North American Free Trade Agreement’s Positive Impact

Introduction

In 1994, Canada, the United States, and Mexico launched the North American Free Trade Agreement (NAFTA) and formed the world’s largest free trade area. With signatures from Brian Mulroney of Canada, Carlos Salinas the president of Mexico, and President George W. Bush representing the United States, NAFTA was brought into existence to promote the economic wellbeing of the three countries. By 1998, total three-way trade among Canada, Mexico, and United States rose to $752 Billion. Some critics have expressed a negative attitude towards this trade agreement. They have pointed out that Canada’s participation in this agreement has resulted in more negative implications as compared to the positive ones. Contrarily, this paper aims to show that NAFTA has had great positive implications on the Canadian economy. This paper will identify these economic implications through the identification of its contribution to the National Gross National Product, its National Saving Rate, and the unemployment rate since the signing of the NAFTA agreement. In addition, the paper will show how the free trade agreement has facilitated capital movement across these three countries, therefore, improving investment in Canada and also increase the amount of export from Canada to the United States and Mexico. In addition, the paper aims at showing that the working opportunity will be increased as a result of NAFTA.

This study acts as a reference upon which policymakers can refer to come up with policies that advance the economic and social interests of Canada. The paper seeks to ascertain the position that Canada’s Gross National Product has increased steadily since 1994. In addition, the National Saving Rate has also improved greatly within the same period of time. Furthermore, the rate of unemployment in Canada has reduced greatly while investments were also improved due to the facilitated capital flow. All these developments are attributed to the NAFTA agreement.

Background

In 1992, three heads of states engaged in a move that was aimed at improving the economic cooperation between their respective states. Prime Minister Brian Mulroney of Canada, President George Bush of the United States of America, and President Carlos Salinas of Mexico signed a trade agreement act that has since promoted economic growth and has also led to improved living standards for the member countries’ citizens. The North American Free Trade Agreement was then ratified in 1993 by the legislative arms of the individual countries. On 1st January 1994 that the agreement was put into force.

Although the agreement can be attributed to the Clinton administration, the foundation of this agreement can be traced well back to the Reagan administration in 1984 after the passage of the Trade and Tariff Act by Congress. With this Act, the president was given the power to push for the free trade agreement while Congress’s only involvement was the approval or disapproval of the points from which the negotiations would be based but they could not make any changes on these points. Figuring the likely positive economic implications of this agreement, the Canadian premier, Brian Mulroney decided to join the negotiation table with Reagan. This resulted in the formation of the now-suspended Canada-US Free Trade Agreement which was signed in 1988 and commenced the following year.

The Bush administration realized that the tariffs on exports to Mexico were approximately 250% higher than what they charged Mexico’s imports to the US. Accordingly, Reagan resorted to entering into trade negotiations with President Salinas of Mexico that would allow for a liberalized trade between them. As the negotiations continued, Canada took the lead requesting the three nations to come up with a trilateral agreement in the year 1991. This marked the birth of NAFTA.

NAFTA’s birth was stimulated by various economic and social conditions. First, the role of NAFTA was to ensure that the flow of goods between the three-member countries was facilitated. This could only be achieved through the removal of trade barriers. Second, through NAFTA, the member countries aimed at creating conditions that would offer a platform for fair competition among them. Thirdly, by promoting this, the countries would be allowing for increased investment opportunities within and outside the region. Fourth, protection and enforcement of intellectual property rights was another obligation for NAFTA. Considering that disputes are part of any trade relationship between two entities, NAFTA was created to facilitate dispute resolution between the member countries. Finally, NAFTA would provide the framework by which other trilateral endeavors would be based for the aim of promoting the interests of NAFTA.

Despite the named importance, the establishment of NAFTA has experienced a lot of opposition. There have been several individuals who have pointed out the negative side of this agreement. According to them, the formation of NAFTA was simply the promotion of imports from Mexico and Canada. Through the facilitated flow of goods between the member countries, the US has been exposed to the danger of an imbalance of trade. It risks importing more goods than those they export. Furthermore, it is argued that the contribution of this agreement to the GDP of a country could be negligible after all. For instance, the arguments from the US point out that the country has only witnessed a 1% GDP growth since the signing of the agreement. Comparatively, the Mexican Peso is lower in value than the Canadian Dollar. This forms one of the greatest negative impacts of NAFTA on Canada. Because of the agreement, the Mexican Peso gained strength. Accordingly, imports from this country cost more than what was initially experienced. This means that the agreement increased the cost of importation for Canada from Mexico.

Labour imbalance forms the other argument for the opponents of this agreement. According to them, the NAFTA stipulations sidelined the minority workers, women and further weaken the labor unions. Through their eyes, the labor accords of NAFTA are weak and hence fail to protect the common worker from job loss as witnessed in various industries. Of specific interest is the demographic bracket of women and ethnic minorities who rely mostly on companies that have been greatly implicated by the NAFTA rules.

As much as negative impacts of NAFTA have been identified, it is important that the positive part be emphasized while the best ways of addressing the negative aspects of NAFTA are devised. It is important that the opponents of this agreement understand its contribution to the Canadian economy.

Proposal

Considering the points of contention that have led to the formation of two sides, this section of the paper will bring forward a solution that will act as a bridging gap that will ensure that a solution is found. While the opponents of the formation of NAFTA argue that the negative impacts of this agreement outweigh the positive ones, the truth is that the general contribution of NAFTA to the Canadian economy cannot be underestimated. Although this paper argues that NAFTA’s impacts are more positive than negative, it is without a doubt that these mentioned negative impacts exist. It is, therefore, more constructive to understand these negative impacts and identify a way through which they can be corrected. For instance, one of the major complaints by the opponents of this agreement has been the weak labor accords in the agreement that have impacted negatively on job securities for women and ethnic minorities. To curb this problem it is important that the policymakers come up with good labor accords that will strengthen the existing weak ones and hence result in well stipulated organizational systems that will promote the interests of the women and ethnic minorities.

By employing this approach, the contagious issues will be dealt with. As argued earlier by this paper, NAFTA has exhibited several positive impacts on the Canadian economy which cannot be denied even by the opponents of the agreement. This proposal is therefore authentic because it offers a solution that will bring the two sides together. Firstly, it will serve the interest of the proponents because it will offer a solution of bettering the agreement and hence making it less prone to arguments and debates. On the other side, this proposal will rectify the few aspects of the agreement that have brought about contention hence allowing the agreement to retain only the positive aspects while the negative ones are addressed.

How can this be achieved? To begin with, the policymakers must take it as their responsibility to readdress the issue of labor relations. The aspects of the labor accords specified within the agreement that subject the women and the minorities to unfavorable working conditions must be corrected. In addition, one of the contagious issues involves the risk of an imbalance of trade as an increase in imports could result in more imports than exports. This can also be addressed through trade regulation. While the agreement gives room for more imports, it as well gives room for more exports considering that the flow of goods between the three countries has been facilitated. Canada should therefore ensure that more export trade is enforced so that the risk of an imbalance of trade is avoided.

Analysis

The proposal mentioned above provides the most recommendable solutions to solve the contentions associated with NAFTA. However, there are other alternatives that could be considered. Although they are also viable, their negative implications on the economy outweigh their positive contributions by far. One of the alternatives includes abolishing the agreement completely so that the three countries operate like any other country with full enforcement of taxes and other trade barriers. Unfortunately, this will impact greatly on the economy.

Impacts of abolishing the agreement

By deciding to employ this alternative, the economic benefits that Canada has enjoyed since the formation of the agreement will be lost. For example, since the formation of this agreement, the three countries have witnessed a great increase in total trade. Currently, the total trade between Canada and the United States stands at $752 billion while the Canadian Mexican cooperation stands at $484 billion. This, according to statistics is an increase of 80% for the trade between Canada and the United States of America and a double increase for the trade between Canada and Mexico.

Statistics from Canadian foreign affairs and international trade also point out that there has been substantial growth in exports within the NAFTA region. This has been especially much in high-value sectors like automotive equipment other industrial goods and machines. This is evidenced by the great increase in exports of these products in 1998 where the total export to Canada and the European Union’s 15 countries was approximately equal to that of the same exports within the NAFTA region. Furthermore, the credit crunch experienced by the world economy greatly impacted the total exports from Canada. Considering the exports to other important markets, there would have been a great deficit in the export. However, the exports in the NAFTA region offset this imbalance. In fact, the exports to NAFTA have increased steadily from 1993 to 1998. During that year, they accounted for 84.3% as opposed to 80.8% witnessed in 1993.

Although the imports from the NAFTA region have also increased since the formation of the agreement, it cannot be termed as an imbalance of trade. For instance, the total cost of Canada’s imports from the United States has always been lower than the exports to the same region. According to data from the foreign affairs and international trade department, the exports to the US have always increased since the formation of NAFTA. The table in index 1 shows the Canadian exports to the United States since the formation of the trade agreement.

The above table indicates that the export trade between Canada and the United States of America has witnessed a steady increase since the NAFTA agreement. The table above shows that Canadian exports to the United States of America in 1993 were $151 billion a value that increased steadily to a total value of $271 billion in the year 1998. This trade has now increased to $339.5 billion by the year 2008 (office of Trade representative). Considering the imports from the US, it is clear that the importations have also increased but not to the level that would cause a trade imbalance. Considering the other diagram showing the rate of imports of Canada from the United States shows that the number of imports has increased. However, the rate of increase has not at any point surpassed the export level. This means that despite the level of increase in the flow of goods, the balance between imports and exports has been contained to the favorite side at the advantage of Canada. The following table shows the number of imports that Canada has had from the United States.

The above table shows that the total imports from the United States by Canada amounted to $117 billion in the year 1993. The imports however increased to $203 billion in the year 1998. This further increased to 261 billion in the year 2008. This increase has been attributed to the facilitation of goods flow between the two countries in the NAFTA agreement. Comparatively, Canada has maintained a favorable balance of trade since the inception of NAFTA’s rules.

The impact of NAFTA on labor can be identified as one of the greatest negative implications on the economies of Canada and Mexico. Through the weak accords that do not promote the interests of the members of the society that are less privileged, the agreement has driven many peasants to joblessness hence increasing the gap between the rich and the poor.10 The OECD study curried out between its members to identify the impacts to labour of intergovernmental organizations point out that labour has been implicated negatively by NAFTA.

In the above chart, the OECD line was used as the control to identify the effects of NAFTA on the inequality of income between the United States of America, Mexico and Canada. Using the given chart, the OECD average represents the global average of the rate of inequality of income. In the early seventies, the OECD trend experienced slight decrease to the mid eighties before it assumed a steady increase that persisted to the mid 2000s.

Canada portrays a clear picture of the impact of NAFTA on labour in the North American region. The data indicates that Canada had experienced a slight but steady decrease in inequalities in income. In fact, it was less than the average of the global trend as represented by the OECD data. This trend was persistent until the mid-nineties which were coincidentally the years which witnessed the ratification of NAFTA. Before the ratification of NAFTA, poverty rates in Canada had been declining. However, this trend was changed immediately after the ratification through to 2008 where it stood at a rate of 12%. In addition, the rate had been maintained below the OECD standard for all these years until the very year that the agreement was ratified. The rate started shooting until it even surpassed the OECD average.

From this chart, one conclusion remains inevitable. The ratification of NAFTA had great implications on the labour of the North American countries. Both Canada and the United States had negative implications while Mexico experienced a positive outcome. This means that the stipulations of NAFTA concerning labour had some weak points that did not put into consideration all the three member states. This is the most contagious part of NAFTA that has created the most heated controversy as to whether NAFTA is an organization that adds value to the economic endeavors of Canada or not.

What are these limits that have led to negative impacts on the Canadian and American labour markets while favoring the Mexicans? During the formation of NAFTA, the Clinton administration realized that the labour issue in NAFTA needed to be addressed more emphatically. It was realized that Mexican labour laws had no impact on the labour market due to weak enforcements. As a result, the United States wanted to form an arm that would ensure enforcement of labour laws within each member country. In fact, the United States expected that this would act as the platform from which the Mexican labour laws would be reinforced. However, the American ambition was killed by the opposition from Mexico and Canada. This therefore left a single solution. The member countries were made to sign an agreement that they would ensure that the labour laws were enforced in their respective countries. By signing this agreement, the countries vowed to be committed to compliance and also to ensure that they facilitated enforcement mechanisms. This marked the weakness of the NAFTA labour directives. They failed to come up with a mechanism through which the labour laws from each member countries would be enforced. As could have been expected, Mexico has never emphasized on the adherence to the agreement. They never came up with a body to enforce compliance and adherence to its labour laws. Time and again, its labour laws have been violated.

Alternatives

As viewed earlier, NAFTA implications have not been negative on the balance of trade. This means that the most contagious point is labour which has exhibited negative implications on the economy of Canada. To curb this problem, there are two main approaches that will ensure that the contagious issues are addressed. These are the alternatives that will ensure that NAFTA continues to promote the living standards of the Canadian people. The two are ensuring that a commission is formed that would ensure that labour laws within the three members are enforced. This will address the main point of contention which has been weak labour accords by NAFTA. The second alternative is the total disbandment of NAFTA because of its weakness that has led to increase in income disparities within member country.

By deciding to disband the whole organization, the region will have chosen to reintroduce the tariffs that have since been waived by the NAFTA agreement. In addition, there will be no more easy movement of goods from one country to the other. For Canada, NAFTA accounting for 80.8% of their export market will mean that this is no more a privilege to enjoy. In addition, the advantage that has been earned through trade within NAFTA will cease to exist. For instance, Canada would have experienced a great drawback due to the current financial crisis. However, it was throgh trade within the NAFTA region that the short was offset. Also, the total exports of Canada to the NAFTA region were approximately similar to a combination of Japan and all the members of European Union when put together. This means that NAFTA is a very important part of Canada’s economic growth. However, totally disbanding NAFTA would be important. For instance, by totally disbanding NAFTA, it is possible that Canada’s income disparities would be reduced greatly to resume their initial position which was below the OECD average.

The best alternative is so far one that will put into consideration both sides of the argument. This is to say, an approach that would understand and appreciate the contribution of NAFTA to the economies of the three member countries. However, this should not be the only view of a good approach.

The approach should also consider the negative impacts of the agreement on the economies of the countries. This means that formation of a body whose role will be enforcing the labour laws within these member countries as initially planned by the United States will be the best way forward. This method does not only retain the advantages of NAFTA as pointed out earlier, but it also addresses the main contagious issue associated with this agreement. Formation of a single commission to deal with compliance and enforcement of labour laws within member countries will serve as the utmost solution for the strengthening of the labour

accords that will eventually lead to equal opportunities for ethnic minorities and women who have been sidelined by the existing labour accords that do not give strength to labour unions. With reinforcements and less people will be affected by job losses and this will reduce the gap between income disparities within NAFTA member countries.

Recommendations

Considering the mentioned advantages and disadvantages of the two possible alternatives to this problem, it is important that Canada assumes the second alternative. It is recommended that Canada pushes for structural reforms within NAFTA so that an arm or a commission is developed within this organization that will be given the mandate to ensure that member countries are abiding to the stipulations of the compliance agreement. Members must comply with the labour rules. To be precise, it will be the role of the commission to ensure that it enforces compliance to the rules within the given countries. This will solve the most contagious aspect of NAFTA that have acted as the main tool of attack by the opponents of the agreement.

Conclusion

It is true that NAFTA has had to withstand scathing attacks from opponents who have insisted that this is an organization that promotes more of failure than success. This paper aimed at identifying whether NAFTA is truly an organization that promoted failure or is it an agreement that promotes success within Canada. Accordingly, it was found that NAFTA contributes greatly to the Canadian economic development as it makes up the main market for its exports. However, it was identified that this agreement was not well organized when it comes to the issues of labour. Its weak accords have led to great instances of job losses within Canada and America. Therefore, it was found out that the best way forward for this agreement is not to disband it totally. However, structural reforms are the necessary way forward. Through the formation of a commission that would ensure that the member countries are complying with the set laws concerning labour. It will be the role of this commission to ensure that it enforces adherence to the laws. This is the best way forward for Canada’s involvement in NAFTA. It is therefore important that policy makers in Canada push for these reforms so that the country continues with the good economic performance as exhibited during its involvement in trade agreement between the three countries. With this, Canadian economic power will not only be strengthened but it will be developed to last for ages.

References

Foreign Affairs and International Trade. The NAFTA’s Impact, 2009, Web.

Hufbauer, Gary. and Schott, Jeffrey. NAFTA Revisited: Achievements and Challenges. New York: Peterson Institute, 2005.

Human Rights Watch. The NAFTA Labour side accord, 2009, Web.

Office of the United States Trade Representative. North American Free Trade Agreement, 2009. Web. 

Vogel, Richard. Free Trade Labour: A Zero Sum Labour, 2009. Web.

White, William. The Implications of the FTA and NAFTA for Canada and Mexico, (n.d) 2009. Web.