The NAFTA stands for “North American Free Trade Agreement”. It created the largest free trade area in the world that covers countries like Canada, Mexico, and the United States. This agreement eliminated several barriers, and tariffs to trade between these member nations. Since that time, it was observed that the trade between these nations increased by manifolds.
Not everyone liked this development. This agreement was found to be controversial. It is quite difficult for the politicians to do find whether this free trade agreement pose advantages or disadvantages. After our in-depth analysis, we have compiled a list of positive and negative impact of NAFTA.
Positive effects of NAFTA
Based on the research conducted in 2017 by Congressional Research Service, it was found that this act has increase the trade between Mexico, Canada, and the United States by three times. The agreement lessened or completely eliminated tariffs.
Enhanced economic output
Greater trade led to increase in economic output. The NAFTA implementation increased the U.S. economic growth by 0.5 percent a year.
Though there were various different estimates, however stronger growth led to more creation of jobs. As per the 2010 report, the NAFTA agreement provided direct support to 5.4 million jobs, and the NAFTA trade among the member countries supported around 17.7 million jobs in a year.
Nearly 2 lac export jobs were created yearly. Even in the field of manufacturing, NAFTA resulted in cooperation between nations, that created new, and local industries and businesses where different areas were made in different participant nations.
Another important and positive impact of NAFTA trade is an unprecedented increase in the FDI (foreign direct investment). This increase in FDI is seen in Mexico from $15.6 billion in 1993 to $104.2 billion in 2012.
In Canada, the FDI increased from $69.7 billion in 1993 to $352.3 billion in 2015. Where Mexico’s FDI by this U.S. trade increased by 1283%, Canada’s FDI was seen to increase by 911% during the same period of time.
Low prices of oil imports
Another major positive contribution of NAFTA was the reduced prices of oil imports. It was observed that the cost of oil that got imported from Mexico was less due to elimination of tariffs. This in turn lowered any dependency of U.S. on oil and gas from the Middle East.
This reduction in price of goods, ultimately led to low cost of transportation, and low food prices. In this way, the low prices of goods and reduced tariffs were favorable for the budget of Americans. It also increased their buying power. It positively impacted the average American.
Favorable for GDP
As per the research conducted by the CFR (Council on Foreign Relations), NAFTA added approximately 78 billion dollars to the GDP of the U.S. When looked at the macro level, it was clear that NAFTA has expanded the U.S. economy.
Strengthened diplomatic ties between nations
NAFTA trade was one of the factors that strengthened the diplomatic ties among nations. It helped countries to stay interconnected economically, so that they experience less military conflict. Post-NAFTA trade, the heads of Canada, Mexico, and US meet often and put emphasis on their diplomatic relations.
Negative effects of NAFTA
As per 2011 report, NAFTA trade estimated a reduction of 682,900 jobs. A majority of them were from the manufacturing units in New York, California, Texas, and Michigan. The U.S. automobile industry lost around 340,000 jobs between 1995 and 2015. Besides manufacturing and automotive industries, computer, electrical appliance, and textile industries suffered from huge loss.
Job migration led to suppression in wages. Where the manufacturing unit of the U.S. suffered the massive job loss, wages declined in several sectors that did not need workers to possess a college degree. Competition created by the low earning workers in Mexico resulted in downward pressure on American wages also.
Prevent farmers to take part in a business
NAFTA kept Mexican farmers aloof from the business. Local farmers couldn’t compete with the funded prices due to which 1.3 million farmers stayed out of business.
Farmers were made to work in subnormal conditions
Unemployed farmers in Mexico has to work in inferior conditions under the “maquiladora program”. They had to work at a very nominal rate to assemble goods and commodities for export into the US. Also, U.S. firms dishonored the Mexican environment for keeping costs too low.
Agriculture business used high levels of chemicals and fertilizers, that increased pollution. Increased deforestation and global warming were the negative impacts of NAFTA trade on the environment.
NAFTA has put nations in both winning as well as losing situation. According to some people, this trade agreement has resulted in an overall loss for the United States, others believe that it has produced significant gains for the entire economy. Whatever is the opinion, it is important to remember that the influence of NAFTA on the entire U.S. economy is very less.