On January 1, 1994, the North
American Free Trade Agreement (NAFTA) took effect. This agreement between the
United States, Canada, and Mexico created the largest trade bloc in the world.
The goal of NAFTA was to eliminate trade barriers between the three nations.
When looking at the effects of NAFTA on the United States over the past two
decades, it becomes evident that free trade comes with both benefits and
consequences.
The main benefits of NAFTA are
best seen when looking at aggregate economic data between the three
countries. Overall, trade flows have
increased from $209 billion to 1.1 trillion (as of 2012). From 1993 to 2006 alone, U.S. exports to
Canada and Mexico grew by 157% compared to 108% for the rest of the world. In
2003, the Congressional Budget Office conducted a study to estimate the total
economic impact of NAFTA, and revealed that NAFTA has caused a small increase
in U.S. GDP.
With
the elimination of tariffs between the three nations, consumers are not
burdened with the extra cost of imported goods, which reduces domestic inflation.
Furthermore, on the manufacturing side
of the economy, industries have been able to rely on specialization and
division of labor to maximize their profits. An example of such an industry is
the U.S. auto industry, where the elimination of tariffs on U.S. auto parts has
resulted in increased exports to Mexico. The U.S. has also been able to import oil from
Mexico and Canada for the past 20 years, which has helped decrease U.S.
dependence on the Middle East.
These benefits did not come
without a cost, however. Critics of NAFTA cite the impact of the agreement on
the labor market as a reason why free trade is not necessarily as beneficial as
some would believe. In many ways, NAFTA now required all U.S. workers to not
just compete with each other, but with workers in all three countries. Some
companies took advantage of this new workforce and moved their factories to
Mexico, where there are fewer regulations. This change resulted in a loss of
jobs in the U.S. manufacturing industry and low wages for those who were able
to keep their jobs, resulting in increased income inequality. The decrease in
demand for U.S. labor diminished the power and influence of collective
bargaining, which resulted in poorer working conditions as well.
The drawbacks to NAFTA are not
limited to its economic effects. In the agriculture industry, NAFTA created an
opportunity for the U.S. to expand its production via exports to Mexico.
Ultimately, this expansion led to increased deforestation and unsustainable
water use due to the need for increased farmland. While supporters of NAFTA will claim that
increased oil imports from Mexico and Canada are a positive aspect of the trade
deal, opponents argue that such imports have increased our reliance on fossil
fuels as energy and ultimately delayed the development of alternative energy
sources. Perhaps the largest and most devastating effect that NAFTA has had on
the environment is the increase in greenhouse gas emissions. In order for all
of this trade to take place, manufacturers have built new factories and
machinery that release carbon dioxide into the atmosphere. Greenhouse gas
emissions near the U.S.-Mexican Border increased by 1.3 billion tons over a
period of 15 years.
During
lecture last week, it was mentioned that with free trade, there are always
winners and losers. NAFTA exemplifies this concept well. While the effects on
total economic output have certainly been positive, it is clear that workers
in the manufacturing industry and the environment paid the price for this economic expansion. As the United States considers
free trade agreements in the future, policymakers should keep in mind the impact of NAFTA
and where it brought both successes and shortcomings.
Sources:
I think that your views on the pros and cons of NAFTA are very interesting. I think the importance of the increase in trade has opened up so many opportunities for people in all of the countries. Although the drawbacks are strong, I feel that the benefits of the system outweigh the costs. The environment and the labor market have been hampered, but not to the extent that the economies of all three countries growing has counteracted this.
ReplyDeleteUnfortunately no matter how good the intentions start off as there will always be flaws therefore, it’s important to focus on which outweighs the other the benefits or the drawbacks. It is definitely important to learn from history in order to make better well-informed decisions in the future. Relying on specialization and division of labor is possibly the most efficient way to maximize profits.
ReplyDeleteI think another thing to consider about free trade is that people feel some effects more strongly than others. For example, Americans probably won't care much about increased car exports to Mexico if it means that their local factory is being shut down or their spouse will lose their job. Therefore, while free trade might make perfect economic sense and benefit the overall economy, it is hard to ignore the "losers" in these transactions when they are your neighbors or your constituents.
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