North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA; Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that created a trilateral trade bloc in North America. The agreement came into force on January 1, 1994, and superseded the 1988 Canada–United States Free Trade Agreement between the United States and Canada.[2] The NAFTA trade bloc formed one of the largest trade blocs in the world by gross domestic product.

"NAFTA" redirects here. For other uses, see Nafta (disambiguation).
See also: United States–Mexico–Canada Agreement

North American Free Trade Agreement

  • Tratado de Libre Comercio de América del Norte  (Spanish)
  • Accord de Libre-échange Nord-Américain  (French)
1994–2020
Logo of the NAFTA Secretariat
Languages
TypeFree trade area
Member statesCanada
Mexico
United States
History 
• Effective
January 1, 1994
• USMCA in force
July 1, 2020
Area
• Total
21,578,137 km2 (8,331,365 sq mi)
• Water (%)
7.4
Population
• 2018 estimate
490,000,000
• Density
22.3/km2 (57.8/sq mi)
GDP (PPP)2018 estimate
• Total
$24.8 trillion[1]
• Per capita
$50,700
NAFTA GDP – 2012 : IMF – World Economic Outlook Databases (Oct 2013)

The impetus for a North American free trade zone began with U.S. president Ronald Reagan, who made the idea part of his 1980 presidential campaign. After the signing of the Canada–United States Free Trade Agreement in 1988, the administrations of U.S. president George H. W. Bush, Mexican President Carlos Salinas de Gortari, and Canadian prime minister Brian Mulroney agreed to negotiate what became NAFTA. Each submitted the agreement for ratification in their respective capitals in December 1992, but NAFTA faced significant opposition in both the United States and Canada. All three countries ratified NAFTA in 1993 after the addition of two side agreements, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC).

Passage of NAFTA resulted in the elimination or reduction of barriers to trade and investment between the U.S., Canada, and Mexico. The effects of the agreement regarding issues such as employment, the environment, and economic growth have been the subject of political disputes. Most economic analyses indicated that NAFTA was beneficial to the North American economies and the average citizen,[3][4][5] but harmed a small minority of workers in industries exposed to trade competition.[6][7] Economists held that withdrawing from NAFTA or renegotiating NAFTA in a way that reestablished trade barriers would have adversely affected the U.S. economy and cost jobs.[8][9][10] However, Mexico would have been much more severely affected by job loss and reduction of economic growth in both the short term and long term.[11]

After U.S. President Donald Trump took office in January 2017, he sought to replace NAFTA with a new agreement, beginning negotiations with Canada and Mexico. In September 2018, the United States, Mexico, and Canada reached an agreement to replace NAFTA with the United States–Mexico–Canada Agreement (USMCA), and all three countries had ratified it by March 2020. NAFTA remained in force until USMCA was implemented.[12] In April 2020, Canada and Mexico notified the U.S. that they were ready to implement the agreement.[13] The USMCA took effect on July 1, 2020, replacing NAFTA.

Negotiation, signing, ratification, and revision (1988–94)

Negotiation

The impetus for a North American free trade zone began with U.S. president Ronald Reagan, who made the idea part of his campaign when he announced his candidacy for the presidency in November 1979.[14] Canada and the United States signed the Canada–United States Free Trade Agreement (FTA) in 1988, and shortly afterward Mexican President Carlos Salinas de Gortari decided to approach U.S. president George H. W. Bush to propose a similar agreement in an effort to bring in foreign investment following the Latin American debt crisis.[14] As the two leaders began negotiating, the Canadian government under Prime Minister Brian Mulroney feared that the advantages Canada had gained through the Canada–US FTA would be undermined by a US–Mexican bilateral agreement, and asked to become a party to the US–Mexican talks.[15]

Signing
Back row, left to right: Mexican President Carlos Salinas de Gortari, U.S. President George H. W. Bush, and Canadian Prime Minister Brian Mulroney, at the initialing of the draft North American Free Trade Agreement in October 1992. In front are Mexican Secretary of Commerce and Industrial Development Jaime Serra Puche, United States Trade Representative Carla Hills, and Canadian Minister of International Trade Michael Wilson.

Following diplomatic negotiations dating back to 1990, the leaders of the three nations signed the agreement in their respective capitals on December 17, 1992.[16] The signed agreement then needed to be ratified by each nation's legislative or parliamentary branch.

Canada

The earlier Canada–United States Free Trade Agreement had been controversial and divisive in Canada, and featured as an issue in the 1988 Canadian election. In that election, more Canadians voted for anti-free trade parties (the Liberals and the New Democrats), but the split of the votes between the two parties meant that the pro-free trade Progressive Conservatives (PCs) came out of the election with the most seats and so took power. Mulroney and the PCs had a parliamentary majority and easily passed the 1987 Canada–US FTA and NAFTA bills. However, Mulroney was replaced as Conservative leader and prime minister by Kim Campbell. Campbell led the PC party into the 1993 election where they were decimated by the Liberal Party under Jean Chrétien, who campaigned on a promise to renegotiate or abrogate NAFTA. Chrétien subsequently negotiated two supplemental agreements with Bush, who had subverted the LAC[17] advisory process[18] and worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing of the implementation law to incoming president Bill Clinton.[19]

United States

Before sending it to the United States Senate, Clinton added two side agreements, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC), to protect workers and the environment, and to also allay the concerns of many House members. The U.S. required its partners to adhere to environmental practices and regulations similar to its own. After much consideration and emotional discussion, the U.S. House of Representatives passed the North American Free Trade Agreement Implementation Act on November 17, 1993, 234–200. The agreement's supporters included 132 Republicans and 102 Democrats. The bill passed the Senate on November 20, 1993, 61–38.[20] Senate supporters were 34 Republicans and 27 Democrats. Republican Representative David Dreier of California, a strong proponent of NAFTA since the Reagan Administration, played a leading role in mobilizing support for the agreement among Republicans in Congress and across the country.[21][22]

Clinton signed it into law on December 8, 1993; the agreement went into effect on January 1, 1994.[23][24] At the signing ceremony, Clinton recognized four individuals for their efforts in accomplishing the historic trade deal: Vice President Al Gore, Chairwoman of the Council of Economic Advisers Laura Tyson, Director of the National Economic Council Robert Rubin, and Republican Congressman David Dreier.[25] Clinton also stated that "NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement."[26] NAFTA replaced the previous Canada-US FTA.

Mexico

NAFTA (TLCAN in Spanish) was approved by the Mexican Senate on November 22, 1993, and was published in the Official Gazette of the Federation on December 8, 1993.[27]

The decree implementing NAFTA and the various changes to accommodate NAFTA in Mexican law was promulgated on December 14, 1993, with entry into force on January 1, 1994.[27]

Provisions

The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico. The implementation of NAFTA on January 1, 1994, brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.–Mexico tariffs were to be eliminated except for some U.S. agricultural exports to Mexico, to be phased out within 15 years.[28] Most U.S.–Canada trade was already duty-free. NAFTA also sought to eliminate non-tariff trade barriers and to protect the intellectual property rights on traded products.

Chapter 20 provided a procedure for the international resolution of disputes over the application and interpretation of NAFTA. It was modeled after Chapter 69 of the Canada–United States Free Trade Agreement.[29]

NAFTA is, in part, implemented by Technical Working Groups composed of government officials from each of the three partner nations.[30]

Intellectual property

The North American Free Trade Agreement Implementation Act made some changes to the copyright law of the United States, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within the NAFTA nations) on certain motion pictures which had entered the public domain.[31][32]

Environment

The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the commission was mandated to conduct ongoing ex post environmental assessment,[33] It created one of the first ex post frameworks for environmental assessment of trade liberalization, designed to produce a body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a "race to the bottom" in environmental regulation among the three countries, or that NAFTA would pressure governments to increase their environmental protections.[34] The CEC has held four symposia to evaluate the environmental impacts of NAFTA and commissioned 47 papers on the subject from leading independent experts.[35]

Labor

Proponents of NAFTA in the United States emphasized that the pact was a free-trade, not an economic-community, agreement.[36] The freedom of movement it establishes for goods, services and capital did not extend to labor. In proposing what no other comparable agreement had attempted—to open industrialized countries to "a major Third World country"[37]--NAFTA eschewed the creation of common social and employment policies. The regulation of the labor market and or the workplace remained the exclusive preserve of the national governments.[36]

A "side agreement" on enforcement of existing domestic labor law, concluded in August 1993, the North American Agreement on Labour Cooperation (NAALC),[38] was highly circumscribed. Focused on health and safety standards and on child labor law, it excluded issues of collective bargaining, and its "so-called [enforcement] teeth" were accessible only at the end of "a long and tortuous" disputes process".[39] Commitments to enforce existing labor law also raised issues of democratic practice.[36] The Canadian anti-NAFTA coalition, Pro-Canada Network, suggested that guarantees of minimum standards would be "meaningless" without "broad democratic reforms in the [Mexican] courts, the unions, and the government".[40] Later assessment, however, did suggest that NAALC's principles and complaint mechanisms did "create new space for advocates to build coalitions and take concrete action to articulate challenges to the status quo and advance workers’ interests".[41]

Agriculture

From the earliest negotiation, agriculture was a controversial topic within NAFTA, as it has been with almost all free trade agreements signed within the WTO framework. Agriculture was the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The Canada–U.S. agreement contained significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico–U.S. pact allowed for a wider liberalization within a framework of phase-out periods (it was the first North–South FTA on agriculture to be signed).

Transportation infrastructure

NAFTA established the CANAMEX Corridor for road transport between Canada and Mexico, also proposed for use by rail, pipeline, and fiber optic telecommunications infrastructure. This became a High Priority Corridor under the U.S. Intermodal Surface Transportation Efficiency Act of 1991.

Chapter 11 – investor-state dispute settlement procedures

Another contentious issue was the investor-state dispute settlement obligations contained in Chapter 11 of NAFTA.[42] Chapter 11 allowed corporations or individuals to sue Mexico, Canada or the United States for compensation when actions taken by those governments (or by those for whom they are responsible at international law, such as provincial, state, or municipal governments) violated international law.[43]

This chapter has been criticized by groups in the United States,[44] Mexico,[45] and Canada[46] for a variety of reasons, including not taking into account important social and environmental[47] considerations. In Canada, several groups, including the Council of Canadians, challenged the constitutionality of Chapter 11. They lost at the trial level[48] and the subsequent appeal.[49]

Methanex Corporation, a Canadian corporation, filed a US$970 million suit against the United States. Methanex claimed that a California ban on methyl tert-butyl ether (MTBE), a substance that had found its way into many wells in the state, was hurtful to the corporation's sales of methanol. The claim was rejected, and the company was ordered to pay US$3 million to the U.S. government in costs, based on the following reasoning: "But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation."[50]

In another case, Metalclad, an American corporation, was awarded US$15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste landfill it intended to construct in Guadalcázar, San Luis Potosí. The construction had already been approved by the federal government with various environmental requirements imposed (see paragraph 48 of the tribunal decision). The NAFTA panel found that the municipality did not have the authority to ban construction on the basis of its environmental concerns.[51]

In Eli Lilly and Company v. Government of Canada[52] the plaintiff presented a US$500 million claim for the way Canada requires usefulness in its drug patent legislation.[53] Apotex is sued the U.S. for US$520 million because of opportunity it says it lost in an FDA generic drug decision.[53]

Lone Pine Resources Inc. v. Government of Canada[54] filed a US$250 million claim against Canada, accusing it of "arbitrary, capricious and illegal" behaviour,[55] because Quebec intends to prevent fracking exploration under the St. Lawrence Seaway.[53]

Lone Pine Resources is incorporated in Delaware but headquartered in Calgary,[55] and had an initial public offering on the NYSE May 25, 2011, of 15 million shares each for $13, which raised US$195 million.[56]

Barutciski acknowledged "that NAFTA and other investor-protection treaties create an anomaly in that Canadian companies that have also seen their permits rescinded by the very same Quebec legislation, which expressly forbids the paying of compensation, do not have the right (to) pursue a NAFTA claim", and that winning "compensation in Canadian courts for domestic companies in this case would be more difficult since the Constitution puts property rights in provincial hands".[55]

A treaty with China would extend similar rights to Chinese investors, including SOEs.[55]

Chapter 19 – countervailing duty

NAFTA's Chapter 19 was a trade dispute mechanism which subjects antidumping and countervailing duty (AD/CVD) determinations to binational panel review instead of, or in addition to, conventional judicial review.[57] For example, in the United States, review of agency decisions imposing antidumping and countervailing duties are normally heard before the U.S. Court of International Trade, an Article III court. NAFTA parties, however, had the option of appealing the decisions to binational panels composed of five citizens from the two relevant NAFTA countries.[57] The panelists were generally lawyers experienced in international trade law. Since NAFTA did not include substantive provisions concerning AD/CVD, the panel was charged with determining whether final agency determinations involving AD/CVD conformed with the country's domestic law. Chapter 19 was an anomaly in international dispute settlement since it did not apply international law, but required a panel composed of individuals from many countries to re-examine the application of one country's domestic law.

A Chapter 19 panel was expected to examine whether the agency's determination was supported by "substantial evidence". This standard assumed significant deference to the domestic agency. Some of the most controversial trade disputes in recent years, such as the U.S.–Canada softwood lumber dispute, have been litigated before Chapter 19 panels.

Decisions by Chapter 19 panels could be challenged before a NAFTA extraordinary challenge committee. However, an extraordinary challenge committee did not function as an ordinary appeal.[57] Under NAFTA, it only vacated or remanded a decision if the decision involveed a significant and material error that threatens the integrity of the NAFTA dispute settlement system. Since January 2006, no NAFTA party had successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.

Adjudication

The roster of NAFTA adjudicators included many retired judges, such as Alice Desjardins, John Maxwell Evans, Constance Hunt, John Richard, Arlin M. Adams, Susan Getzendanner, George C. Pratt, Charles B. Renfrew and Sandra Day O'Connor.

Impact

Historical context
Obama, Peña Nieto and Harper at the IX North American Leaders' Summit (informally known as the Three Amigos Summit) in Toluca

In 2008, Canadian exports to the United States and Mexico were at $381.3 billion, with imports at $245.1 billion.[58] According to a 2004 article by University of Toronto economist Daniel Trefler, NAFTA produced a significant net benefit to Canada in 2003, with long-term productivity increasing by up to 15 percent in industries that experienced the deepest tariff cuts.[59] While the contraction of low-productivity plants reduced employment (up to 12 percent of existing positions), these job losses lasted less than a decade; overall, unemployment in Canada has fallen since the passage of the act. Commenting on this trade-off, Trefler said that the critical question in trade policy is to understand "how freer trade can be implemented in an industrialized economy in a way that recognizes both the long-run gains and the short-term adjustment costs borne by workers and others".[60]

A study in 2007 found that NAFTA had "a substantial impact on international trade volumes, but a modest effect on prices and welfare".[61]

According to a 2012 study, with reduced NAFTA trade tariffs, trade with the United States and Mexico only increased by a modest 11% in Canada compared to an increase of 41% for the U.S. and 118% for Mexico.[62]:3 Moreover, the U.S. and Mexico benefited more from the tariff reductions component, with welfare increases of 0.08% and 1.31%, respectively, with Canada experiencing a decrease of 0.06%.[62]:4

Current issues

According to a 2017 report by the New York City based public policy think tank report, Council on Foreign Relations (CFR), bilateral trade in agricultural products tripled in size from 1994 to 2017 and is considered to be one of the largest economic effects of NAFTA on U.S.-Canada trade with Canada becoming the U.S. agricultural sectors' leading importer.[63] Canadian fears of losing manufacturing jobs to the United States did not materialize with manufacturing employment holding "steady". However, with Canada's labour productivity levels at 72% of U.S. levels, the hopes of closing the "productivity gap" between the two countries were also not realized.[63]

According to a 2018 Sierra Club report, Canada's commitments under NAFTA and the Paris agreement conflicted. The Paris commitments were voluntary, and NAFTA's were compulsory.[64]

According to a 2018 report by Gordon Laxter published by the Council of Canadians, NAFTA's Article 605, energy proportionality rule ensures that Americans had "virtually unlimited first access to most of Canada's oil and natural gas" and Canada could not reduce oil, natural gas and electricity exports (74% its oil and 52% its natural gas) to the U.S., even if Canada was experiencing shortages. These provisions that seemed logical when NAFTA was signed in 1993 are no longer appropriate.[65]:4 The Council of Canadians promoted environmental protection and was against NAFTA's role in encouraging development of the tar sands and fracking.[65]

US President Donald Trump, angered by Canada's dairy tax of "almost 300%", threatened to leave Canada out of the NAFTA.[66] Since 1972, Canada has been operating on a "supply management" system, which the United States is attempting to pressure it out of, specifically focusing on the dairy industry. However, this has not yet taken place, as Quebec, which holds approximately half the country's dairy farms, still supports supply management.[66]

Mexico
Main article: Effects of NAFTA on Mexico
Former President Enrique Peña Nieto with Prime Minister Justin Trudeau of Canada and then-President Barack Obama of the United States at the 2016 North American Leaders' Summit

Maquiladoras (Mexican assembly plants that take in imported components and produce goods for export) became the landmark of trade in Mexico. They moved to Mexico from the United States, hence the debate over the loss of American jobs. Income in the maquiladora sector had increased 15.5% since the implementation of NAFTA in 1994.[67] Other sectors also benefited from the free trade agreement, and the share of exports to the U.S. from non-border states increased in the last five years while the share of exports from border states decreased. This allowed for rapid growth in non-border metropolitan areas such as Toluca, León, and Puebla, which were all larger in population than Tijuana, Ciudad Juárez, and Reynosa.

The overall effect of the Mexico–U.S. agricultural agreement is disputed. Mexico did not invest in the infrastructure necessary for competition, such as efficient railroads and highways. This resulted in more difficult living conditions for the country's poor. Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.[68]

One of the most affected agricultural sectors was the meat industry. Mexico went from a small player in the pre-1994 U.S. export market to the second largest importer of U.S. agricultural products in 2004, and NAFTA may have been a major catalyst for this change. Free trade removed the hurdles that impeded business between the two countries, so Mexico provided a growing market for meat for the U.S., and increased sales and profits for the U.S. meat industry. A coinciding noticeable increase in the Mexican per capita GDP greatly changed meat consumption patterns as per capita meat consumption grew.[69]

Production of corn in Mexico increased since NAFTA. However, internal demand for corn had increased beyond Mexico's supply to the point where imports became necessary, far beyond the quotas Mexico originally negotiated.[70] Zahniser & Coyle pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, but through a program of subsidies expanded by former president Vicente Fox, production remained stable since 2000.[71] Reducing agricultural subsidies, especially corn subsidies, was suggested as a way to reduce harm to Mexican farmers.[72]

A 2001 Journal of Economic Perspectives review of the existing literature found that NAFTA was a net benefit to Mexico.[5] By the year 2003, 80% of the commerce in Mexico was executed only with the U.S. The commercial sales surplus, combined with the deficit with the rest of the world, created a dependency in Mexico's exports. These effects were evident in the 2001 recession, which resulted in either a low rate or a negative rate in Mexico's exports.[73]

A 2015 study found that Mexico's welfare increased by 1.31% as a result of the NAFTA tariff reductions and that Mexico's intra-bloc trade increased by 118%.[62] Inequality and poverty fell in the most globalization-affected regions of Mexico.[74] 2013 and 2015 studies showed that Mexican small farmers benefited more from NAFTA than large-scale farmers.[75][76]

NAFTA had also been credited with the rise of the Mexican middle class. A Tufts University study found that NAFTA lowered the average cost of basic necessities in Mexico by up to 50%.[77] This price reduction increased cash-on-hand for many Mexican families, allowing Mexico to graduate more engineers than Germany each year.[78]

Growth in new sales orders indicated an increase in demand for manufactured products, which resulted in expansion of production and a higher employment rate to satisfy the increment in the demand. The growth in the maquiladora industry and in the manufacturing industry was of 4.7% in August 2016.[79] Three quarters of the imports and exports are with the U.S.

Tufts University political scientist Daniel W. Drezner argued that NAFTA made it easier for Mexico to transform to a real democracy and become a country that views itself as North American. This has boosted cooperation between the United States and Mexico.[80]

United States

Economists generally agreed that the United States economy benefited overall from NAFTA as it increased trade.[81][82] In a 2012 survey of the Initiative on Global Markets' Economic Experts Panel, 95% of the participants said that, on average, U.S. citizens benefited from NAFTA while none said that NAFTA hurt US citizens, on average.[4] A 2001 Journal of Economic Perspectives review found that NAFTA was a net benefit to the United States.[5] A 2015 study found that US welfare increased by 0.08% as a result of NAFTA tariff reductions, and that US intra-bloc trade increased by 41%.[62]

A 2014 study on the effects of NAFTA on US trade jobs and investment found that between 1993 and 2013, the US trade deficit with Mexico and Canada increased from $17.0 to $177.2 billion, displacing 851,700 US jobs.[83]

In 2015, the Congressional Research Service concluded that the "net overall effect of NAFTA on the US economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of US GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment among their economies." The report also estimated that NAFTA added $80 billion to the US economy since its implementation, equivalent to a 0.5% increase in US GDP.[84]

The US Chamber of Commerce credited NAFTA with increasing U.S. trade in goods and services with Canada and Mexico from $337 billion in 1993 to $1.2 trillion in 2011, while the AFL–CIO blamed the agreement for sending 700,000 American manufacturing jobs to Mexico over that time.[85]

University of California, San Diego economics professor Gordon Hanson said that NAFTA helped the US compete against China and therefore saved US jobs.[86][87] While some jobs were lost to Mexico as a result of NAFTA, considerably more would have been lost to China if not for NAFTA.[86][87]

Trade balances

The US had a trade surplus with NAFTA countries of $28.3 billion for services in 2009 and a trade deficit of $94.6 billion (36.4% annual increase) for goods in 2010. This trade deficit accounted for 26.8% of all US goods trade deficit.[88] A 2018 study of global trade published by the Center for International Relations identified irregularities in the patterns of trade of NAFTA ecosystem using network theory analytical techniques. The study showed that the US trade balance was influenced by tax avoidance opportunities provided in Ireland.[89]

A study published in the August 2008 issue of the American Journal of Agricultural Economics, found NAFTA increased US agricultural exports to Mexico and Canada, even though most of the increase occurred a decade after its ratification. The study focused on the effects that gradual "phase-in" periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increases in members' agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.[90]

Investment

The U.S. foreign direct investment (FDI) in NAFTA countries (stock) was $327.5 billion in 2009 (latest data available), up 8.8% from 2008.[88] The US direct investment in NAFTA countries was in non-bank holding companies and the manufacturing, finance/insurance, and mining sectors.[88] The foreign direct investment of Canada and Mexico in the United States (stock) was $237.2 billion in 2009 (the latest data available), up 16.5% from 2008.[88][91]

Economy and jobs
Main article: NAFTA's effect on United States employment

In their May 24, 2017 report, the Congressional Research Service (CRS) wrote that the economic impacts of NAFTA on the U.S. economy were modest. In a 2015 report, the Congressional Research Service summarized multiple studies as follows: "In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment among their economies."[92]:2

Many American small businesses depended on exporting their products to Canada or Mexico under NAFTA. According to the U.S. Trade Representative, this trade supported over 140,000 small- and medium-sized businesses in the US.[93]

According to University of California, Berkeley professor of economics Brad DeLong, NAFTA had an insignificant impact on US manufacturing.[94] The adverse impact on manufacturing was exaggerated in US political discourse according to DeLong[94] and Harvard economist Dani Rodrik.[95]

According to a 2013 article by Jeff Faux published by the Economic Policy Institute, California, Texas, Michigan and other states with high concentrations of manufacturing jobs were most affected by job loss due to NAFTA.[96] According to a 2011 article by EPI economist Robert Scott, about 682,900 U.S. jobs were "lost or displaced" as a result of the trade agreement.[97] More recent studies agreed with reports by the Congressional Research Service that NAFTA only had a modest impact on manufacturing employment and automation explained 87% of the losses in manufacturing jobs.[98]

Environment
See also: Commission for Environmental Cooperation

According to a study in the Journal of International Economics, NAFTA reduced pollution emitted by the US manufacturing sector: "On average, nearly two-thirds of the reductions in coarse particulate matter (PM10) and sulfur dioxide (SO2) emissions from the U.S. manufacturing sector between 1994 and 1998 can be attributed to trade liberalization following NAFTA."[99]

According to the Sierra Club, NAFTA contributed to large-scale, export-oriented farming, which led to the increased use of fossil fuels, pesticides and GMO.[100] NAFTA also contributed to environmentally destructive mining practices in Mexico.[100] It prevented Canada from effectively regulating its tar sands industry, and created new legal avenues for transnational corporations to fight environmental legislation.[100] In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA's measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers threatened to discourage more vigorous environmental policy.[101] The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada.[102]

Mobility of persons

According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (October 2005 – September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status.[103] Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier).

According to the International Organization for Migration, deaths of migrants have been on the rise worldwide with 5,604 deaths in 2016.[104] An increased number of undocumented farmworkers in California may be due to the initial passing of NAFTA.[105]

Canadian authorities estimated that on December 1, 2006, 24,830 U.S. citizens and 15,219 Mexican citizens were in Canada as "foreign workers". These numbers include both entrants under NAFTA and those who entered under other provisions of Canadian immigration law.[106] New entries of foreign workers in 2006 totalled 16,841 U.S. citizens and 13,933 Mexicans.[107]

Disputes and controversies

1992 U.S. presidential candidate Ross Perot

In the second 1992 presidential debate, Ross Perot argued:

We have got to stop sending jobs overseas. It's pretty simple: If you're paying $12, $13, $14 an hour for factory workers and you can move your factory south of the border, pay a dollar an hour for labor, ... have no health care—that's the most expensive single element in making a car—have no environmental controls, no pollution controls and no retirement, and you don't care about anything but making money, there will be a giant sucking sound going south. ... when [Mexico's] jobs come up from a dollar an hour to six dollars an hour, and ours go down to six dollars an hour, and then it's leveled again. But in the meantime, you've wrecked the country with these kinds of deals.[108]

Perot ultimately lost the election, and the winner, Bill Clinton, supported NAFTA, which went into effect on January 1, 1994.

In 1996, the gasoline additive MMT was brought to Canada by Ethyl Corporation, an American company when the Canadian federal government banned imports of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million,[109] from the Canadian federal government as well as the Canadian provinces under the Agreement on Internal Trade (AIT). They argued that the additive had not been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT,[110] the Canadian federal government repealed the ban and settled with the American company for US$13 million.[111] Studies by Health and Welfare Canada (now Health Canada) on the health effects of MMT in fuel found no significant health effects associated with exposure to these exhaust emissions. Other Canadian researchers and the U.S. Environmental Protection Agency disagreed citing studies that suggested possible nerve damage.[112]

The United States and Canada argued for years over the United States' 27% duty on Canadian softwood lumber imports. Canada filed many motions to have the duty eliminated and the collected duties returned to Canada.[113] After the United States lost an appeal before a NAFTA panel, spokesperson for U.S. Trade Representative Rob Portman responded by saying: "we are, of course, disappointed with the [NAFTA panel's] decision, but it will have no impact on the anti-dumping and countervailing duty orders."[114] On July 21, 2006, the United States Court of International Trade found that imposition of the duties was contrary to U.S. law.[115][116]

Change in income trust taxation not expropriation

On October 30, 2007, American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under NAFTA, claiming thousands of U.S. investors lost a total of $5 billion in the fall-out from the Conservative Government's decision the previous year to change the tax rate on income trusts in the energy sector. On April 29, 2009, a determination was made that this change in tax law was not expropriation.[117]

Impact on Mexican farmers

Several studies rejected NAFTA responsibility for depressing the incomes of poor corn farmers. The trend existed more than a decade before NAFTA existed. Also, maize production increased after 1994, and there wasn't a measurable impact on the price of Mexican corn because of subsidized corn from the United States. The studies agreed that the abolition of U.S. agricultural subsidies would benefit Mexican farmers.[118]

Zapatista Uprising in Chiapas, Mexico
Further information: Zapatista Army of National Liberation

Preparations for NAFTA included cancellation of Article 27 of Mexico's constitution, the cornerstone of Emiliano Zapata's revolution in 1910–1919. Under the historic Article 27, indigenous communal landholdings were protected from sale or privatization. However, this barrier to investment was incompatible with NAFTA. Indigenous farmers feared the loss of their remaining land and cheap imports (substitutes) from the US. The Zapatistas labelled NAFTA a "death sentence" to indigenous communities all over Mexico and later declared war on the Mexican state on January 1, 1994, the day NAFTA came into force.[119]

Criticism from 2016 U.S. presidential candidates

In a 60 Minutes interview in September 2015, 2016 presidential candidate Donald Trump called NAFTA "the single worst trade deal ever approved in [the United States]",[120] and said that if elected, he would "either renegotiate it, or we will break it".[121][122] Juan Pablo Castañón, president of the trade group Consejo Coordinador Empresarial, expressed concern about renegotiation and the willingness to focus on the car industry.[123] A range of trade experts said that pulling out of NAFTA would have a range of unintended consequences for the United States, including reduced access to its biggest export markets, a reduction in economic growth, and higher prices for gasoline, cars, fruits, and vegetables.[124] Members of the private initiative in Mexico noted that to eliminate NAFTA, many laws must be adapted by the U.S. Congress. The move would also eventually result in legal complaints by the World Trade Organization.[123] The Washington Post noted that a Congressional Research Service review of academic literature concluded that the "net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP".[62]

Democratic candidate Bernie Sanders, opposing the Trans-Pacific Partnership trade agreement, called it "a continuation of other disastrous trade agreements, like NAFTA, CAFTA, and permanent normal trade relations with China". He believes that free trade agreements have caused a loss of American jobs and depressed American wages. Sanders said that America needs to rebuild its manufacturing base using American factories for well-paying jobs for American labor rather than outsourcing to China and elsewhere.[125][126][127]

Policy of the Trump administration
Main article: United States–Mexico–Canada Agreement

Renegotiation
Chrystia Freeland, Luis Videgaray Caso and Rex Tillerson in Mexico City in 2018

Shortly after his election, U.S. President Donald Trump said he would begin renegotiating the terms of NAFTA, to resolve trade issues he had campaigned on. The leaders of Canada and Mexico have indicated their willingness to work with the Trump administration.[128] Although vague on the exact terms he seeks in a renegotiated NAFTA, Trump threatened to withdraw from it if negotiations fail.[129]

In July 2017, the Trump administration provided a detailed list of changes that it would like to see to NAFTA.[130] The top priority was a reduction in the United States' trade deficit.[130][131] The administration also called for the elimination of provisions that allowed Canada and Mexico to appeal duties imposed by the United States and limited the ability of the United States to impose import restrictions on Canada and Mexico.[130] The list also alleged subsidized state-owned enterprises and currency manipulation.[130][132]

According to Chad Bown of the Peterson Institute for International Economics, the Trump administration's list "is very consistent with the president's stance on liking trade barriers, liking protectionism. This makes NAFTA in many respects less of a free-trade agreement."[130] The concerns expressed by the US Trade Representative over subsidized state-owned enterprises and currency manipulation are not thought to apply to Canada and Mexico, but rather to be designed to send a message to countries beyond North America.[130] Jeffrey Schott of the Peterson Institute for International Economics noted that it would not be possible to conclude renegotiations quickly while also addressing all the concerns on the list.[132] He also said that it would be difficult to do anything about trade deficits.[132]

An October 2017 op-ed in Toronto's The Globe and Mail questioned whether the United States wanted to re-negotiate the agreement or planned to walk away from it no matter what, noting that newly appointed American ambassador Kelly Knight Craft is married to the owner of Alliance Resource Partners, a big US coal operation. Canada is implementing a carbon plan, and there is also the matter of a sale of Bombardier jets. "The Americans inserted so many poison pills into last week's talks in Washington that they should have been charged with murder", wrote the columnist, John Ibbitson.[133]

"A number of the proposals that the United States has put on the table have little or no support from the U.S. business and agriculture community. It isn't clear who they're intended to benefit", said John Murphy, vice-president of the U.S. Chamber of Commerce.[134] Pat Roberts, the senior US senator from Kansas, called for an outcry against Trump anti-NAFTA moves, saying the "issues affect real jobs, real lives and real people". Kansas is a major agricultural exporter, and farm groups warn that just threatening to leave NAFTA might cause buyers to minimize uncertainty by seeking out non-US sources.[134]

A fourth round of talks included a U.S. demand for a sunset clause that would end the agreement in five years, unless the three countries agreed to keep it in place, a provision U.S. Commerce Secretary Wilbur Ross has said would allow the countries to kill the deal if it was not working. Canadian Prime Minister Justin Trudeau met with the House Ways and Means Committee, since Congress would have to pass legislation rolling back the treaty's provisions if Trump tries to withdraw from the pact.[135]

From June to late August 2018, Canada was sidelined as the United States and Mexico held bilateral talks.[136] On 27 August 2018 Mexico and the United States announced they had reached a bilateral understanding on a revamped NAFTA trade deal that included provisions that would boost automobile production in the U.S.,[137] a 10-year data protection period against generic drug production on an expanded list of products that benefits pharmaceutical companies, particularly US makers producers of high-cost biologic drugs, a sunset clause—a 16-year expiration date with regular 6-year reviews to possibly renew the agreement for additional 16-year terms, and an increased de minimis threshold in which Mexico raised the de minimis value to $100 from $50 regarding online duty- and tax-free purchases.[138][139] According to an August 30 article in The Economist, Mexico agreed to increase the rules of origin threshold which would mean that 75% as opposed to the previous 62.5% of a vehicle's components must be made in North America to avoid tariffs.[140] Since car makers currently import less expensive components from Asia, under the revised agreement, consumers would pay more for vehicles.[141] As well, approximately 40 to 45 per cent of vehicle components must be made by workers earning a minimum of US$16 per hour, in contrast to the current US$2.30 an hour that a worker earns on average in a Mexican car manufacturing plant.[140][141] The Economist described this as placing "Mexican carmaking into a straitjacket".[140]

Trudeau and Canadian Foreign Minister Chrystia Freeland announced that they were willing to join the agreement if it was in Canada's interests.[142] Freeland returned from her European diplomatic tour early, cancelling a planned visit to Ukraine, to participate in NAFTA negotiations in Washington, D.C. in late August.[143] According to an August 31 Canadian Press published in the Ottawa Citizen, key issues under debate included supply management, Chapter 19, pharmaceuticals, cultural exemption, the sunset clause, and de minimis thresholds.[139]

Although President Donald Trump warned Canada on September 1 that he would exclude them from a new trade agreement unless Canada submitted to his demands, it is not clear that the Trump administration has the authority to do so without the approval of Congress.[144]:34–6[145][146][147] According to Congressional Research Service (CRS) reports, one published in 2017 and another on July 26, 2018, it is likely that congressional approval to make substantive changes to NAFTA would have to be secured by President Trump before the changes could be implemented.[144]:34–6[148]

On September 30, 2018, the day of the deadline for the Canada–U.S. negotiations, a preliminary deal between the two countries was reached, thus preserving the trilateral pact when the Trump administration submits the agreement before Congress.[149] The new name for the agreement was the "United States—Mexico—Canada Agreement" (USMCA) and came into effect on July 1, 2020.[150][151]

Impact of withdrawing from NAFTA

Following Donald Trump's election to the presidency, a range of trade experts said that pulling out of NAFTA as Trump proposed would have a range of unintended consequences for the U.S., including reduced access to the U.S.'s biggest export markets, a reduction in economic growth, and increased prices for gasoline, cars, fruits, and vegetables.[9] The worst affected sectors would be textiles, agriculture and automobiles.[10][152]

According to Tufts University political scientist Daniel W. Drezner, the Trump administration's desire to return relations with Mexico to the pre-NAFTA era are misguided. Drezner argued that NAFTA made it easier for Mexico to transform to a real democracy and become a country that views itself as North American. If Trump acts on many of the threats that he has made against Mexico, it is not inconceivable that Mexicans would turn to left-wing populist strongmen, as several South American countries have. At the very least, US-Mexico relations would worsen, with adverse implications for cooperation on border security, counterterrorism, drug-war operations, deportations and managing Central American migration.[80]

According to Chad P. Bown (senior fellow at the Peterson Institute for International Economics), "a renegotiated NAFTA that would reestablish trade barriers is unlikely to help workers who lost their jobs—regardless of the cause—take advantage of new employment opportunities".[153]

According to Harvard economist Marc Melitz, "recent research estimates that the repeal of NAFTA would not increase car production in the United States".[8] Melitz noted that this would cost manufacturing jobs.[8]

Trans-Pacific Partnership

If the original Trans-Pacific Partnership (TPP) had come into effect, existing agreements such as NAFTA would be reduced to those provisions that do not conflict with the TPP, or that require greater trade liberalization than the TPP.[154] However, only Canada and Mexico would have the prospect of becoming members of the TPP after U.S. President Donald Trump withdrew the United States from the agreement in January 2017. In May 2017, the 11 remaining members of the TPP, including Canada and Mexico, agreed to proceed with a revised version of the trade deal without U.S. participation.[155]

American public opinion on NAFTA
Main article: US public opinion on the North American Free Trade Agreement

The American public was largely divided on its view of the North American Free Trade Agreement (NAFTA), with a wide partisan gap in beliefs. In a February 2018 Gallup Poll, 48% of Americans said NAFTA was good for the U.S., while 46% said it was bad.[156]

According to a journal from the Law and Business Review of the Americas (LBRA), U.S. public opinion of NAFTA centers around three issues: NAFTA's impact on the creation or destruction of American jobs, NAFTA's impact on the environment, and NAFTA's impact on immigrants entering the U.S.[157]

After President Trump's election in 2016, support for NAFTA became very polarized between Republicans and Democrats. Donald Trump expressed negative views of NAFTA, calling it "the single worst trade deal ever approved in this country".[158] Republican support for NAFTA decreased from 43% support in 2008 to 34% in 2017. Meanwhile, Democratic support for NAFTA increased from 41% support in 2008 to 71% in 2017.[159]

The political gap was especially large in concern to views on free trade with Mexico. As opposed to a favorable view of free trade with Canada, whom 79% of American described as a fair trade partner, only 47% of Americans believed Mexico practices fair trade. The gap widened between Democrats and Republicans: 60% of Democrats believed Mexico is practicing fair trade, while only 28% of Republicans did. This was the highest level from Democrats and the lowest level from Republicans ever recorded by the Chicago Council Survey. Republicans had more negative views of Canada as a fair trade partner than Democrats as well.[159]

NAFTA had strong support from young Americans. In a February 2017 Gallup poll, 73% of Americans aged 18–29 said NAFTA was good for the U.S, showing higher support than any other U.S. age group.[156] It also had slightly stronger support from unemployed Americans than from employed Americans.[160]

See also

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