NAFTA: Does it have any effect on the U.S.A. economy?

International Journal of Management, Sep 2003 by Shahabuddin, Syed

NAFTA, the North American Free Trade Agreement, has been in existence for nearly six years. During that period of time critics and advocates have presented opposing points of view, deleterious and damaging or beneficial and advantageous. The difficulty is knowing where the truth lies because in addition to supporters and critics, there are neutral parties who have conducted research on the effect of NAFTA on the U.S. economy. As always happens in the case of very controversial topics statistics can be found to support either side. The purpose of this articles is to present both sides with data to support or nullify each point of controversy plus reports by neutral parties. Only by weighing the evidence from all sides can the controversy be resolved.

Introduction

Current economic reality requires that nations must promote liberalization of international trade in order to maintain or increase economic growth. As a result, nations are constantly trying to form alliances to advance their economic and national interests. Regional economic agreements such as the European Free Trade Association, the Central European Free Trade Agreement, the North American Trade Agreement (NAFTA), AEC, ASEAN, and the Asian Free Trade Area, Mercosur, the Caribbean Community and Common Market, the Central American Common Market, the Andean Group, and the European Union have been established during the past fifty years. Some of these integrations have proven to be successful and are still in existence; others have failed and have been disbanded.

The best-known of these agreements are the European Union (EU) and NAFTA. These economic integrations are most often talked and written about. The European Union which initially started as an economic union among a few European countries has now become a political union consisting of fifteen countries. Its goal of the EU is to create an integrated economic community that will have a single currency, a single judiciary, a single legislative body, and a single executive branch. All the member countries would be subject to centralized decisions of the EU administration.

The North American Free Trade Agreement (NAFTA) went into effect January 1, 1994, to establish economic integration between the United States, Mexico, and Canada. It created the largest free trade area of 400 million people and has produced over nine trillion dollars worth of goods and service. The purpose of the paper is to discuss the effect of NAFTA on the US economy.

NAFTA

As always, the purpose of economic integration is to open markets among countries, and to increase the flow of goods and services across national boundaries in order to improve the standard of living in the member countries. Member countries believe that by encouraging partners to concentrate on producing goods and services that they can the most efficiently benefit all members. That is, under integration, countries should produce and sell goods and services they can produce cheaply. They should buy goods and service from countries able to sell them cheaper because of low production costs. This trade result in higher consumption, higher income, and a higher standard of living for all citizens. NAFTA is based on a similar concept. It is believed that the economies of member countries' USA, Canada, and Mexico will improve under to NAFTA.

Supporters believe that NAFTA will help the US economy. For example, Negroponte said that for every additional billion dollars the U.S. exports, 25,000 jobs will be created. Dornbusch said that trade with Mexico during the past five year has created 150,000 jobs which would have not been otherwise possible. FORTUNE magazine estimated a net gain of 325,000 well-paying jobs by 1999 due to NAFTA.

One of the effects, of NAFTA has been reduction of tariff. Because of NAFTA half of all U.S. exports to Mexico are duty-free. The other half of U.S. exports are scheduled for tariff reduction in five, ten, and fifteen year intervals. In some cases, the average Mexican tariff on U. S. products has fallen from 10% to 4.9%. U. S. tariff on Mexican products, during the same period, has fallen from 4% to 2.3%. Limits on investment will be removed and trade in service liberalized.

The argument has been advanced that it is hard to evaluate the impact of NAFTA because it has been in existence for only five years. Supporters of NAFTA might say that NAFTA has performed well under some Criteria but not well under others. Therefore, choosing criteria that will indicate that NAFTA has failed does not prove that it did not achieve its intended goals. Justifications for NAFTA were:

- to reduce barriers to trade

- to create acceptable, mutually advantageous trade rules

- to develop a base for broader international cooperation

These goals were meant to improve the standard of living of the people of the member countries. Therefore, the measures for evaluating the success of NAFTA should be based on whether "people are better off than before." Using this criterion, one should be able to determine whether member countries have benefitted and to what extent.