The North American Free Trade Agreement (NAFTA) was formed in 1994 and comprised the United States, Canada, and Mexico (Caliendo and Parro 27). While there are issues such as loss of jobs, suppressed wages, destruction of the Mexican agricultural company, substandard work conditions, degradation of the Mexican economy, and low business standards, the pros of increased economy, low commodity prices, and increased foreign investment outweigh the cons.
Argument for NAFTA
NAFTA became a worldwide free trade area that encompassed the United States, Mexico, and Canada. In 2017 alone, the trade agreement generated a gross domestic product of 22.2 trillion dollars (Villareal and Fergusson 17). Mexico seems to have been the disadvantaged partner since it lost its jobs, received suppressed wages, got the blame of substandard products, and lost its agricultural economy. However, it can be argued that they failed to meet the threshold standards.
The Congressional Research Service report of 2017 established that the trade agreement inspired over 300% trade growth between the three countries (Villareal and Fergusson 38). Analysts attribute the increase to reduced trade tariffs. The United States was the biggest beneficiary since it acquired the ready market of its products in Mexico and Canada.
More trade meant a higher economic output. Experts estimate that full implementation of the trade plan would grow the United States economy by 0.5% annually. The growth implied additional jobs (Caliendo and Parro 36). A 2010 report suggested that NAFTA created about 5.4 million jobs while the multilateral trade indirectly benefitted other 17.7 million people.
Foreign direct invested (FDI) grew at least threefold. The United States increased Mexico’s FDI to 104.4 billion dollars in 2012 down from 15.2 billion dollars in 1993 (Caliendo and Parro 42). Conversely, the growth in Canada was 352.9 billion in 2015 compared to 69.9 billion dollars in 1993. Mexico benefitted by accelerating investment in the United States by up to 1300% (Caliendo and Parro 25). Canada’s FDI’s growth stood at 911%.
NAFTA reduced commodity prices. The United States paid less for oil from Mexico since the agreement eliminated tariffs. Therefore, the US cut its dependence on Middle East oil. Low oil prices imply low gas prices, hence reduced transport costs. Food manufacturing companies saw a reduced cost of production, which lead to reduced food prices (Villareal and Fergusson 62). Relatedly, the trade agreement improved government spending as governments increased their contracts with suppliers in the member countries. The resultant competition also helped to reduce prices.
Pros Outweigh Cons
While NAFTA’s demerits are substantial and manifest in the loss of industries in Michigan and New York and mistreatment of Mexican workers and environmental degradation in the border, the economic gains surpassed the cons. Without NAFTA, competition from emerging economies of China and the European Union would have reduced profits for the countries (Villareal and Fergusson 116). There would be low economic growth, lower food prices, and the United States would be the worst affected since it is the greatest beneficiary of the trade agreement. Already, the combined growth of China and the European Union surpasses that of the United States, which underscores NAFTA’s importance.
Whereas there were measurable cons such as loss of Mexican jobs, suppressed wages, environmental damage, and poor working conditions, NAFTA was instrumental in spurring the economy of the three countries. Without it, the entry of China and the European Union would increase competition and reduce trade, culminating in high commodity prices and reduced government revenue.
Caliendo, Lorenzo, and Fernando Parro. “Estimates of the Trade and Welfare Effects of NAFTA.” The Review of Economic Studies 82.1 (2015): 1-44.
Villareal, M., and Ian F. Fergusson. “The North American Free Trade Agreement (NAFTA).” (2017).