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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

NAFTA at 20: Overview and Trade Effects

M. Angeles Villarreal, Specialist in International Trade and Finance

Ian F. Fergusson, Specialist in International Trade and Finance

February 21, 2013

http://www.fas.org/sgp/crs/row/R42965.pdf

[full-text, 34 pages]

 

Summary

The North American Free Trade Agreement (NAFTA) entered into force on January 1, 1994. The

agreement was signed by President George H.W. Bush on December 17, 1992, and approved by

Congress on November 20, 1993. The NAFTA Implementation Act was signed into law by

President William J. Clinton on December 8, 1993 (P.L. 103-182). The overall economic impact

of NAFTA is difficult to measure since trade and investment trends are influenced by numerous

other economic variables, such as economic growth, inflation, and currency fluctuations. The

agreement may have accelerated the trade liberalization that was already taking place, but many

of these changes may have taken place with or without an agreement. Nevertheless, NAFTA is

significant because it was the most comprehensive free trade agreement (FTA) negotiated at the

time and contained several groundbreaking provisions. A legacy of the agreement is that it has

served as a template or model for the new generation of FTAs that the United States later

negotiated and it also served as a template for certain provisions in multilateral trade negotiations

as part of the Uruguay Round.

 

The 113th Congress faces numerous issues related to international trade. Canada and Mexico are

the first and third largest U.S. trading partners, respectively. With the two countries participating

in the negotiations to conclude a Trans-Pacific Partnership (TPP) free trade agreement among the

United States and 10 other countries, policy issues related to NAFTA continue to be of interest for

Congress. If negotiations progress, a TPP agreement could affect the rules and market access

commitments governing North American trade and investment since NAFTA entered into force. A

related trade policy issue in which the effects of NAFTA may be explored is the possible renewal

of Trade Promotion Authority (TPA; formerly known as “fast-track authority”) to provide

expedited procedures for the consideration of bills to implement trade agreements.

 

NAFTA was controversial when first proposed, mostly because it was the first FTA involving two

wealthy, developed countries and a developing country. The political debate surrounding the

agreement was divisive with proponents arguing that the agreement would help generate

thousands of jobs and reduce income disparity in the region, while opponents warned that the

agreement would cause huge job losses in the United States as companies moved production to

Mexico to lower costs. In reality, NAFTA did not cause the huge job losses feared by the critics or

the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S.

economy appears to have been relatively modest, primarily because trade with Canada and

Mexico account for a small percentage of U.S. GDP. However, there were worker and firm

adjustment costs as the three countries adjusted to more open trade and investment among their

economies.

 

The rising number of bilateral and regional trade agreements throughout the world and the rising

presence of China in Latin America could have implications for U.S. trade policy with its NAFTA

partners. Some proponents of open and rules-based trade maintain that a further deepening of

economic relations with Canada and Mexico will help promote a common trade agenda with

shared values and generate economic growth. Some opponents argue that the agreement has

caused worker displacement and that NAFTA needs to be reopened. One possible way of doing

this is through the proposed TPP. The ongoing TPP negotiations, launched in the fall of 2008,

may not result in a reopening of NAFTA, but could alter some of the rules and market access

commitments governing North American trade and investment.

 

Contents

Introduction ...................................................................................................................................... 1

Market Opening Prior to NAFTA .................................................................................................... 2

The U.S.-Canada Free Trade Agreement of 1989...................................................................... 2

Mexico’s Pre-NAFTA Trade Liberalization Efforts .................................................................. 3

Overview of NAFTA Provisions ...................................................................................................... 5

Removal of Trade Barriers ........................................................................................................ 5

Services Trade Liberalization .................................................................................................... 7

Other Provisions ........................................................................................................................ 7

NAFTA Side Agreements on Labor and the Environment ........................................................ 8

Trade Trends and Economic Effects ................................................................................................ 9

U.S. Trade Trends with NAFTA Partners ................................................................................ 10

Effect on the U.S. Economy .................................................................................................... 12

U.S. Industries and Supply Chains .................................................................................... 13

Effect on Mexico ..................................................................................................................... 15

U.S.-Mexico Trade Market Shares .................................................................................... 16

U.S. and Mexican Foreign Direct Investment ................................................................... 17

Income Disparity ............................................................................................................... 17

Effect on Canada ..................................................................................................................... 18

U.S.-Canada Trade Market Shares .................................................................................... 18

U.S. and Canadian Foreign Direct Investment .................................................................. 20

Issues for Congress ........................................................................................................................ 20

Trans-Pacific Partnership (TPP) .............................................................................................. 21

Regulatory Cooperation ........................................................................................................... 22

Proposals for Deeper Regional Integration ............................................................................. 23

 

Figures

Figure 1. U.S. Trade with NAFTA Partners: 1993-2012 ............................................................... 11

Figure 2. Market Share as Percentage of Total Trade: Mexico and the United States ................... 16

Figure 3. Market Share as Percentage of Total Trade: Canada and the United States ................... 19

 

Tables

Table 1. U.S. Trade in Vehicles and Auto Parts: 1993 and 2011 .................................................... 14

Table A-1. U.S. Merchandise Trade with NAFTA Partners ........................................................... 25

Table A-2. U.S. Private Services Trade with NAFTA Partners ...................................................... 26

Table A-3. U.S. Trade with NAFTA Partners by Major Product Category: 2012 .......................... 27

Table A-4. U.S. Foreign Direct Investment Positions with Canada and Mexico ........................... 28

 

Appendixes

Appendix A. U.S. Merchandise Trade with NAFTA Partners ....................................................... 25

Appendix B. Mexico’s Protectionist Trade Policies Prior to NAFTA ........................................... 29

 

Contacts

Author Contact Information........................................................................................................... 30

 

 

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