Introduction

The North American Free Trade Agreement (NAFTA) is an agreement signed

by the governments of Canada, Mexico, and the United States, creating a
trilateral trade bloc in North America. The agreement came into force on
January 1, 1994.
It superseded the Canada United States Free Trade Agreement between
the U.S. and Canada. In terms of combined GDP of its members, as of 2010
the trade bloc is the largest in the world.
NAFTA has two supplements: the North American Agreement on
Environmental Cooperation (NAAEC) and the North American Agreement on
Labor Cooperation (NAALC).
As of January 1, 2008, all tariffs between the three countries were eliminated.
Between 1993-2009, trade tripled from $297 billion to $1.6 trillion.

REASONS
The objectives of this Agreement, as elaborated more specifically through its
principles and rules, including national treatment, most-favored-nation
treatment and transparency, are to:
a) Eliminate barriers to trade in, and facilitate the cross-border movement of,
goods and services between the territories of the Parties;
b) Promote conditions of fair competition in the free trade area;
c) Increase substantially investment opportunities in the territories of the
Parties;
d) Provide adequate and effective protection and enforcement of intellectual
property rights in each Party's territory;
e) Create effective procedures for the implementation and application of this
Agreement, for its joint administration and for the resolution of disputes; and
f) Establish a framework for further trilateral, regional and multilateral
cooperation to expand and enhance the benefits of this Agreement.

ESTABLISHMENT
NAFTA was signed by President George H.W. Bush, Mexican President Salinas,
and Canadian Prime Minister Brian Mulroney in 1992. It was ratified by the
legislatures of the three countries in 1993. The U.S. House of Representatives
approved it by 234 to 200 on November 17, 1993. The U.S. Senate approved
it by 60 to 38 on November 20, three days later. It was signed into law by

President Bill Clinton on December 8, 1993 and entered force January 1,

1994.

PROCESS
The impetus for NAFTA actually began with President Ronald Reagan, who
campaigned on a North American common market. In 1984, Congress passed
the Trade and Tariff Act. This is important because it gave the President "fasttrack" authority to negotiate free trade agreements, while only allowing
Congress the ability to approve or disapprove, not change negotiating points.
Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations
for the Canada-U.S. Free Trade Agreement, which was signed in 1988, went
into effect in 1989 and is now suspended due to NAFTA.
Meanwhile, Mexican President Salinas and President Bush began negotiations
for a liberalized trade between the two countries. Prior to NAFTA, Mexican
tariffs on U.S. imports were 250% higher than U.S. tariffs on Mexican imports.
In 1991, Canada requested a trilateral agreement, which then led to NAFTA.
In 1993, concerns about liberalization of labor and environmental regulations
led to the adoption of two addendums to NAFTA.

ADVANTAGES OF NAFTA
NAFTA created the worlds largest free trade area. It allows 450 million
people in the U.S., Canada and Mexico to export to each other at a lower
cost. As a result, it is responsible for $1.6 trillion in goods and services
annually. Estimates are that NAFTA increases the U.S. economy, as measured
by GDP, by as much as .5% a year.
First, it eliminates tariffs. This reduces inflation by decreasing the costs of
imports. Second, NAFTA creates agreements on international rights for
business investors. This reduces the cost of trade, which spurs investment
and growth especially for small businesses. Third, NAFTA provides the ability
for firms in member countries to bid on government contracts. Fourth, NAFTA
also protects intellectual properties.
Trade between the NAFTA signatories more than quadrupled, from $297
billion in 1993 to $1.6 trillion in 2009 (latest data available). Exports from the
U.S. to Canada and Mexico grew from $142 billion to $452 billion in 2007 and
then declined to $397 billion in 2009, thanks to the 2008 financial crisis.
Exports from Canada and Mexico to the U.S. increased from $151 billion to

$568 billion in 2007, then down to $438 billion in 2009. (Source: Office of the
US Trade Representative, NAFTA)

DISADVANTAGES OF NAFTA
NAFTA has many disadvantages. First and foremost is, NAFTA made it
possible for many U.S. manufacturers to move jobs to lower-cost Mexico. The
manufacturers that remained lowered wages to compete in those industries.
The second disadvantage was that many of Mexico's farmers were put out of
business by U.S.-subsidized farm products. NAFTA provisions for Mexican
labor and environmental protection were not strong enough to prevent those
workers from being exploited.
At a time when globalization and a free world economy are being promoted,
NAFTA exposes the hypocrisy of the developed nations which are turning to
protectionism and regionalism to secure their own best interests.

Salient Features of the Member nations of NAFTA

The long-time growth in the U.S. trade deficit accelerated dramatically after
NAFTA became effective in 1994. According to the Bureau of Labor Statistics,
the $30 billion U.S. trade deficit in 1993 increased 281% to an inflationadjusted $85 billion in 2002.
Despite a growing trade deficit, a report from the Office of the U.S. Trade
Representative categorizes the trade effects as positive:
Between 1993 and 2006, trade among NAFTA partners climbed 197%,
from $297 billion to $883 billion.
U.S. exports to NAFTA partners grew 157%, versus 108% to the rest of
the world in the same period.
Daily NAFTA trade in 2006 reached $2.4 billion.
U.S. manufacturing output rose 63% from 1993-2006, compared to an
increase of 37% from 1980-1993.
A unique aspect of the trade agreement covering Canada, the U.S. and Mexico is the significant
differences between the three NAFTA partners. In terms of economic size, the U.S. is clearly
dominant, accounting for 88.4 percent of gross domestic product (GDP) in the NAFTA area at
US$10.4 trillion. Canada, a little less than one-tenth the size of the U.S., accounts for 6.2 percent
while Mexico accounts for 5.4 percent of NAFTA area GDP.

When measured by population, the U.S.

is still the dominant partner, but not to
the same degree as for GDP. The U.S.
accounts for just over two-thirds of
NAFTA area population at 68.6 percent,
compared to 23.9 percent for Mexico
and 7.5 percent for Canada. Mexico also
possesses a much younger and faster
growing population than its two northern
neighbours creating a unique set of
opportunities and challenges for that
country within North America.
Possibly
most
revealing is the difference in GDP per capita between the three
NAFTA partners. Here too, the U.S. stands out. When measured
using market exchange rates, the U.S. posts the highest GDP per
capita at US$36.2 thousand per person. Canada lags somewhat
at US$23.4 thousand, while Mexico trails significantly at
US$6.3 thousand per head.. Using a PPP measure of GDP per
capita closes the gap between Canada and the U.S. from
US$12.9 thousand per person (using market exchange rates) to
US$4.7 thousand per person (using PPP exchange rates). Still,
Canada's GDP per capita is only 85 percent of U.S. levels and
the object of much debate and concern in Canada. The
difference is even more dramatic for Mexico, whose GDP per capita measured at market
exchange rates is only 17.4 percent of the U.S. level but jumps to 25.7 percent of the U.S. level
when measured using PPPs.

The sheer size of the U.S. economy makes it

less dependent on trade in general, including
with its NAFTA partners. Canada has the
highest trade-to-GDP ratio at more than 80
percent, and just under 60 percent of Mexico's
GDP is traded, while the U.S.'s trade-to-GDP
ratio is around one-quarter. Furthermore, both
Canada and Mexico send more than 80 percent
of their exports to NAFTA partners and rely on
them for the large majority of their imports. The
U.S. however relies on its NAFTA partners for
only about 30 percent of its trade.

Impact of NAFTA on USA

The major benefits that US businesses received in general from NAFTA are:
larger North American market access
New export and investment opportunities
Elimination of tariffs; Canadian and U.S. tariffs were eliminated on
January 1, 1998; Mexico became duty free by the year 2008 for North
American made products
Creation of strong "rules of origin" for North American made products
Effective procedures to resolve trade disputes
Establishment of compatible standards of goods between the three
countries
Facilitation of cross-border movement of goods and services
The specific area that were largely affected by the enforcement of NAFTA are
as follows:

Trade Balances
The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4%
increase ($25 billion) over 2009.
The US goods trade deficit with NAFTA accounted for 26.8% of the overall
U.S. goods trade deficit in 2010.
The US had a services trade surplus of $28.3 billion with NAFTA countries in
2009 (the latest data available).

Boosted U.S. Farm Exports:

Agricultural exports to Canada and Mexico grew from 22% of total U.S. farm
exports in 1993 to 30% in 2007. To put this into perspective, agricultural
exports to Canada and Mexico were greater than exports to the next six
largest markets combined. Exports to the two countries nearly doubled,
growing 156% compared to a 65% growth to the rest of the world
NAFTA increased farm exports because it eliminated high Mexican tariffs.
Mexico is the top export destination for U.S.-grown beef, rice, soybean meal,
corn sweeteners, apples and beans. It is the second largest export
destination for corn, soybeans and oils. NAFTA has enabled United States
agricultural producers and consumers to more effectively use their
comparative advantages and to respond more efficiently to changing
economic conditions.

Created Trade Surplus in Services:

More than 40% of U.S. GDP is services, such as financial services and health
care. These aren't easily transported, so being able to export them to nearby
countries is important. NAFTA boosted U.S. service exports to Canada and
Mexico from $25 billion in 1993 to $106.8 billion in 2007, which dropped to
$63.5 billion in 2009. NAFTA eliminates trade barriers in nearly all service
sectors, which are often highly regulated. NAFTA requires governments to
publish all regulations, lowering hidden costs of doing business.

Reduced Oil and Grocery Prices:

The U.S. imported $116.2 billion in oil from Mexico and Canada as shale
oil (down from $157.8 billion in 2007). This also reduces U.S. reliance on oil
imports from the Middle East and Venezuela. Mexico is a friendly country,
whereas Venezuela's president often criticizes the U.S. Both Venezuela and
Iran have started selling oil in currencies other than the dollar, contributing
to the decline in the dollar's value.
Since NAFTA eliminates tariffs, oil prices are lower. The same is true for food
imports, which totaled $29.8 billion in 2010 (up from $28.9 billion in 2009).
Without NAFTA, prices for fresh vegetables, chocolate, fresh fruit (except
bananas) and beef would be higher. (Source: USTR,NAFTA Imports)

Stepped Up Foreign Direct Investment:

Since NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada and
Mexico more than tripled to $357 billion in 2009, up from $348.7 billion in
2007. Canadian and Mexican FDI in the U.S. grew to $237.2 billion, up from
$219.2 billion in 2007. That means this much investment poured into U.S.
manufacturing, finance/insurance, and banking companies.
NAFTA reduces investors' risk by guaranteeing they will have the same legal
rights as local investors. Through NAFTA, investors can make legal claims
against the government if it nationalizes their industry or takes their property
by eminent domain.

Improved transportation system:

Better transportation became necessary because of the high growth rate in
agricultural products. Inorder to do a better job of improving the efficiency of
truck and rail freight services and make improvements to supply chain
infrastructure, a new report by the Commission for Environmental
Cooperation (CEC), a multimodal organization established in 1994 as part of
the North American Agreement on Environmental Cooperation, a side
agreement to NAFTA. This report was entitled Destination Sustainability:
Reducing Greenhouse Gas Emissions from Freight Transportation in North
America' the report also calls for the NAFTA partners to form "a ministerial-

level forum to foster an integrated, intelligent freight transportation system"

and criticizes the condition of a "congested and deteriorating" North
American freight transport infrastructure.

Protection of each countrys import-sensitive crops:

NAFTA allowed Mexico and the United States to protect their import-sensitive
crops with longer transition periods to eliminate barriers to trade. Importsensitive product markets would fluctuate too much if there were no
protection. For the United States and Mexico, dairy products, cotton, peanuts
and sugar are import-sensitive.

United States employment:

Free trade has caused more U.S. jobs losses than gains, especially for higherwage jobs. While corporate profits soar, individual wages stagnate, held at
least partly in check by the brave new fact of offshoring -- that millions of
Americans' jobs can be performed at a fraction of the cost in developing
nations near and far. Since labor is cheaper in Mexico, many manufacturing
industries moved part of their production from high-cost U.S. states. Between
1994 and 2010, the U.S. trade deficits with Mexico totaled $97.2 billion,
displacing 682,900 U.S. jobs. Jobs were moving to Mexico because of NAFTA.
In 1991, the average hourly compensation in Mexican manufacturing was
only about 14 percent of the U.S. figure: $2.17 in Mexico versus $15.45 for
the United States. There was also concern that investment would move from
the United States to the Mexican economy, further eliminating U.S. jobs.
Nearly 80% of the losses were in manufacturing. California, New York,
Michigan and Texas were hit the hardest because they had high
concentrations of the industries that moved plants to Mexico. These
industries included motor vehicles, textiles, computers, and electrical
appliances. There has been a substantial decline in employment in the
United States textile and apparel sectors. The building of maquiladoras was
largely responsible for this decline.

Crisis in the US Textile and Apparel Industry:

The U.S. textile and apparel industry complex is experiencing its worst
downturn in over two decades. It is faced with a major crisis that is believed
to have been caused by recent global trade liberalization and Asian currency
devaluation. Most observers credit policies stemming from global trade
liberalization, such as the World Trade Organization (WTO) and the North
American Free Trade Agreement (NAFTA), with contributing to rapid job
losses, especially in the rural areas of the Southeast region where the
industry complex is disproportionately located. Since 1995 and especially
following the 1997-98 global financial crisis, the currencies of the top textile

exporting countries in Asia seem to have collapsed causing a shock wave of

low-priced textile products in global markets. The value of textile imports
from Asia, which had shown relatively little growth over the previous ten
years, grew rapidly by about 36 percent (%) from 1995 through 2001 in
tandem with a decrease in Asian currencies. Additionally, volatility in the
apparels market, fueled by frequent fashion changes, have contributed to
exacerbating the economic stress faced by industry participants and rural
residents. Therefore, the recent spate of plant closures may seriously impact
economic development opportunities that are offered by the industry
complex in those rural communities where a majority of plants are located.
Canada. To date, trade among the countries is led by industrial and valueadded agricultural goods such as textiles and apparel. U.S. yarn and fabric
production have become more automated, while apparel production in
Mexico is more labor intensive and can be produced at relatively lower
wages.

Impact of NAFTA on Mexico

Upon implementation, almost 70% of U.S. imports
from Mexico and 50% of U.S. exports to Mexico
received duty-free treatment. The
remainder
of the duties were eliminated over a
period of
15 years, after the agreement was in
effect. The
agreement also contained provisions for
market access to
U.S. firms in most services sectors;
protection of U.S. foreign direct investment in Mexico; and intellectual
property rights protection for U.S. companies. At the time that NAFTA went
into effect, a number of economic studies predicted that the trade
agreement would have a positive overall effect on the Mexican economy,
narrowing the U.S.- Mexico gap in prices of goods and services and the
differential in real wages.

Economic Effects
A number of studies have found that NAFTA has brought economic and social
benefits to the Mexican economy as a whole, but the benefits have not been
evenly distributed throughout the country. Most studies after NAFTA have
found that the effects on the Mexican economy tended to be modest at
most. While there have been periods of positive growth and negative growth
after the agreement was implemented, much of the increases in trade began
in the late 1980s when the country began trade liberalization measures.
Though its net economic effects may have been positive, NAFTA itself has
not been enough to lower income disparities within Mexico, or between
Mexico and the United States or Canada.
A 2005 World Bank study assessing some of the economic impacts from
NAFTA on Mexico concluded that NAFTA helped Mexico get closer to the
levels of development in the United States and Canada. The study states
that NAFTA helped Mexican manufacturers to adopt U.S. technological
innovations more quickly and likely had positive impacts on the number and
quality of jobs. Another finding was that since NAFTA went into effect, the
overall macroeconomic volatility, or wide variations in the GDP growth rate,
has declined in Mexico.
Business cycles in Mexico, the United States, and Canada have had higher
levels of synchronicity since NAFTA, and NAFTA has reinforced the high
sensitivity of Mexican economic sectors to economic developments in the
United States.
Several economists have noted that it is likely that NAFTA contributed to
Mexicos economic recovery directly and indirectly after the 1995 currency

crisis. Mexico responded to the crisis by implementing a strong economic

adjustment program but also by fully adhering to its NAFTA obligations to
liberalize trade with the United States and Canada.
NAFTA may have supported the resolve of the Mexican government to
continue with the course of market-based economic reforms, resulting in
increasing investor confidence in Mexico. The World Bank study estimates
that FDI in Mexico would have been approximately 40% lower without NAFTA
199
4

2004
*

Population (millions)

91

105

Nominal GDP ($US billions)

422

677

GDP, PPP** Basis

($US billions)

671

1,01
7

Per Capita GDP ($US)

4,61
7

6,45
0

Per Capita GDP in $PPPs

7,35
1

9,68
0

Total Merchandise Exports (US$ billions)

71

215

Exports as % of GDP

17%

32%

Total Merchandise Imports (US$billions)

91

216

Imports as % of GDP

22%

32%

Public Debt/GDP

32%

23%

Key Economic Indicators for Mexico

Mexican Wages and Per Capita GDP

Any changes in Mexican wages since NAFTA implementation cannot be solely
attributable to trade integration. Wages are reflective of a number of
economic variables including GDP, productivity, exchange rates, and
international trade. Mexican wages have generally followed the cycles of the
Mexican economy for many years. Wages increased from the early 1980s
until the mid-1990s, when the currency crisis hit when real wages fell by
15.5%. Wages increased after 1996 until 2000 when the percent increase
was 10.8% and then stagnated for several years. Wages fell by 3.2% in 2008
and by 5.0% in 2009.

Mexican Productivity, Exports and Prices

With Mexicos entry into NAFTA, the expectation was that relative prices for
certain Mexican crops would decrease while prices for other crops would
likely remain the same. This was based on the economic expectation that, by
removing Mexicos price and trade interventions in basic crops such as grains
and oilseeds, prices for the same goods in Mexico and the United States
would equalize. Prices for crops that were exported such as fruits and

vegetables were expected to stay the same because these had not been
subject to major government intervention before or since NAFTA. NAFTA and
Mexicos internal reforms were expected to lead to the law of one price for
all agricultural goods produced in North America. This meant that prices for
basic crops such as grains and oilseeds produced in Mexico, which previously
had fixed prices by the government, would decline as these goods faced
competition from U.S. goods.
NAFTA and agriculture reform measures were also expected to increase
efficiency in Mexicos agricultural production as farmers adjusted to
competition from lower cost imports. Production in agricultural sectors that
had prior price and trade interventions was expected to decrease as lowerpriced imports from the United States entered the market, while production
in export-oriented sectors, mainly fruits and vegetables, was expected to
increase. As a result of these shifts, employment was expected to increase in
some areas, but, according to one study, the increase was not expected to
be large enough to absorb all the workers who would be displaced by
reduced production in other sectors. After NAFTA, Mexican prices of basic
crops such as maize dropped and, subsequently, Mexican imports of those
crops increased. Mexican agricultural production, however, did not decrease
after NAFTA. The Mexican governments unilateral liberalization of corn and
NAFTA were both factors in declining prices of corn in Mexico. In 1993, the
price of corn in Mexico was $4.84 per bushel; the price fell to $3.65 per
bushel in 1997 and has remained at about the same level ever since.43
Mexican corn production, however, increased despite the decline in prices.
Total production of maize increased from an annual average of 12.5 million
metric tons during the 1983-1990 period to an annual average of 17.7 million
metric tons, representing an increase of 41%, during the post-NAFTA period
of 1994-2001.44 Mexican corn production yields were a fraction of U.S. corn
production yields in 2003, but in spite of the low yields,
Mexican corn production increased after NAFTA. Between 1990 and 2003,
Mexican corn production increased 44%, a faster rate of growth than U.S.
corn production which increased by 27% during the same time period.45
Most of the effects from NAFTA likely took place within the first ten years of
implementation.
From 1993 to 2003, Mexican exports to the United States in agricultural
products increased from $2.7 billion in 1993 to $6.3 billion in 2003, while
Mexican exports to Canada increased from $136 million to $409 million over
the same time period. Mexican imports from the United States also increased
during this time period, from $3.6 billion in 1993 to $7.9 billion in 2003.
Mexican exports to the United States sharply increased in the following
categories: sugar and related products (595%), beverages excluding fruit

juices (584%), and grains and feeds (328%). U.S. foreign direct investment in
the Mexican food processing industry more than doubled from $2.3 billion in
1993 to $5.7 billion in 2000

Devastating Mexicos Rural Peasants

Prior to NAFTA, small plots of land were permanently deeded to Mexicos
peasant farmers. In preparation for NAFTA, Mexico was required to change its
constitution to allow foreign ownership of this land and allowed these plots to
be sold or seized by creditors. In addition, NAFTA opened the door for the
dumping of large amounts of subsidized U.S. agricultural goods on the
Mexican market lowering prices and endangering the livelihood of peasant
farmers. For example: Corn is the primary crop in Mexico, but post-NAFTA
farmers received 70% less for their harvests because U.S. corn imports into
Mexico more than quadrupled since 1993.
Unable to compete with U.S. prices and with no employment prospects in
their rural communities, more than 2 million Mexican farmers have been
forced off
their land since NAFTA was enacted. These disenfranchised farmers have
migrated to the already overcrowded and heavily polluted cities and
manufacturing zones of Mexico, worsening existing environmental and health
conditions.
It is estimated that NAFTA created only 700,000 manufacturing jobs in
Mexico - far too few to absorb the 2 million displaced farmers and the
130,000 jobs lost in domestic manufacturing due to the replacement of
formerly domestically produced goods by imports. 13 Mexican farmers have
called for a suspension of NAFTA tariff reductions, and a re-negotiation of
NAFTAs agriculture provisions, but to no avail. With no employment
prospects and worsening living conditions, many farmers believe their only
option to earn a living is to attempt the perilous crossing into the United
States.

Impacts on Mexicos Natural Resources

The weakening of environmental standards by NAFTA has also caused the
increased use of chemical intensive production methods in Mexicos large
commercial farms. These methods include the use of harmful pesticides and
fertilizers that pollute land and water resources. Specifically, they contribute
to high soil salinity, ground-level ozone, lake and river acidification, and the
disruption of natural forest processes. The change in land ownership and the
more export oriented farming system in Mexico have also led to a dramatic
loss of forests and the unique biodiversity they sustain. Peasant farmers who
were driven off their lands were forced to clear forestland for farming and

fuel. Since the implementation of NAFTA the annual rate of deforestation in

Mexico has risen to 1.1 million hectares practically doubling the prior rate
of 600 thousand hectares. 15 This places Mexico second behind Brazil in the
rate of deforestation

Effects on Employment
While official unemployment rates in Mexico are lower now than they were
before NAFTA, there has been an increase in underemployment, as well as an
increase in low-pay jobs and low-productivity jobs. Therefore, even though
unemployment has decreased, the incomes of the employed have actually
fallen.

Quality of Life
There have been some improvements to Mexican quality of life due to
NAFTA. According to several speakers at a NAFTA conference, health care for
the citizens of Mexico has improved due to the import of U.S. health services
and technology. However, there is still room for improvement, because the
wide range in differing income levels, as well as differences in the level of
health care facilities, is affecting the availability and delivery of quality
health care to all Mexican citizens.

Maquiladora Workers Were Exploited:

NAFTA expanded the maquiladora program, in which U.S.-owned companies
employed Mexican workers near the border to cheaply assemble products for
export to the U.S. This grew to 30% of Mexico's labor force. These workers
have "no labor rights or health protections, workdays stretch out 12 hours or
more, and if you are a woman, you could be forced to take a pregnancy test
when applying for a job," according to Continental Social Alliance.

Mexico's Environment Deteriorated:

In response to NAFTA competitive pressure, Mexico agribusiness used more
fertilizers and other chemicals, costing $36 billion per year in pollution. Rural
farmers expanded into more marginal land, resulting in deforestation at a
rate of 630,000 hectares per year.

NAFTA Called for Free Access for Mexican Trucks:

Another agreement within NAFTA has not been implemented. NAFTA would
have allowed trucks from Mexico to travel within the United States beyond
the current 20-mile commercial zone limit. A demonstration project by the
Department of Transportation (DoT) was set up to review the practicality of
this. In 2008, the House of Representatives terminated this project, and
prohibited the DoT from allowing this provision of NAFTA to ever be
implemented without Congressional approval.
Congress was concerned that Mexican trucks would have presented a road
hazard. They are not subject to the same safety standards as U.S. trucks. In
addition, this portion of NAFTA was opposed by the U.S. truckers'
organizations and companies, who would have lost business. Currently,
Mexican trucks must stop at the 20-mile limit and have their goods
transferred to U.S. trucks.

Impact of NAFTA on Canada

Canadas NAFTA exports have grown substantially, and have been
particularly successful in high valueadded sectors such as automotive
equipment (trucks, cars and parts), machinery and parts and industrial
goods.
In 1998, total threeway trade among Canada, Mexico and the United States
rose to about $752 billion, with CanadaU.S. and CanadaMexico trade
accounting for $484 billion (Sources: Statistics Canada, U.S. Department of
Commerce and SECOFI). Since the implementation of the NAFTA, Canadas
trade with the United States has risen 80%, while trade with Mexico has
doubled.
Canada & US

Goods & Services

Canada and the U.S. enjoy the world's largest bilateral trading relationship.
Nearly $1.9 billion in goods and services cross the border each and every
day. Canada-U.S. trade has grown considerably since the Canada-U.S. Free
Trade Agreement came into force in 1989. Between 1989 and 2002,
Canadian exports to the U.S. grew at an average annual rate of 9.3 percent
while imports grew at 7.5 percent. Canada's trade surplus with the U.S. also
increased tremendously, from $4.4 billion in 1989 to a peak of $90.7 billion in
2001 before falling off somewhat to $86.4 billion in 2002.

Canada's Trade in Goods and Services with the U.S.

Millions of current CAGR*, %
Share of World, %5
dollars
1989 1994 2002 1989 1994 1989 1989
1994 2002
1994 2002 2002
* Compound
annual
growth
rate
Source: Statistics Canada, Balance of Payments back

Exports
Imports
Balance

119,8
20
115,3
81
4,439

199,8
64
182,5
74
17,29
0

382,1
01
295,7
34
86,36
7

10.77 8.44

9.33

9.61

6.21

7.51

N/A

N/A

N/A

71.43

76.6
0
68.62
72.3
7
(1,109. 200.
7)
30

80.85
69.89
174.42

Since the implementation of the Canada-U.S. Free Trade Agreement in 1989

and the North American Free Trade Agreement in 1994, there has been a
dramatic increase in two-way inter-dependence between the two economies.
As can be seen from the adjacent chart, U.S. exports bound for Canada
increased from $US 93.4 billion in 1989 to $US 184.9 billion in 2002 - an
increase of almost 100 percent. Similarly, U.S. imports from Canada
increased from $US 99.0 billion to $US 232.4 billion between 1989 and 2002.
Millions of current CAGR
US$
198
1994 2002 1989
9
1994
U.S. Exports to Canada
Goods
and
Services
Goods

93,4
15

132,0
76

*, %
1994
2002

1989
2002

Share
World, %
198 199
9
4

of
200
2

184,9
29

7.17

4.30

5.39

19.
18

18.
76

19.
03

79,8 114,6 160,8

88
50
79
Services 13,5 17,42 24,05
27
6
0
U.S. Imports from Canada
Goods
98,9 141,4 232,4
and
82
97
21
Services
Goods
89,9 131,1 213,1
44
49
51
Services 9,03 10,34 19,27
8
8
0

7.49

4.33

5.53

5.20

4.11

4.53

22.
20
10.
64

22.
80
8.6
7

23.
57
8.3
1

7.41

6.40

6.79

17.
06

17.
67

16.
51

7.83

6.26

6.86

2.74

8.08

6.00

18.
83
8.8
2

19.
61
7.8
5

18.
27
8.0
1

Most Canada-U.S. trade is merchandise trade. Merchandise trade accounted

for 87.0 percent of total U.S. exports to Canada in 2002 and 91.7 percent of
total imports from Canada in that year. Merchandise trade growth between
the two countries also outpaced growth in services trade, albeit by a small
margin. Canada-U.S. trade is much more dependent on merchandise trade

than the U.S's trade with other countries, as is shown by Canada's low share
of U.S. services trade - 8.3 percent for exports in 2002, compared to 23.6
percent of merchandise trade. A similar trend is observed for imports where
Canada accounts for only 8.0 percent of U.S. services imports 18.3 percent
for merchandise.

Tourism

Furthermore, Canadians are an important source of tourism revenue for the

U.S. They spent US$ 6.2 billion on travel in the U.S. in 2002, or 8.5 percent of
total foreign travel spending in the U.S. that year.

Commodity

Canada is also an important source for U.S. imports used in the production
process or directly consumed. Just under one-fifth of total U.S. imports come
from Canada. Over 60 percent of U.S. Wood & Paper imports came from
Canada in 2002, despite the softwood lumber dispute between the two
countries. Canada is the most important source of U.S. imports in seven out
of the eleven major commodity groupings and ranks among the top five
sources in the remaining four commodity groups.

These trade numbers also reflect the high degree of integration between
Canadian and U.S. industry. Over 40 percent of U.S. trade with Canada is
intra-firm - trade occurring between parts of the same firm operating on both
sides of the border. The automotive industry is a prime example of this type
of trade. Every vehicle assembled in North America now contains nearly US$
1,250 of Canadian made parts.

Energy

Canada is also the U.S.'s most important source of energy imports. Canada is
undoubtedly the dominant source of Electricity and Natural Gas imports,

accounting for 100 percent of U.S. electricity imports, and 93.5 percent of
natural gas imports. But, even for oil combining crude and non-crude oil, the
U.S. imports more from Canada than from any other country.

Investment

Canada-U.S. economic linkages extend beyond trade. As already mentioned,

many firms operate on both sides of the border with activities that are often
tightly integrated. Canada is one of the most important destinations for U.S.
investment abroad. 10.1 percent of U.S. direct investment assets abroad
were located in Canada in 2001. There are just under 2,000 U.S. affiliates
operating in Canada that generate US$ 2.9 trillion in sales annually.

Canadians are also among the largest investors in the U.S., accounting for
8.2 percent of all foreign direct investment in that country in 2001. Canadian
companies own US$ 434 billion in assets in the U.S., generating US$ 168
billion in sales and employing 643 thousand people and returned US$4.4
billion in income to Canadians.

Canada & Mexico

Canada-Mexico trade has accelerated rapidly over the past decade, with
exports more than doubling. The largest increase, however, came from
imports, which jumped nearly five-fold. And, while Canadian exports to
Mexico remain relatively small, at only $3.2 billion in 2001, or 0.7 percent of
our total exports, Mexico has emerged as one of our most important sources
of imports at $13.1 billion, or 3.1 percent of our total imports.

Goods & Services

Canada appears to have a large and growing trade deficit with Mexico,
reaching $9.9 billion in 2001, more than four times the value of our exports
to Mexico. It is important to note, however, that the merchandise portion of
Canada-Mexico trade statistics may suffer significantly from a
transshipments problem.
Goods and Services Trade, Canada Mexico
Millions of current CAGR*, %
dollars
1989 1994 2002 1989- 19941994 2002
Expor 733
1,26
3,20
11.59 14.17
ts
9
8
Impor 2,04
4,98
13,0
19.53 14.76
ts
2
3
67
Balan (1,30 (3,71 (9,86 N/A
N/A
ce
9)
5)
0)

19892002
13.09

Share of World,
%
198
1994 2002
9
0.44 0.49 0.67

16.73

1.21

1.98

3.13

N/A

327.
25

(43.0
4)

(15.7
8)

Merchandise Trade

Agricultural products account for the largest share of Canada's exports to

Mexico at 31.3 percent in 2002; they have also been the fastest growing
among those products that are exported in a significant quantity to
Mexico. Agriculture, along with Transportation Equipment, is the only major
category of exports to see its share increase from 1989. Machinery &
Electronics and Transportation Equipment, combined, accounted for nearly
three quarters of our imports from Mexico in 2002, up from just over 65
percent in 1989. Most of this increase came from Transportation Equipment
which saw its share rise from 17.7 percent in 1989 to 29.3 percent in 2002
and was second only to Misc. Manufactures in terms of overall growth.
Canada and Mexico trade in many of the same product categories (at the
aggregate level) such as Agriculture, Metals & Minerals, Machinery &
Electronics and Transportation Equipment. It is interesting to note that, in
this context, a trade deficit is recorded with Mexico in each of these
categories with the exception of Agriculture. It is also interesting to note that
only in Agriculture does Mexico account for more than one percent of
Canada's total exports (at 3.5 percent in 2002), whereas Mexico accounts for
more than one percent of our imports in 7 out of 11 categories, and a
relatively high share of two categories of imports that are considered 'hightech', namely Machinery & Electronics and Transportation Equipment, as well
as the catch-all category of Miscellaneous Manufactures.
At a more disaggregated level, significant differences in the types of
products coming from Canada and Mexico can be observed. For example,
there is considerable trade in both directions between Canada and Mexico in
Automotive products. At the 6-digit HS level, 43.2 percent of Canada's
imports fall under HS 870223 (Automobiles with engines displacing between
1500 and 3000cc) while 22.9 percent of our exports fall under the same HS
category. This is likely due to different models of cars being produced in each
country with Volkswagen, for example, producing only in Mexico and
exporting to Canada.

Service trade

Unlike Canada's service exports to the U.S., services account for a relatively
large and growing share of Canada's exports to Mexico. In 2001, 14.1 percent
of Canada's exports to Mexico were services, up from 13.0 percent in 1989.
The opposite is true for imports, however, with the share of services falling
almost 9.0 percentage points between 1989 and 2001 and now accounting
for only 7.2 percent of our total imports from Mexico. It was more the result
of a rapid increase in merchandise imports from Mexico over this period,
rather than slow growth of services, that contributed to this observed
decline.

In dollar terms, both imports and exports have increased tremendously.

Exports more than quadrupled since 1989, to reach $453 million in 2001,
while imports more than doubled to $950 million. As has been reported
throughout this report, Canada still imports far more than it exports to
Mexico with our trade deficit in 2001 exceeding our exports. Overall,
Canada's services trade with Mexico outpaced that with other countries as
can be seen from Mexico's rising share of our total services trade.

Similar to trends in trade with other countries, Commercial services is the

fastest growing and largest sector of Canada's services exports to Mexico,
accounting for 39.7 percent of our total services exports in 2001, up from
about one-third in 1989. On the import side, however, Travel accounts for
nearly four-fifths of Canada's services imports from Mexico.

Investment

Canada's foreign direct investment (FDI) linkages with Mexico have grown
rapidly, particularly since the North American Free Trade Agreement (NAFTA)
came into effect in 1994.

As can be seen from the table below, Mexican inward FDI to Canada stood at
$83 million in 2002, representing only 0.02 percent of total FDI in Canada.
Because of the relatively small amount of Mexican FDI in Canada, little can
be said about trends or its industrial distribution.
Canadian FDI in Mexico outstrips Mexican FDI in Canada by a factor of fortyto-one. Canadian FDI in Mexico accelerated dramatically since the NAFTA
came into effect in 1994 as is illustrated in the adjacent graph. Canadian FDI
in Mexico increased fourteen-fold since 1989, and Mexico's share of total
Canadian outward FDI nearly tripled from 0.3 percent in 1989 to a still
modest 0.8 percent in 2002. Canadian FDI stock in Mexico is down from its
peak in 2000, but this factor is more likely due to the global economic
slowdown and to a decline in M&A activity. There is surprisingly little
evidence of a dramatic impact of the 1994 Mexican Peso crisis on Canadian
FDI in Mexico.
Table 3.4.1

Canada's Direct Investment Position (Stock) with Mexico

Millions
of CAGR*, %
current dollars
198 1994 2002 1989- 1994- 19899
1994
2002
2002
Outwa 237
1,07 3,34 35.26
15.27
22.58
rd
3
4
Inward 12
177
83
71.30
-9.03
16.04

Share of World,
%
198 1994 20
9
02
0.26 0.73 0.7
7
0.01 0.11 0.0
2
Balanc 225
896
3,26 N/A
N/A
N/A
(0.6 (10.8 3.9
e
1
9)
2)
6
Below figure shows that the biggest investments occurred in the Finance &
Insurance industry, which accounted for 36.0 percent of Canadian FDI in
Mexico in 2001, while not even registering in 1989. In fact, this industry
accounted for 38.3 percent of the growth in Canadian FDI in Mexico since
1989.

The next two largest sectors for Canadian FDI in Mexico are 'Other Industries'
which includes everything from the telecommunications industry to Textiles
& Clothing and the Food & Beverage industry; and Energy & Minerals, a
traditionally strong industry for Canadian investment in developing countries.
It is interesting to note that, in 1989, 25.7 percent of Canadian FDI in Mexico
was in the Machinery & Transportation Equipment sector, but this share had
fallen to 6.0 percent in 2001.

NAFTA in a Global Context

Measured by gross domestic
product (GDP) the NAFTA area is the
world's largest trading bloc,
representing 32.7 percent of world
GDP or US$11.4 trillion. The E.U., at
25.8 percent of global economic
output, lags considerably. Even with
the addition of ten new members
next year, the E.U. GDP will
increase from its current US$7.9
trillion to US$8.3 trillion, still well
behind the NAFTA region. Asia,
although not a formal trading bloc,
has many trade linkages as shown
by its high level of intra-regional
trade - comparable to that of formal trading blocs, and accounts for another
23.0 percent of global output4. This triad combined accounts for 85.9 percent
of global output.
Measured by trade volumes, the E.U. dominates: it accounts for 36.8 percent
of global exports and 34.8 percent of imports, compared to 18.8 percent and
24.8 percent for NAFTA. NAFTA ranks second, behind the E.U. for imports, but
ranks third, only marginally above the rest of the world (ROW) for exports, a
reflection of the U.S.'s huge current trade deficit.
Using total trade, however, somewhat overstates the size of the E.U. and
other regions relative to NAFTA. With only three member countries, much of
NAFTA's exchanges occur within countries (mostly in the U.S.) and are
therefore not considered trade. As can be seen from the chart below, this
fact is reflected in the much higher share of intra-E.U. trade compared to
NAFTA: 60.7 percent v. 46.3 percent. By using only external exports, the
NAFTA region is the world's largest importer but comes after the E.U. and
Asia in terms of exports.

Share of Exports, Percent

Destination
Exporter

NAFTA

EU
Asia
ROW
Share of Imports, Percent
Data: IMF, Direction of Trade Statistics
Source
NAFTA
56.0
14.6
17.4
12.0
Importer
NAFTA
EU
Asia
EU
10.9
61.0
7.2
20.9
Data: IMF, Direction of Trade Statistics
Asia
26.3
14.7
48.1
10.9
NAFTA
38.1
17.6
31.5

ROW

12.8

EU
8.1
58.9
12.0
21.0
Measured
by global
Asia
13.7
12.1
56.3
18.0
foreign
direct investment (FDI), NAFTA ranks number two behind the E.U. for both
inward FDI - 23.9 percent of global FDI stocks in 2001 v. the E.U.'s 38.7
percent - and even further behind for outward FDI - 25.0 percent compared
to the E.U.'s 52.5 percent. Similar to
trade, however, these numbers should
be interpreted carefully, as a
considerably larger share of
investment qualify as FDI within the
fifteen E.U. countries while most U.S.
investment is consid-ered domestic.

Impact of NAFTA on India

Indias Trade with NAFTA in 2005-2006

Indias Export to NAFTA in 2005-2006 Total USD 18,817.71 million

Indias Import from NAFTA in 2005-2006 Total USD 10,472.22 million

Loss of Indias Textiles Trade Share

After the formation of NAFTA (North American Free Trade Agreement) in
1994, USA's imports of textiles and clothing items have clearly shown a trend
in favor of the Latin American suppliers, particularly Mexico, which is a
member of NAFTA. Though India maintains a very low share in the global
textiles trade (3%), it is one of the major items in India's export basket.
However, India's position as a major supplier of textiles and clothing items to
USA market has been sliding since 1994. It was at 7th position in 1995 and
came down to 11th position in 2001. On the other hand, Mexico has
improved its position from 7th in 1993 to 2nd just after China, in 2001. The
direction of trade reveals that India has been losing much of its share due to
USA's specific arrangements with countries under CBI (Caribbean Basin
Initiative) and NAFTA. The decline of exports to USA is a warning signal of
increasing competition from NAFTA-empowered Mexico. There are
particularly two categories, i.e., cotton yarn and woven apparel group, where
India has been affected, and this may be a result of the trade diversionary
effects due to Mexico.

India signs BIPA with Mexico

India and Mexico signed a bilateral investment protection agreement (BIPA)
in 2007 that enabled India Inc to access North American Free Trade

Agreement (NAFTA). The agreement was signed by Finance Minister P

Chidambaram and the visiting Mexican Finance Minister M Eduardo Sojo
Garza-Aldape. Mexico, being part of Nafta and having a large number of
important partners including the EU, offered a good opportunity to Indian
companies and enhanced market access through investments and joint
ventures. This agreement was possible because over the years, India had
maintained good relations with Mexico. Bilateral trade between the two
countries has increased to USD 1.5 billion in 2007 from USD 251 million in
1999. Among others, Indian exports to Mexico are engineering goods,
chemicals and pharmaceuticals, gems and jewellery, and textiles, while
Mexican exports to India are dominated by crude and petrochemicals.
Investors of Indian origin have pumped in over USD 1.6 billion over 60
business ventures in Mexico, apart from recent joint ventures in
pharmaceuticals and IT sectors by Indian companies.

Indian Exports and Imports with members of NAFTA

Each table below gives a list of important items of export and import
between India and USA, Canada and Mexico respectively.
Indias Trade with USA
Exports
Imports
Precious Stones
Sophisticated Machinery
Diamond and Gold Jewellery
Electrical Machinery
Woven Apparel
Medical & Surgical Equipment
Knit Apparel
Aircrafts, space crafts
Fish and Seafood
Plastic
Iron/Steel Products
Wood Pulp
Organic Chemicals
Metals
Indias Trade with Canada
Exports
Imports
Readymade Garments
Newsprint in rolls or sheets
Gems, jewellery and precious stones
Copper ores concentrates
Engineering Goods
Peas dried and shelled
Iron & Steel articles
Iron scrap, potash, copper
Coffee
Wood Pulp
Spices
Minerals
Organic Chemicals
Industrial Chemicals
Indias Trade with Mexico
Exports
Imports
Transport Equipment
Articles of iron and steel
Drugs, Pharmaceutical
Iron and steel
Readymade Garments
Plastic articles
Inorganic/organic chemicals
Nuclear reactor
Machinery & Instruments
Medical or surgical equipments

Electronic Goods
Dyes and intermediaries

Ores, slag and ash

Organic chemicals

Indias exports to NAFTA countries (USA, Canada & Mexico) showed a

positive growth in 2003-2004. Indian exports to USA from January to October
2003 grew by 11.5% as compared to the year before. Although global
imports to Canada from January to October 2003 declined by 3.28%, Indiaian
exports showes a growth of 9-10% as compared to the year before. Indian
exports also showned a healthy growth of 22% to Mexico from January to
September 2003, period as compared to the year before.
USA:
USA is Indias largest trading partner and foremost export destination,
accounting for about 22% of Indias global exports. The year 2003 was a
good year for Indian exports to USA, having grown by 11.55% for January
October 2003. The global imports of USA had also increased by 8.8%. India is
now the 18th largest supplier of goods to USA (was 19th in 2002). Substantial
increases had been registered in the exports of pharmaceutical products
(85.14%), electrical machinery (55%), organic chemicals (37%), misc. textile
articles (19%), fish and seafood (12.79%). Knit apparels, leather articles, iron
and steel and edible fruits & nuts are the sectors where the growth has been
negative.
Exports of USA to India had also shown a strong growth, registering an
increase of 25.36% to reach US $ 4.15 billion during the ten-month period in
2003. Among its 25 large export destinations (India is 24th), the growth rate
in exports to India continued to be the highest, more than even China.
Several sectors like electrical machinery, other machinery, chemical
products, aircraft and parts, cotton yarn and fabrics, plastics and mineral oil
had shown positive growth. Fertilisers exports of USA had also grown
significantly to US $ 87.9 million during January October 2003, as against
only US $ 34.2 million for the same period in 2002.
CANADA:
Indian exports to Canada had increased by 9.1% during January October
2003 compared to the same period last year. The growth had been
remarkable since the global imports of Canada had declined by 3.2% during
this period. Nine out of top ten exports products of India had shown a
positive growth except cotton yarn and fabric. Organic chemicals had shown
a growth of 35.67% closely followed by iron & steel products. Preserved food,
plastics and man-made filament had also shown remarkable growth during
this period. Indian exports are presently valued at US $ 1222 million and
India is the 21stlargest exporter of goods to Canada. It comprises just 0.43%
of Canadas global imports (was 0.38% in 2002).
The Canadian exports had declined by 3% globally but had shown a healthy
growth of 7.5% to India during January October 2003. In 2003, India was
the 18th largest export destination of Canadian goods. Paper and paperboard

had shown massive growth of 136%, followed by aircraft and inorganic

chemicals.
MEXICO:
Indian exports to Mexico for the period January September 2003 were
valued at US $ 398 million showing a positive growth of 22%, against the
global Mexican import growth rate of 0.4%. Indias market share had risen to
0.32% up from 0.26% in 2002. Amongst the top 30 exporting countries to
Mexico, only 8 had registered a growth of over 20% in their exports and India
was one of them.
Mexican exports to India had also grown substantially by 83% during the
period January September 2003 valued at US $ 318 million. Indias share in
total Mexican exports was 0.26% (up from 0.14% in 2002).

Recent Events & Future Prospects of NAFTA

The TTC:
The Trans-Texas Corridor (TTC) is no ordinary highway. The toll road would be
four football fields wide. It includes separate lanes(up to six for automobiles,
four for large trucks), plus tracks for freight trains, separate tracks for highspeed and commuter rail, also space for oil and gas pipelines, electricity
wires, and broadband transmission cables. The implications of this scheme
are staggering. Some experts say that up to a million people in Texas stand
to lose their homes and 584,000 acres of rich farm and ranchland are to be
destroyed, all for a privately funded highway.

Peru, Columbia & Panama

The Bush administration in 2007 created an agreement to extend the
provisions and boundaries of NAFTA to Peru, Columbia & Panama. They
intended to fast track the approval with the Senate & Congress. However,
this has not yet happened to date leaving the number of countries that are
members of NAFTA at 3 founding members as of now.

The US Elections Obamas Position on NAFTA

During the US elections, both Democratic candidates i.e. Barack Obama as
well as Hillary Clinton, fiercely opposed NAFTAs provisions and made
stringent promises to renegotiate the agreement. However, today, President
Obama seems to have taken a complete u-turn claiming that not all the
provisions of NAFTA are bad and there seems to be no reason to renegotiate
the agreement in a unilateral manner.
President Obama wants a trade policy that shifts the benefits of globalization
more in favor of labor, and argues that there are both economic and ethical
considerations behind renegotiating NAFTA. Doing so, he argues, would help
level the playing field by making it easier to eliminate practices like child
labor and lax environmental regulation in foreign countries, both of which put
American workers at a disadvantage.

The Chapter 11 Provisions Debate

Fifteen years ago the North American Free Trade Agreement (NAFTA) entered
into force and became the first regional trade agreement between a
developing country (Mexico) and two developed nations (Canada and the
United States of America). While a number of criticisms and controversies
have arisen with respect to different aspects of NAFTA, there can be little
doubt that one of the most contentious features of the agreement has been

Chapter 11; a chapter which contains obligations that each NAFTA Party must
respect when dealing with the investors of other NAFTA Parties and their
investments.
From its inception, NAFTA Chapter 11 has drawn a number of concerns with
respect to its scope and operation. Some argue that the Chapter is overly
protective of investors and, as a result, inappropriately infringes on a states
ability to regulate investment within its borders. Others argue that the
Chapter has had a positive influence on international investment law by, for
example, allowing for more transparent arbitration proceedings.

TPP: The logical progeny of NAFTA?

The Trans-Pacific Partnership (TPP) is a secretive, multi-nation trade
agreement that threatens to extend restrictive intellectual property laws
across the globe.
The nine nations currently negotiating the TPP are the U.S., Australia, Peru,
Malaysia, Vietnam, New Zealand, Chile, Singapore, and Brunei Darussalam.
However, Canada and Mexico has also been invited to join the negotiations
so it is very likely they will do so. The TPP will contain a chapter on
Intellectual Property (copyright, trademarks, patents and perhaps
geographical indications) that will have a broad impact on citizens rights,
the future of the Internets global infrastructure, and innovation across the
world. A leaked version of the February 2011 draft U.S. TPP Intellectual
Property Rights Chapter [PDF] indicates that U.S. negotiators are pushing for
the adoption of copyright measures far more restrictive than currently
required by international treaties, including the controversial AntiCounterfeiting Trade Agreement (ACTA).
The TPP will rewrite the global rules on IP enforcement. All signatory
countries will be required to conform their domestic laws and policies to the
provisions of the Agreement. In the U.S. this is likely to further entrench
controversial aspects of U.S. copyright law (such as the Digital Millennium
Copyright Acts broad ban on circumventing digital locks and frequently
disproprotionate statutory damages for copyright infringement) and restrict
the ability of Congress to engage in domestic law reform to meet the
evolving IP needs of American citizens and the innovative technology sector.
The recently leaked U.S. IP chapter also includes provisions that appear to go
beyond current U.S. law. This raises significant concerns for citizens due
process, privacy and freedom of expression rights.

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