North American Free Trade Agreement: Nafta

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North American Free Trade Agreement: NAFTA

Introduction

I believe that the North American Free Trade Agreement was an inevitable step in the evolution of the United States economic policy. The globilization of the world economy due to technological advances in computers and communications have shrunk the world to the point where no single country acting alone can effectively compete on the foreign market. Even the United States, with its vast resources, can not have an absolute advantage in all thing that it produces. It does not have unlimited factors of endowments and must do its best to make these available to the companies within its borders.

There are two basic sides to the argument over the North American Free Trade Agreement. The Pro-NAFTA side views the treaty as a way to provide a large, efficient production base for the entire geopolitical area. This would result in lower cost to consumers and an increase in exports to Mexico and Canada. The multiplier effect would then take place producing growth in all areas. The Anti-NAFTA group feels that Mexico will be an unequal partner due to the lower wage rates of the Mexican populace, causing the loss of thousands of jobs in the United States and Canada. Environmentalist fear that pollution will spread across the continent. Farmers fear that produce grown in Mexico will be contaminated from pesticides banned in the United States. These are but a few of the arguments for and against NAFTA.

What does NAFTA mean

A Free Trade Area is, by definition, an area where all barriers to trade are lifted. This is not the case with regards to NAFTA at this point. Currently most of the trade barriers between the United States and Canada are lifted but those with Mexico have largely been kept in place. This is an obvious disparity on the part of the Mexican government but is due largely to the proportional loss of income to the governments in each country. The Gross Domestic Product per individual in Mexico is one seventh of the other two countries. Therefore, the loss of revenue would have a major impact on the daily life of its population and the operation of the government . Never before has a major economic power like the United States considered a free trade area with an under-developed third world country.

The major difference between a Free Trade Area and Common Market is that a Free Trade Area primarily deals with trade, while a Common Market has this in addition to no barriers on factors of production and a common external trade policy.

While on the surface it seems that a free trade area would always be a good thing, it is easier said then done. The majority of people that oppose NAFTA do so because of the potential for loss of employment. Mexico with its cheap work force, will tend to make manufactures requiring extensive manual labor more likely to move to the lower cost area. A loss of sovereignty may also be a stumbling block, since some economic policy decisions are taken out of the governing bodies' hands.

Another factor is the extent of trade creation versus trade diversion. The difference is if high cost domestic producers are replaced by low cost producers within the trade area then trade creation occurs. If trade diversion occurs, it would have a major impact on consumer prices. This practice is evident in the textile industry and will be discussed later.

History of NAFTA

In 1988, the United States and Canada agreed to enter into a free trade agreement. This went into effect on January 1, 1989 and was widely accepted as a logical course of action. Canada is a highly developed nation and has a lot in common with the United States. Its per capita income and hourly wages are equivalent to the U.S. and has long been considered our brother to the north. Then in 1991, Mexico entered into talks with Canada and the United States that concluded on 17 December 1992. The treaty was...
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