What It Means For United States’ Economy?
The North American Free Trade Agreement (NAFTA) is a free trade agreement, which aimed to reduce the trade barriers between United States, Canada and Mexico. The agreement was implemented by President Bill Clinton in 1994 and was initially negotiated by President George Bush prior to its enactment.
The agreement aimed at eliminating the tariff and non-tariff trade barriers between the three countries to ease the flow of the goods across borders. The objective of NAFTA was to improve the efficiency, boost economic activity in the region by economic integration, and strengthen each participating country’s Terms of Trade.
The trade deal, which was put in place decades ago, is under scrutiny. The current U.S. Administration believes it is in the favor of all participant countries to negotiate a deal that is more relevant to the current times. Economists and political analysts predicted that President Trump would terminate the trade agreement but events turned out differently.
In a recent turn of events, President Trump agreed to renegotiate NAFTA. In his address he said that, ‘It is my privilege to renegotiate NAFTA and bring it up to date.’
The news was later confirmed by Mexican government when they issued a statement saying that, ‘ The leaders have agreed on maintaining and renegotiating NAFTA for the benefit of all three countries’.
NAFTA is under hot water these days, but aside from economics, what other implications does this trade pact have? Political economists and social scientists believe that NAFTA was not solely an economical move; in fact, they believe it had certain political aspirations attached to it as well.
Every free trade agreement aims at fostering positive and cooperative relations between the neighboring countries. The agreement had similar aspirations as it aimed to ease the tensions and improve bilateral relations between U.S. and Mexico and U.S. and Canada.
One of the primary goals of NAFTA was the integration of Mexico with developed economies of U.S. and Canada. Canada and United States saw Mexico as a new consumer market with significant potential. And Mexico saw an opportunity to stimulate sustainable economic growth in the country by trading with developed and high-wage economies of U.S. and Canada. In this way the three countries were to be benefitted by the trade deal.
However, after NAFTA was enacted, The United States experienced a significant increase in unemployment and it became a popular opinion that NAFTA adversely affected American workforce. There are various statistics to support the claim but the above mentioned statement only presents a partial truth.
According to research conducted by economist Shushanik Hakobyan, blue-collar workers saw a decrease in the wages following NAFTA whereas workers with a college degree and executives benefitted from the agreement.
The research helps clear some myths about correlating NAFTA with unemployment in America. The early 1990’s was a period when production processes started to become automated, and companies replaced human labor with modern technologies to reduce the production costs. The reality of machines replacing human labor holds true even today. Increase in the inclusion of machine learning and artificial intelligence technologies in the production process pose a threat to the human labor force. In addition to that, China emerging as an economic power in the late 1990’s also affected the American job market negatively. Therefore, based on the results revealed from the data, it can be concluded that NAFTA was not solely responsible for the negative shift observed in American job markets.
Canada is United States’ largest trading partner and the trade of goods is averaged at $2 billion a day. The concerning factor for U.S. government is that U.S. deficit with Mexico stands at $50 billion, which is approximately thrice as more as U.S. deficit with Canada (about $15 billion). However, if NAFTA is renegotiated, the terms with Canada will also be negotiated because the deal is essentially between the three countries.
Canadian protection against poultry and dairy products is likely to be negotiated because it is a conflicting factor that inhibits the flow of dairy goods from U.S. to Canada. U.S. farmers believe that if the restrictions in these sectors were eased, they can make more profits by selling products at competitive prices in these industries. In addition to the high tariff barriers in the dairy and poultry industry, Canada also imposes high restrictions on alcohol products such as beer, wine and spirits.
Another bone of contention between Canada and U.S. trade is that Canada is considering localizing the storage of data. However, it is impossible for international businesses to localize the company’s data and manage a database separately in each country, where it operates. The process is neither time effective nor is it cost-effective.
NAFTA is portrayed extremely negatively, especially in the current political scenario. It is imperative to understand that the American economy has also benefitted from the unrestricted flow of goods between the borders. Because of the free trade agreement, it has managed to gain access to a large consumer market on both ends of the border. However, we have yet to see how the renegotiated terms will affect the American economy in the future.