The North American Free Trade Agreement

Introduction to International Business

Negative Effects on NAFTA5On the Mexican Side5

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NAFTA and the Free Trade Area of the Americans8

The Future of Rules of Origin in NAFTA Trade8

The North American Free Trade Agreement (NAFTA), which built on the 1989 U.S.-Canada Free Trade Agreement (CFTA), is the most comprehensive regional free trade agreement ever negotiated. It created the world’s largest free trade area: 380 million people producing nearly $8 trillion dollars worth of goods and services.

On January 1, 1994 the North American Free Trade Agreement entered into force. One of the main objectives of the Agreement is the elimination of tariffs between Canada, Mexico and the United States on “qualifying” goods by the year 1998 for originating goods from Canada and for originating goods from Mexico by the year 2008.

Total North American trade increased from $293 billion in 1993 to $420 billion in 1996, a gain of $127 billion or 43 percent during NAFTA’s first three years. Mexico and Canada purchased $3 of every $10 in U.S. exports and supplied $3 of every $10 in U.S. imports in 1996.

Thanks to NAFTA, Mexican tariffs—which had averaged 10 percent before the trade agreement was implemented—now average less than 6 percent, while average U.S. tariffs have fallen from 4 percent to about 2.5 percent. As a result, U.S. exports to Mexico grew by 37 percent from 1993 to 1996, reaching a record $57 billion.3 During this period, U.S. exports to Canada also increased by 33 percent, to $134 billion. Total two-way trade between the United States and Canada was $290 billion in 1996, while total two-way trade between the United States and Mexico was nearly $130 billion. Moreover, U.S. market share in Mexico increased from 69 percent of total Mexican imports in 1993 to 76 percent in 1996. During NAFTA’s first three years, 39 of the 50 states increased their exports to Mexico; moreover, 44 states reported a growth in exports to Mexico during 1996 as the pace of U.S. exports to that country accelerated.

NAFTA has shattered the myth that U.S. trade deficits destroy U.S. jobs. The combined U.S. trade deficit with Canada and Mexico increased during the first three years of NAFTA’s implementation—from $9 billion in 1992 to $39.9 billion in 1996—because Canada and Mexico suffered economic recessions. U.S. exports to NAFTA countries currently support 2.3 million U.S. jobs.

The largest post-NAFTA gains in U.S. exports to Mexico have been in such high-technology manufacturing sectors as transportation and electronic equipment, industrial machinery, plastics and rubber, fabricated metal products, and chemicals. NAFTA has encouraged U.S. and foreign investors with apparel and footwear factories in Asia to relocate their production operations to Mexico.

In December 1995, the Clinton Administration postponed indefinitely the implementation of a NAFTA deadline to allow Mexican trucks to circulate in the southwest United States.

President Clinton’s first official trip to Mexico this month came at a time in which relations between the two countries were at their lowest point in years. The trade and investment growth achieved during NAFTA’s first three years has been eclipsed by the peso crisis and political turmoil in Mexico and by growing bilateral tensions over drug control policy, immigration, and the Helms-Burton Act’s tightening of economic sanctions against Cuba. These tensions in U.S. Mexico relations have surfaced because the Clinton Administration did not assign a sufficiently high priority to Mexico during its first term in office. NAFTA, however, was never intended to be anything other than a free trade agreement—a three-way pact by the United States, Mexico, and Canada to eliminate all tariff and non-tariff barriers to trade over a period of 10 to 15 years. NAFTA was designed to encourage faster growth in North American trade and investment, which it has been doing successfully since January 1, 1994.

One of NAFTA’s important achievements has been to “lock in” the process of economic and political reform under way in Mexico for the past decade. Mexico’s membership in NAFTA, the World Trade Organization, the Asia-Pacific Economic Cooperation forum, and the Organization for Economic Cooperation and Development has created international commitments and linkages that it cannot ignore. Even though The Heritage Foundation’s 1997 Index of Economic Freedom still accords Mexico a ranking of 3.35, or “Mostly Not Free,”12 Mexico has become a more democratic country since NAFTA was implemented.

Paúl Picard del Prado, president of the Food Board at the National Manufacturing Industry Chamber (Canacintra), says the first five years of the North American Trade Agreement (Nafta) have been good for Americans, but not for Mexicans. Meanwhile, assembly plants that export semi-finished goods (maquiladoras) have seen significant growth under Nafta. The Border Trade Alliance, however, will focus on Nafta’s future at its first international conference next month in Monterrey, Mexico, entitled “The 21st Century: Planning the Way.”

Companies with high import-export volumes do business in dollars, while professionals like lawyers or accountants bill clients in dollar rates. But that dollarization touches only a certain upper crust of society some observers contend. A recent poll surprised many political analysts when it showed that two-thirds of respondents in the industrial city of Monterrey, and more than half of respondents in Mexico City, were ready to welcome the dollar as their everyday currency.

The American Coalition for Competitive Trade (known as ACCT) plans this month to file the first of several legal challenges to the NAFTA and GATT treaties and the $53 million bailout of Mexico. Two years ago, at an ACCT conference on NAFTA, von Raab predicted that passage of the trade agreement linking the Mexican and American economies would lead to “chaos on the border,” and so it has. Thomas Considine, director of the federal government’s Drug Enforcement Administration, advised a Senate committee in August that drug gangs in Mexico could eventually rival the ruthless ring now operating in Colombia. A Congressional Joint Economic Committee reported that “Mexican imports to this country cost the United States 137,000 jobs” in the nine months following passage of NAFTA. Imports from Mexico have soared since then, perhaps tripling the job-loss figure. “Trade with Mexico has been a big factor in the expanding U.S. trade deficit this year,” says trade correspondent Richard Lawrence in the August 18th Journal of Commerce. A study by Vanderbilt University documents some of the specific consequences of NAFTA: tomato production down 25 percent in Florida, Scott Paper Company cutting more than 10,000 jobs worldwide prior to opening multimillion-dollar plants in Mexico, the virtual elimination of the apparel industry in the United States.

Trade agreements can have negative impacts on efforts to achieve sustainable development if they do not adequately address environmental issues. Increased wealth as envisaged within NAFTA, and that this would inevitably lead to better environment was a misnomer recognized by Canada, USA and Mexico.

Increase trade volumes and general spiral in a population’s wealth have environmental impacts. Environmental regulations by individual countries affect others.

There are several fundamental environmental issues that are currently being addressed by NAFTA. Permist trade in compliance with or to enforce international conservation or environmental protection agreements.

The future of NAFTA and the environment is promising. NAFTA will help clean up existing problems and result in better environmental protection. NAFTA vigorously addresses Mexico – US cross border issues and will promote public participation and due process. For the first time in Mexico, NAFTA guarantees public right of access of information about environmental non-compliance, and improved rights of private

From US perspective, NAFTA works for continued enforcement of the Montreal (CFC) Protocol, the Convention on International Trade in endangered species, and 36 other international agreements. It also ensures that countries can continue to enforce environmental laws.


The NAFTA contains a very simple clause that states that if agreed to by the United States, Mexico, and Canada, other countries may accede to this agreement. Chile subsequently negotiated separate bilateral arrangements with Mexico and Canada, leaving U.S. firms at a relative disadvantage. The CEOs noted that fast track was the key to winning congressional approval of NAFTA expansion, and added that ” without new fast track authority, there can be no expansion of NAFTA to include Chile or other Central and South American countries, and America’s global trade leadership will be irreparably harmed.”(UE News).

Labor Unions, human-rights groups, protectionists, and some environmental organizations have debated the issue of benefits of trade and investment to the US by the current NAFTA agreement, and have strongly opposed the expansion of NAFTA.

The Future of Rules of Origin in NAFTA Trade

As tariff rates on goods traded between the three NAFTA countries continue to decline, NAFTA originating products will gain competitive advantage within the North American market. This advantage makes compliance with NAFTA rules of origin ever more important.

At present, however, investors in Mexico may find in- bond duty drawback programs to offer greater tariff reduction than the NAFTA preferential duties. Pitex and Maquiladora programs were established years ago to promote the export industry in Mexico and create desperately needed jobs. These programs allow materials and equipment to enter the country duty free and the only tariff charge is over the value added to the exported finished product. Under NAFTA, an increasing proportion of maquiladora output can be sold in Mexico (currently 80 percent of a firm’s prior year output) reaching 100 percent in 2001.

T CNN TIME, “Expanding NAFTA Needs Congressional Approval.” CNN.Com. Feb.26, 1997.

UE NEWS, ” New NAFTA Battle Looms.” Sept. 14, 1999.

CNN World News, “In Chile, Clinton seeks patience on free trade.” CNN.Com.April 16,1998.

“Accession of Chile to NAFTA.” January, 1998.

Nafta and GATT Hurt U.S. Economy. Duplantier, F.R. 11Oct 1999 < http://www.americasfuture. net/1995/oct95/af-1022c.html>.

NAFTA AND GATT Undermine Sovereignty. Duplantier, F.R. 11 Author: Title:
Author:LaFranchi, H.

Title:Mexicans start to sing, adiyos peso- hello $$$
Title:The future of rules of Origin in NAFTA Trade
Author: Mexico Direct
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The North American Free Trade Agreement. (2018, Jun 11). Retrieved from