Impact of NAFTA over 20 Years since 1994
Currently, NAFTA is the world's largest regional free trade area with a population of 444 million people and a combined gross national product of 17 trillion dollars. The North American Free Trade Agreement has a few ideas that apply to the sphere of trade, services and investment. In addition, this agreement brings together the industrialized nations and developing country. In fact, the members of NAFTA are united by the presence of common geographic boundaries, economic relations, and transport communications. Besides, the signing of this agreement helped to create a single continental market and the mobility of goods, services, capital, and a labor movement. Accordingly, the active processes under NAFTA significantly affected the economy of the United States, Canada, and Mexico during 1994-2014.
NAFTA is a free trade agreement between the United States, Canada, and Mexico. The first step of this agreement was the plan of Abbot adopted in 1947. In fact, this concept stimulated the United States to contribute their investments to the leading Canadian industries. The following step was signing the agreement of the liberalization of car exchange, which added to the integration of others areas. Besides, the first trade and political association among the United States, Canada and Mexico was the energy alliance in the 1970s. Presidents Ronald Reagan and George W. Bush supported this idea in 1980. In September 1988, after the three years of troublesome arrangements, the US-Canadian Free Trade Agreement (CUSFTA) marked another document, according to which the United States and Canada ought to frame the free commerce zone for ten years (Hufbauer & Schott, 2005). By excellence of the integration forms in Europe, the United States, Canada, and Mexico signed the North American Free Trade Agreement on December 1992, which came into power on January 1994. Indeed, some important elements prompted the creation of the North American Free Trade Agreement. Primarily, it is the geographical proximity and macro-economic complementary of the participating countries. Secondly, it is the close trade relation between NAFTA partners and expanding production cooperation. The third factor is a growing network of businesses controlled by the American multinational corporations in Canada and Mexico and increasing number of the Canadian multinationals organizations in the United States. The last reason for the free trade agreement creation is to strengthen the position of the European and Asian industrialized countries in the global market.
More importantly, NAFTA created a progressive international trade agreement including a list of specific goals. Firstly, it aimed at removing the barriers and stimulating the movement of goods and services between the countries of the agreement. Secondly, the agreement planned to create and maintain the conditions of the fair competition in the free trade zone. The third goal is the attraction of investments in the participating countries. The next important aim of the NAFTA policy is ensuring the adequate and effective protection of the intellectual property rights in the free trade zone. Due to this goal, the members of this agreement tried to create effective mechanisms for the collaborative disputes resolution and management. Finally, countries wanted to establish a basis for future trilateral, regional and international cooperation in order to expand and improve the agreement (Kong & Wroth, 2015). Therefore, the members of agreement attempted to establish a proficient policy, which unites and builds up their exchange understanding.
The basis for NAFTA is the United States economy. In fact, Canada and Mexico are closely related to it, and, thud, it is necessary to identify the correlation of GDP in Canada and Mexico to the United States GDP.
Figure 1. The correlation of GDP between the participating countries ("North American Free Trade Agreement," n. d.).
The increase in the correlation coefficient indicates the Canadian and Mexico’s economies increasing dependence on the United States. This means transferring a part of its national sovereignty in exchange for economic benefits. However, it strengthens the economic power of the United States integration (Caulfield, 2010).
The great impact of NAFTA has exceedingly affected the economies of the member countries. In fact, this is one of the biggest free trade areas in the world, which demonstrates clear advantages of a trade liberalization. The agreement made a noteworthy contribution to the economic development and increased living standard in each of the three nations. During the integration, the members built a joint enterprise for the creation of products, permitting a simpler access to the innovation, and lower manufacturing costs. Furthermore, it upgraded the participation in the shared structure with an objective to improve the position of the United States, Canada and Mexico in international markets. Moreover, the North American Free Trade Agreement significantly affected the management of the banking area. Thus, business analysts noticed the expanded actions of American banks in Canada and Canadian banks in the United States. Besides, American banks and other financial foundations got the chance to open their branches in Mexico. In fact, the general motivation of NAFTA creation was to advance financial development by expanding rivalry in the residential market and energize cooperation of the internal and foreign sources. For the quarter century, there have been sufficient changes in the economies of the member countries, and various elements in different areas that represent these actions (Boskin, 2014).
First of all it should be noted that the total trade among the United States, Canada and
Mexico increased from 297 billion dollars in 1993 to 946 billion dollars in 2008. Today, daily trade between the partners is 2.6 billion dollars, or 108 million dollars per hour. In the framework of NAFTA, Canada and Mexico carry out 80% of trade, and the United States carries out the third part of the total trade. Moreover, after the creation of the North American Free Trade Agreement, GDP of Canada, the United States and Mexico significantly increased ("North American Free Trade Agreement," n. d.).
Figure 2. NAFTA members GDP growth since 1993 ("The North American Free Trade Agreement," n. d.).
North American Free Trade Agreement developed the process for new workplaces creation and increasing employment. In fact, the participating countries have simplified for citizens a temporary permit for the business or investment activities. Through the business integration, NAFTA increased the level of competitiveness and profitability, which helped to create new workplaces. Thus, the participating countries provided near 50 million jobs during 1993-2014 (Caulfield, 2010).
As previously mentioned, the North American Free Trade Agreement had a weighty effect on the economies of member countries. According to the deep analysis, the world economists indicate a great list of changes that occurred within 20 years of the agreement. At first, they attempted to define the NAFTA influence on the United States of America. According to the United States Office of the Trade Representative, goods and services trade with the NAFTA countries in 2008 amounted to 1.1 trillion dollars, including 482 billion dollars export and 596 billion imports. In 2009, the US exchange with Canada and Mexico tumbled to 735 billion dollars with 334 billion dollars exports and 401 billion dollars import. Service exchange with NAFTA reached the 110 billion dollars in 2008 with 69.8 billion dollars exports and 40.2 billion dollars imports. Compared with 2008, the volume of United States export to the NAFTA decreased by 19.1% in 2009 but increased by 102% from 1994 and 135% from 1993. The share of the NAFTA in the total volume of United States exports amounted to 31.6% in 2009, which is slightly lower than 32.2% in 1994 ("North American Free Trade Agreement," n. d.). Thus, opening a free trade zone does not significantly affect the increase in United Sates exports to the partner countries of NAFTA (Hufbauer & Schott, 2005). The reason is that United States have had strong relationships with the NAFTA member countries and high integration with Canadian economy before the agreement signing. The main product groups exported from the United States in 2009-2014 were machinery and equipment, electrical equipment, vehicles auto parts, plastic products, and biofuels with oil. This information demonstrates the increasing technological complexity of the produced goods. The Unites States imports from NAFTA amounted to 401.4 billion dollars in 2009, which is 27.7% lower than in 2008 (154 billion dollars), but 126% higher than in 1994. The share of the NAFTA in 2009 was equal to 25.8% of total US imports, as compared with 26.9% in 1994. Import of private business services to the US from NAFTA countries reached 40.2 billion dollars in 2008, which is 0.5% higher than in 2007 and 127% higher than in 1994. Besides, economists analyzed the rapid growth of export and import in a period of 2010-2014. As a result, they concluded that the United States prefer to import mineral raw materials, fuel and labor-intensive goods from the countries of NAFTA (Boskin, 2014).
Figure 3. United States trade (billion dollars) with Canada and Mexico since NAFTA’s entry into force ("The North American Free Trade Agreement," n. d.).
Furthermore, the United States created over 30 million the new workplaces in a period of 1994-2014. At the same time, employment in the US industry fell down to 3.65 million. The transfer of labor-intensive industries to Mexico caused this process. Most new jobs appeared in the service sector. Such process is called «de-industrialization», and it is the next stage of the US economic development. Moreover, since the 20 years of signing the free trade agreement, the United States unemployment rate fell to 5.1% from 7.1%. In addition, trade liberalization is accompanied by faster growth of the wages. For example, the hourly wages of American business sector grew by 0.7% during the period of 1979-1993, or 11% during the entire period. Moreover, the payment increasing procedure expanded 1.5% every year during 1993-2014 ("North American Free Trade Agreement," n. d.). Thus, the NAFTA agreement positively affected the US economy through the time of 1994-2014. This impact reflected in the growth of the main macroeconomic indices, reducing the unemployment rate, and changing the export commodity structure towards manufacturing high technology products (Caulfield, 2010).
Secondly, the financial analysts noticed the NAFTA influenced Canadian economy. Due to their exploration, this agreement helped to develop work efficiency and extend specialization of the Canadian economy. Besides, it improved the competitiveness of Canadian exports and increased its structure of industrial production. Moreover, with the ability to the freely access the US and Mexican markets, Canadian companies were able to expand their presence in previously closed areas such as financial services, automotive, trucking, energy, and fisheries. Furthermore, duty-free imports of Canadian goods to the United States and Mexico have led to a decrease in their prices, which stimulated the growth of demand and helped to increase sales abroad. As a result, the agreement helped to lower the prices of the imported goods, which was a great advantage for the Canadian consumers. Besides, imports of cheaper foreign goods led to the replacement of the less efficient domestic producers in the Canadian market in a period of 1994-2014. Moreover, NAFTA offered the advantages to Canadians since it excludes high Mexican duties, which customarily were placed on the import of Canadian agrarian products. However, the main indicator of the successful realizations of NAFTA is the dynamic growth of the foreign trade in Canada. In fact, Canada's trade with the partner countries was 626.3 billion in 2008, which is the three times bigger than in 1994. In fact, Canada's main trading partner is the United States. The volume of exchange between Canada and the United States has practically multiplied since 1994 and reached more than 700 billion dollars in 2014. Additionally, the normal yearly increase rate of Canadian production exports to the United States was 6.3% during 1994-2014. Furthermore, Canadian exports to the US amounted 375.5 billion dollars in 2008 ("North American Free Trade Agreement," n. d.). Despite the geographical distance, the mutual trade of goods between Canada and Mexico has also increased, accounting 23.8 billion dollars in 2008, which is 424% higher comparing to the period before the agreement has been signed. Since 1994, Canada's GDP grew at a faster rate than the GDP of Mexico or the United States. In 1998, the growth of the Canada's exports to NAFTA was equivalent to the aggregate volume of Canada's exports to Japan and 15 European countries (Boskin, 2014). These figures show a beneficial influence of the North American Free Trade Agreement on the Canada's flow of imports and fares. NAFTA helped Canada to expand the exports of equipment, communications, and automotive electronics. This process led to the development of the automobile industry in Canada. Despite the accelerated pace of growth of the Canadian economy, the economists noticed a gap in the level of efficiency of production between Canada and the United States. Furthermore, the United States has outpaced work efficiency in Canada and after the agreement; the difference became even more visible. Due to the participation in this agreement, Canada was able to create new workplaces and raise the salary of the Canadian workers. In fact, the economists estimated the appearance of over 5 million new workplaces in the period of 1993-2014. For example, the number of employees in Canada reached 17.1 million people out of a total population of 33.3 million people in 2008. Moreover, Canada's participation in NAFTA increased the investment attractiveness of its economy, which contributed to an increase of FDI inflows. Therefore, the FDI in the Canadian economy amounted to more than 300 billion dollars in 2014. Besides, NAFTA had a significant impact on the growth of bilateral trade between the United States and Canada. Furthermore, Canada is the leading importer of the United States agricultural products. In fact, the volume of the United States agricultural exports to Canada increased by about three times during 1994-2014. Consequently, NAFTA has a positive impact on the Canadian economy, strengthening its economic and trade ties with the United States and Mexico (Kong & Wroth, 2015).
Finally, the economists analyzed the NAFTA impact on the economy of Mexico. In fact, when the agreement came into force in 1994, Mexico abolished approximately 50% of the customs tariffs on the industrial goods imported from the US, and liberalized some non-tariff barriers (Orme, 1996). Besides, Mexico wiped out all taxes on mechanical merchandise by 2003, and on various agricultural items imported to Mexico from the US in 2008. In fact, Mexico's economy took the 13th place in the world in terms of GDP ("North American Free Trade Agreement," n. d.). Besides, it is the third greatest trading accomplice of the United States and the second market of the United States foreign trade. Undoubtedly, this achievement was caused by the NAFTA formation. There are several positive effects of the changes in economies associated with membership in NAFTA. The first effect is the state property privatization, deregulation, and the reduction of state support of the inefficient sectors of the Mexican economy. The second is the growth of trade. Thus, the bilateral trade between Mexico and the United States grew more than four times, since the agreement was signed. Moreover, the Mexican goods export to the United States rose to over 300 billion dollars in 2014 in comparison with 39,9 billion dollars in 1993 ("North American Free Trade Agreement," n. d.). The United States exported goods to Mexico accounted for 136.5 billion dollars in 2007, which was 242% more than in 1993. During the period when Mexico signed the NAFTA agreement, the GDP increased by over 50% (Boskin, 2014).
Figure 4. Imports for Mexico (billion dollars) before and after NAFTA ("The North American Free Trade Agreement," n. d.).
Before signing the NAFTA arrangement, the position of the Mexican work sector was less steady than in the United States and Canada. However, since 2005, the Mexican subsidiaries of US companies hired over 900 thousand people, which accounted for 3.3% of Mexico's GDP. Moreover, the salary of Mexican workers is steadily growing since the national currency crisis in 1994 ("North American Free Trade Agreement," n. d.). The other important aspect is the freight and energy liberalization. Due to this process, Mexico attracted foreign investments and engaged in the free border-crossing zone for the export expansion. NAFTA helped Mexican producers receive free access to the capacious markets of the United States and Canada, which was an important factor for the growth of the industrial production. Besides, the NAFTA integration encouraged Mexico to open for the foreign trade, stabilize favorable investment climate and support the growth of the high-capacity internal market. Despite the predominance of the benefits of the NAFTA, the economists noticed some adverse factors that happened during 1994-2014. One of them is the abroad rivalry that has a negative influence on the job placement in the United States and Canada. In fact, the American and Canadian companies moved to Mexico because of the cheap labor. Other adverse NAFTA impact is an increasing dependence of the United States market that raised the vulnerability of Canadian and Mexico’s economies, which is especially evident in times of the United States economic downturns (Kong & Wroth, 2015).
Consequently, NAFTA had a huge effect on the economy of the United States, Canada, and Mexico during the time of 1994-2014. This association, which is currently one of the largest free trade areas in the world, demonstrates clear benefits of trade liberalization. Moreover, the agreement made a significant contribution to the economic growth and improved living standards in all three countries. During the existence of NAFTA, the member countries organized a cooperation for the creation of products and services. This process gave an easier access to the technology, lower production costs, and enhanced the cooperation within the mutual framework with an aim to strengthen the position of these countries in the international markets. Furthermore, the economists noticed the rising rates of the industrial production and share of the high technology products. However, the beneficial effects of integration under NAFTA are uneven. In fact, the United States is an economic and political leader in this agreement. Besides, all three NAFTA countries observed an increase in the volume trade, flow of the direct foreign investment, and employment. As a result, NAFTA is a great example of the successful economic integration between countries with different levels of the economic development.