Essay/Term paper: The north american free trade agreement

Essay, term paper, research paper:  Economics

The North American Free Trade Agreement


Since the birth of this great nation in 1776, the United States has
remained a dominant world power in many aspects. The American standard of living
has been the envy of the world, powered by an economy rivaled by nearly no one.
Our economy continues to be the rock with which the global economy can lean on,
as evidenced by nations that rely on huge reserves of the dollar because of its
stability as a means of settling international debts. Unfortuneatly, despite the
solidity that our economy is so often associated with, we have accumulated a 5
trillion dollar (that's 9 zeros) national debt. Something has to be done about
this colossal problem to ensure that the United States retains its status as a
world power in the global economy. One vital catalyst to help promote growth and
neutralize the massive account deficit and foreign debts is the North American
Free Trade Agreement. NAFTA, for short, is one positive effort that not
surprisingly, has met with the opposition of many. In light of this opposition,
it is evident that NAFTA is accomplishing its primary goals and encouraging the
growth of the American economy.
NAFTA negotiations began on June 11, 1990 when former President George
Bush and Mexican President Carlos Salinas de Gurtari met to discuss the
possibility of revising current trade policies. The thing that set the NAFTA
apart from other trade agreements historically was that it was to be the first
trade agreement entered into between two industrial countries and a developing
country. By much of the world the NAFTA is often viewed upon as North America's
answer to the European trading bloc. Many provisions of the NAFTA take their
roots in the Canada-U.S. Free Trade Agreement which became operational January 1,
1989. A target objective was to create free trade between the United States,
Mexico, and Canada rather than a comprehensive economic union such as that of
the European Community. Whereas the EC dealt with monetary exchange rate issues
by implementing a standard in currency called the "Euro-Currency", the NAFTA
would be off limits to such control. Like many issues today, this topic was
hotly debated. Many people vehemently argued that job loss and low wages would
plague the United States and Canada inflicting more damage on these two already
struggling economies. The pro-NAFTA big business sector reportedly coughed up
between 20 and 30 million dollars for lobbying. This seems to make sense
considering that 86% of the companies listed on Fortune magazine's top 500 list
has operations in Mexico. With the support of current president, Bill Clinton,
the NAFTA passed through Congress late in 1993.
The 2,000 page NAFTA plan details many things, one of the most important
clauses being the reduction of tariffs. Over the next 15 years all internal
tariffs will be reduced to zero for trade amongst the United States, Canada, and
Mexico. Tariffs on "sensitive" goods such as agricultural products that require
a longer adjustment period will remain in place for the full 15 years, while
being subjected to incremental decreases each year. All in all there are 4
tariff classes, quite cleverly lettered A, B, C, and C+, to be reduced to zero
eventually. Tariffs for the "A" class were void as of January 1, 1994. The "B"
category will diminish at a rate of 20% for five years, the "C" class at a rate
of 10% a year for 10 years, and finally the "C+" category which will stretch
tariff reductions out over the full 15 years. Other than tariffs, NAFTA also
eliminates things such as the costly need to convert drivers as merchandise
rolls over the borders of a neighboring country.
What all of this could do for the United States is quite clear. The most
important objective is to improve the efficiency and productivity of the member
countries to more effectively compete against foreign suppliers at home and
abroad. The NAFTA imparts an export-led growth strategy to help solve the United
States' account deficits. The premise behind the whole thing is quite simple.
Once our nation experiences the expected increase in productivity, which in turn
forces prices down, exports would ultimately increase. NAFTA will undoubtedly
contribute to economic growth in Mexico, which will also increase the demand for
U.S. goods and services in our neighbor to the South. A prosperous Mexico, which
is already this country's third largest trading partner, would become a thriving
market for U.S. exports. Another promising goal of the NAFTA is the amount of
jobs it will create, not lose, in the American workforce.
According to the book North American Free Trade, U.S. jobs are assumed
to be created at the rate of 14.5 thousand new jobs per billion dollars of net
improvement in the U.S. trade balance. The employment impact of the NAFTA will
vary across the country but never be too significant in one area. It seems that
the rationale of the typical NAFTA critic is that a wave of American jobs will
be lost as companies make a run for the border or imports flood our market. This
is not the case. It is estimated that perhaps 100,000 American jobs will be lost
over the next 10 years due to NAFTA. Naturally, workers will be needed to fill
all the jobs in our booming export sectors and the government is prepared to
retrain these individuals to succeed in areas of the workforce such as this. If
anything, the burden will fall primarily on the low-wage workers rather than
the skilled, higher-wage workers. Evidence of this burden has yet to surface,
this supported by a statement in the economic magazine appropriately titled The
Economist proclaiming that some 3.5 million more American jobs have been created
than lost since the NAFTA was put into operation.
One more important effect that the NAFTA could encourage is a slowing of
the flood of illegal immigrants that enter our country, with Mexico
understandably being the largest contributor. At present this is a formidable
problem in our country. The extreme number of immigrants surfacing in our
country, approximately 1.8 to 3 million from Mexico alone put a huge strain on
our economy. The main cause of this problem is the relentless search for higher
paying jobs which leads Mexicans to stray across the border into this country,
that or the new value menu at Taco Bell. By encouraging the Mexican economy to
grow, the United States can focus less on harsh immigration policies such as
California's Proposition 187 and more on correcting the problem currently at
hand.
Once this economy in Mexico begins to establish itself and experience
any growth, labor laws and regulations will become increasingly more enforceable.
Despite what may be thought by many Americans, The labor laws of Mexico nearly
parallel those of the U.S. and in some instances exceed them, but without the
funds or manpower to back them up, they are as worthless as the paper that they
are written on. Keep in mind though, that sharp decreases in illegal immigration
are not expected immediately, rather within the next two decades will the influx
of these people be reduced significantly.
Since NAFTA passed in late 1993 and took effect, it has lived up to it's
promises. Ross Perot and his cohorts can gloat about the fact that U.S. imports
from Mexico increased by about $6 billion dollars, but conversely U.S. exports
to Mexico increased by $8 billion. If you get out your calculator and do the
math, you can see that the U.S. is left with a $2 billion dollar net improvement
in their trade balance with Mexico. North to Canada, our exports increased by
12.7% in the first 10 months that NAFTA has been functioning. If the Big Three
automakers are any barometer of what is to come from NAFTA, this has been one of
the wisest economic trade alliances this country could have entered into.
According to the Commerce Department, Big Three automobile exports from the U.S.
and Canada to Mexico for the first quarter of 1994 reached 9,925 units,
compared with 9,479 during all of 1993. In addition, Chrysler, Ford, and GM are
expecting a combined 55,000 cars and trucks to be delivered to Mexico in "94. As
for the warning that auto industry jobs would be lost to the Mexican market, it
is not foreseen anytime in the near future as a car manufactured in Detroit is
now $600 dollars than it's equivalent counterpart manufactured south of the
border due to the reduction in tariffs. The Commerce Department also backs this
up by proclaiming that 130,000 American jobs have been secured.
What needs to be understood is that there will always be two sides to
this issue. Each faction will take and exploit a given statistic any way that
they can to try and fortify their position. When separating the carefully
gathered facts from the fiction, it is hard to see how the NAFTA has had any
seriously detrimental effects has on the U.S. This trade agreement is certainly
still very young, but apparently is reaching higher and higher levels as it
boosts the economies of the member nations.
As aforementioned, NAFTA was the focal point of heated debates for
nearly 14 months, and during that period, the plights of many people began to
surface, environmentalists included. Once again, the target for enraged
environmentalists was the less developed Mexico. At present their ecological
system is in shambles when compared to that of the other countries participating
in NAFTA. When you look at it from the perspective of the nature buffs, you end
up with a worst case scenario of sorts. They feel, if NAFTA remains intact, that
a reduction in trade restrictions and the newfound competition will destroy the
already damaged environment. Forced to be efficient and throw the occasional
barrel of toxic waste into the groundwater supply or face bankruptcy, companies
may resort to "environmentally unfriendly" means of dumping wastes. While stingy
environmental standards remain in the U.S. and Canada, Mexico, which can escape
such restrictions due simply to a lack of enforcement, will push itself up in
the market costing American jobs. On the homefront, this also means that
vegetables from Mexico may have a tendency to end up on our tables pesticide
ridden as long as the trade laws permit them to be.
In response to the pleas from groups such as the Audubon Society and
Friends of the Earth, George Bush put environmental concerns front and center.
He implemented the "Gephardt-Rostenkowski Resolution" which keyed on the
environment and forces the president to report to Congress on progress toward
meeting the objectives of an action plan. In essence, there is only so much that
the U.S. can do to persuade Mexico to clean up it's act because provisions in
NAFTA pertaining to environmental standards are not feasible at this point. Of
late, Mexico has put forth an honest effort, as they enter the third year of a
plan utilizing nearly $800 million dollars for projects such as nature preserves,
solid waste disposal, and the cleaning up of the Mexico-U.S. border. Another
government agency that has been receiving a significant increase in funds is the
Mexican equivalent of the United States' EPA. Provisions concerning the
environment and industry standards may escape NAFTA, but due to mounting
pressure, they will not escape serious revamping at the national level.
In conclusion, NAFTA, the brainchild of George Bush and Salinas de
Gurtari, has many positive aspects that with a little ironing out could prove to
be a dynamic economic catalyst for this country. By using this export-led growth
strategy centered around a reduction in tariffs over a 15 year period, the
member nations can achieve all that they hoped to. After about 2 years of NAFTA,
the U.S. has shown formidable gains in it's economy. To avoid problems that
critics argue such as job loss and depletion of the environment, the U.S.,
Canada, and Mexico can create policies on the national level to curb such things
as these from happening. All in all, granted support from the constituencies of
the member nations, NAFTA should be around for a while.