North American Free Trade Agreement - NAFTA


DEFINITION of 'North American Free Trade Agreement - NAFTA'

A regulation implemented January 1, 1994 in Mexico, Canada and the United States to eliminate most tariffs on trade between these nations. The three countries phased out numerous tariffs, (with a particular focus on those related to agriculture, textiles and automobiles), between the agreement’s implementation and January 1, 2008. NAFTA’s purpose is to encourage economic activity between the United States, Mexico and Canada.

BREAKING DOWN 'North American Free Trade Agreement - NAFTA'

About one-fourth of U.S. imports, (especially crude oil, machinery, gold, vehicles, fresh produce, livestock and processed foods), comes from Canada and Mexico, which are the United States’ second- and third-largest suppliers of imported goods. In addition, about one-third of U.S. exports, particularly machinery, vehicle parts, mineral fuel and oil, and plastics are destined for Canada and Mexico.

The Clinton administration, which signed the law that was developed under the George H. W. Bush administration, believed NAFTA would create 200,000 American jobs within two years and 1 million within five years because exports played a major role in U.S. economic growth. They anticipated a dramatic increase in U.S. imports to Mexico under the lower tariffs. Critics, however, were concerned that NAFTA would move U.S. jobs to Mexico. While the United States, Canada and Mexico have all experienced economic growth, higher wages and increased trade with each other since NAFTA’s implementation, experts disagree on how much NAFTA contributed to these gains, if at all.

NAFTA was supplemented by the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). These side agreements were intended to prevent businesses from relocating to take advantage of lower wages, more lenient laws about worker health and safety, and less strict environmental laws.

NAFTA did not eliminate regulatory requirements on companies wishing to trade internationally, such as rule of origin regulations and paperwork requirements that determine whether a good can be traded under NAFTA. The free trade agreement also contains administrative, civil and criminal penalties for businesses that violate any of the three countries’ laws or customs procedures.

  1. Tariff

    A tax imposed on imported goods and services. Tariffs are used ...
  2. Clintonomics

    The economic policies used by Bill Clinton, who was president ...
  3. Multi-Fiber Arrangement - MFA

    An international trade agreement on textile and clothing that ...
  4. Dumping

    In international trade, the export by a country or company of ...
  5. Import

    A good or service brought into one country from another. Along ...
  6. Balance Of Trade - BOT

    The difference between a country's imports and its exports. Balance ...
Related Articles
  1. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  2. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  3. Economics

    NAFTA's Winners And Losers

    Read on to find out who this free-trade agreement helped, and who it hurt.
  4. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  5. 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.
  6. Economics

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  7. 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.
  8. Investing Basics

    Learn How To Trade Crude Oil in 5 Steps

    Crude oil and energy markets are specialized venues. Here are five steps to take to build consistent profits.
  9. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  10. Retirement

    4 Reasons Why Americans Retire in Mexico

    Learn why Mexico's low cost of living, inexpensive health care, natural beauty and culture make it such a popular retirement destination for Americans.
  1. Who decides to print money in Canada?

    In Canada, new money comes from two places: the Bank of Canada (BOC) and chartered banks such as the Toronto Dominion Bank ... Read Full Answer >>
  2. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!