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North American Free Trade Agreement - History,

N Objectives, Provisions, Advantages and
Disadvantages!
Last updated on Dec 26,
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North American Free Trade Agreement (NAFTA), enacted in 1994, is an

international free trade agreement between 3 North American countries,
Canada, the US and Mexico and is the most important feature in the bilateral
commercial relationship of the U.S.-Mexico. The purpose of this agreement
was to boost trade between these countries by removing trading barriers
and increasing investment opportunities. However, after confronting certain
disadvantages, the United States-Mexico-Canada Agreement (USMCA)
replaced NAFTA in 2020.

The North American Free Trade Agreement is one of the most important
topics for the UPSC IAS exam. It covers a significant part of the International

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Organisations subject in the General Studies Paper-2 syllabus and for UPSC
prelims. In this article, we shall detail the objective, overview, functions,
advantages, and disadvantages of NAFTA UPSC.

What is North American Free trade

agreement (NAFTA)?
The North American Free Trade Agreement (NAFTA) is an international
agreement established on January 1, 1994. It is a free trade agreement
signed by the governments of Canada, Mexico, and the United States,
creating a trilateral trade bloc in North America. The goal of NAFTA is to
eliminate all tariff and non-tariff barriers to trade and investment between
the United States, Canada, and Mexico.

Background of NAFTA

During the 1980 Presidential campaign, President Ronald Reagan

proposed the idea of a unified market across North America, similar to
the European Economic Community established by the Treaty of Rome
in 1957.
Inspired by the success of the European Economic Community in
eliminating tariffs, the North American Free Trade Agreement (NAFTA)
aimed to encourage trade among its member countries.
Advocates believed that establishing a free-trade area in North America
would lead to increased trade, production and the creation of millions
of well-paying jobs in the participating countries.
In 1984, the Trade and Tariff Act was passed, granting increased "fast-
track" authority to negotiate bilateral free trade agreements, building
on the earlier Trade Act of 1974.
Negotiations for the Canada-U.S. Free Trade Agreement began in 1985
when Canadian Prime Minister Brian Mulroney consented to the talks.
George H. W. Bush's Enterprise for the Americas Initiative led to the
development of NAFTA law.
The Clinton administration, which signed NAFTA into law in 1993,
anticipated that it would generate 200,000 jobs in the U.S. within two
years and 1 million within five due to increased exports and lower
tariffs.
Negotiations for NAFTA started in 1986, and the agreement was signed
in 1988. The Canada-U.S. Free Trade Agreement took effect on January
1, 1989, and continued until NAFTA replaced it on January 1, 1994. The
NAFTA agreement was signed by President George H.W. Bush, Mexican
President Salinas, and Canadian Prime Minister Brian Mulroney in 1992.

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Objectives of NAFTA
The objectives of NAFTA are enlisted in Chapter 1 of Article 102.

To eliminate barriers to trade and facilitate the cross-border movement

of goods and services between the territories of the Parties
To promote conditions of fair competition in the free trade area
To increase substantially investment opportunities in the territories of
the Parties
To provide adequate and effective protection and enforcement of
intellectual property rights in each Party’s territory
To create effective procedures for the implementation and application
of this Agreement, for its joint administration and the resolution of
disputes
To establish a framework for further trilateral, regional and multilateral
cooperation to expand and enhance the benefits of this Agreement.

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Provisions of NAFTA
The full text of the trade agreement included extra annexes and appendices,

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North American Free Trade Agreement (NAFTA) | Aim & Provisions 06/03/24, 7:56 PM

as well as 22 chapters split into eight divisions. The key provisions of the
NAFTA agreement are listed below.

Elimination of Trade Barriers

The elimination of the majority of tariffs and other trade barriers was one of
the key objectives of NAFTA. High import taxes deterred cross-border trade
in some manufactured items prior to the advent of the North American Free
Trade Agreement. The pact also aimed to remove non-tariff trade
restrictions such as border procedures and licence requirements.

Intellectual Property Protections

NAFTA strengthened protections for intellectual property, including software

and trade secrets. Due to the decreased risk of corporate secrets being
disclosed to a foreign rival, these protections increased the incentives for
cross-border trade.

Environmental and Labor Protections

The Clinton administration negotiated a number of side agreements to

assure protections for the environment and labour rights in response to
critics who claimed that NAFTA’s common market would result in a
decrease in environmental and labour standards.
The North American Agreement on Labor Cooperation, the first of
these, contained safeguards to stop child labour and other violations
but did not fully protect the freedom to organise.
The North American Agreement on Environmental Cooperation, the
second, established a commission to evaluate the effects of regulatory
liberalisation on the environment.

Dispute Resolution

The agreement contained a dispute resolution procedure for problems

between investors, corporations, and state governments in order to
encourage cross-border trade even more. In all three nations, this
procedure received harsh criticism since it was perceived as a tool for
international firms to preempt local laws.

Also, check out the article on WTO Agreements for UPSC with this link!

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Advantages of NAFTA
2022 2023

The advantages of NAFTA are listed below.

ViewNAFTA lowered the priceView

Test Series of many
Testgoods:
Series Lower tariffsView
also Test
reduced
Series
import prices. As a result, the Federal Reserve maintained low interest
rates and reduced the risk of inflation.
NAFTA was good for Gross Domestic Product: The North American
View More
Free Trade Agreement boosted trade by eliminating all tariffs among
the three countries (the US, Canada, and Mexico). It also produced
accords on global commercial investor rights. As a result, trade was
cheaper. It encourages growth and investment, particularly for small
enterprises.
Improved diplomatic relations: NAFTA improved bilateral relations
among its member nations, i.e. Canada, Mexico, and the US.
Increase exports and formation of regional industry blocs: Up to 0.5%
per year was added to U.S. economic growth thanks to NAFTA. 17
Agriculture, autos, and services were the industries that profited the
most.
Creation of Jobs: NAFTA also helped in creating jobs through imports.
There was an increase in manufacturing exporters and revenue from
factory workers.
Government Spending was Reduced: Members of NAFTA could submit
bids for all government contracts. For all businesses operating inside
the boundaries of the agreement, this produced a level playing field.
Encouraging greater competition and cheaper bids reduced budget
deficits for the government.
Increased Foreign Direct Investment: The North American Free Trade
Agreement also safeguarded intellectual properties. The pirating
business was discouraged, which helped innovative businesses. It
boosted FDI because companies know that international law will
safeguard their rights. By ensuring that they will have the same legal
rights as local investors, NAFTA minimizes the risk for investors.

Study in detail about the Free Trade Agreement here!

Disadvantages of NAFTA
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North American Free Trade Agreement (NAFTA) | Aim & Provisions 06/03/24, 7:56 PM

Disadvantages of NAFTA

NAFTA led to the loss of U.S. manufacturing jobs.

Many jobs were taken by workers in Mexico.
NAFTA negatively impacted the economic prospects of Mexican small
business owners and farmers.
After the agreement, many small farmers found it difficult to compete
with bigger agribusinesses.
Farmers from some of the nation’s family-run farms moved to work in
factories instead.
According to detractors, they were paid less, had less freedom, and
had worse working conditions.
NAFTA reduced earnings for American employees without college
degrees.
The U.S. manufacturing sector had the greatest employment losses
due to NAFTA.
Salaries fall across various industries where a college degree is not
required.
The competition from Mexican employees, whose earnings are
generally lower than those of American workers, put downward
pressure on U.S. wages.

Study in detail about the Asia pacific trade agreement here!

Controversy Over NAFTA

The controversy about the North
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around its updates.

Robert Lighthizer, the US Trade Representative, established an

ambitious renegotiation agenda covering everything from customs
processes, intellectual property protection, digital trade, rules of origin,
energy requirements, and agricultural trade instead of threatening a US
withdrawal.
Canada and Mexico have also attempted the goals of the NAFTA
update. Mexico has decided to concentrate on improving the
inclusiveness and responsibility of the agreement, modernising the
agreement, and boosting regional investment and confidence.
Mexico suggests several steps to achieve this goal, including
streamlining customs procedures, increasing the number of seasonal
entrance permits, writing chapters on energy and digital trade, and
removing non-tariff trade obstacles.
The goal for Mexico is to preserve a positive economic relationship with
the United States while regaining faith in its markets.
NAFTA’s Article 2205 stipulates that the United States must give the
other parties written notice of six months’ termination.
The US Constitution, however, might make any withdrawal difficult.
Congress is given the authority to approve and revoke US participation
in trade agreements under the Constitution's Commerce Clause.
If Trump decides to pull the US out of the trade deal without getting

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Congress’ approval, US exporters, consumers, and even members of

Congress may fight with the administration. The case could even make
its way to the US Supreme Court.
Study in detail about Foreign Trade in India here!

NAFTA vs. USMCA

NAFTA was renegotiated by the US, Mexico, and Canada on November 30,
2018. The United States-Mexico-Canada Agreement (USMCA) is the name
of the new agreement. In 2019, Mexico ratified the pact. On January 29,
2020, Donald Trump signed the contract. It was approved by the Canadian
Parliament on March 13, 2020.

The US-Mexico trade gap was something the Trump administration sought
to reduce. In six areas, the new agreement modifies the North American
Free Trade Agreement. The requirement that automakers produce at least
75% of the car’s components within the USMCA trading zone is the most
significant.

On July 1, 2020, the U.S.-Mexico-Canada Agreement (USMCA) replaced the

North American Free Trade Agreement (NAFTA).
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Important Facts of NAFTA for UPSC

PDF

Key Facts of NAFTA

NAFTA Full Form North American Free Trade

Agreement

NAFTA Established January 1, 1994

NAFTA Headquarters Mexico City (Mexico)

Ottawa (Canada)

Washington D.C (USA)

NAFTA Members/ NAFTA Canada, Mexico and the United

countries States

North American Free Trade Agreement (NAFTA) – United

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