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.
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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.
1992 Mexican Imports from U.S.
Motor Vehicle Body Parts
10% - 15%
Motor Vehicle Parts (other)
10% - 15%
Oil, not crude
Radio -TV parts
Ignition Wire Sets
Source: FAIR TRADE? TARIFFS WITH AND WITHOUT NAFTA, TIME MAGAZINE DATED 11/25/95
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 succes...