North American Free Trade Agreement (NAFTA)

Related Terms: Globalization

The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed between the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day, the three countries became the largest free market in the world—the combined economies of the three nations at that time measured $6 trillion and directly affected more than 365 million people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and services; to remove investment restrictions; and to protect intellectual property rights. This was to be done while also addressing environmental and labor concerns (although many observers charge that the three governments have been lax in ensuring environmental and labor safeguards since the agreement went into effect). Small businesses were among those that were expected to benefit the most from the lowering of trade barriers since it would make doing business in Mexico and Canada less expensive and would reduce the red tape needed to import or export goods.

Highlights of NAFTA included:

• Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism.
• Elimination of nontariff barriers by 2008. This includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced.
• Establishment of standards. The three NAFTA countries agreed to toughen health, safety, and industrial standards to the highest existing standards among the three countries (which were always U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The speed of export-product inspections and certifications was also improved.
• Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution, special side agreements were included in NAFTA. Under those agreements, the three countries agreed to establish commissions to handle labor and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently. Environmental and labor groups from both the United States and Canada, however, have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced.
• Tariff reduction for motor vehicles and auto parts and automobile rules of origin.
• Expanded telecommunications trade.
• Reduced textile and apparel barriers.
• More free trade in agriculture. Mexican import licenses were immediately abolished, with most additional tariffs phased out over a 10-year period.
• Expanded trade in financial services.
• Opening of insurance markets.
• Increased investment opportunities.
• Liberalized regulation of land transportation.
• Increased protection of intellectual property rights. NAFTA stipulated that, for the first time, Mexico had to provide a very high level of protection for intellectual property rights. This is especially helpful in fields such as computer software and chemical production. Mexican firms will no longer be able to steal intellectual property from companies and create a "Mexican" version of a product.
• Expanded the rights of American firms to make bids on Mexican and Canadian government procurement contracts.

One of the key provisions of NAFTA provided "national goods" status to products imported from other NAFTA countries. No state, provincial, or local governments could impose taxes or tariffs on those goods. In addition, customs duties were either eliminated at the time of the agreement or scheduled to be phased out in 5 or 10 equal stages. The one exception to the phase out was specified sensitive items, for which the phase-out period would be 15 years.

Supporters championed NAFTA because it opened up Mexican markets to U.S. companies like never before. The Mexican market is growing rapidly, which promises more export opportunities, which in turn means more jobs. Supporters, though, had a difficult time convincing the American public that NAFTA would do more good than harm. Their main effort centered on convincing people that all consumers benefit from the widest possible choice of products at the lowest possible price—which means that consumers would be the biggest beneficiaries of lowered trade barriers. The U.S. Chamber of Commerce, which represents the interests of small businesses, was one of the most active supporters of NAFTA, organizing the owners and employees of small and mid-size businesses to support the agreement. This support was key in countering the efforts of organized labor to stop the agreement.

NAFTA AND SMALL BUSINESS

Analysts agree that NAFTA has opened up new opportunities for small and mid-size businesses. Mexican consumers spend more each year on U.S. products than their counterparts in Japan and Europe, so the stakes for business owners are high. (Most of the studies of NAFTA concentrate on the effects of U.S. business with Mexico. Trade with Canada has also been enhanced, but the passage of the trade agreement did not have as great an impact on the already liberal trade practices that America and its northern neighbor abided by.)

Some small businesses were affected directly by NAFTA. In the past, larger firms always had an advantage over small ones because the large companies could afford to build and maintain offices and/or manufacturing plants in Mexico, thereby avoiding many of the old trade restrictions on exports. In addition, pre-NAFTA laws stipulated that U.S. service providers that wanted to do business in Mexico had to establish a physical presence there, which was simply too expensive for small firms to do. Small firms were stuck—they could not afford to build, nor could they afford the export tariffs. NAFTA leveled the playing field by letting small firms export to Mexico at the same cost as the large firms and by eliminating the requirement that a business establish a physical presence in Mexico in order to do business there. The lifting of these restrictions meant that vast new markets were suddenly open to small businesses that had previously done business only in the United States. This was regarded as especially important for small businesses that produced goods or services that had matured in U.S. markets.

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