Michigan State University Extension
Extenstion International Trade Res. - 12179502
03/31/96
Geoff Benson Extension Economist
In August, 1992 the United States, Mexico and Canada completed negotiations on the North American Free Trade Agreement. The purpose of the agreement is to improve the flow of goods, services and investment across their borders in the expectation that all three countries will benefit.
Canada and Mexico are two very important U.S. trading partners. Canada is both the largest U.S. export market and the largest supplier of U.S. imports. U.S.-Canada trade was liberalized under a bilateral agreement that came into effect on January 1, 1989. Mexico ranks third both in imports to and exports from the United States. Trade has grown steadily over the last ten years as a result of major changes in Mexican economic and trade policies, including reduced government intervention, lower barriers to trade, and fewer restrictions on foreign investment. If these policies continue, U.S.-Mexico trade and investment flows are likely to increase with or without NAFTA.
Under the proposed agreement, market access would be improved by eliminating tariffs and many nontariff border measures such as quotas and import licences. Some tariffs would be eliminated immediately, others phased out over 5, 10 or 15 years, depending on the severity of the expected impact.
Also, selected terms of the agreement can be suspended if an unexpected surge of imports causes serious damage to NAFTA participants. Rules of origin specify which goods qualify for preferential treatment to deny benefits on goods produced by non-member countries.
Restrictions on NAFTA member investment and financial and other services would be eased, but some restrictions would remain. Land transportation would be opened up over a 10 year period to allow cross-border trucking and bus services, and telecommunications access between the member countries would beimproved. Intellectual property rights such as patents and copyrighted materials would receive more protection and rules would be more strictly enforced. Dispute settlement procedures are specified. The agreement can be extended to other countries if the original members agree.
Terms of the agreement will become effective on January 1, 1994 if approved by the governments of all three countries. In the United States, the President must formally sign the trade agreement, but legislation must be drafted and submitted to Congress for approval. Before the trade negotiations began, Congress agreed to consider NAFTA under a so-called "fast track" procedure whereby it votes for or against the agreement but cannot change any of its terms. A vote is expected in the summer of 1993.
The U.S. Gross National Product (GNP) dwarfs those of the
other two trading partners, being ten times as large as Canada's and 20 times as large as Mexico's. The population of the United States is approximately 250 million, compared to Canada's 27 million and Mexico's 88 million. Therefore, the impact on the U.S. economy is likely to be small, with GNP at most one-half of 1 percent larger once the terms of the agreement are fully implemented.
There would be winners and losers from the agreement because of the different benefits accruing to each NAFTA member. The United States has an advantage in skilled labor and advanced technology while Mexico has an abundance of unskilled labor. Research studies disagree about the relative size of the increase in jobs in U.S. export industries relative to losses in sectors that will suffer increased competition from imports. The U.S. apparel industry likely will face increased competition but there is little agreement on the impact on other sectors of the U.S. economy. Uncertainty also surrounds the long term impact of increased U.S. investment in Mexico.
There are concerns that Mexico's weak enforcement labor laws and lack of emphasis on environmental quality will give Mexican employers an unfair advantage. It is unclear whether NAFTA would aggravate these problems or whether a healthier Mexican economy would make them easier to solve. NAFTA is seen by some as important way to reinforce the open market policies adopted by the Mexican government and to encourage a more democratic political process. The United States has a vested interest in reducing the large gap beween U.S. and Mexican living standards as well as in promoting and maintaining a stable and friendly government south of our border.