What is the 'North American Free Trade Agreement - NAFTA'
The North American Free Trade Agreement (NAFTA) is a piece of regulation implemented January 1, 1994 simultaneously in Mexico, Canada and the United States that eliminates most tariffs on trade between these nations. The essence of a free trade measure, NAFTA’s purpose is to encourage economic activity between the three major economic powers of North America. Numerous tariffs (with a particular focus on those related to agriculture, textiles and automobiles) were phased out on a gradual basis, beginning with the agreement’s implementation and ending on January 1, 2008.
BREAKING DOWN 'North American Free Trade Agreement - NAFTA'
About one-fourth of all 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/oil and plastics are destined for Canada and Mexico.
The legislation had been developed during George H. W. Bush's presidency, as the first phase of his Enterprise For The Americas Initiative (EA). The Clinton administration, which signed it into law in 1993, believed NAFTA would create 200,000 American jobs within two years and one 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.
Additions to NAFTA
NAFTA was supplemented by two other regulations: 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 looser environmental regulations.
NAFTA did not eliminate regulatory requirements on companies wishing to trade internationally, such as rule of origin regulations and paperwork requirements that determine whether certain goods 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.
North American Industry Classification System
The three signatory countries have also developed a new collaborative system of business classification, which allows for the comparison of statistics of all business activities across North America. Companies are classified and separated into industries utilizing the same or similar processes of production.
The NAICS was established to take the place of and modernize the U.S. Standard Industrial Classification (SIC) system, allowing businesses to be classified and relatable to an ever-changing economy. The new system enables easier comparability between all countries in North America. To ensure that the NAICS continues to be relevant, plans are in place for a system review every five years.
The three parties responsible for the formation and continued maintenance of the NAICS are the Instituto Nacional de Estadistica y Geografia (INEGI) in Mexico, Statistics Canada and the United States Office of Management and Budget (OMB) through its Economic Classification Policy Committee (ECPC) and staffed by the Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS) and the Census Bureau. The first version of the classification system was released in 1997. A revision in 2002 made room for substantial changes occurring in the information sector. The most recent revision, in 2012, slightly reduced the number of industries in the system and made modifications to some of the system’s sector classifications.
This classification system allows for more flexibility than the four-digit structure of the SIC, instead utilizing a hierarchical six-digit coding system, classifying all economic activity into 20 different industry sectors. Five of these sectors are primarily those that produce goods, with the remaining 15 sectors being strictly those that provide some type of service. Every company receives a primary NAICS code, indicating the company’s main line of business. This primary code is determined by the code definition that generates the largest revenue for said company at a specified location in the past year.
The first two digits of a NAICS code indicate the largest business sector a company operates in. The third digit designates the company’s subsector and the fourth digit indicates the industry group to which the company belongs. The fifth digit of the code reflects the company’s particular industry of operation. The sixth and final digit designates the company’s specific national industry.
Impact of NAFTA
A lot of debate ranges about NAFTA's meaning – that is, its impact on its three signatory countries. While the United States, Canada and Mexico have all experienced economic growth, higher wages and increased trade since NAFTA’s implementation, experts disagree on how much the agreement actually contributed to these gains, if at all (for more details on NAFTA pros and cons, see NAFTA's Winners and Losers). The results are hard to isolate from other, arguably more important developments that have taken place on the continent and globally in the past quarter century.