North American Free Trade Agreement’s Pros & Cons

The North American Free Trade Agreement (NAFTA) was a business pact between the United States, Canada, and Mexico, which was effected in 1994. The deal sought to facilitate the free flow of goods and services across the borders of the three nations. Also, it aimed at eliminating all administrative and tariff barriers that hindered trade amid the countries. According to Bradbury (2014), NAFTA signified the zenith of an extensive journey of trade liberalization. Before the agreement, the United States and Canada allowed movement of tariff-free products and services within particular sectors. On the other hand, the trade of tariff-free goods between the United States and Mexico was restricted to specific zones. The trade agreement resulted in the introduction of policies that privatized and deregulated transportation, which promoted trade amid the countries. Despite the positive gains attributed to NAFTA, one may argue that the business amid the three states is not entirely free. Bradbury (2014) defines free trade as “a situation where the movement of goods across a national frontier is no more costly than the movement of the same goods over the same distance within a single country” (p. 138). Numerous factors continue to impede free shipment of goods and services across the United States, Canada, and Mexico. This report will discuss the benefits and demerits of NAFTA to the transportation industry of the three countries.

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NAFTA Parties

The three countries that are signatories to NAFTA are the United States, Canada, and Mexico. They differ significantly regarding economic development, geographical size, and role of trade. The United States and Canada are among the global economic powers. Nevertheless, the United States’ has higher gross domestic production (GNP) and population than Canada. Thus, the Canadian economy relies heavily on the international trade. On the other hand, Mexico is a middle-income nation, which is experiencing significant economic growth. Economic growth, coupled with massive population makes Mexico one of the most promising international markets. The United States, Canada, and Mexico started to trade long before the enactment of NAFTA. They participated in the form of trade “involving industrial complexes that span the borders between the nations” (Vogel, 2015, p. 18). Hence, NAFTA helped to improve and strengthen trade relations amid the nations. The desire to liberalize trade led to the United States and Canada signing the Canada- U.S Free Trade Agreement (CUSFTA) in 1988. The trade agreement served as an antecedent to NAFTA. The CUSFTA did not cater to the transportation regulations and needs of the two states as the United States was in the process of implementing an extensive transportation deregulation program. On the other hand, Canada was in the course of formulating a similar plan.

The United States- Mexico relations are based on weak historical backgrounds (Nica, Swaidan, & Grayson, 2016). The two countries engaged in a war that saw Mexico lose a significant share of its terrain to the United States. Despite their weak relationships, the Mexican economy significantly benefits from the United States. A lot of the Mexican immigrants working in the United States send home a substantial share of their earnings. Before NAFTA, the United States and Mexico formed the “Maquiladora” assembly firms (Truett & Truett, 2013). The plants were situated in Mexico. However, they sourced their raw materials from the United States. Moreover, they targeted the American market only. In spite of the economic disparities between Mexico and Canada, the United States – Mexico and the United States – Canada business architectures are quite identical. Truett and Truett (2013) aver, “The two are dominated by the intra-industry trade of manufactured goods arising from a high degree of integration with the United States production systems” (p. 379). Nonetheless, the bilateral trade between Mexico and the United States and Canada and the United States differ significantly. The United States and Canada have superior economies. Thus, the deal between them is akin to intra-industry business amid members of the economic community. Conversely, Mexico has a middle-income economy and disparities in wage and skills characterize economic integration between the country and the United States.

Overview of the Continental Transportation System

The United States, Mexico, and Canada laid down the current continental transportation system in phases. The individual countries relied on national transportation policies that were aligned to their economic and political needs. Consequently, a more significant share of the continental transportation system was formulated and constructed to address diverse economic realities. An analysis of the past national transportation policies of the United States, Canada, and Mexico reveals that they were established and organized based on the prevailing conditions (Woudsma, 2014). The initial national transportation policy for Canada was developed based on the need to integrate economic and trade policies into haulage regulations. The first Canadian transcontinental rail was build based on a protectionist trade policy, resulting in the establishment of an east-west-oriented transportation pattern (Woudsma, 2014). The country continued to advance its transportation system through the construction of the TransCanada Highway, which was aimed at complementing the railway transport. Woudsma (2014) argues that the Canadian transportation system evolved and supported trade models, which were products of tariff obstacles of the early 1880s.

Similarly, the American transportation system was established along the east-west axis. The move was aimed at connecting the Pacific and Atlantic seaboards. Between 1916 and 1956, the majority of the highway laws appeared to support the east-west pattern. The United States Interstate Highway System was aimed at connecting essential cities to enhance trade. The Mexican transportation system is different because it is established along a north-south axis. Initially, the transportation system was focused on the Mexico City. It underlines the reason Mexico has a balanced transportation infrastructure. The system facilitates the shipment of goods and services to both east-west and north-south directions. Mexico was reluctant to establish transport networks in the Northern Border States because of weak political relationship with the United States (Nica et al., 2016). However, it later constructed a national railway system that linked the Mexico City to the northern border. Subsequently, the country built highways that observed the north-south orientation. The orientations of the three countries’ transportation systems prove that they were established with the objective of achieving national economic goals. NAFTA has altered all that, as it seeks to promote economic interdependence and enhance interactions. The introduction of NAFTA rendered obsolete the transportation networks.

Pros of NAFTA

The United States had two different trucking regulations for Canada and Mexico before the enactment of NAFTA. The Canadian trucks were allowed to cross the American borders, mainly because Canada extended the same favor to the United States drivers. However, the United States did not allow Mexican trucks to acquire operating permits in the country. Vogel (2015) holds that the Mexican trucks on transit to Canada were allowed to go through the United States under the condition that they would stick to the American insurance requirements and safety regulations. The United States did not impose strict conditions on Canadian trucks due to healthy trade relations. On the other hand, the government of Mexico imposed trucking regulations on American vehicles. Initially, NAFTA was intended to eliminate trade barriers between the United States, Canada, and Mexico. Eventually, the trade agreement helped to lift various transportation regulations that impeded smooth shipment of goods and services between the nations. According to Vogel (2015), the introduction of NAFTA marked the advent of cross-border trucking competition. It became easy for the Mexican drivers and trucks to compete on different routes against their American counterparts. NAFTA introduced the laws of Most-Favored-Nation Treatment and nondiscrimination, which prevented the member countries from according special treatment to domestic market participants at the expense of the foreign traders. It required the United States to use similar safety, inspection, and financial policies to handle Canadian and Mexican drivers and trucks. Today, the Mexican drivers and vehicles enjoy a level playing field, thanks to the enactment of the treaty.

One of the most significant benefits of NAFTA to the transportation sector was the establishment of the CANAMEX Corridor (Bradbury, 2014). The corridor comprises a road network that links Canada to Mexico via the United States. According to Bradbury (2014), the limitation of truck dimension and weight affected the transportation companies. It impacted the companies’ ability to ship freights efficiently. NAFTA served as a boost to the transportation industry as it allowed the use of heavier vehicles. Moreover, the CANAMEX Corridor enhanced the traffic flow between the three countries, therefore minimizing transportation costs. Plans are underway to construct railroads and communication infrastructure along the corridor (Bradbury, 2014). The move would not be satisfied without the trade agreement that bides the three countries. The establishment of the railroad will reduce transportation costs and boost regional economic development. The governments of the member states will be responsible for maintaining the highways. Therefore, the transportation companies and business people will not require transferring their consignment from trucks to rail or vice versa. Construction of the railroad will result in the creation of a transportation system that meets the needs of different shippers.

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Cons of NAFTA

The inability to come up with a comprehensive North American transport system signals the shortfalls of NAFTA. Individual countries who are parties to NAFTA have distinct transportation systems. Failure to link the different transportation systems hinders the realization of the spirit of NAFTA. For Instant, the Mexican transportation systems are premised on autonomous policies, which do not facilitate interconnectivity with the United States or Canadian systems (Woudsma, 2014). The Mexican government has control over the transportation industry. On the other hand, Canada and the United States have decentralized forms of government, where provinces or states have control over the transportation industry. According to Brooks and Ritchie (2015), NAFTA failed to appreciate the impact of individual country’s regulations on the continental transportation system. The trade agreement was written without standard policies to manage the North American Transportation Corridor.

NAFTA brought about the elimination of trade barriers, which resulted in the member countries looking for ways to rationalize their transportation systems to suit the common market. Nevertheless, the United States, Mexico, and Canada are yet to do way with all obstacles that impede the free movement of goods and services between their borders. One of NAFTA’s primary objectives was to establish a level playing field for Mexican, American and Canadian trucks and drivers (Brooks & Ritchie, 2015). The trade agreement sought to ensure that the Mexican trucks and drivers were not disadvantaged. Unfortunately, NAFTA has not managed to eliminate all the barriers that affect transborder traffic. The countries signed a trade agreement after a lengthy period of conflicting public policy management regarding domestic transportation systems. They had different technical and safety-related guidelines that governed their transportation systems. The policies serve as a significant hindrance to efficient shipment of goods and services between the three countries. For instance, the three nations used different regulations to govern the weight and size of the trucks. NAFTA has not helped to resolve the majority of these standards because of their complex nature.

Despite the significant deregulation and liberalization of trade in Mexico, the United States, and Canada, the three states are yet to eliminate barriers to the transborder flow of goods and services. NAFTA has not helped to get rid of the challenges attributed to cabotage. Brooks and Ritchie (2015) define cabotage as the “ability of foreign vehicles and labor to transport goods within a country” (p. 25). The cabotage regulations restrict the use of international transport carriers and labor to ship products and services within a country. They contribute to the increase in the cost of transborder transport. NAFTA regulations do not affect the Jones Act, therefore making it difficult for Canada and Mexico to benefit from participating in the American water transportation. The United States prevents Canada and Mexico from partaking in its intercostal trade. The country has imposed restrictions due to the need to provide for adequate commercial marine power to the United States defense. Only American-made and registered ships are allowed to engage in intercostal trades.

NAFTA has not helped to eliminate all the variations in transportation policies amid the United States, Mexico, and Canada (Woudsma, 2014). The inconsistencies contribute to the present economic ineffectiveness and unequal opportunities, therefore signaling the need for harmonization. The presence of transport non-tariff barriers makes it difficult for countries to rationalize their transportation systems. The demand for the logistics companies to abide by the trade regulations increases transportation costs. Additionally, it becomes hard for the Mexican companies to compete with their rivals from the United States and Canada.

Conclusion

NAFTA has both positive and negative impacts of the transportation systems for the member states. The trade agreement has helped to resolve numerous trade barriers that hindered the uninterrupted flow of goods and services between the countries. It offered the Mexican trucking companies an opportunity to operate in some parts of the United States. NAFTA gave birth to CANAMEX Corridor, which enhanced the transportation of goods and services between the countries. Despite the numerous benefits attributed to NAFTA, the trade agreement has not eradicated variations in transportation policies. For instance, it does not address the problems associated with cabotage, which inhibit traffic flow and lead to increase in transportation costs. The member states continue to suffer from economic inefficiencies and unequal opportunities due to disparities in transportation policies. Suspicion amid the member states makes it difficult for the countries to establish a standard transportation system.

References

Bradbury, S. (2014). Planning transportation corridors in post-NAFTA North America. Journal of the American Planning Association, 68(2), 137-150.

Brooks, M., & Ritchie, P. (2015). Trucking mergers and acquisition in Canada and the U.S. since NAFTA. Transportation Journal, 44(3), 23-38.

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Nica, M., Swaidan, Z., & Grayson, M. (2016). The impact of NAFTA on the Mexican-American trade. International Journal of Commerce and Management, 16(4), 222-233.

Truett, L., & Truett, D. (2013). NAFTA and the maquiladoras: Boon or bane? Contemporary Economic Policy, 25(3), 374-386.

Vogel, R. (2015). The NAFTA corridors: Offshoring U.S. transportation jobs to Mexico. Monthly Review, 57(9), 16-29.

Woudsma, C. (2014). NAFTA and Canada-US cross-border freight transportation. Journal of Transportation Geography, 7(2), 105-119.

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