The North American Free Trade Agreement

The North American Free Trade Agreement (NAFT) is a three-country agreement negotiated by the United States, Mexico, Canada and Mexico. The business arrangement links the economies and markets of Canada, the United States, and Mexico (Hill & Hult, 2019). The trade accord was implemented in January 1994 and involved waiver of tariffs on goods traded between members. Business studies have shown that NAFTA is the most extensive trade area or jurisdiction shared by more than 500,000 million people (Allen, 2019). It is a trade powerhouse with more than $24 million in gross domestic product (GDP). According to NAFTA, in 2018, the United States, Canada, and Mexico GDP were $20.5 trillion, $1.8 trillion and $2.6 trillion (Boskin, 2014). The economic powerhouse had a higher GDP than the $22 trillion countries in the European Union. The trade powerhouse has produced significant nets benefits to the United States, Canadian and Mexican economies.

One of the ways that NAFTA create nets for the three countries is that it reduced import prices. Lowering import prices condensed the danger of inflation and enabled the Federal Reserve to maintain interest rates low. Furthermore, the NAFTA accord led to a reduction in food prices. An A.T. Kearney study has shown that a withdrawal from the trade would cost United States consumers more than $16 billion every year (Boskin, 2014). The move would mean a significant rise in the prices of food at grocery stores (Allen, 2019). The study has also indicated that food beverages in grocery stores would experience the biggest hit with more than a $2.7 billion increase in costs. The beverages would be followed by appliances, electronics, and household goods. Reports have indicated that United States grocery stores have imported from other partners goods worth more than $182 billion (Boskin, 2014). NAFTA, according to these studies, has, over the years, reduced food prices among the partners by $5 billion annually (Allen, 2019). The reduction of food prices is an indication of how the trade accord has produced significant net benefits for member countries.

NAFTA also made trade between the three countries Quadruple by eliminating trade tariffs between the members. In 2018, NAFTA was $1.23 trillion, which is more than four times higher than $297 billion recorded in 1993 (Boskin, 2014). The agreement also created internal rights for entrepreneurs and reduced the cost of doing business in the countries. As a result, there was a profound growth of small businesses in the three economies. The growth led to the production of significant net benefits because it stimulated profits and the economic growth of the partners. Also, between 2018 and 1993, the exports the United States grew its exports to Mexico and Canada from $142 billion and $564 billion (Allen, 2019). The rise made Mexican and Canadian economies the top two export markets for the United States with 34% of its exports. The United States, in 2018, exported goods and world $299 billion and $265 billion to Canada and Mexico, respectively. The U.S. shipments from the partners were $665 billion, which was triple $151 billion recorded in 1993 (Boskin, 2014). Imports represent 26% of the total United States imports. Mexico exported $346 to the United States, while Canada exported $265 billion. By lowering trade tariffs and barriers, NAFTA stimulated commerce and trade among the partners. The numbers are an indication of how NAFTA has stimulated net befits to its members’ economies (Hill & Hult, 2019).

Increased economic growth is the other reason why NAFTA has produced significant benefits for Canadian, U.S., and Mexican economies. For instance, business reports from the United States have indicated that NAFTA stimulated 0.5% annual economic growth in the country. The growth was because of the profound advancement of automobiles, services, and agricultural industries. In 2016, farm shipments from America to Mexico and Canada quadrupled to $43 billion from $11 billion in 1993. As a result, the trade leveraged more than $50 billion in commerce and business investments. Allen (2019) indicated that the elimination of Mexican tariffs had a significant effect on U.S. food exports because Mexico is the top destination for U.S. beef, corn, soybean, and other food products. NAFTA also boosted U.S. service shipments to Canada and Mexico from $25 billion in 1993 to $106.8 billion in 2007. The exports dipped to $63.5 in 2009 because of the financial recession, but by 2018 they had bounced back to $95 billion. The rise shows economic growth in the U.S. that has consistently stimulated net profits for the economy (Boskin, 2014).

Furthermore, NAFTA came during the period of Canada trade liberalization and stimulated the U.S.-Canada trade (Boskin, 2014). Canadian exports to the United States grew to $346 billion from $110 billion. Furthermore, in 2013, the U.S.-Mexican trade also proliferated. Mexican exports grew to 36.95% of total GDP from 8.56% in 1993. NAFTA led to a decrease in trade deficits between the member states, which resulted in significant economic growths. Furthermore, according to Boskin (2014) from 1993 to 2015, Canadian, United States and Mexican per-capita GDP grew 40.3% to $50,000, 39.3% to $51,638 and 24.1% to $9,511 respectively.

Boskin (2014) revealed that NAFTA led to the increase of investments by United States companies to the Mexican food processing sector to $5.3 billion in 1998 from $210 million in 1987. NAFTA created and harmonized the environment for American companies to invest in Mexican food processing plants. As a result, the industry posted an annual expansion rate of 5-10% between 1995 and 2003. Furthermore, according to Boskin (2014), NAFTA allowed and enabled multi-national accords between domestic and foreign companies. The move led to the explosion of convenience and chain supermarkets in the member states. The impact of the NAFTA trade agreement led to economic development in the region that has consistently created major net benefits for Canadian, Mexican, and U.S. economies (Hill & Hult, 2019).

Foreign Direct Investment (FDI) is the other reason why NAFTA has led to the production of significant nets in the U.S., Canada, and Mexico. After NAFTA was endorsed, the U.S. FDI in the Canadian economy tripled to more than $500.9 billion (Hill & Hult, 2019). Financial reports have indicated that, in 2017, America invested $391.2 billion and $109 billion to Canada and Mexico respectively. The growth boosted United States profits by giving them new opportunities to invest. The investments also had significant effects on the growth of industries in both Mexico and Canada (Allen, 2019). Furthermore, in 2017, Canadian and Mexican foreign investments in the United States grew to more than $500 billion. The money was directed to American, insurance, banking, and manufacturing companies. NAFTA also promoted intellectual rights that helped to discourage piracy (Hill & Hult, 2019). Companies began to invest in other countries because they knew international law would protect their interests. NAFTA boosted FDI by reducing investor’s risk by ensuring that foreigners have the same legal and operational standards as locals. Through NAFTA, traders could seek legal claims and privileges from the host government (Hill & Hult, 2019). Economists have stated that NAFTA has brought significant economic growth to the United States, Canada, and Mexico. Within two decades of the treaty, the trade between the countries had grown to more than $1.1 trillion in 2016 form $290 billion in 1993 (Hill & Hult, 2019). The growth has led to cross-border investments that have had positive effects on the economies of the member states.

Lastly, the other reason why NAFTA has brought substantial net profits for Canadian, Mexican, and U.S. economies is that it has created jobs. Four years after enactment NAFTA created more than 5 million jobs in America (Hill & Hult, 2019). The manufacturing industry added more than 800,000 during this period, and after five years, the manufacturing industry had exported $487 billion. The exports produced more than $40,000 in export income for every factory employee (Boskin, 2014). NAFTA also allowed the United States to produce some goods locally and to outsource some of the portions of the manufacturing process in Mexico. Outsourcing resulted in the creation of jobs in Mexico. Boskin (2014) indicated that without NAFTA, the United States would have chosen China to complete the portions instead of Mexico. The Council on Foreign Relations has stated that Canada has registered massive economic gains because of NAFTA. The gains have made allowed the Canadian economy to add more than 4.5 million jobs since 1993.

Conclusion 

The North American Free Trade Agreement (NAFT) treaty links the economies and markets of Canada, the United States, and Mexico. The trade accord was implemented in January 1994 and involved waiver of tariffs on goods traded between the three members. The accord has brought major net profits for Canadian, Mexican, and U.S. economies because it has lowered prices of products, enhanced economic growth, increased trade, and FDI plus led to the creation of new jobs. For example, between 1993 and 2015 Canadian, United States and Mexican per-capita GDP grew 40.3% to $50,000, 39.3% to $51,638 and 24.1% to $9,511 respectively. The growth is directly associated to NAFTA. Also, within two decades of the treaty, the trade between the countries had grown to more than $1.1 trillion in 2016 form $290 billion in 1993. The two examples show how the treaty has brought massive profits to members.

References

Allen, L. J. (2019).  The greening of US free trade agreements: From NAFTA to the present day . Abingdon, Oxon; New York, NY: Routledge

Boskin, M. J. (2014).  NAFTA at 20: The North American Free Trade Agreement's achievements and challenges . Springer. (Boskin, 2014)

Hill, C. W. L., & Hult, G. T. M. (2019).  International business: Competing in the global marketplace . New York, NY: McGraw-Hill Education.