The Mutual Benefits of Canada-US Trade

The North American Free Trade Agreement (NAFTA) was a three-country agreement negotiated by the governments of Canada, Mexico, and the United States that went into effect in January 1994. NAFTA abolished most tariffs on goods traded between the three countries, with a particular emphasis on liberalizing trade in agricultural, textiles, and automobile manufacture. The accord also aimed to protect intellectual property, develop dispute resolution processes, and, through side agreements, enhance labor and environmental protections.

NAFTA substantially altered North American economic relations, resulting in unprecedented integration between the industrialized economies of Canada and the United States and Mexico's emerging economy. In the United States, NAFTA had bipartisan support when it was negotiated by Republican President George H.W. Bush, passed by a Democratic-controlled Congress, and implemented by Democratic President Bill Clinton. The pact tripled regional commerce and increased cross-border investment between the three countries significantly.

How did NAFTA fit into the larger discussion about trade policy?

When NAFTA negotiations began in 1991, the three countries' common goal was to integrate Mexico into the established, high-wage economies of the United States and Canada. The goal was that freer trade would spur greater and more consistent economic growth in Mexico by creating new jobs and opportunities for its increasing workforce while deterring illegal migration. Mexico was viewed as a prospective export market as well as a low-cost investment site that may boost US and Canadian company competitiveness.

The United States had already signed a free trade agreement (FTA) with Canada in 1988, but the inclusion of a less developed country like Mexico was unprecedented. Opponents of NAFTA focused on salary disparities with Mexico, which had a per capita income of only 30% [PDF] that of the United States. In 1992, U.S. presidential candidate Ross Perot argued that trade liberalization would result in a "giant sucking sound" of American employment fleeing across borders. Supporters, including Presidents Bush and Clinton, argued that the pact would generate hundreds of thousands of new jobs each year, while Mexican President Carlos Salinas de Gortari regarded it as an opportunity to modernize the Mexican economy so that it would "export goods, not people."

How did NAFTA impact the US economy?

Since NAFTA, trade between the United States and its North American neighbors has more than tripled, rising faster than trade with the rest of the globe. Canada and Mexico are the top two destinations for US exports, accounting for more than one-third of the total. Most estimates suggest [PDF] that the pact raised U.S. GDP by less than 0.5 percent, adding up to $80 billion to the US economy upon full implementation, or several billion dollars of additional growth annually.

Such trade benefits frequently go unnoticed because, while the expenses are heavily concentrated in specific areas such as auto manufacture, the benefits of a pact like NAFTA are evenly distributed across society. According to NAFTA advocates, commerce with Canada or Mexico supports around fourteen million employment in the United States, and the nearly two hundred thousand export-related jobs produced annually by the pact pay 15 to 20 percent more on average than the jobs lost. Critics of the agreement, on the other hand, believe that it was to blame for job losses and wage stagnation in the United States, which were caused by low-wage competition, corporations shifting production to Mexico to cut costs, and a growing trade deficit. Dean Baker of the Center for Economic and Policy Research (CEPR) and Robert Scott of the Economic Policy Institute argue that the surge in imports following NAFTA resulted in the loss of up to 600,000 US jobs over two decades, though they acknowledge that some of this import growth would have occurred even without NAFTA.

How did it damage Mexico's economy?

NAFTA increased Mexican farm exports to the United States, which have tripled since the treaty was implemented. Hundreds of thousands of auto manufacturing jobs have also been generated in the country, and most studies [PDF] show that the deal enhanced productivity and reduced consumer costs in Mexico. The agreement accelerated Mexico's transformation from one of the world's most protectionist countries to one of the most open to trade. Mexico had removed many of its trade barriers after entering the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, in 1986, but it still had a pre-NAFTA average tariff level of 10% [PDF].

Mexican authorities saw NAFTA as an opportunity to advance and secure the hard-won reforms of the Mexican economy. In addition to liberalizing trade, Mexican officials decreased public debt, implemented a balanced-budget policy, controlled inflation, and increased the country's foreign reserves. Although Mexico was hard hit [PDF] by the 2008 financial crisis due to its reliance on exports to the U.S. market—the following year, Mexican exports to the United States fell 17 percent and its economy contracted by more than 6 percent—its economy recovered relatively quickly, returning to growth by 2010.