When a regulation changes, it can be difficult to determine which changes in the economy were directly caused by the regulatory change, and which were caused indirectly or by unrelated factors. The North American Free Trade Agreement (NAFTA), implemented on Jan. 1, 1994, is no exception. Here are some of the gains and losses that have been attributed to the agreement. NAFTA is clearly responsible for some, but others have a less clear cause.

NAFTA Decreased Tariffs
A tariff is a tax that a national government places on an imported or exported good or service to encourage or discourage trade. Tariffs increase costs for consumers, which in turn discourages consumption of those items. One of the most common reasons governments impose tariffs is to "protect" domestic companies from cheaper foreign competitors. Tariffs can also be used to retaliate against a trading partner's own tariffs or to express disapproval of a country's foreign policy.

The decreased trade restrictions brought about by NAFTA have made it easier for Americans to purchase Canadian and Mexican goods. As of 2010, the most recent year for which these data were available, the United States received about a quarter of its imports from these two countries, which are its second and third largest suppliers of imported goods. In particular, the U.S. gets much of its crude oil, vehicles, machinery and gold from these two countries, as well as fresh produce, snack foods, live animals, red meat and chilled and frozen foods.

All Three Countries Experienced Real Wage Increases
According to a November 12 Washington Post article, a study done by three Federal Reserve economists showed that NAFTA increased wages in the U.S. by 0.17%, in Canada by 0.96% and in Mexico by 1.3%. We don't doubt that these economists were rigorous in their analysis, but numerous factors can affect wages, so it's difficult to tell how much influence one factor really had.

NAFTA Increased Trade Between the U.S., Mexico and Canada
NAFTA is credited with significantly increasing trade among the U.S., Mexico and Canada. The U.S. alone traded $1.6 trillion in goods and services with its NAFTA partners in 2009, the latest year for which data are available, and the U.S. sold 32.2% of its exports to Canada and Mexico in 2010. Trade of goods and services between the U.S., Canada and Mexico has increased from $337 billion in 1993, before NAFTA went into effect, to $1.182 trillion in 2011.

NAFTA Increased Industrial Integration Between the U.S. and Mexico
Occidental College Dean Jorge Gonzales said in a recent NAFTA summit that U.S.–Mexico industrial integration, particularly in automobile manufacturing, was NAFTA's greatest success, the San Antonio Express News reported. The biggest categories of U.S. exports to Canada and Mexico in 2010 were electrical machinery, vehicle parts, mineral fuel and oil and plastics. The U.S. also saw 800,000 new manufacturing jobs from 1994 through 1998, reversing a 13-year trend during which the country lost 2 million manufacturing jobs.

NAFTA Created Jobs for U.S. Workers
According to the U.S. Chamber of Commerce, increased trade from NAFTA supports about 5 million U.S. jobs. The chamber of commerce also points out that unemployment was 7.1% in the decade before NAFTA and 5.1% from 1994 to 2007. We can't say for sure that this decrease is attributable to NAFTA, and we also know that unemployment from 2008 to 2012 has been significantly higher - a point that the chamber doesn't seem eager to attribute to the free trade agreement.

NAFTA may have had many benefits. However, it hasn't eliminated all the problems associated with international trade between the three countries.

Mexican Workers Have Benefited Less Than Expected
While NAFTA encouraged significant U.S. investment in Mexico, much of that investment has been in the form of factories near the border that are called maquiladoras, where Mexican workers provide cheap labor to produce U.S. goods. This arrangement has fallen short in its goal of increasing the size of Mexico's middle class because Asian labor has proven to be cheaper, and maquiladora towns have a poor quality of life for workers.

NAFTA Lifted Tariffs but not Regulations
NAFTA may have eliminated tariffs between the U.S., Canada and Mexico, but it didn't do away with the numerous customs regulation that can stifle trade. Rule of origin regulations decide whether a good qualifies for trade under NAFTA guidelines, and exporters must complete certificate of origin paperwork. More rules determine what records businesses must keep for trades under NAFTA and for how many years. Businesses that believe their goods have wrongly been deemed unqualified can go through an appeals process. Each of the three countries has a different procedure for NAFTA claims, and businesses that violate the laws or customs procedures of any country are subject to administrative, civil or criminal penalties. In other words, even without tariffs, there are still plenty of government-imposed barriers to trade.

The Bottom Line
As we approach the agreement's 20th anniversary, contemplation of the benefits and costs that have been attributed to NAFTA can help U.S. leaders consider how to best approach trading relationships, not just with Mexico and Canada, but with all foreign countries.

Related Articles
  1. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  2. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  3. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  4. Investing

    China's Top Trading Partners

    A slowdown in China, the largest trading nation in the world, will have significant impacts on major trading partners: the U.S., Hong Kong, and Japan.
  5. Economics

    Explaining Economic Integration

    Economic integration reduces or eliminates trade barriers among nations, and coordinates monetary and fiscal policies.
  6. Economics

    How US Interest Rates Move the World Economy

    Because the US has the world's largest economy, fluctuations in America's interest rates affect much more than domestic growth
  7. Economics

    What Is A Trade Surplus?

    A trade surplus occurs when a country’s exports exceed its imports for a given period of time.
  8. Economics

    Understanding Free Trade

    Free trade exists when nations can swap goods and services without the constraints of tariffs, duties or quotas.
  9. Term

    Understanding Net Exports

    Net exports are the difference between a country’s exports and imports.
  10. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  1. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  2. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  3. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  4. What is the difference between cost and freight (CFR) and cost, insurance and freight ...

    The difference between cost and freight (CFR) and cost, insurance and freight (CIF) is essentially the requirement under ... Read Full Answer >>
  5. What is the difference between Cost and Freight (CFR) and Free on Board (FOB)?

    The difference between cost and freight (CFR) and free on board (FOB) lies in who has responsibility for various shipping ... Read Full Answer >>
  6. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!