Question

Assess the benefits of NAFTA for the member countries and argue why the benefits achieved could be unequal to each member country.

Essay format would be preferred.

Answer 1

NAFTA or the North American Free Trade Agreement is the world's largest free trade agreement in terms of economic value. The members of this trade bloc include United States of America, Canada and Mexico. The value of GDP of the three countries put together is around $ 20 trillion.

There are many benefits of this agreement to all the member countries. In plain words, the agreement is signed by the nations to open up their economies and ensure free trade. We shall now examine the positive impact of the pact to the member countries.

Advantages:

• Increased growth of trade: Studies point out that the volume of trade went up nearly 4 times during 1993-2016. Such a level of increase in trade is an indicator of increased output, profits, jobs and overall economic development. NAFTA contributed to increased volume of trade by removing all tariffs on trade between the three countries. The agreement also provided a platform for international investors on domestic soil.

• Reduction of prices: The pact included lowering of import prices, which resulted in less inflation and low interest rates. This encouraged more investment and kept the economies stimulated. Prices of food items also went down significantly.

• Growth of the economies: NAFTA boosted the growth of the economy of the United States of America by close to 1 percent a year. Opening up of economies between friendly countries ensured mutual benefits for all the members. This meant that the United States did not have to rely on unfriendly countries like Iran etc for oil. NAFTA boosted exports of services from the United States to Canada and Mexico amounting to $107 billion.

• Increased Jobs: The agreement contributed to the creation of around 790,000 jobs up until 1997. It also led to increased jobs in Mexico as it was preferred over China for outsourcing some production processes. Up until now, the agreement has created around 5 million jobs in the US alone.

• Promotes Specialisation: NAFTA provided a platform for the member countries to specialize in the sectors which it was best at. For instance a large amount of mineral oil, fuel, fruits, vegetables, machinery etc accounting for upto 26% of overall imports of the US was from Cananda and Mexico.

• Increased Foreign Direct Investment: The agreement led to an increase foreign direct investment in all the member countries. The US investment in Canada and Mexico has nearly tripled since the inception of the pact. While it provided FDI to Canada and Mexico, it also provided more opportunities for the United States to explore the markets of neighbouring countries.

Now, we shall see how the benefits accrued to each nation was not equal.

While it created around 5 million jobs in the US, more than a million farmers lost their jobs in Mexico since the US placed its own agricultural produce in the Mexican markets. This severely affected local businesses. This was one of the main reasons for the large scale illegal migration of Mexicans to the United States in search of greener pastures.

The United States of America set up farming businesses in Mexico and used a lot of fertilizers and chemicals to increase its produce. This led to the degradation of the environment. Canada on the other hand, exploited its own shale gas fields to supply to the US, which was a major importer of natural gas.

The US exported financial services to Mexico and thereby put many indigeneous companies out of business. The US had also its own share of losses. They included the loss of around 700,000 jobs as companies moved to Mexico for cheaper labour. Wage rates in the United States dropped significantly as the companies now could move to Mexico for cheaper labour and threatened to do so if laborers did not comply to wage terms set by the companies.

The losses incurred by the members do not neccesarily mean that the agreement must be called off since, it is economically beneficial to have good relations with neighbours in a competitive globalised environment.