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NAFTA - Beneficial or Costly, AP economics
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Background• The North American Free Trade Agreement
(NAFTA) went into effect 1994• Free trade agreement between the U.S.,
Canada, and Mexico• Signed by Bill Clinton, though negotiated
prior• Purpose:
• Remove trade barriers to increase flow of capital, and goods and services• Protective tariffs - a tax on imports• Protective quotas - a limit on imports• Gives the exports an advantage
• Fair competition• Means to resolve trade disputes• Enforce intellectual property rights
Office of the United States Trade Representative
Background
• NAFTA created free trade zone• As of 2008, all tariffs between U.S., Canada, and Mexico
eliminated
• Even today, it is still controversial• Polarized debate• Pro Nafta – benefited North America
• Mostly conservatives (conservative Republicans and Democrats)
• Anti Nafta – harmed North America• Mostly progressives
• Some arguments completely contradict its opposing arguments and vice-versa
Benefits• NAFTA has helped all three nations economies as it was
intended• Decreased tariffs
• Increased competition and efficiency
• Increased exports and imports
• Increased growth
Tariffs• NAFTA over eliminated 9,000
tariffs• Cutting tariffs boosts trade• Increases efficiency through
competition• Consumers gain more
because of comparative advantage
• Cutting tariffs makes imports less expensive• More people will buy because
comparative advantage • Exists if the opportunity costs
for producing the good or service is lower for another producer
The Heritage Foundation - Riley
Tariffs
• Tariffs make it difficult for poorer nations to enter global market• Gives wealthier countries unequal advantage• Opens up economies for foreign investment
• NAFTA gives foreign investors equal legal rights• Since NAFTA, U.S. investment in Canada and Mexico increased• Foreign direct investment (FDI) needed for economic growth
• With U.S. companies investing Mexico, U.S. production increases• Less cost in Mexico• More efficient production• Jobs for the Mexican people• Wages have increased for Mexican workers
Trade• Trade between the countries
has vastly increased• Trade between NAFTA
quadrupled• $297 billion in 1993 to $1.6
trillion in 2009
• Exports from the U.S. to Canada and Mexico increased
• $142 billion to $452 billion in 2007
• Exports from Canada and Mexico to the U.S. increased
• $151 billion to $568 billion in 2007
• Agriculture exports to Canada and Mexico increased
NCPA - Sommer
The Consumer• Prices lower
• Without tariffs, prices for goods are lower• More efficient and more gains from trade
• Higher wages in U.S.• 1993-2007: real wages rose 1.5%
annually• 1979-1993: rose 0.7% annually
• Jobs were not lost• 1994-2007: average unemployment rate
5.1%• 1980-1993: 7.1%
• Environmental amendments included
Prentice Hall
Costs• NAFTA has not helped the economies of all three nations
as it was said it would and has hurt all three nations• Cost jobs and lower wages
• Bad for environment and well being
• Helps big business and hurts the little guy
• Hurt all three nations
Cost Jobs• With cheaper costs in Mexico,
manufacturing jobs were lost• 3.1 million U.S. manufacturing jobs lost since
1994
• Factories closed as they moved to Mexico• Wages in Mexico are 13% of wages in the U.S.
• Taking in account the jobs created by NAFTA, the Economic Policy Institute reports that 682,900 U.S. jobs were lost
• U.S. manufacturing jobs accounted for 60.8% of the jobs
• 116,400 jobs lost between 2007-2010 because of trade deficit created by NAFTA
The New York Times - Malkin
Wages & Trade Deficit• Wages in U.S. and Mexico did
not change• Wages in Mexico low because more
supply of labor than demanded and government policies• With low wages, Mexicans cannot
purchase as much• Wages for U.S. workers have not
changed• Workers fear outsourcing• Closing the factory used as threat
leading to lower wages
• U.S. trade deficit increased with Canada and Mexico• $70 billion deficit with Mexico
The New York Times - Malkin
Mexico’s woes• U.S. and Canadian agribusiness subsidized giving
them advantage against small Mexican producers• 2/3 of the 12 million illegal immigrants since 1995 from rural Mexico• Pushed Mexican farmers off land by big corporations
• Mexican farmers left vulnerable• Mexico had 14 years to establish subsidies for their farmers but did
not• Reform needed but not delivered Mexican government• Large corporations drove out small farmers because more efficient
• Economic growth was weak for Mexico standards• 1993-2007: 1.6% per capita
Environment• Needs tougher environmental standards
• Enforcement• Corporations can sue governments for enacting
laws that “violate their NAFTA rights”• Difficult to enforce regulations internationally• Mexican agribusiness uses more fertilizers and
chemicals because competition• Pollution - $36 billion a year
• Rural farmers expanded into land - deforestation• Mexico receives little funding from environmental
institutions created by NAFTA• Cut regulation because fiscal crisis
Gallagher
What Should Be Done?• Almost 20 years after
• All its components in effect for about 4 years• We see NAFTA’s effects• Now what?
• NAFTA has its benefits and costs• All depends on how you weigh them
• Solution:1. Keep NAFTA – it worked2. Reforms and changes at home and abroad3. Expand free trade elsewhere
NAFTA Works - Mostly• Trade has clearly increased in North America• Cutting tariffs is good
• Frees up the flow of goods and services, and capital• Capital investment builds countries and economies
• Prices are lower• Lower production costs enable products to be less expensive
• Markets for goods have grown• With the removal of barriers for the flow of goods, consumers have
greater access• Consumers gain from trade
• Comparative advantage• Specialization
• But…
There Needs to Be Changes• Mexico was unable to really grow because of NAFTA and
its government• The Mexican government needs to create an environment open for
competition - efficient• Monopolies needed to be busted - inefficient• Wages need to be higher for workers• Environmental standards need to be raised• Public investment in Mexico
• Mexico to have fair competition needs to step up a level
• The U.S. and Canada also need to change• Subsidies for agriculture need to end• Subsidies do not make trade free and competitive
Reasoning• Mexico’s economy is growing but at a slow rate
• GDP=C+I+G+X-IM• Consumers must spend – need more income to do so• Foreign investment – increase production• Government must invest to help make Mexico able to compete
effectively• For there to be growth the environment must open for it
• Subsidies are used to give advantage to industry in global trade• Creates inefficiency• Goal is to be efficient• If politically difficult in Canada and U.S., Mexico will have to also
subsidize
Summary• International trade complex• Economic theory is the foundation of economic policy• Application does not always match theory• NAFTA has many trade offs
• Cost-benefit analysis allows us to see if we are maximizing our benefit
• NAFTA has benefited mostly the U.S. and Canada• But it needs to also benefit Mexico
• Changes can be made to make the global economy better
• All that it takes is doing it
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