FAQ: What is the impact of NAFTA on the United States?

Talking Points:

Formal NAFTA negotiations began in June 1991 and were completed in August 1992. The trade accord, ratified by both the U.S. House of Representatives and the Senate in November 1993, was implemented on January 1, 1994. Although more than a decade has passed, the question of whether NAFTA has had a positive or negative impact still persists. The perceived loss of U.S. economic preeminence vis-à-vis the rest of the world, coupled with the reduction in the number of U.S. manufacturing jobs, have generated frustration among many Americans. In addition, in this period of globalization, the fear of losing one’s job is echoed daily. Without foundation, much of this frustration has been vented on NAFTA.

NAFTA is the most misunderstood trade agreement in memory. Due to a massive dissemination of misinformation by anti-NAFTA interests, including Ross Perot in the early 1990s, a large segment of the U.S. population continues to believe that NAFTA is not in the interest of the United States and will accelerate the loss of U.S. jobs and a decline in U.S. wages. Ironically, through NAFTA, the exact opposite has occurred.

Although it is easy to identify a lost job, it is difficult to identify a job gained as a result of trade with a specific country or region. Nevertheless, there’s no doubt that NAFTA has generated a net increase in jobs in the United States. According to NAFTA At Five Years, published by the Council of the Americas and The U.S. Council of the Mexico-U.S. Business Committee, “NAFTA has led to more high-quality, better-paying jobs for U.S. workers.” Between January 1994 and October 1998, the report states that the U.S. economy created 14.2 million jobs, “and many of these jobs can reasonably be attributed to NAFTA.”

Based on job estimation formulas provided by the United States Trade Representative, NAFTA resulted in a net gain of over 900,000 jobs in the United States from 1994 through December 31, 1999. This figure accounts for the loss of jobs attributed to NAFTA by the NAFTA-Transitional Adjustment Assistance program (NAFTA-TAA) during this period. In 2000, Raul Hinojosa-Ojeda and others put the job net gain number closer to 74,000 annually. Regardless of the exact number, it is clear that NAFTA has provided a net gain in jobs.

But job gains are only one indicator of benefit. According to The U.S. Employment Impact of North American Integration After NAFTA: A Partial Equilibrium Approach, published by the North American Integration and Development Center at UCLA, “In general, job gain/loss accounting methodologies should not be used to evaluate the relative benefits of trade... What is much more significant as a measure of trade policy is the impact on economies of scale, technological change, new investments and productivity growth in the liberated sectors and the ability of the economy as a whole to reap benefits from these productivity increases.”

Stated in NAFTA At Five Years, “NAFTA has fostered growth in cross-border investment that has improved the competitiveness of American companies, and consequently, their ability to keep high-skill, high-wage jobs in the United States. Hence, NAFTA’s positive impact on the quality of jobs has been significant, while its overall impact on the number of U.S. jobs has been positive as well.”

The increase in U.S.-Mexican trade since the implementation of NAFTA is a very positive factor. In fact, Mexico has become the United States’ second largest export market. Mexico also has helped North America compete with an increasingly growing EU. But as stated earlier, increased trade in goods and services only represents a portion of NAFTA’s benefits. Since U.S. gross domestic product was 20 times larger than Mexico’s prior to the implementation of the agreement, and U.S. tariffs on Mexican goods already averaged a low 2 percent, the free trade agreement would not have a significant impact on the U.S. economy. “NAFTA was more about foreign policy than about the domestic economy,” says Dan Griswold, director of the Center for Trade Policy Studies at the Washington, DC-based CATO Institute. “Its biggest payoff for the United States has been to institutionalize our southern neighbor’s turn away from centralized protectionism and toward decentralized, democratic capitalism. By that measure, NAFTA has been a spectacular success.”

Importantly, the typical Mexican boom-and-bust-cycle, high inflation, large debt, and the election-cycle economic crises seem to be things of the past. This has resulted in a more stable environment, increasing Mexico’s level of global attractiveness in terms of its ability to capture foreign direct investment.

The Congressional decision to ratify NAFTA did not simply concern a trade agreement among the United States, Canada and Mexico. Rather, it was a decision on the direction of the United States, defining our perceived strengths and weaknesses, our level of confidence and courage, and a determination on how we, as a nation, would conduct ourselves in the new post-Cold War era. The world was closely watching the NAFTA vote. Ratification of NAFTA signaled that the United States was ready for the challenges of the 21st century. A “no” vote, however, would have been perceived as a retreat by the United States into policies of isolationism and protectionism. European and East Asian nations would have been more likely to turn inward. Most importantly, well-paying American jobs would have been lost. According to Federal Reserve Chairman Alan Greenspan, rejection of NAFTA would have had “a very wrenching effect” on the United States and the entire region.

FAQ: What were the original objectives and hopes of each NAFTA party?

Talking Points:

Both Canada and Mexico initiated NAFTA with the United States for a variety of reasons. In January 1990, Mexican President Carlos Salinas de Gortari visited Europe to promote foreign investment that would support the Mexican trade liberalization process. He found the Europeans preoccupied with Eastern Europe. It became apparent that Europe would not be a sufficient source of investment and exports. Mexico would have to depend upon U.S. investment and markets to increase productivity, exports and wages. Through a U.S.-Mexico free trade agreement, President Salinas hoped to stimulate Mexican economic growth through increased trade and investment. President Salinas also saw that a free trade agreement would likely prevent future Mexican presidents from deviating from his economic policies which he believed were essential to provide the stability necessary to promote long-term economic growth.

From Mexico’s perspective, the anticipated benefits of greater economic integration included increased and secure access to U.S. and Canadian markets; achievement of international credibility and a gain of foreign investment; improved domestic confidence in Mexico’s economic future and the return of flight capital; access to U.S. and Canadian technology and expertise; the development of economies of scale; higher productivity; a movement toward greater specialization; an increase in jobs and wages resulting in a higher standard of living with a more equal income distribution; improvement of working conditions; and a reduction in the so called brain drain or loss of educated workers through migration.

From Canada’s perspective, the expected benefits of NAFTA included better access to Mexico’s large and growing market; establishment of guarantees protecting intellectual property rights; enhanced competitiveness at home and abroad; establishment of long-term guarantees protecting Canadian direct foreign investment; the development of economies of scale; greater productivity; a movement toward greater specialization; and availability of less-expensive products. (Note: NAFTA incorporated the benefits Canada already had derived from the U.S.-Canada Free Trade Agreement.)

President George H. Bush and Mexican President Salinas defined a U.S.-Mexican free trade agreement as a process of gradual and comprehensive elimination of trade barriers between the United States and Mexico, including the full, phased elimination of import tariffs; the elimination or fullest possible reduction of non-tariff trade barriers, such as import quotas, licenses and technical barriers to trade; the establishment of clear, binding protection for intellectual property rights; fair and expeditious dispute settlement procedures; and other means to improve and expand the flow of goods, services and investment between the United States and Mexico.

The United States had several fundamental objectives in pursuing a free trade agreement with Canada and Mexico. These included increasing U.S. exports to Mexico, thereby growing the number of well-paying U.S. jobs; the continued pursuit of Mexican trade and investment reforms, especially intellectual property rights, which would generate substantial new opportunities for U.S. firms; more efficient uses of natural and human resources in North America, in turn promoting U.S. world competitiveness; and Mexican economic growth and prosperity, increasing the Mexican standard of living and reducing the number of undocumented Mexican immigrants in the United States.

On February 5, 1991, the United States, Canada and Mexico issued a joint communiqué formally proposing a North American pact, they said, “would link our three economies in bold and different ways.”

FAQ: How did NAFTA provide for the elimination of Mexican tariffs on U.S. goods?

Talking Points:

Duties on goods identified in “category A,” which had the fastest tariff phase-out rate, were eliminated entirely on January 1, 1994. According to the U.S. International Trade Commission, this represented 31 percent of U.S. goods exported to Mexico (based on goods traded in 1990). Duties on goods in category B were removed in five equal annual stages beginning on January 1, 1994. This represented 17.4 percent of goods exported to Mexico. Duties on goods in category C were removed in 10 equal annual stages—representing 31.8 percent. Duties on goods in category C+ were to be removed in 15 equal annual stages—representing 1.4% of U.S. goods exported to the United States. And duties on goods in category D would continue to be duty free. This represented 17.9 percent of U.S. exports to Mexico.

Without NAFTA, Mexico would have had the right under international law to raise most of its duties to 50 percent. Under NAFTA, Mexico has been prevented from raising its duties above specific rates. Importantly, the United States, Mexico and Canada agreed on several occasions to accelerate the tariff reduction stages.

FAQ: How do NAFTA rules of origin operate?

Talking Points:

In an attempt to confine NAFTA benefits to North America, rules of origin were devised such that, when applied to a particular product, define the product’s origin. As a result, only products that originate in North America are accorded free trade status—entering the United States, Mexico or Canada duty-free.

Concerns that non-North American companies would use Mexico as an export platform were addressed in NAFTA. For example, if two Japanese components are shipped to Mexico, undergo “simple assembly” there, and then are exported to the United States, under the NAFTA rules of origin, the finished product would not be classified as a Mexican product. Rather, it would be classified as a Japanese product. As a result, U.S. Customs would assess the same duty as if the product were shipped directly from Japan to the United States.

Under these origin requirements, products wholly obtained in North America, such as minerals extracted from the ground, undeniably satisfy these rules. However, products that embody overseas parts or materials must be substantially transformed in North America in order to satisfy the transformation requirements stipulated in NAFTA. For example, live chickens imported from Europe into the United States enter under a particular U.S. harmonized code. If processed in the United States into chicken cutlets, the product then takes on an entirely different tariff code classification. Thus, the cutlets would have been sufficiently transformed to be considered a U.S. product. If exported to Mexico, the cutlets would then qualify for duty-free treatment.

In some cases, a product must satisfy both transformation and content requirements. For example, hair dryer parts imported into Mexico from Japan and South Korea will arrive under parts classifications. When assembled with North American parts, the sum of the parts becomes a hand-held hair dryer. At this point, tariff transformation rules have been satisfied, but percentage content requirements also must be met.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book, Grasping Globalization: Its Impact and Your Corporate Response, 2005.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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