International business
Fall 2012

NAFTA stands for North America Free Trade Agreement, and it was signed by

Canada, Mexico, and the United States and went into effect on January 1, 1994. The

basic purpose of NAFTA is to promote free trade by eliminating tariffs among the

three countries. As related to GDP, it is the largest trading bloc in the world. NAFTA

has two other parts: the North American Agreement on Environmental Cooperation

(NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

NAFTA was created to eliminate trade barriers and increase investment among the US,

Canada, and Mexico, especially between Mexico and the United States. When NAFTA

was implemented, tariffs on more than half of the tariffs on exports from Mexico to the

US and one third of the tariffs from US exports to Mexico were immediately eliminated.

Within ten years of 1994, almost all but a few agricultural US-Mexico tariffs were to

be eliminated, and within 15 years all tariffs were to be eliminated. The real change of

NAFTA was with Mexico, as most US-Canada trade had already been tariff free when

NAFTA was passed.

From the beginning NAFTA has been controversial, and there have been several studies

about the effect of NAFTA, including studies done by the World Bank, and the Institute

for International Economics. Assessing the effect of NAFTA is quite difficult, as the

world economy and the economy of single nations are quite complex, and it is difficult

to analyze the effect of one policy in isolation. While difficult, it is necessary and useful

as analyzing the economy of the world and individual nations can help with future trade

agreements.

Let’s examine the effect of NAFTA and the issue of free trade on the USA developed nation. Free trade is very controversial. One side believes free trade allows countries with cheap labor to flood the US market for manufactured and agricultural products, which quickly results in the loss of US jobs and the wages of the jobs that remain. The other side maintains that free markets are best way for new products, lower prices for consumers, and quality of products. Examining NAFTA is a good study on the effect of free trade and brings up basic philosophical questions. To evaluate NAFTA, it is best to look at the economic indicators of the US before and after NAFTA including unemployment, GNP, GDP, productivity, education rates, poverty rates, inflation, tax rates, new business, and businesses closing. The difficulty is in determining how much NAFTA affects any of these indicators.
According to John Murphy in February of 2009, the vice president of international affairs at the US Chamber of Commerce, the US Chamber of Commerce recognizes the NAFTA benefited workers, farmers, and businesses. He maintains that NAFTA has added jobs to the US, increased the GDP, and increased the manufactured goods sold. NAFTA has increased trade dramatically between Canada, the United States, and Mexico from $293 billion in 1993 before NAFTA to close to a trillion in 2008, which is almost a 300% increase. On a daily basis over 2.5 billion dollars worth of trade is conducted between Canada, the United States, and Mexico. The US exports $60 billion in services to Canada and Mexico annually. Merchandise exports rose to $422 billion in 2008 from $142 billion in 1993, almost a 200% increase while exports to the rest of the world grew only 141%. Moreover, together Canada and Mexico purchase more than a third of total exports.
In fact, Canada and Mexico are by far the two largest markets in the world for U.S. exports, purchasing more than a third of total exports. U.S. merchandise exports to Canada and Mexico rose from $142 billion in 1993 to a projected $422 billion in 2008. This represents a near tripling in U.S. goods exports to Canada and Mexico (a rise of 197%) in a period when U.S. exports to the rest of the world grew by 141%.
Since NAFTA was implemented in 1993 and until 1997, the GDP of all three nations has grown: the US by 54%, Mexico by 48% and Canada by 56%. Some critics of NAFTA claim that NAFTA has cost as much as one million jobs in the US, but from January 1994 to December 2007, employment increased twenty-five percent from 110.7 million jobs to 138.9 million jobs, which is an increase of more than 28 million jobs! Once could argue that the population has also increased, but this argument is not valid because the US unemployment rate has been significantly lower with NAFTA. From 1994 to 2007 unemployment has averaged 7.1 % compared to 7.1% from 1982-1993 before NAFTA. In the last two years unemployment has been around 10%, but this is due to the greatest recession since the great depression, and was not the result of NAFTA. It was the result of a credit bubble caused by the packaging of subprime mortgages in the US into securities called CDOs, it had very little and most likely nothing to do with NAFTA.
Almost half of the new jobs created in the last few years have come from small and medium sized firms, and over 110,000 of these companies come from all fifty states and the leaders are Texas, California, Michigan, Ohio, Illinois, New York, Indiana, Pennsylvania, Indiana, and Washington. The dollar value of small-business exports is anything but small. U.S. small and medium-size companies exported $70 billion worth of manufactured goods to Mexico and Canada in 2006. Canada and Mexico together accounted for more than one-quarter of U.S. merchandise exports from small and medium-size companies.
Some NAFTA critics believe that NAFTA has cut manufacturing jobs, and they point to the loss of millions of manufacturing jobs, for example the loss of 3 million jobs between 2000 and 2003. While jobs have been eliminated, manufacturing output increased close to 57 percent between 1993 and 2007, which was much higher than production between 1981 and 1993. Moreover, output, revenues, profit and profit growth, and return on investment in manufacturing have been setting records. Likewise, Americas service economy has grown significantly, and employs 80% of workers. . At the same time, growth in America's service sectors—which employ some 80% of U.S. workers—has reduced the share of U.S. GDP represented by manufacturing from 15.6% in 1993 to about 12% in 2007.
The loss of jobs is not due to NAFTA, but due to increases in productivity. America typically leads the world every year in productivity growth, meaning workers progressively produce more goods and products every year, thus fewer workers are needed. Automation, systems, computerization, and management effectiveness with logistics has reduced the number of jobs, not NAFTA. This is good for society—you can produce more products with fewer workers thus reducing labor cost and product price, and the workers are free to create new products or services. This is bad for workers as they lose a “comfortable” job, and retraining, getting new education, and relocating is quite difficult. Free market capitalism was never meant to be comfortable—it requires hard work, vision, adaptability, and mobility. Free market capitalism does not guarantee entitlements of the same job for life. In fact, the high point of manufacturing employment occurred in 1979, which is fifteen years before NAFTA was even implemented.
Currently, there are more than 13 million Americans working in manufacturing, and they produce $870 billion in exports for 2007, and $330 billion were purchased by consumers in Canada and Mexico. This amount calculates to $25,000 for each manufacturing US worker, which is most of the $37,000 average salary for factory workers. Thus, NAFTA has been benefitted companies that produce products that Mexico and Canada want but can’t produce themselves at the same value. Thus NAFTA has benefitted US workers of effective US companies, and the consumers of Canada and Mexico.
While Mexico and Canada can produce some farm products cheaper than the US, agriculture exports have increased and Canada and Mexico make up 37% of the increase. NAFTA has resulted in Canada being the largest importer of US wheat, oats, potatoes, poultry, and eggs, and the second largest importer of beef, pork, apples, and soybean meal. Likewise, Mexico is the largest importer of U.S. beef, rice, soybean meal, apples, cheese and beans, and the second largest for corn, soybeans and oil, and third largest for pork, poultry, eggs, and cotton. Farmers in the US have had increased competition for Canadian exports of lumber, and Mexican fruits and vegetables, but if Canada and Mexico can product them cheaper than US growers must find ways to compete or put their effort into other products or services. There is no entitlement in a free market capitalistic society to a certain job or industry or farm product.
Human society benefits when everybody works. If a person wants a product or service, they have to earn money by providing another product or service to trade. The founding of America is based on this principle with the Puritan work ethic of “Those who don’t work don’t eat”. This is good because then everybody adds to society. You have to either provide for yourself and find your own food, shelter, clothing, health care, and entertainment or you have to provide something that somebody else wants to satisfy your needs. Moreover, with the division of labor and efficient free markets people work at what they are good at or enjoy and provide the products and services at the lowest prices. For example, some people like farming and are good at and develop efficient methods partly to satisfy the positive desire of human nature to improve, develop, and create. These farmers can develop irrigation methods, higher yielding plants, and hybrid plants resistant to drought, disease and pests. Thus with development one farmer can produce food for a hundred people, and the other ninety-nine can produce clothes, housing, and provide medical care, food preparation and entertainment. Likewise the can develop these activities and society grows richer with a wider variety of products at higher quality.
This system has the problem that not all human nature is positive for the individual or society. While people have a desire to work, provide, develop, , and create, people also have the desire to avoid work, horde, dominate, and destroy. Most people want to work, but there will always be some who don’t want to work and are happy to be idle. Furthermore, those who work want to get paid for their work, and some want to get paid as much as possible, and there are some who want to get paid as much as possible while doing as little as possible (some argue that lawyers, bankers, high end real estate brokers, and Wall-Street executives are the perfect example). Most people are selfish, but extreme selfishness causes greed and the desire to have more than others. These people get more not by producing more but by taking more from others. They get rich by others being poor. Some people are motivated by power and are more interested in dominating what exists then by creating more. They want to control the market through monopolies and also want to eliminate competition. This satisfies their ego and gives them a sense of “winning”. Free markets need to be regulated only to the point that there is opportunity for anybody willing to get educated, invest, and work hard to compete. This was the philosophy of Ronald Reagan (a hero in both the US and Saudi Arabia) —deregulation to promote economic growth and advancement. With free markets consumers usually win unless there are monopolies or the negative aspects of the business cycle with shortages. Thus some regulation is needed to provide opportunity for new companies in developing companies to develop. Extreme capitalism and communism are both terrible. Free market capitalism in its extreme form is slavery—the resources including human resources are owned by private individuals. On the other hand, communism results in lethargy and very little development in business, art, science. Look at the lost three decades—most notably the cultural revolution of China --under communism from 1950 to 1980., and the decades of communism in the Soviet Union and Cuba. What is needed is moderation—where is Bill Clinton when you need him!
As the United States is a developed country, there is plenty of opportunity for business and farming, and it is ridiculous to argue that American workers and growers need to be protected from Canada and Mexico. It can be argued that workers high salaries and farm profits should be protected from cheap products and labor from Canada and Mexico, but this is not good for society. Consumers would be paying artificially high prices and subsidizing workers, farms, and companies who don’t want to adapt, improve, and innovate to compete.
While competition is good for society as a whole, it hurts some individuals, companies, industries, and localities in the short term. Nobody wants to do a job for less pay or sell a product for less after having done the job or produced the product for a long time at a higher price. Competition for them is not seen as a progress but rather as a threat to their quality of life. Nobody wants to sacrifice themselves for the greater good of society for the long term. Nobody is has the right to entitlement, and if a person loses a job because someone else will do it for less money, more efficiently or productively, than that is a natural part of the evolution of the market. Evolution holds for the financial world too—“Survival of the Fittest” means companies favored by consumers by providing best value. Free markets are not always pretty; the benefit of lower prices comes at the cost of jobs and even whole companies that can’t compete. Yes, some people have lost jobs a result of NAFTA, especially farmers and factory workers who produced similar produce and products at much higher cost than in Mexico. However, other jobs were created especially in high technology manufacturing and research and design. Consumers in Mexico consumed products and services that they could not produce themselves, for example technology including computers, Iphones, People cannot have it both ways. If someone else can do the same job cheaper, than there are two choices. Accept the lower price and have a lower quality of life, or add value to society and produce the same product a cheaper price through innovations in production, or create a new product or service. This requires education and hard work, but that is the essence of competition, entrepreneurs, and the pioneer-frontier spirit of the USA.
This is true with NAFTA, innovative, effective well-run companies have prospered with increased production, employees, exports, profits, and salaries while ineffective, un-adaptable companies have lost revenue, reduced workers or even closed down. NAFTA has rewarded well run companies to thrive with new markets and allowed poorly run non innovative companies to die a quicker death with cheaper products. In the long run, NAFTA has benefitted society with lower prices, new markets and products, but forces some workers and companies to evolve, change, and improve or die. With the current economic crisis and high unemployment in the US, there is growing pressure to repeal NAFTA with the Democrats. This would be terrible and reduce growth and innovation. Displaced workers need to retrain or develop skills to produce efficiently. Taxpayers in a developed country should not subsidize workers or industries who do not want to compete. Saudi Arabia is investing hundreds of billions in education with scholarships and new Universities including King Abdullah University to reduce its dependency on oil. The US needs to invest in education and manufacturing to better compete, not reducing free trade or reducing NAFTA and other free trade policies.

Sources
"NAFTA." Encyclopedia Americana. 2010. Grolier Online. 4 Oct. 2010 <http://ea.grolier.com/article?id=0432379-00>.

"NAFTA Benefits America." Globalization. Ed. Louise I. Gerdes. San Diego: Greenhaven Press, 2010. Opposing Viewpoints. Gale Opposing Viewpoints In Context. Web. 3 Oct. 2010.

North American Free Trade Agreement." Encyclopædia Britannica. Encyclopædia Britannica Online Library Edition. Encyclopædia Britannica, 2010. Web. 4 Oct. 2010 <http://www.library.eb.com/eb/article-9002251>
"North American Free Trade Agreement." Grolier Multimedia Encyclopedia. 2010. Grolier Online. 4 Oct. 2010 <http://gme.grolier.com/article?assetid=0209985-0>.