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What is the North American Free Trade Agreement (NAFTA)?

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Last editedSept 20202 min read

When it was signed, the North American Free Trade Agreement (NAFTA) was the world’s largest free trade agreement. Although NAFTA has since been replaced by the United States-Mexico-Canada Agreement (USMCA) – which came into effect on July 1, 2020 – NAFTA had a significant effect on trade between Canada, Mexico, and the United States.

Learn more about NAFTA with our North American Free Trade Agreement (NAFTA) definition and overview, right here.

North American Free Trade Agreement (NAFTA) definition

NAFTA was a treaty between the United States, Mexico, and Canada that eliminated most trade tariffs between these North American countries. It also removed investment restrictions, protected intellectual property rights, and addressed labor and agricultural concerns.

Small businesses in all three countries were expected to benefit substantially, since NAFTA helped to reduce red tape and cut the cost of doing business abroad.

What year was the North American Free Trade Agreement (NAFTA) signed?

NAFTA had an extensive pre-history before it was eventually signed into law. In his 1979 presidential campaign announcement, President Ronald Reagan stated that he wanted to unify the North American market to help the USA compete better abroad.

Then, in 1984, Congress approved the Trade and Tariff Act. This gave the president the authority to negotiate free trade agreements, permitting Congress only to approve/disprove the agreement. In 1992, President George H.W. Bush signed NAFTA before it went to the legislatures of the United States, Canada, and Mexico for ratification.

Finally, NAFTA came into effect on January 1, 1994.

Why was the North American Free Trade Agreement (NAFTA) established?

As mentioned in the previous section, NAFTA was established to help American companies compete better on the international stage. Around one-quarter of imports to the United States, from livestock and vehicles to produce and machinery, originate in Mexico and Canada. In addition, around one-third of exports from the United States go to Mexico and Canada.

As such, reducing tariffs and investment restrictions was expected to fuel economic growth and boost the fortunes of small businesses.

What did the North American Free Trade Agreement, or NAFTA, accomplish?

Debate continues to surround the impact of the North American Free Trade Agreement (NAFTA) on the three signatories. There are several notable effects to consider.

Firstly, NAFTA granted the status of most-favoured nation to each co-signer. This meant that the signatories were unable to give better treatment to domestic investors than foreign investors, while federal contracts had to be offered to companies in all three NAFTA countries.

In addition, NAFTA eliminated tariffs on exports and imports, making it simpler and cheaper to trade. NAFTA also helped to establish procedures to resolve disputes, helping small businesses avoid costly and time-intensive lawsuits.

It’s also important to note that all NAFTA countries were obligated to respect trademarks, patents, and copyrights, thereby ensuring that intellectual property rights didn’t interfere with trade.

So, what did the North American Free Trade Agreement, or NAFTA, accomplish? Overall, NAFTA had a positive effect on the three signatories. Trade increased between all parties and the United States, Canada, and Mexico became increasingly competitive on the global stage.

How did the North American Free Trade Agreement (NAFTA) affect the United States?

Although NAFTA clearly had many accomplishments, some of its detractors argue that it ended up having a negative effect on US workers.

Put simply, the concern revolved around the possibility that manufacturing jobs would move to Mexico due to lower labor costs and that US workers who were able to retain their jobs would be forced to accept lower wages.

The US has lost a strikingly large number of manufacturing jobs over the past three decades (manufacturing employment fell by 3.3 million between 1998 and 2004), but it’s difficult to determine whether this was an effect of NAFTA, or merely coincidental.

After all, manufacturing jobs were already declining prior to the approval of NAFTA, and it’s difficult to isolate the effects of NAFTA from the larger economic currents as a whole.

In addition, NAFTA was met with opposition from environmentalists, who argued that the anti-pollution elements of the treaty were inadequate and poorly enforced.

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