Canada-US Trade: A Cornerstone of North American Economy

The governments of Canada, Mexico, and the Joined together States worked together to form the North American Free Exchange Assention (NAFTA). It went into impact in January 1994. NAFTA got freed of most duties on merchandise that were sold between the three nations. Its primary objective was to open up exchange in agribusiness, materials, and car fabricating. The bargain too attempted to guard mental property, set up ways to settle contradictions, and, through extra assentions, incorporate securities for laborers and the environment. 

NAFTA completely changed the way North American economies work together. It made it possible for the developed economies of Canada, the US, and Mexico to work together in a way that had never been seen before. In the US, NAFTA was first supported by both Democrats and Republicans. It was negotiated by Republican President George H.W. Bush, passed by a Congress controlled by Democrats, and put into effect by Democratic President Bill Clinton. Under the deal, trade between the three countries tripled, and investment between them also grew by a large amount.

When talking about trade policy in general, how did NAFTA fit in?

The three countries that made up NAFTA wanted to bring Mexico into the developed, high-wage economies of the US and Canada when talks for the deal started in 1991. People thought that freer trade would help Mexico's economy grow more steadily and stronger by giving its growing workforce more jobs and chances and stopping people from crossing the border illegally. It was thought that Mexico would be a good place for the US and Canada to sell their goods and an inexpensive place to spend that would make their businesses more competitive.

The US already had a free trade agreement (FTA) with Canada, which was signed in 1988. However, adding a less developed country like Mexico was a first. The fact that Mexico's per capita income was only 30% [PDF] of the US's was used by people who were against NAFTA as an example. Ross Perot, who ran for president of the United States in 1992, said that trade opening would cause "a giant sucking sound" of U.S. jobs to leave for other countries. Supporters of the deal, like Presidents Bush and Clinton, said it would create hundreds of thousands of new jobs every year. Meanwhile, Mexican President Carlos Salinas de Gortari saw it as a chance to bring the Mexican economy up to date so that it could "export goods, not people."

What effect did NAFTA have on the US economy?

Trade between the US and its North American neighbors has more than tripled since NAFTA. It has grown faster than trade between the US and the rest of the world. More than a third of all U.S. exports go to Canada and Mexico, making them the two biggest markets for them. The deal is thought to have raised the U.S. gross domestic product (GDP) by less than 0.5%. This could have added up to $80 billion to the economy once it was fully put into place, or several billion dollars of extra growth each year.

People don't always notice the good things about trade because the costs are mostly felt in a few industries, like car manufacturing, while the good things about a deal like NAFTA are felt by most people. Supporters of NAFTA say that trade with Canada or Mexico is important for about 14 million U.S. jobs and that the deal creates about 200,000 export-related jobs each year that pay 15 to 20 percent more than the jobs that were lost. However, people who are against the deal say that it is to blame for the loss of jobs and stagnant wages in the US, which was caused by low-wage competition, companies moving production to Mexico to save money, and an expanding trade imbalance. Dean Baker from the Center for Economic and Policy Research (CEPR) and Robert Scott from the Economic Policy Institute say that the rise in imports after NAFTA cost the U.S. up to 600,000 jobs over 20 years. However, they do admit that some of this growth in imports would have happened even without NAFTA.

What did it do to the Mexican economy?

Farm products from Mexico that are sent to the US through NAFTA have tripled in value since the agreement went into effect. The agreement has also created hundreds of thousands of jobs in the car industry. Most studies [PDF] have also found that it has raised productivity and lowered prices for consumers in Mexico. Mexico went from having one of the most protectionist countries in the world to having one of the most open to trade thanks to the pact. When Mexico joined the General Agreement on Tariffs and Trade (GATT), which was the organization that came before the WTO, in 1986, it got rid of many of its trade barriers. However, it still had an average tariff level [PDF] of 10% before NAFTA.

Mexican leaders saw NAFTA as a chance to speed up and solidify the hard-won changes they were making to the economy. Along with opening up trade, Mexico's leaders lowered the country's debt, put in place a balanced-budget rule, kept inflation stable, and increased the country's foreign assets. Due to its reliance on exports to the U.S. market, Mexico was hit hard by the 2008 financial crisis. The next year, Mexican exports to the U.S. dropped 17%, and the country's economy shrank by over 6%. However, Mexico's economy quickly recovered and began to grow again in 2010.