North American Free Trade Agreement: NAFTA

Introduction

I believe that the North American Free Trade Agreement was an inevitable
step in the evolution of the United States economic policy. The globilization
of the world economy due to technological advances in computers and
communications have shrunk the world to the point where no single country acting
alone can effectively compete on the foreign market. Even the United States,
with its vast resources, can not have an absolute advantage in all thing that it
produces. It does not have unlimited factors of endowments and must do its best
to make these available to the companies within its borders.
There are two basic sides to the argument over the North American Free
Trade Agreement. The Pro-NAFTA side views the treaty as a way to provide a
large, efficient production base for the entire geopolitical area. This would
result in lower cost to consumers and an increase in exports to Mexico and
Canada. The multiplier effect would then take place producing growth in all
areas. The Anti-NAFTA group feels that Mexico will be an unequal partner due
to the lower wage rates of the Mexican populace, causing the loss of
thousands of jobs in the United States and Canada. Environmentalist fear that
pollution will spread across the continent. Farmers fear that produce grown in
Mexico will be contaminated from pesticides banned in the United States. These
are but a few of the arguments for and against NAFTA.

What does NAFTA mean

A Free Trade Area is, by definition, an area where all barriers to trade
are lifted. This is not the case with regards to NAFTA at this point.
Currently most of the trade barriers between the United States and Canada are
lifted but those with Mexico have largely been kept in place. This is an
obvious disparity on the part of the Mexican government but is due largely to
the proportional loss of income to the governments in each country. The Gross
Domestic Product per individual in Mexico is one seventh of the other two
countries. Therefore, the loss of revenue would have a major impact on the
daily life of its population and the operation of the government . Never before
has a major economic power like the United States considered a free trade area
with an under-developed third world country.
The major difference between a Free Trade Area and Common Market is
that a Free Trade Area primarily deals with trade, while a Common Market has
this in addition to no barriers on factors of production and a common external
trade policy.
While on the surface it seems that a free trade area would always be a
good thing, it is easier said then done. The majority of people that oppose
NAFTA do so because of the potential for loss of employment. Mexico with its
cheap work force, will tend to make manufactures requiring extensive manual
labor more likely to move to the lower cost area. A loss of sovereignty may
also be a stumbling block, since some economic policy decisions are taken out of
the governing bodies\' hands.
Another factor is the extent of trade creation versus trade diversion.
The difference is if high cost domestic producers are replaced by low cost
producers within the trade area then trade creation occurs. If trade diversion
occurs, it would have a major impact on consumer prices. This practice is
evident in the textile industry and will be discussed later.

History of NAFTA

In 1988, the United States and Canada agreed to enter into a free trade
agreement. This went into effect on January 1, 1989 and was widely accepted as
a logical course of action. Canada is a highly developed nation and has a lot
in common with the United States. Its per capita income and hourly wages are
equivalent to the U.S. and has long been considered our brother to the north.
Then in 1991, Mexico entered into talks with Canada and the United States that
concluded on 17 December 1992. The treaty was ratified and came into effect on
1 January 1994. The treaty called for the elimination of all tariffs between
the three nations over a ten year time span. Some of these tariffs are listed
below.

Mexico\'s turmoil since NAFTA

The political turmoil in Mexico has added a great deal of controversy to
the issue. On the same day that NAFTA was implemented, some of the poorest
regions of Mexico in the Chiapas highlands revolted. After twelve days an
accord was reached with the rebels. In march, the Mexican president\'s chosen
successor was assassinated. This forced the president to pick