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== History and Background ==


=== '''What is NAFTA?''' ===

The North American Free Trade Agreement (NAFTA) was put into practice on January 1, 1994 and eliminated most barriers to trade between the U.S., Canada and Mexico (Topulos 2007).  Some barriers were removed right away while others were eliminated over longer periods of time, ranging from five to fifteen years (USDA 2008).  The agreement addresses energy, textiles and apparel, agricultural products, transportation, investment, and intellectual property, among other things (TCC 2008).  Two related agreements were created after NAFTA to address environmental and labor issues.

=== '''Negotiations before the Treaty''' ===

The agreement itself was signed on December 17, 1992, by Mexican President Salinas de Gortari, U.S. President George Bush and Canadian Prime Minister Brian Mulroney (Cameron 2000).  Incoming President Bill Clinton asserted the need for side agreements to go along with NAFTA, and a number of talks and meetings were held in Washington, Mexico City and Ottawa to negotiate the terms of the two side agreements. The side agreements were signed by all three countries on September 14, 1993 and NAFTA was passed by the United States Senate and Congress on November 20, 1993 (Cameron 2000).

=== '''The North American Agreement on Environmental Cooperation (NAAEC)''' ===

The North American Agreement on Environmental Cooperation (NAAEC) calls for environmental impact analyses by each nation that is a member of NAFTA. The agreement encourages the respective states to consider the interconnectedness of their environments, to promote sustainable development, enforce and comply with environmental regulations, and use pollution prevention practices(SICE 2007).

=== '''The North American Agreement on Labor Cooperation (NAALC)''' ===

The North American Agreement on Labor Cooperation was established to foster the creation of new jobs, improvements in wages and living conditions, and the protection of the rights of workers (SICE 2007).  More secure markets were intended to result in a rise in productivity of firms and the quality of goods. The agreement calls for each country to develop their own laws and regulations concerning labor standards, while also establishing cooperative standards (SICE 2007).  A secretariat performs publicly accessible studies of labor conditions in each country in order to promote transparency (SICE 2007).

== Controversial Legislation ==



 

==='''Chapter 11'''=== 
 

Chapter 11 of NAFTA concerns issues of investment, and the conflict between economic life standards of parties to the agreement and trade or business standards. Disagreement over chapter 11 concerns whether or not NAFTA should follow a system of neutral laws, or one that helps developing countries (Afilalo 2004).  Under the chapter, the governments of the U.S., Canada, and Mexico can be liable for the losses of companies or individuals. Chapter 11 allows international panels to examine the domestic policies of those governments, which is also a disputed issue (Afilalo 2004).

==='''Chapter 19'''===
 

Chapter 19 of NAFTA concerns antidumping and countervailing measures, “Review and Dispute Settlement in Antidumping and Countervailing Matters.” Parties to the agreement can use their own antidumping and countervailing laws with goods produced in that country (Nafta Secretariat 2003).  There is controversy over judicial review of the law (Magnus 2007).  Issues pertaining to Chapter 19 can be reviewed by a panel made up of representatives from the two concerned parties, instead of being reviewed by an Article III court from the Court of International Trade in the U.S., and similar courts in Canada and Mexico (Magnus 2007).  Decisions made by the panels are final (Nafta Secretariat 2004).

==='''Chapter 20'''===

Chapter 20 concerns the settlement of disputes about NAFTA policies and their implementation. First, there is discussion between the two concerned parties, then a meeting between the trade ministers of the two parties, then a meeting of a five member panel. There are also scientific and review boards to gather and analyze relevant information (Nafta Secretariat 2004).

[[Image:000a4ff0.jpg]]

== Economic Impacts ==

=== Overview ===
Since the inception of NAFTA in 1994, the volume of trade between the three countries has more than tripled going up from $297 billion to $930 billion (Office of the United States Trade Representative). NAFTA has led to the elimination of trade barriers between the three members, thus facilitating the free exchange of goods. Because of the trade liberalization and the increased competition, firms from the three countries have been stimulated to become more efficient in order to maintain their competitive edge (U.S. Department of Commerce, International Trade Administration). Currently all the countries are each other’s top three importers or exporters. However, many analysts point out that the trade between the members has been growing even before the agreement and would have still grown at a significant pace without it (Congressional Budget Office). Although difficult to create, a precise assessment of the impact of NAFTA is important because this would determine the future development of the agreement. In the light of the upcoming elections in the U.S., politicians and businesspeople in both Mexico and Canada are wondering what will the new government politics toward the agreement be and what implications will stem from it.

=== Impacts on the United States ===
==== Positive Effects ====
One of the strongest proponents of NAFTA and most vocal promoter of the benefits it has brought is the Office of the United States Trade Representative (USTR). According to its statistics, US manufacturing output has increased with 58% over the period 1996-2003, which is 11 percentage points increase compared to the rate of growth for the previous seven-year period  (Office of the United States Trade Representative). 

In the area of agriculture, the U.S. has benefited tremendously from the freer trade with Canada and Mexico. The two countries are the top two largest markets for US agricultural products, representing together 30% of the exports. While the U.S. food and farm exports to the world have grown with about 65% over a 15 year-period, those to the two other NAFTA members have increased 156% (United States Department of Agriculture). The trade in the area of agriculture has always been strong between the U.S. and Canada. The U.S.-Canada Free Trade Agreement (CFTA), later incorporated in NAFTA has additionally boosted that trend. In terms of its agriculture-trade relationship with Mexico, in the years prior to the agreement, U.S. exports to its southern neighbor were in a downslide. However, after the introduction of NAFTA the trend was reversed and in 2007 72% of Mexico’s agricultural imports came from the USA. 

In terms of employment levels in the U.S., USTR states that the rates in the country have risen with 24% between 1993 and 2007 and unemployment has decreased with 2 percentage points over the same period. Despite the fear that after the introduction of NAFTA cheaper competition from Mexico would trigger a race to the bottom for wages in the U.S., this has not happened. According to official statistics real hourly wages have gone up with over 19% between 1993 and 2007 (Office of the United States Trade Representative). 

The trade liberalization has increased competition and particularly in the heavy manufacturing sector many firms have been forced to become more cost-efficient. Often time, this has resulted in outsourcing to developing countries in Asia. The loss of jobs in the heavy manufacturing sector in the US has inflicted the criticism of many who blame NAFTA for the process. In defense of the agreement, many analysts say that certain jobs in manufacturing would have been outsourced to Asia anyway because of competitive pressures triggered by globalization. In addition, according to Daniel Griswold from the Cato Institute, there has been a switch to more light manufacturing and high-end service-oriented jobs, which usually are paid higher wages (Cato Institute). For many economists this is a natural trend that cannot be blamed on NAFTA.

==== Negative Effects ====
:Many economists point out the negative effects that NAFTA has had on the U.S. One of the major areas of criticism is the trade balance of the country. According to data provided by the U.S. Census bureau, before the introduction of the agreement, the US has had a measurable and relatively stable level of deficit with both Mexico and Canada. However, after 1994, the level of trade deficit had gone up five times, reaching $107 billion in 2004  which can be seen on the [[graph]] (Scott, Salas and Campbell). In the mean time, the total exports of the US to the rest of the world have also declined between 1993 and 2004 reaching 5%, or 2 percentage points lower compared to the previous ten year period (Scott, Salas and Campbell).
 
[[Image:NAFTA-related job losses since 1993.gif]]
:The expectations that NAFTA will improve the competitiveness of US firms, by giving them access to Mexican labor and Canadian raw materials has not fully materialized. To an extent, the domestic firms have gained access to a large market of inputs, but that has come at the expense of loss of jobs in the U.S. The manufacturing industry is the one that has been hit the hardest. Former steel-production centers in states like Michigan, Indiana, Ohio and Pennsylvania have shut down, giving a new name to the area: “The Rust belt of America”. Although many argue that the people who were left unemployed after the closedown of the manufacturing facilities can be retrained and move into different segments, the statistics show that over 30% of these people were not reemployed and dropped out of the workforce altogether. Those of them who did get reemployed in import-related industries faced wages 11-13% lower than their previous wages (Scott, Salas and Campbell).  

:One of the indirect effects of the free trade agreement has been a decrease of wages across various industries. Contrary to the predictions, US workers did not move into higher paying jobs, because with the increase of the trade deficit and the closing of many US traded-goods industries, the unemployed had to choose positions in non-traded-goods sectors, where the wages were lower. According to data based on wages and employment statistics for the US, the net wages gained through growing exports to Mexico and Canada were over $7 billion lower than the net wages displaced through growing imports from the two NAFTA members (Scott, Salas and Campbell).
[[Image:Table1-4.gif]]

=== Impacts on Mexico ===
==== Positive Effects ====
As a result of NAFTA Mexico has become closer to reaching the levels of exports of its northern neighbors. Mexican exports to the United States have increased four times since NAFTA’s implementation, from $60 billion to $280 billion per year (Teslik). The country has moved from a much closed economy to one that is highly open to foreign markets and investments. The main exports for the country have come from the manufacturing sector and have included primarily non-oil exports. The amount of foreign direct investment (FDI) in Mexico has gone up from $1.3 million prior to NAFTA to $14 billion after launching the agreement (Bhagwati, Haass and Hills). The majority of FDI has come from the other two members and has been targeted at the manufacturing sector. 

In the agricultural sector, Mexico has moved closer to the agri-business model with the creation of larger farms in the north. The country’s agricultural exports have gone up with more than 100% since the introduction of NAFTA (Bhagwati, Haass and Hills). To facilitate the transition to an open trade, between 2005 and 2008 the other two NAFTA members have invested over $20 million in programs and technology to assist with Mexico’s challenges related to the agricultural changes (United States Department of Agriculture). 

The sectors that are of paramount importance for the stability of the country – particularly natural resources and energy have not been directly subdued to the agreement and they are still protected by longer transition periods. This is particularly important to ensure smooth transition and enough preparedness for potential further integration between the three countries. Given the current rising energy prices and demand, partnership between the resources of Mexico and Canada and the technological knowledge and capital of Canada and the U.S. can be a key way for the NAFTA members to gain energy independence. 

As a result of the free trade agreement, wages have been raised and more jobs have been created. In addition, the Mexican consumer has benefited from greater competition and increased imports, which have brought the prices of many goods down. Last, but not least, the liberalization in trade has also led to liberalization in the political regime, including greater transparency in the government and in the press (Teslik). 

==== Negative Effects ====
The creation of NAFTA has not achieved the goals to boost economic growth in Mexico, raise the standards of living and create greater incentives for Mexican workers to stay in the country rather than migrate north. The only real gainers from NAFTA have been large corporations and farm owners on both sides of the US-Mexico borders. Looking at the economic growth, economist Alejandro Portes notes that it has been “anemic, averaging less than 3.5 percent per year [...] since 2000” (Portes). 

The sector that has suffered the most is agriculture. As a highly segmented sector with numerous small and middle-size farmers, the Mexican agriculture was not ready to bear the completely deregulated market of NAFTA. Despite initial government promises to impose [corn] tariffs which will last over 5 to 15 years, so that a more gradual transition can be assured, the Mexican government has not followed the promise and opened up the market to imported food and farm products from the US. The effect has been severe for small and medium Mexican farmers, as they have found it very hard to compete with large and highly subsidized US producers (Wise). The US farms are usually much bigger in acreage and crops such as corn are heavily subsidized in the US. Therefore, the products can be sold at much cheaper prices in Mexico, compared to the locally grown maize. The case of maize harvests in Mexico has had a particular importance because of the cultural and economic importance of the crop for the local farmers. Considering the importance of the agricultural sector as a main income source for numerous households, the increase of poverty levels in rural populations is worrisome (Wise). 

In terms of job creation, the results of NAFTA have not been very promising. The sector that has accounted for the highest job creation is manufacturing, but the jobs created there have had only a marginal impact on alleviating unemployment. In addition those jobs often time do not meet the standards of Mexico’s social system (insurance, benefits, vacations) (Wise). There has not been a real improvement of wages’ levels either. According to statistics of the World Bank, the real minimum wages have declined with 23% since the beginning of NAFTA. The wage gap in the country has increased dramatically, with 80% of Mexicans living below the poverty line in 2003, an increase of 34 percentage points from the mid 1980s (Wise).

== Environmental Impacts ==


The introduction of NAFTA carries a continuous impact the environment in Mexico; it is difficult to say definitively whether this is for better or for worse as there is a balance between the inadvertent effects and the institutions introduced as a part of the agreement. 

==='''Positive Impact'''===

NAFTA introduced legislation meant to integrate environmental policies and enforcement in North America. This is particularly significant for Mexico, which has very progressive environmental laws on the books but lacks the means to enforce them effectively.
	
NAFTA also created cooperative improvement projects across the Mexican-American border. These projects were created with the goal of equalizing the distribution of resources across the border as well as assisting the Maquiladoras with environmental concerns. These projects also focus on trans-national provision of technical assistance that will help with sewage treatment and sanitation of drinking water among other things. 
	
NAFTA has also had positive effects on environmental spending in Mexico. Since 1994 the Mexican government spends more on environmental policy and enforcement, which can arguably be attributed to the increase in trade that the agreement encouraged.
	
Since 1994 Mexico has seen environmental improvements in the industrial sector. Waste produced by American owned Maquiladoras, for instance, is now shipped to the US for treatment in greater quantities. Also, the Mexican government is far more likely to respond to environmental emergencies now than it was prior to NAFTA. There have also been improvements in emissions standards, however as the vast majority of air pollution in Mexico stems from automobiles, this effect is marginal in the grand scheme of things. 

==='''Negative Impact'''===

One of the major weaknesses of NAFTA’s environmental policies is that the organizations in charge of enforcing them are institutionally weak. The lack the means to actually ensure adherence to the policies they are tasked with upholding. This creates obvious problems, as there is legislation on the books without an appropriate means of enforcement. 
	
There is also debate as to whether or not the legislation provides enough protection to counter balance the increased stress of higher levels of trade. As production and transport increases, more waste will be produced. It is not entirely clear whether the new legislation is enough to deal with the increase in pollution.
	
Abuse of the nature of the free trade agreement is also an issue. Because firms have the right to challenge environmental policies if they can be construed as barriers to trade as defined by the legalese of NAFTA, it has in some ways become easier to dodge environmental legislation.
	
There are also certain specific examples of negative effects associated with NAFTA. For instance, since the agreement entered into effect, the amount of American corn sold in Mexico has increased. While this is not a problem in and of itself, the prevalence of gene-modified corn entering Mexico has caused problems for Mexican corn farmers. The modified corn tends to intersperse with regular corn making it very hard to separate the two. When modified corn breeds with natural corn it may have unforeseen effects, but more importantly it tends to drive out native species of corn, creating problems with bio-diversity as the modified corn breeds and pushed out the native species.

[[Image:Mmgar05b.gif]]

== Opposing Views ==
It is hard to determine whether NAFTA is a success or a failure because of the great number of parties involved. What is thought to be an improvement for one party may be degradation for another party. In this section we present some of the opposing views that exist. 
=== '''Mexican Farmers''' ===
On January 1st 2008 the import tariffs on corn were eliminated as part of the North American free trade agreement. In practice little has changed because the tariffs on corn have gradually been dropping since 1994, but this elimination deepens the problems that the small-scale Mexican farmers have to deal with. Mexican farmers cannot compete against the huge corn subsidies that the U.S. and Canada receive. The American corn farmers receive more than $10 billion in agricultural subsidies which allows them to sell their grains at a price lower than the production cost (Becker 2003). At the same time the “entire Mexican agricultural budget is only one-tenth the size of the subsidies given to American corn farmers alone.” This results in undermining Mexican farmers because the cheap American corn is flooding the Mexican markets. It is estimated that the price of corn has fallen more than 70 percent since the signing of the free trade agreement and this has reduced the income of more than 15 million Mexicans who earn a good living by producing corn. Also according to the Institute for Policy Studies (IPS), 1.3 million farm jobs have been lost since 1993. The suggestion of the experts from the World Bank is to reduce the agricultural subsidies and tariffs of wealthy nations so that the developing nations could compete (Becker 2003).

=== '''Corporations''' ===
The biggest winners from the North American free trade agreement seem to be the corporations. First of all under NAFTA’s Chapter 11 the corporations have the right to sue governments if they feel that the profit-making potential of their ventures has been threatened by governmental decisions. One of the most well known examples that resulted from this privilege is the case of the U.S. Ethyl Corporation against government of Canada in 1997. Ethyl Corporation sued the government for $250 million because “the Canadian parliament banned the import and interprovincial transport of an Ethyl product – the gasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT) – which Canada considers to be a dangerous toxin.” (Sforza 1997). The argument that the corporation presented was that the ban would reduce “the value of Ethyl’s MMT manufacturing plant, hurt its future sales and harm its corporate reputation.” (Sforza 1997). Eventually, the Canadian government agreed to lift its prohibition against importing MMT, paid the Ethyl Corporation $10 million and issued a public statement that the formula posed no risk.  

Another benefit for the corporations is the flexibility to relocate their production to Mexico where the living standards are lower and the environmental requirements are not so strict. This weakens the position of the labor unions that are now afraid of raising their voice. (Cheney 2001).

=== '''Former trade representatives''' ===
In 2004 the Council on Foreign Relations held a panel discussion about the accomplishments and failures of NAFTA. The guest speakers were Carla Hills who was a former U.S. trade representative, Roy MacLaren, former Canadian trade minister and Jaime Serra Puche, former Mexican trade minister. The three of them presented their points of view on how NAFTA had affected each country and what direction the treaty should take. 

Carla Hills based her speech on economic data that documented that NAFTA has served very well the national interests of all three of the participants. According to her a further step in the integration has to include persuading the US citizens that economic interdependence is one of the best tools “generate economic growth, alleviate poverty, and encourage stability”, although the trade does not make every citizen a winner. (Bhagwati 2004). She rejects the proposal of the Mexican president to have a common market which would eventually lead to common external tariff in which labor can move freely. Instead, what should be done is to have “a serious and intense trilateral dialogue on a wide range of issues that will create a context within which they can try to develop the means that will both deal with key challenges and take account of their divergent interests.” (Bhagwati 2004). 
 
Roy Maclaren was more skeptical about the benefits that came along with the signing of the treaty. He made a point that the same benefits might have flowed from the unparallel growth and economic dynamic that was enjoyed by the US during the 1990s. According to him Canada is not ready for further integration because the people are afraid that the country may lose its sovereignty. (Bhagwati 2004).

While Maclaren was dubious about the benefits from NAFTA, the former Mexican trade minister Jaime Puche presented data that clearly showed the positive outcomes from the treaty. According to a study done by the World Bank Mexico’s global exports would have been about 25 percent lower and the foreign direct investment would have been 40 percent less without NAFTA. An interesting observation that he makes is that Mexico has a trade surplus with countries with which the country has free trade agreements and a trade deficit with those with which it does not have free trade agreements. Pulche also touches on the topic of agriculture. He notes that people concentrate mainly on the impacts of NAFTA only on corn, but there are other agricultural products that Mexico exports to the US. According to him the agricultural exports has gone up by 100 percent since the treaty was implemented. Mexico is the number one supplier to the U.S. market in products such as sunflower seeds, chili, lemon pulp, jojoba, tamarind, etc. As for production of corn he says that it has gone up from 18 million tons to 20 million tons during NAFTA years and that rise would not have been possible, if Mexico had had troubles exporting their corn. (Bhagwati 2004).

=== '''US Politicians''' ===
As the presidential elections are approaching, the question about NAFTA is largely discussed during the presidential debates. It is important to examine the view points of different presidential candidates because they are going to determine the future of NAFTA. The current position of the White House defends NAFTA and George Bush is even suggesting to expand NAFTA by including the countries from Mercosur. He is warning that a withdrawing from the pact “would hurt U.S. farmers and businesses, which export around $380 billion worth of goods to Canada and Mexico each year.” (Palmer 2008). At the same time Hillary Clinton and Barack Obama clearly state that they would opt out of the North American Trade Agreement unless the labor and environmental policies are renegotiated with Mexico and Canada. Largely discussed is the position of Clinton who said that she always opposed the free trade agreement which was signed under her husband’s administration. However, not only she did not have the role of a mere bystander, but also she was a strong supporter of NAFTA. Clinton spoke at meetings to promote NAFTA and believed that “NAFTA was giving Americans a chance to compete.” (McGann 2008). On the other hand, it is not clear whether Obama is not bluffing as well. Early in March Associated Press obtained a memo from a Canadian diplomat, Joseph DeMora, saying that Obama’s advisor Austan Goolsbee told Canadian Consulate officials that Obama’s intentions to renegotiate NAFTA are just about “political positioning rather than a clear articulation of policy plans.” (CNN 2008). As of now it seems that the candidate amongst the top three who has a clear position on NAFTA is John McCain. McCain’s supports NAFTA because he fears that an attempt to restructure the free trade agreement would be seen by the Canadians “as a betrayal of the long years of negotiation and agreement” and the US may lose the military support that is offered by Canada in the war in Afghanistan. (Reston 2008).

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