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NAFTA stands for the North American Free Trade Agreement and it is an agreement promoting interregional trade between the USA, Mexico, and Canada, launched in 1993. NAFTA has achieved results in a variety of aspects that directly and indirectly affect trade between its member countries. This essay argues that NAFTA has freed the barriers to trade, spurred investments within the region, and achieved an enhanced region’s competitiveness and thus, a higher share of global production – all contributing to increased interregional trade. The essay also reviews the obstacles that preclude the furthering of free trade within North America. NAFTA was envisaged to facilitate development of a competitive and well-integrated North American region.
NAFTA’s major objective was to reduce obstacles to free trade within North America. As previously, cross-country trade was hampered by tariff and non-tariff barriers, free trade was limited. With tariffs in place, each country concentrated on producing goods internally, while sourcing or buying goods from abroad could benefit national economy. For example, before NAFTA, Mexico imposed duties on exported textiles and automobiles, limiting trade relations with other countries. All three NAFTA’s member countries reduced tariffs as part of this agreement. While theoretically this could result in the increased imports and exports of every good, in practice, three industries experienced significant increases in interregional trade. These industries were agriculture, textiles, and automobile (Sergie, 2014).
Furthermore, NAFTA allowed the three member countries to increase investments within the North American region. Effective according to the improved conditions for trade-related measures, such as effective dispute resolution mechanisms, resultant investments raised productivity in each country, also increasing trade flows within the region as well as to other countries. The share of global production of NAFTA member countries, calculated as a whole, reached 36 % in 2001 (“Nafta at 20”, 2014). Trade flows increased within North America, from $ 290 billion in 1993 to $ 1.1 trillion in 2012 (Villareal & Fergusson, 2015), illustrating the scale of increased imports and exports and thus, trade. Aside from rising trade levels within North America, NAFTA allowed its member countries to trade with other countries. This made North America more competitive as a region.
While NAFTA has been successful in improving conditions for trade and investment, its member countries face obstacles to furthering their economic integration and thus, increasing trade to new levels.
Limited movement of people and information is one of the obstacles, cited by the Congressional Research Service (Villareal & Fergusson, 2015). For improvements in trade, the movement of people needs to complement the movement of goods and services across borders. NAFTA allowed for only minor increases in flows of migrant workers (Sergie, 2014). Further limitations are Mexico’s limited investment in country’s infrastructure and its low incomes (Sergie, 2014) with proposals on part of the USA to establish an investment fund to level the trade conditions (Villareal & Fergusson, 2015). In addition, a large percentage of imports to the USA are of US origin, while 40% of exports come from Mexico and 25% – from Canada (Villareal & Fergusson, 2015). This means that the components that are imported to Mexico, for example, are beneficial to the economy of the USA, but they not necessarily bring desired effects of trade for Mexico.
Moreover, NAFTA remains ineffective in promoting free movement of people and information, which would level the conditions for trade and strengthening each member country’s benefits (border security between the USA and Mexico being the main issue in this regard). Finally, benefits from trade need to be equitable, for a free trade agreement to be considered effective, for instance per capita income and infrastructure need to be improved.
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NAFTA has created conditions for free trade and resulted in the increased trade and investment within North America. It contributed to building competitiveness of this region relative to other regions and countries globally. Still, its member countries face obstacles to increased imports and exports and thus, to increased trade. In addition, other free trade agreements, such as a free trade agreement between the USA and China, can limit or enhance NAFTA’s role in trade, economic integration, and competitiveness.