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North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) is a comprehensive economic and trade agreement that establishes a free-trade area encompassing Canada, Mexico, and the United States. NAFTA is structured as three separate bilateral agreements: one between Canada and the United States, a second between Mexico and the United States, and a third between Canada and Mexico. The first accord, the Canada-U.S. Free Trade Agreement (CUSTA), took effect on January 1, 1989, and was subsumed by NAFTA. The second and third agreements are embodied in NAFTA itself, which took effect on January 1, 1994. This agreement removed most barriers to trade and investment among the United States, Canada, and Mexico.

NAFTA covers much more than tariffs and quotas. The agreement also establishes key principles regarding the treatment of foreign investors, including a commitment from each NAFTA country to treat investors from other member countries no less favorably than its own domestic investors. In addition, the accord prohibits the imposition of certain performance requirements, such as a minimum amount of domestic content in production, on foreign investors. These provisions reinforce similar changes that Mexico made to its foreign investment laws prior to NAFTA.

From 1993 to 2007, trade among the NAFTA nations more than tripled, from $297 billion to $930 billion. Business investment in the United States has risen by 117 percent since 1993, compared to a 45 percent increase between 1979 and 1993. U.S. employment rose from 110.8 million people in 1993 to 137.6 million in 2007, an increase of 24 percent. The average unemployment rate was 5.1 percent in the period 1994-2007, compared to 7.1 percent during the period 1980-1993. U.S. manufacturing output rose by 58 percent between 1993 and 2006, as compared to 42 percent between 1980 and 1993. Manufacturing exports in 2007 reached an all time high with a value of $982 billion. US business sector real hourly compensation rose by 1.5 percent each year between 1993 and 2007, for a total of 23.6 percent over the full period. During 1979-1993, the annual rate of real hourly compensation rose by 0.7 percent each year, or 11 percent over the full 14-year period.

Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008. The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas, were removed by January 1, 1998.

Implementation of the North American Free Trade Agreement is now complete. On January 1, 2008, the last transitional agricultural trade restrictions established by NAFTA were removed, marking an end to a 14-year process in which Canada, Mexico, and the United States - the member countries of NAFTA - gradually removed thousands of barriers to regional agricultural trade. As a result, the NAFTA countries' agricultural economies are increasingly behaving as one market. Regional agricultural trade is growing across an increasingly broad range of products, additional cross-border investments are taking place in the region's processed food industry, changes in commodity prices are felt across international borders, and food safety issues in the NAFTA region sometimes have cross-border dimensions. U.S.-Mexico agricultural trade is continuing to grow for almost all commodities covered by the last set of transitional restrictions, even for products that were previously shielded by small barriers.

Market integration is the extent to which one or more formerly separated markets have combined to form a single market. Integration is evident in increased cross-border fl ows of goods, services, capital, and labor. Trade in goods consists not only of fi nal consumer products but also intermediate inputs and raw materials, as firms reorganize their activities around regional markets for both inputs and outputs, spurred in part by greater foreign direct investment (FDI). In addition, both government and private sector decisionmakers pursue greater institutional and policy coordination to encourage market integration.

Technological and institutional advancements in transportation and communications clearly spur this process. Geographic areas that once seemed remote become easily accessible, and are ultimately integrated economically. Also key to market integration is the elimination of policies-tariffs, quotas, import licensing, limits on the amount of foreign ownership in a particular fi rm or industry, and the differential treatment of foreign and domestic investors - that hinder international trade and investment. All of these policies were common in North America prior to CUSTA and NAFTA.

The benefi ts of market integration are many. In general, market integration enables agricultural producers and consumers throughout the newly integrated region to benefi t more fully from their relative strengths and to respond more efficiently to changing economic conditions. For producers, market integration opens new sales territories, sometimes enabling further exploitation of economies of scale. It gives producers access to potentially cheaper inputs and creates new opportunities for FDI. But market integration also exposes producers to new competition from producers in formerly isolated locations.

NAFTA has allowed the increased flow of illegal drugs and controlled substancesinto the United States from Mexico at accelerated rates. With the adoption of NAFTA, Mexican drug cartels have taken advantage of the increased cross-border commercial traffic. Since the formation of NAFTA, commercial truck crossings from Mexico into West Texas and New Mexico have risen 11.7%, from 666,225 trucks in 1999 to 744,407 in 2002. Pedestrian traffic has risen 55%, from 6.2 million in 1999 to 9.6 million in 2002.

Since coming to power in December 2000, Mexican President Vicente Fox continually expressed a willingness to pursue further North American integration beyond the North American Free Trade Agreement (NAFTA). At the Quebec City Summit of the Americas in 2001, for example, he declared his hope of moving toward a "North American Union" - an arrangement similar to the European Union (EU) that would involve a common currency, a customs union, new political institutions, the harmonization of a wide range of policies, and the establishment of a North American Regional Development Bank. The then Canadian Prime Minister Jean Chrétien received the proposal somewhat coolly.

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One Billion Americans: The Case for Thinking Bigger - by Matthew Yglesias

Page last modified: 11-07-2011 15:39:11 ZULU