President Donald Trump signed an executive order January 23, 2017, to renegotiate NAFTA. He would require Mexico to end its value-added tax on U.S. companies. He claims it acts as a tariff on U.S. exports to Mexico. Trump would ask Mexico to end the maquiladora program because it undercut American workers by sending jobs to Mexico.
Trump threatened to withdraw from NAFTA if Mexico doesn’t agree to these terms. In that case, he would also impose a 35 percent tariff on Mexican imports.
It took three U.S. presidents more than a decade to get NAFTA off the ground. President Ronald Reagan conceived of a North American trade agreement to compete with the Treaty of Rome, which later became the European Union. In fact, NAFTA and the EU's Treaty of Maastricht were both signed in 1993. President H.W. Bush negotiated the agreement, while President Bill Clinton signed it.
To determine if the pros outweigh the cons, it depends on who you are and how NAFTA has affected you. American workers who lost their jobs to NAFTA are against it. On the other hand, the jobs outsourced to Mexico lowered prices for gas and food. This is something everyone benefits from, but most don’t realize it's because of NAFTA.
By easing trade between 450 million people in three countries, NAFTA more than quadrupled trade in 20 years. This boosted economic growth in all three countries. It also led to lower prices on groceries and oil in the United States.
Grocery prices went down because NAFTA lowers the cost of produce imported from Mexico and Canada. While this means less demand for American agricultural products, there is high demand for lower food prices because food is more expensive every year.
Oil prices went down because the United States could now import much of its oil from Mexico and Canada. The elimination of tariffs plus the lack of political tension makes this cheaper than importing from the Middle East.
Even though NAFTA increased the U.S. trade deficit, it still benefited the U.S. economy by increasing exports. NAFTA increased imports of the products Canada and Mexico have comparative advantages in. But at the same time, it increased exports of what the United States does best, like services. The great thing about trade agreements is even if a country doesn’t have a comparative advantage in the global market, they can have an advantage among the other countries in the agreement and therefore increase their exports.
Growth comes with costs, and NAFTA was no exception. NAFTA is criticized for destroying half a million American jobs and lowering U.S. wages. In addition, NAFTA increased the U.S. trade deficit.
How did NAFTA contribute to these problems? First, it cost jobs when manufacturers moved to Mexico to take advantage of lower labor costs. The four states that suffered the most were California, New York, Michigan and Texas. Before NAFTA, these states had a high concentration of factories for motor vehicles, textiles, computers and electrical appliances. Those were the industries most likely to move to Mexico.
Lower wages in Mexico reduced U.S. wages and benefits. That's because workers in the remaining U.S. factories could not bargain for higher wages. Companies could now threaten to move to Mexico if labor unions negotiated too hard. (Source: Kate Bronfenbrenner, "Uneasy Terrain: The Impact of Capital Mobility on Workers, Wages, and Union Organizing," Cornell University, September 6, 2000.)
Some accuse NAFTA of exploiting Mexico's workers, destroying its farms and polluting its environment. Rural Mexican farmers could not compete with low-cost American subsidized corn and other grains. The Mexican farmers who managed to stay in business were forced to use more fertilizers and farm marginal land to survive. That created more pollution and deforestation.
Labor in Mexico’s maquiladora program was cheap because workers had no labor rights or health protection. Thanks to NAFTA, almost a third of Mexico's labor force works in the poor conditions of these manufacturing jobs.
Facts About NAFTA: Statistics and Accomplishments
Fast Facts About the World's Largest Trade Agreement
The North American Free Trade Agreement was created 20 years ago to expand trade between the United States, Canada and Mexico. Its secondary purpose was to make these countries more competitive in the global marketplace. It has been wildly successful in achieving both goals. NAFTA is now the largest free trade agreement in the world.
Why, then, is NAFTA so severely criticized? Its success comes at a cost. One of the problems with NAFTA is that it's reduced U.S. jobs. A second disadvantage is that it has exploited Mexico's farmers and its environment. Find out more about the how and why was NAFTA created, and whether it has successfully fulfilled its purpose.