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Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.
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The North American Free Trade Agreement (NAFTA) was a treaty between Canada, Mexico, and the United States that eliminated most tariffs between the counties. It was replaced by the United States-Mexico-Canada Agreement (USMCA) on July 1, 2020.
NAFTA was the world’s largest free trade agreement when it was established on January 1, 1994, among Canada, the United States, and Mexico. NAFTA was the first time two developed nations signed a trade agreement with an emerging market country.
Through NAFTA, the three signatories agreed to remove trade barriers between them. By eliminating tariffs, NAFTA increased investment opportunities.
NAFTA accomplished six distinct things for the participating countries. First, NAFTA granted most-favored-nation status to all co-signers. That meant each country treated the other two fairly and couldn't give better treatment to domestic investors than to foreign ones. They also couldn't offer a better deal to investors from non-NAFTA countries and had to offer federal contracts to businesses in all three NAFTA countries.
Second, NAFTA eliminated many tariffs on imports and exports among the three countries. Tariffs are taxes that are used to make foreign goods more expensive. NAFTA created specific rules to regulate trade in farm products, automobiles, and clothing, for example.
Third, exporters were required to get certificates of origin to waive tariffs. That meant an export had to originate in the United States, Canada, or Mexico. A product made in Peru but shipped from Mexico would still pay a duty when it entered the United States or Canada.
Fourth, NAFTA established procedures to resolve trade disputes. Parties would start with a formal discussion, followed by a discussion at a Free Trade Commission (FTC) meeting if needed. If the disagreement wasn't resolved, a panel reviewed the dispute.
The trade dispute resolution process helped all parties avoid costly lawsuits in local courts and helped them interpret NAFTA’s complex rules and procedures. These trade-dispute protections applied to investors as well.
Fifth, all three NAFTA countries were required to respect patents, trademarks, and copyrights. At the same time, the agreement ensured that these intellectual property rights didn't interfere with trade.
Sixth, the agreement allowed business travelers easy access throughout all three countries.
NAFTA increased the competitiveness of these three countries in the global marketplace. It allowed them to compete better with China and the European Union. By per capita GDP on a purchasing power parity basis, China is now the world's largest economy, having surpassed the United States in 2014.
It took three U.S. presidents to put NAFTA together. President Ronald Reagan kicked it off during his 1979 announcement of his bid for the presidency. He wanted to unify the North American market to compete more effectively.
In 1984, Congress passed the Trade and Tariff Act, which gave the president fast-track authority to negotiate free trade agreements. It permitted Congress only the ability to approve or disapprove, and it couldn't change negotiating points.
In 1992, President George H.W. Bush signed NAFTA shortly before he left office. It then went back to the legislatures of all three countries for ratification. In 1993, President Bill Clinton signed it. NAFTA went into effect on January 1, 1994.
On November 30, 2018, the United States, Mexico, and Canada renegotiated NAFTA. The new deal is called the United States-Mexico-Canada Agreement (USMCA). The implementation act passed the House in December 2019 and the Senate in January 2020, and it was signed by President Trump on January 29, 2020. It was ratified in Mexico in June 2019 and in Canada in March 2020. The USMCA went into force on July 1, 2020.
Some of the key differences between NAFTA and the USMCA are:
In Mexico, the changes in farming that NAFTA prompted increased the use of chemicals and fertilizers for farming, as well as deforestation so farmers could stay in business and stay competitive. These changes degraded the environment.
NAFTA was a free trade agreement between the United States, Mexico, and Canada. It was designed to increase economic growth and investment by removing barriers to trade among the three countries. The European Union (EU) is an alliance of European nations that eliminates border controls among member countries. It created a unified monetary system and allowed people and goods to move freely.
