*USMCA/CUSMA replaced NAFTA on July 1st, 2020. Read More...
NAFTA – the North American Free Trade Agreement – came into effect on January 1, 1994, building upon the Canada-U.S. free-trade deal of 1988 and creating the largest free-trade area in the world.
It promised unprecedented market access North America-wide and free and open trade between Canada, the United States and Mexico.
Now, 23 years on, the Trump Administration is clear in its desire to renegotiate NAFTA… The three parties are now in talks for this purpose.
What’s been the general effect of NAFTA?
Early on, it was hoped that the agreement would lead to thousands of new jobs, easing of trade, a narrowing of the income gap and greater prosperity (particularly for Mexico). At the same time, opponents worried the agreement would cause huge job losses for the two richer countries as companies sought make use of lower costs and wages in Mexico.
In reality, NAFTA caused neither the huge job losses feared by the critics nor the large economic gains predicted by supporters.
But the impacts of NAFTA are difficult to isolate and measure since trends in trade and investment are influenced by variables outside the scope of the agreement – factors such as global economic trends, inflation and currency fluctuations.
A clear benefit for the North American economy – and businesses – has been the creation of a seamless supply chain for many goods. The components and labour input for many goods – the automotive industry being a prime example – cross multiple borders in both directions en route to market, allowing industries to increase efficiencies and keep costs down.
Are there winners and losers in this deal?
Let’s take a look at how each of the NAFTA countries have fared since the agreement came into effect.
- Overall employment has increased
- Mexico’s share of the US market has more than doubled – from 5% in 1988 to 13% last year
- Large Mexican farms that rely on exports have profited
- Many cities in central Mexico have seen an emerging, prosperous middle class thanks to the growth in manufacturing jobs
The less good:
- The small-scale agricultural sector has declined substantially
- Prices of some staples – such as corn – have increased substantially
- Many of the new jobs are low-wage factory jobs in industries dominated by large U.S. corporations – and with little job security or opportunity for advancement
- The lowest end of the income scale hasn’t seen much improvement: the Mexican poor remain poor
What they’re after: If NAFTA is reopened, Mexico will likely seek changes in the areas of security, counter-narcotics, and transmigration. Mexico has indicated it may withdraw from the agreement altogether if the new terms are not deemed favourable.
- The overall effect of NAFTA on the U.S. economy has been modestly positive: trade with Mexico and Canada combined now accounts for about five per cent of U.S. economic activity
- U.S. produce prices remain low, largely thanks to Mexican immigrant labour (legal and otherwise)
- The increase in Mexican imports to the U.S. has lowered the price of some consumer goods
The less good:
- The U.S. has lost manufacturing jobs to lower-cost markets (yes, Mexico, but also China and others)… however, this trend was already under way before NAFTA, and is mostly attributed to advances in technology and automation rather than the agreement itself
- Americans aren’t crazy for it: According to a recent Globe and Mail poll, only about half of Americans believe NAFTA has been good for their country
Overall, NAFTA was neither devastating nor transformational for Canada's economy. There have been benefits; however, greater U.S. border security since 9/11 and the emergence of new trade rivals have since watered down some of the initially-positive effects of NAFTA.
- Canadians like it: According to a Globe and Mail poll, 74% of Canadians believe NAFTA has been good for the country
- The share of Canadian goods exported to the U.S. has increased from roughly 70% in 1988 to a high of nearly 90% in the early 2000s (and it has since come down to about 75% due to market diversification)
- Labour productivity has increased, particularly in manufacturing and other older industries
- Canada's sales of oil to the U.S. grew 527% from 1993 to 2015; we became, and have remained, the largest supplier of oil to the U.S. since 2006
The less good:
- Canada’s share of the U.S. market has shrunk from about 19% in 1988 to 13% last year. Canada is now in number two in supplying imports to the U.S.
- Canada has been on the losing end of most NAFTA-related investment disputes with the U.S.
- Large swaths of Canada’s economy remain essentially outside of NAFTA’s influence – most notably agriculture and lumber
- Canada has been frustrated by the issue of lumber, where the U.S. alleges the provinces unfairly subsidize producers
- Most of Canada’s vehicle production has been relocated to the southern U.S. and Mexico.
No one knows for sure what the future holds. Certainly, all three signatories have their wishes and priorities but how it all plays out in the renegotiation is anyone’s guess.
Keep an eye on our “What’s happening with NAFTA” blog to keep on top of this evolving story. And, as always, feel free to email our Free Trade specialists to discuss the latest developments and to make sure you are prepared to make the most of a revamped NAFTA.
Information provided by: NAFTA & Free Trade Dept. - Cole International