The North American Free Trade Agreement (NAFTA) is a regional trade agreement (RTA) between Canada, Mexico, and the United States. It came into effect on January 1, 1994. NAFTA is the largest economy in the world by gross domestic product (GDP) generation and the fourth-largest in terms of total population.
An extension of the Canada-U.S. Free Trade Agreement of 1988, NAFTA suspended a large majority of tariffs and other trade-related barriers on nearly all goods manufactured and sold in the North American region, and calls for the gradual abandonment of other tariffs during a 15-year period. In addition to the removal of trade tariffs in many industries, the treaty also protects intellectual property rights.
Provisions to NAFTA concerning labor and environmental protection were added as a result of supplemental agreements signed in 1993.
Supplemental Treaties
There are two supplemental treaties to be aware of concerning NAFTA. The first is the North American Agreement on Environmental Cooperation (NAAEC). Under NAAEC, Canada, Mexico, and the United States created the Commission for Environmental Cooperation (CEC), to address regional environmental issues, avoid trade conflicts, and encourage enforcement of environmental law.
NAAEC also established the North American Development Bank (NADB) and the Border Environmental Cooperation Commission (BECC). The NADB is a bi-national financial institution governed by the United States and Mexico for use in the financing of environmental projects certified by the BECC.
The second important supplemental agreement is the North American Agreement on Labor Cooperation (NAALC). NAALC was established to assist in the resolution of labor issues and improve labor conditions. The agreement, however, has not produced convergence in employment, productivity, and salary trends in the region.
Facts and Figures of the 1993-2005 ‘Trade Matrix’
According to information issued by the respective countries’ trade government offices, the United States experienced a 48 percent growth in GDP for the time period between 1993 and 2005, while Canada reported a 48 percent growth, and Mexico experienced a 40 percent increase.
In Canada, U.S. exports grew from US $88 billion to US $143 billion during this period, while U.S. exports grew from US $47 billion to US $105 billion.
In the United States, Canadian exports grew from US $103 billion to US $345 billion, while Canadian exports grew in Mexico from U.S. $6 billion to US $18 billion.
In the United States, Mexican exports totaled more than US $138 billion during this period, while growing from US $3 billion to US $9 billion in Canada.
Overall, these figures represent a 28 percent increase in productivity for the United States, a 23 percent increase for Canada, and a 55 percent increase for Mexico.
A Decade of NAFTA
One unique aspect of the trade agreement covering the three countries is the significant difference between the three NAFTA partners. In terms of economic size, the United States is dominant, accounting for 85 percent of the GDP in the NAFTA area at US $12.4 trillion. Canada, about one-tenth the size of the United States, accounts for 8 percent of NAFTA GDP, while Mexico accounts for 7 percent.
When measured by population, the United States still is the dominant partner, but not to the same degree as for GDP. The United States accounts for a little more than two-thirds of the NAFTA-area population at 69 percent, compared to 23 percent for Mexico, and 8 percent for Canada.
Mexico also possesses a much younger and faster growing population than its two northern neighbors, creating a unique set of opportunities and challenges for that country.
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 United States’ 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 United States, however, relies on its NAFTA partners for only about 30 percent of its trade.
Finally, measured by gross domestic product, the NAFTA area is the world’s largest trading bloc, representing 24 percent of world GDP, or US $14.5 trillion.
Hector Garcia Lopez, GMS, is founder and managing partner of Setup Global, Sao Paulo, BRAZIL, partner of Living In Brazil International Executive Mobility Management, Sao Paulo, and co-founder of the Persona Place. He can be reached at +55 11 3013 2073 or e-mail hglopez@setupglobal.com.