The North American Free Trade Agreement (NAFTA) is proposed to address concerns regarding barriers to trade between the United States, Canada, and Mexico. For Americans and Canadians, NAFTA will provide low-cost investment options because labor is cheap in Mexico. For Mexicans, NAFTA means export opportunities and foreign investments. On paper, the agreement can reshape trade between the three countries and allow them to become one of the most powerful trade blocs in the world. In practice, however, there are many adverse implications both in terms of environmental impact, economic stability in Mexico, and the flow of illegal migrants to the United States.
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Mexico and Canada remain the United States’ biggest trading partners in terms of both U.S. exports and imports. The development and signing of NAFTA is a necessity because there is a risk that the shortage of jobs in Mexico may lead to its inability to trade with its northern neighbors (Chatzky et al., 2020). The increasing population of Mexico is not parried by a corresponding increase in job opportunities. The country needed foreign investments in terms of technology and financial capital. The United States and Canada sought other benefits – cheap labor offered by Mexico can allow them to make their goods more competitive on the international market in the context of affordability (Burfisher et al., 2019). Also, the U.S. believes that investing in Mexico will decrease the flow of immigrants.
Economic growth is the primary advantage of NAFTA – free trade means fewer tariffs and lower import costs. Because the largest product the U.S. imports in terms of price is oil, the low cost of Mexican oil could decrease the U.S. reliance on oil from the Middle East (Chatzky et al., 2020). The absence of tariffs also incentivizes countries to increase trade with each other, thereby raising the total value of the Gross Domestic Product produced in NAFTA member-countries (Gálvez, 2018). Such positive dynamics in export and import reduce inflation rates, which is vital for economic stability. Under such circumstances, banks can keep interest rates low, which is beneficial for entrepreneurs and businesses.
Under NAFTA, not only American businesspeople can directly invest in Canada and Mexico. Canadians and Mexicans also have the opportunity for direct investments in the United States. The incoming flow of foreign capital means new jobs for Americans in a variety of industries. Investment in American companies causes a chain of reactions – additional money allows businesses to build facilities outside of the U.S., thereby exploring new markets and creating jobs in Canada and Mexico (Hernandez-Trillo, 2018). The primary mechanism by which NAFTA incentivizes foreign direct investment is the protection of intellectual properties and granting foreign investors the same rights as local businessmen.
NAFTA allows foreign companies to bid on government contracts, which is beneficial for the United States’ budget. The reason is that limited competition during pre-NAFTA times significantly increased government spending because organizations could charge any price they saw as appropriate. However, the inclusion of Canadian and Mexican companies means that the average bid price will be lower, thus decreasing government spending. Saved resources could be spent on other projects vital for the socio-economic well-being of communities.
Despite the mentioned advantages, there are crucial implications to be considered before signing the trilateral agreement. One of the most significant concerns is that number of jobs in the U.S. will inevitably shrink. The reason is that the cheap labor force in Mexico will incentivize U.S. companies to outsource production to Mexico. As a result, many Americans working in the manufacturing industry will lose their jobs. Other sectors that may perceive the same effect are textile, computers, and electronics.
Not all companies may move their plants out of the United States. Some may decide to stay, but not without financial implications for workers. Competition on behalf of Mexicans that are ready to occupy outsourced positions will decrease wages in certain industries, including automobile manufacturing and assembly. Such a situation may result in disparities across economic sectors and the gradual loss of the middle class. A sharp difference in income levels will limit the buying power of households, possibly resulting in a demand shortage. Therefore, before signing the NAFTA, some limitations should be considered regarding the extent to which American companies can outsource production to Mexico.
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Unlike manufacturing, agriculture is to receive specific priorities under NAFTA. Significant subsidization of the agricultural products by the U.S. government and free export to Mexico will result in the inability of Mexican farmers to compete with American corn and other grains. As an outcome, millions of Mexicans will lose their jobs and will be forced to seek fortune in immigration to the United States. While NAFTA aims at reducing undocumented migration, it will lead to directly opposite results. Despaired farmers will have no other options besides illegally crossing the U.S.-Mexico border and looking for employment opportunities there.
The environmental impact will be drastic under NAFTA – inferior regulation in Mexico will allow the U.S. companies moving South to exploit the lands and cut their spending on environmental protection and safety standards. As a result, pollution will be immense, which will have a long-term impact on Mexico and its population. Furthermore, subsidies for American farmers will force some of the Mexicans in agriculture to use more fertilizers to increase the volume of crops and decrease their prices. Deforestation and pollution are only some of the potential outcomes that will be yielded under NAFTA.
In summary, NAFTA, under current economic conditions and stiff competition on behalf of China, is a necessary step for the United States, Canada, and Mexico to take. However, before signing the agreement, the countries should be ready for the discussed adverse outcomes. No agreement and no project can be designed in such a way that it benefits every sector and person exhaustively. Therefore, it is recommended that the deal be signed, but additional measures should be developed to address the mentioned concerns. Otherwise, there is a possibility that this free trade will come at a high cost.
Free trade is often considered a solution to economic issues. However, “free” does not mean it does not inflict costs. The North American Free Trade Agreement is the vision of the U.S., Canada, and Mexico of how free international trade should be implemented. This trade bloc will benefit all member countries – Mexicans will receive investments, Canadians will have opportunities to expand into new markets, and American goods will be able to compete in the international arena. Despite potential adverse outcomes, the agreement should be signed because the yielded benefits will allow the countries to address these concerns.
Burfisher, M. E., Lambert, F., & Matheson, M. T. D. (2019). NAFTA to USMCA: What is gained? International Monetary Fund.
Chatzky, A., McBride, J., & Sergie, M. A. (2020). NAFTA and the USMCA. Council on Foreign Relations. Web.
Gálvez, A. (2018). Eating NAFTA: trade, food policies, and the destruction of Mexico. University of California Press.
Hernandez-Trillo, F. (2018). Mexico, NAFTA, and beyond. The International Trade Journal, 32(1), 5-20. Web.