NAFTA
Throughout the existence of the modern world, countries have wrestled with the idea of whether there are gains to trade and if these are enough to incentivize opening up a nation to trade, thus making it susceptible to the world’s influence. This is a fair question given various economic models’ outcome based on this very situation. When opening up to trade, it is also possible that countries can take steps to protect themselves from market fluctuations in the form of trade agreements. While not only mediating the susceptibility to market conditions, trade agreements seek to reduce costs of trade, while also providing consumers with more product variety. As the world’s largest free trade area, the North American Free Trade Agreement (NAFTA) seeks to promote trade between the United States, Canada, and Mexico through the elimination of tariffs and quotas.
History
In January of 1994, history was made as the NAFTA came to fruition, opening up enormous trade potential between the three countries, United States, Canada, Mexico, and slowly eliminating and reducing tariffs and quotas (NAFTA). The agreement established a free trade area which allows signing countries to engage in trade without barriers, but allows the parties to maintain tariffs and quotas with other nations. This is in contrast to what is well known as the European Union (EU). The EU is a customs union, which consists of an agreement allowing free trade among signing parties, but also forces the signing party to maintain a common set of tariffs with other trading partners outside the union. Although these only seem slightly different in definition, the free trade area allows for countries to retain autonomy when dealing with other nations; therefore this type of agreement may be more appealing for some. At the same time, both types of agreements make trading with partner nations much more beneficial due to the elimination of trade barriers.
While there are some simple and complex economic tools to use in order to prevent trade, and an entire United States era of protectionism, the elimination of barriers does not eliminate all obstacles to trade. Transportation and production cost remain deterrents to full integration of the trade markets under NAFTA. The United States exports to Canada and Mexico grew by 23.4% when comparing 2010 to 2009 (NAFTA). Since 2001, the real GDP growth rate has been 1.9% for Canada and 1.6% for the United States (Fergusson). At the same time, Canada and Mexico became the primary importers of US goods in 2010. By the same token, the United States imported a significant number of their total goods from Canada and Mexico. Trade occurred in almost every sector, from machinery, to mineral fuel and oil, all the way to fresh vegetables (NAFTA). While trade increased significantly between these three nations, trade within the respective nations was actually still higher. It turns out that crossing the Mexican, US, and Canadian border still has some transportation and production costs. Resources controlled by foreign government, such as natural resources in Canada, require that profits be distributed among Canadian provinces (Fergusson). This not only makes it difficult for a foreign firm to enter the market, but also leads Canadian businesses in this sector to refrain from trade. In response to this, primarily the United States and Canada have resorted to foreign direct investment (FDI) in the other signing partner nations. This allows factories to be built and operated in the other country, thereby reducing the cost of transferring semi complete goods or raw material frequently across the borders. Although FDI continues to integrate the three nations, the cost of simply moving some goods exceeds the price countries are willing to pay for trade. Although NAFTA has eliminated many trade barriers and drastically increased trade between the United States, Canada, and Mexico, transportation cost still remain a distinct barrier to trade.