North American Free Trade Agreement (NAFTA) - Business in United States of America

Identification: Trilateral trade and common tariff agreement among the United States, Mexico, and Canada
Significance: The North American Free Trade Agreement significantly altered the economic relationship among businesses in the United States, Canada, and Mexico by approximating the conditions of a common market. The agreement created the largest free trade area in the world and sparked considerable controversy over exactly who benefits most from its terms.
The North American Free Trade Agreement (NAFTA) was negotiated between 1991 and 1992, with additional agreements incorporated in 1993 to shore up U.S. ratification and allow the accord to go into effect on January 1, 1994. The two supplemental agreements were the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). NAFTA’s main objectives included the promotion of a more harmonious development and a greater expansion of trade among its member nations. All of its objectives were consistent with the interests of broad sectors of the American, Canadian, and Mexican business communities. For this reason, the passage of North American Free Trade Agreement largely symbolized the triumph of probusiness lobbies in the three member countries.
NAFTA also increased the pressure on labor unions, particularly in the United States and Canada, and enlarged the possibilities that environmental regulations in these countries could be bypassed by “environmental dumping,” that is, relocation of contaminating industries to Mexico, where environmental protection and enforcement is generally weaker. For Mexico, closer ties with American business through NAFTA meant driving a wedge between it and the rest of Latin America. It also required reforms of certain aspects of its development model, including an earlier liberalization of the restrictive rules of collective land tenure that dated back to the Mexican Revolution of 1910. In Canada, North American Free Trade Agreement seemed to reinforce the image of Ottawa’s subservience to Washington, D.C., creating new hurdles for longstanding grievances between the two countries, particularly with respect to environmental issues. In sum, NAFTA provided a lightning rod of protest for organized labor and various social movements in all three member countries.

A Political Triumph for Business

NAFTA represented the culmination of years of business lobbying efforts aimed at opening up new markets and investment opportunities. The notion of a trade agreement was generally embraced by the U.S. Republican Party and was thrown into high gear during the administration of President George H.W. Bush. Although the terms of agreement were reached in October, 1992, substantial opposition in the U.S. Congress, spearheaded by labor and environmental interests, prevented the Bush administration from achieving quick ratification. Before this tripartite agreement, a U.S.-Canada Free Trade Agreement had been finalized in 1989. The Conservative Party administration of Brian Mulroney in Canada worked closely with the Bush administration to bring NAFTA to fruition. However, stiff opposition on both sides of the border made passage in the U.S. Congress impossible until the Democratic Party regained the White House. It was ultimately the administration of President Bill Clinton that rallied sufficient bipartisan support for congressional ratification, only after two separate sidebar agreements addressing labor and environmental concerns were added to the agreement. Once ratified in Washington, NAFTA went into effect on January 1, 1994.
NAFTA was designed to create a free trade area across the three member countries by eliminating tariff and nontariff barriers on agricultural and manufacturing goods as well as services. In addition, it was meant to significantly reduce restrictions on foreign investment among the three countries and offered specific protections of intellectual property rights. Nearly half of all trade was to be stripped of tariff protections at the start of the agreement, and subsequent tariff reductions were to take place in phases over a fourteen-year period. At the time the agreement took effect, the combined free trade area represented $6 trillion and included more than 365 million inhabitants.
In effect, North American Free Trade Agreement ratified a trend toward economic liberalization in the Mexican economy that was already well under way. A shift in political orientation on the part of the ruling Institutional Revolutionary Party had prepared the way for the agreement by systematically dismantling statist protections and opening the country to foreign investment in previously restricted spheres of the economy. Especially notable was the maquiladora sector along the Mexican side of the U.S. border, which consisted of a duty-free, tariff-free platform for assembly-line factories for manufactured goods destined for U.S. consumers. The maquiladora factories grew rapidly during the 1980’s, providing cheap labor for American businesses investing across the border, thus helping pave the way for NAFTA.
The American small-business sector was especially attracted to NAFTA because it promised the possibility of an international market for products that had been limited to local and national markets. Ultimately, however, larger businesses such as agribusiness proved to be better positioned to take advantage of the opportunities posed by the expanded markets offered by this agreement. In the final analysis, NAFTA encouraged an already well-established trend, the increasing concentration of transnational capital into the hands of fewer and larger firms.

A Persistent Controversy

When NAFTA was still being negotiated in 1992, independent third-party presidential candidate H. Ross Perot became famous for his slogan “you will hear the giant sucking sound” if North American Free Trade Agreement is eventually ratified. He was referring to the anticipated loss of American industrial jobs heading across the border. As in all free trade agreements, there were indeed winners and losers after NAFTA went into effect. In Mexico, small peasant farmers were most adversely affected, being unable to compete with the massive agricultural food imports from the United States.
Perhaps corn production best illustrates the downside of North American Free Trade Agreement for Mexico’s peasantry because the crop is grown on more than half of that country’s cultivable land and its production involves nearly half of the agrarian labor force. American producers are heavily subsidized by their government, as are large Mexican producers (albeit on a smaller scale), but the majority of Mexico’s small farmers have no governmental support. They rely on subsistence farming techniques and plow the least fertile lands with the lowest yields. Predictably, these small farmers were ill-equipped to compete with the influx of American-grown corn that occurred after NAFTA came into effect. In a country in which around 25 percent of the population works in the agricultural sector, NAFTA became a hated symbol of liberalization by peasants and the poor. The very day that NAFTA went into effect, a peasant uprising took place in the largely indigenous region of Chiapas, led by the Zapatista Front for National Liberation (EZLN), which declared war on Mexico’s federal government. Since then, frequent and often large protests have taken place in Mexico, demanding the repeal of the most sensitive sections of North American Free Trade Agreement regarding agricultural liberalization policies.

United States Trade with NAFTA Countries, 2005-2007, in Billions of Dollars

Implications for Business

NAFTA was originally touted as a move toward regional integration of the Americas. The Bush administration argued that NAFTA was the first major step toward an eventual Free Trade Area of the Americas (FTAA) agreement that would integrate the hemisphere from Canada to the tip of South America. It is important to understand, however, that NAFTA is a trade and investment agreement. It contains none of the political institutions associated with the kind of comprehensive integration created by the European Union. The primary goal of North American Free Trade Agreement was to open up trade and investment markets. Many observers also point to the strategic geopolitical significance that such economic pacts hold for Washington. Clearly, however, these free trade and investment agreements never envisioned a move toward a common currency or even free mobility of labor between their member countries. Indeed, the only move toward expanding NAFTA involved various proposals over the years to increase its geographical reach by including other nation members. Eventually, separate U.S. free trade agreements were signed on a bilateral basis with Chile, Peru, and others, including a subregional trade and investment agreement signed with Central American countries and the Dominican Republic. This has left the original terms of North American Free Trade Agreement intact and increasingly under political fire due to persistent opposition on the part of farmers, trade unions, and environmental groups.
The proposed FTAA eventually stalled because of considerable social protests all across the hemisphere. This opposition led important regional actors such as Brazil to pull back, preventing any final agreement under the original timetable of negotiations. In the United States, the possibility of renegotiating NAFTA has steadily gained currency among major political figures, mostly in the Democratic Party. In Mexico, a broad coalition of peasant organizations and social movements as well as leftist political parties have continued to demand renegotiations on portions of NAFTA that are key for that country. Because opposition to the agreement, particularly over environmental concerns, also remains considerable in Canada, the long-term future of the agreement remains uncertain.