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NAFTA and the US: An explainer

What is NAFTA, who are the winners and losers, and why did Trump call it "the worst trade deal" in US history?

US President Donald Trump has told the leaders of Canada and Mexico that he wants to renegotiate the terms of the NAFTA treaty which, on the campaign trail, he labelled "the worst trade deal" ever signed by the United States.

Trump has repeatedly vowed to pull out of the 23-year-old trade pact that he blames for job losses in the US.

What is NAFTA?

The North American Free Trade Agreement is a trade deal between the US, Mexico, and Canada. 

NAFTA lifted tariffs, such as taxes on imports and exports, on virtually all goods traded among the three nations. It also eliminated other barriers for trade.

What was the purpose?

The argument for NAFTA was that – by boosting economic integration – the US, Mexico, and Canada would all see increased economic prosperity.

The goal was to make it as easy for companies to do business across borders as it was domestically.

READ MORE: Donald Trump: US to renegotiate, not pull out of NAFTA

Who signed it?

The agreement was negotiated under President George H. W. Bush. Bill Clinton pushed it through congress after his election, and NAFTA went into effect on January 1, 1994.

Can Trump pull the US out of NAFTA? 

A country can withdraw from the agreement six months after giving notice. Trump can set that in motion without approval by congress.

Can NAFTA be renegotiated?

It is possible for the US to renegotiate the terms. Officials in Canada and Mexico have said they are willing to talk.

Why is Trump against it?

Trump blames NAFTA for wiping out US manufacturing jobs because it allowed companies to move factories to Mexico where labour is cheaper.

Has America lost jobs because of NAFTA?

Researchers have found mixed effects on the US labour force. Some industries have shrunk, while others have grown.

The Economic Policy Institute said in 2013 that some 700,000 jobs had been lost as production moved to Mexico – with California, Texas, and Michigan among the worst hit states.

A 2014 report from the Peterson Institute for International Economics said at most 5 percent of dislocated US workers could be traced to imports from Mexico. It said over 4 million Americans lose their jobs each year by plant shutdowns and mass layoffs, regardless of trade.

A nonpartisan report by congress published in 2015 said "NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters".

Who benefited from NAFTA and who lost?

Economists Shushanik Hakobyan and John McLaren studied NAFTA's effect on the US labour market in 2016.

They saw a severe impact on income among blue-collar workers in the most affected industries and areas. College-educated workers were less likely to be affected, they said, and executives saw some benefits.

"The most affected workers were college dropouts working in industries that depended heavily on tariff protections in place prior to NAFTA. These workers saw wage growth drop by as much as 17 percentage points relative to wage growth in unaffected industries," McLaren told UVA Today.

If NAFTA is not to blame for manufacturing job losses, what is?

It is difficult to separate effects of NAFTA from other developments.

Economists note that manufacturing employment was already in decline before NAFTA was signed.

Much of the decline can be attributed to automation in US industry. Companies have been able to increase output with fewer workers. 

Also, US tariff cuts on Mexican trade under NAFTA were implemented at roughly the same time as tariff cuts with most other countries as the US entered the World Trade Organization (WTO) in 1995.

Competition from Chinese exports increased during the same time period and boomed as China joined the WTO in 2001. Economists are more united in the view that the US has lost more jobs to China than to Mexico.

What has the impact of NAFTA been on Mexico and Canada?

According to the Council on Foreign Relations (CFR), NAFTA gave a major boost to Mexican farm exports to the US, which have tripled since NAFTA's implementation. Hundreds of thousands of Mexican auto-manufacturing jobs have also been created, and most studies have found that the pact had a positive impact on Mexican productivity and consumer prices.

But there are significant downsides: Mexico's economy grew at an average rate of just 1.3 percent a year between 1993 and 2013 during a period when Latin America was undergoing a major expansion, and poverty remains at similar levels to 1994, while mass unemployment has increased.

Some believe that, instead of fulfilling its promise of providing cheaper food to Mexicans, NAFTA deepened Mexico's dependency on food imports, leaving it unprotected from volatility in international food prices and exchange rates, reported recently.

Canada has seen strong gains in cross-border investment in the NAFTA era, according to the CFR: Since 1993, US and Mexican investments in Canada have tripled. Canadian agriculture in particular saw a boost, while employment in Canadian manufacturing held steady. 

However, the "productivity gap" between the Canadian and US economies remains wide: Canada’s labour productivity remains at 72 percent of US levels.

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