NAFTA for Dummies

NAFTA logoWhat exactly is NAFTA?
The North American Free Trade Agreement, an international treaty, was adopted in 1994 by the U.S., Mexico, and Canada. It created the world’s largest free-trade zone, with a combined population of almost 400 million and more than $6 trillion in combined gross domestic product. U.S. approval came only after a bitter congressional debate that pitted most U.S. business interests—which saw the treaty as a way to expand markets—against unions and environmentalists, who feared that NAFTA would depress U.S. wages and lower environmental standards. To address those concerns, two “side agreements” were aimed at ensuring that U.S. and Canadian companies would not adopt Mexico’s looser pollution and labor standards to remain competitive.

How does NAFTA work?
It eliminates tariffs—surcharges that make imported goods more expensive than their domestic counterparts—on more than 70 percent of the products and services that the U.S., Mexico, and Canada sell one another. Before NAFTA, for example, Mexico slapped a 20 percent tariff on imported American cars, which made them prohibitively expensive for most Mexicans. After NAFTA, the tariff was cut in half (it was eliminated altogether in 2004), immediately boosting U.S. car sales. NAFTA also set timetables for eliminating agricultural subsidies and for easing restrictions on cross-border commercial traffic. After 9/11, though, the U.S. tightened up on truck traffic into the U.S. from Canada and Mexico, prompting protests that the U.S. was unilaterally changing the treaty’s terms. Such disputes are addressed by a mediating body with representatives from all three treaty partners.

What has its economic impact been?
“On balance, researchers have found NAFTA a slight positive for the U.S. as a whole,” says Anil Kumar, an economist at the Federal Reserve Bank of Dallas. Mexico and Canada have gained, too. In the 14 years since NAFTA was enacted, job creation and economic growth in all three countries have been more robust than in the 14 preceding years. Businesses in all three countries have benefited from easy access to the others’ consumers—two-way trade between Mexico and the U.S. alone has tripled since 1994. “Ten years ago, 70 percent of our clients were Mexican and the rest foreigners,” says Veronica Gonzalez, a Guadalajara-based business consultant. “Today those proportions have been reversed.” But wages in Mexico and the U.S. have stagnated, and the deal hasn’t curtailed illegal immigration as promised; two-thirds of the estimated 12 million illegal Mexican immigrants in the U.S. arrived here after 1995. “What they earn there in four months,” says Dionisio Garcia, a farmer in southern Mexico, “we don’t earn here in a year.”

Have Americans been helped or hurt?
There have been both winners and losers. Jim Cole, owner of Noshok, a Cleveland-based maker of pressure gauges, credits NAFTA with transforming Noshok from a struggling start-up to a company with $20 million in annual sales and 49 employees. “All it’s going to do is create jobs here,” says Cole of NAFTA. “We’re very optimistic.” But North Carolina textile worker Tim Cloninger is one of the many workers hurt by NAFTA. The plant where he worked shut down when it couldn’t compete with low-priced Mexican textiles. “Us poor people in the South, we’re suffering,” he said.

How is NAFTA viewed in Mexico and Canada?
Mexicans disapprove of NAFTA by a 2-to-1 margin, according to a recent poll. That finding reflects disappointment that NAFTA hasn’t brought widespread prosperity to Mexico. “Executives and high-skilled workers have found opportunities,” says consultant Gonzalez. “But for most workers things have not improved.” Forty percent of Mexicans still live in poverty, and small farmers have been especially hard-hit; many went under after they were unable to compete with cheaper agricultural imports from the U.S. and Canada. NAFTA has been more popular in Canada. The U.S. has always provided a ready market for Canadian natural resources—the U.S. imports more oil from Canada than from any other country. But since NAFTA, Canadian exports of goods other than natural resources have tripled. Yet some Canadians fear that competitive pressures will force them to dismantle their European-style social safety net in favor of the harsher American model.

Is it fair to blame NAFTA for Americans’ economic woes?
Probably not. Economists point out that trade agreements don’t have much effect on the total number of jobs. Instead, they shift employment patterns, with some sectors losing jobs and others gaining them. It’s true that America has lost more than 3 million manufacturing jobs since NAFTA’s adoption, but those jobs went primarily to China, India, and other low-wage offshore manufacturing centers, not to Mexico. “My plant manager told me they were sending some of the older looms to India,” says North Carolina textile worker Delores Gambrell. “He said they’d be doing jobs we used to do.” But in political campaigns, during which sound bites play better than nuanced arguments, NAFTA is a handy scapegoat. NAFTA, says American University professor Robert Pastor, “has become this piñata that everybody has put their frustrations into.”

Renegotiating NAFTA
While Republican presidential hopeful John McCain supports NAFTA, Democrats Barack Obama and Hillary Clinton both say that as president, they would renegotiate NAFTA’s terms. But that won’t be easy. All three nations would come to the table with its own wish list, and any gains would be offset by politically unpalatable concessions. “If any American government ever chose to make the mistake of opening NAFTA,” Canadian Prime Minister Stephen Harper warned recently, “we would have some things we would want to talk about as well.” Canada, for instance, would likely press the U.S. to drop tariffs on Canadian lumber, which without tariffs is cheaper than U.S. lumber. And renegotiation would only be a first step—winning congressional approval for a revised deal would be a long, messy wrangle. Like it or loathe it, then, NAFTA will probably be around for a long time—which in a way makes it the perfect campaign issue. “There is no risk calling for NAFTA renegotiation,” says American trade lawyer Larry Friedman, “because they know it won’t happen.”