policies include strengthening
protections for workers and the environment, enhancing regulatory cooperation,
investing in border infrastructure, and promoting research and development to
improve the competitiveness of North American industries.

Trade remains a divisive issue in the United States, and efforts to advance regional
integration through NAFTA have largely stalled. But new potential trade

agreements, such as the Trans-Pacific Partnership (TPP)which comprises

Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru,
Singapore, Japan, the United States, and Vietnammay bring in a set of rules that
go beyond NAFTA and ultimately deliver the reforms that regional negotiations
haven't reached. Proposed TPP provisions on labor and the environment, stronger
intellectual property rights, and constraints on state-owned enterprises, if agreed
upon, will effectively update trade relations without reopening the treaty.
LOOKING AHEAD
What happened during the first six years of NAFTA? The effects of NAFTA on
trade between Canada and the United States were visible but not unexpected,
because the United States and Canada already had a free trade agreement that
eliminated nearly all tariffs as of 1998. Meanwhile, Mexico has seen significant
increases in trade with the United States and Canada since 1994.
On the other hand, NAFTA has not been a success for labor interests and the
environment. The Labor Commission created under the Labor Side Agreement has
had little success in improving the status of workers. And the Environmental
Commission has had similar limited results. Further, the environmental
contamination in Mexico is escalating.
Meanwhile, NAFTA is being watched closely by observers throughout the world,
because it is being used as a model for other agreements. For example, in
December 1994, the United States and 33 other Western Hemisphere countries met
in Miami, Florida, for a "Summit of the Americas." At the summit, the 34 countries
agreed to create a Free Trade Area of the Americas (FTAA) by the year 2005. The
FTAA will be modeled after NAFTA. As an immediate step, at the close of the
1994 Summit of the Americas, the United States, Canada, and Mexico announced

their plans to admit Chile to NAFTA by 1996, but that did not happen for a variety
of political and economic reasons.
Therefore, NAFTA's provisions and its implementation will continue to be watched
closely. NAFTA must be monitored to determine whether its provisions need
modification and to determine whether its provisions provide a suitable model for
additional trade agreements, such as the FTAA.

TRADE AND ECONOMIC CONSEQUENCES

NAFTA is facilitating an unprecedented level of economic integration in North
America. It is creating opportunities for investment and growth by private
business, and it is promoting more stable relations between and among the United
States, Mexico, and Canada. Nevertheless, NAFTA is not welcomed by all people
in the three countries. Overall, NAFTA is neither a complete success nor a
complete failure. Its benefits vary for each of the three countries.
The effects of NAFTA on trade between the United States and Canada have not
been as dramatic. The U.S.-Canada Free Trade Agreement was enacted in 1989,
and tariffs between the United States and Canada were completely eliminated (with
a few minor exceptions) as of 1998. Therefore, under NAFTA, trade observers
have focused on effects on Mexico.
Mexico has benefited from NAFTA in substantial ways including, but not limited
to, the following: First, as of 1998 Mexico passed Japan to become the secondlargest trading partner of the United States. Second, exports from maquiladoras (in

Mexico) to the United States are up about 135 percent comparing 1994 to 1999.
(The maquiladora program was established pursuant to an agreement between the
United States and Mexico. The agreement allows U.S. businesses to operate
manufacturing facilities in northern Mexico, with restrictions, including the
condition that all products produced be returned to the United States.) Third, direct
foreign investment in Mexico has grown tremendously. It was at about $4 billion
before NAFTA and reached over $10 billion in 1998. Fourth, Mexico is beginning
to enjoy a more diversified economy. Before NAFTA, oil production was its
primary source of revenue; now the manufacturing sector is becoming its primary
source.
NAFTA's effect on the United States has not been as dramatic. In 1993, in his
book Save Your Job, Save Our Country, former U.S. presidential candidate and
businessperson H. Ross Perot (1930-) warned workers of a "giant sucking sound"
that would be the flow of American jobs to Mexico. In reality, NAFTA's effect on
jobs in the United States has varied. The jobs that have been most vulnerable are
those that require unskilled labor and those that were, in the past, protected by high
U.S. tariffs. Such industries include the clothing industry, glassware, and
manufacture of ceramic tiles. The American Textile Manufacturers Association
strongly opposed and continues to oppose NAFTA because lower labor costs in
Mexico make it hard for U.S.-manufactured clothing to compete with low-priced
garments made in Mexico. On the other hand, it is reported that NAFTA led to the
creation of 100,000 jobs in the United States during the first half of 1994, and that
as of January 1995 there were at least 700,000 U.S. jobs that depended on exports
to Mexico. Trade officials say that 2.6 million U.S. jobs were supported by exports
to Mexico and Canada in 1998.

Economic consequences of NAFTA for Mexico are more significant than those for
the United States because Mexico has a much smaller economy. As of 1993, the $6
trillion American economy was 20 times the size of Mexico's. As of 1998, U.S.Mexico trade totaled $173.3 billion in a U.S. economy with a GDP of $8.5 trillion.
In contrast, Mexico had a GDP of about $381 billion in 1998.

ENVIRONMENTAL CONSEQUENCES
Environmentalists, business representatives, and the governments of the three
NAFTA countries agree that environmental contamination has reached serious
proportions in northern Mexico, where U.S. businesses have been operating for
nearly three decades under the maquiladoraprogram and where industrial
development has continued to grow under NAFTA.
The hazardous waste treatment industry was expected to be a major area for U.S.
investors under NAFTA. The United States could offer experience and expertise
that Mexicans lacked. Sadly, however, "five years into NAFTA, Mexico's
hazardous waste industry is in total disarray," as reported by Sam Qunones. Of
seven major waste-treatment projects in which tens of millions have been invested,
all are "stalled." "As it stands, Mexico has less landfill infrastructure than it had
before NAFTA," Qunones related.
A few observers are guardedly optimistic that, in the long term, NAFTA may result
in better environmental conditions in Mexico and in the U.S.-Mexican border area.
Such optimism rests on the belief that the success of NAFTA itself will help the
environment. If jobs are created in Mexico, and wages increase, and Mexico's
economy improves, there should be more money available for what is needed

environmentally. Money is needed for personnel to enforce Mexico's

environmental laws; money is needed for infrastructure, including waste disposal
facilities, water treatment and sewage facilities; and technology and equipment are
needed to create safer working conditions inside and outside the walls of industrial
facilities.

Conclusion
The North American Free Trade Agreement (NAFTA) will not be fully
implemented until 2008. However, it is evident that NAFTA has already proved its
worth to the United States by playing an important and vital role in increasing
consumer choice, improving market access for U.S. products, and expanding U.S.
jobs supported by exports.