What Is the North American Free Trade Agreement?


The North American Free Trade Agreement is a treaty between Canada, Mexico and the United States, who all agreed to remove trade barriers between them. By eliminating tariffs, NAFTA increases investment opportunities. The NAFTA agreement is 2,000 pages, with eight sections and 22 chapters.

On January 23, 2017, President Donald Trump signed an executive order to renegotiate NAFTA. He wanted Mexico to cut its value-added tax and end the maquiladora program.

Critics point to three main disadvantages of NAFTA. First, it sent many U.S. manufacturing jobs to lower-cost Mexico. Second, workers who kept jobs in those industries had to accept lower wages. Third, Mexico's workers suffered exploitation in its maquiladora programs.

But NAFTA also has three significant advantages. U.S. grocery prices would be higher without tariff-free imports from Mexico. Imported oil from both Canada and Mexico has prevented higher gas prices. NAFTA has also increased trade and economic growth for all three countries.

What Does NAFTA Do?

First, NAFTA grants most-favored-nation status to all co-signers. That means countries must give all parties equal treatment, including foreign direct investment. They cannot give better treatment to domestic investors than foreign ones. They can't offer a better deal to investors from non-NAFTA countries.

Second, NAFTA eliminates tariffs on imports and exports between the three countries.

Third, exporters must get Certificates of Origin to waive tariffs, which means the export must originate in the United States, Canada or Mexico.

Fourth, NAFTA establishes procedures to resolve trade disputes and protects businesses from unfair practices.

Fifth, all NAFTA countries must respect patents, trademarks, and copyrights. At the same time, the agreement ensures that these intellectual property rights don’t interfere with trade.

Sixth, the agreement allows business travelers easy access throughout all three countries.

NAFTA has two other agreements that support the enforcement of environmental laws and protect working conditions.

How NAFTA Affects the U.S. Economy

NAFTA increased the competitiveness of these three countries in the global marketplace. It allows them to better compete with China and the European Union. In 2007, the EU replaced the United States as the world's largest economy. In 2015, China replaced both.

Source: What Is the North American Free Trade Agreement?
By Kimberly Amadeo © TheBalance.com

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