What is the North American Free Trade Agreement (NAFTA)?

The North American Free Trade Agreement (NAFTA) was signed by Mexico, Canada and the United States to eliminate trade barriers on products (textiles, automobiles, agriculture and many others) traded between these countries. The major aim of this trade agreement was to foster economic activities among these three countries. 

The governments of the United States, Mexico and Canada agreed to replace NAFTA with the United States Mexico Canada Agreement (USMCA) on September 30th 2018. This trade agreement is expected to create robust economy, employment opportunities and freer markets for these countries.

Additions to NAFTA

Two other regulations augmented the provisions contained in the North American Free Trade Agreement (NAFTA) agreement. They are North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). NAAEC and NAALC are regarded as side agreements that were enforced to supplement NAFTA. Both agreements provide regulations guiding the relocation of businesses to other countries. They prevent businesses that relocate to other countries because of loose regulations that exist in the countries and lower wages. NAFTA also contains regulations and requirements on international trade between the participating countries and penalties for violation of the regulations.

North American Industry Classification System

In order to appropriately classify business establishments and draw a comparison of business activities across North America, a new business-classification system was developed. The North American Industry Classification System (NAICS) have three signatories, this business-classification system aid the classification of industries or businesses with regard to their peculiar production processes. NAICS is a new classification system that replaced the U.S. Standard Industrial Classification system. NAICS is however designed to be reviewed at a period of five years so that it can be continually relevant. The Instituto Nacional de Estadistica y Geografia in Mexico, Statistics Canada and the United States Office of Management and Budget are the three signatories to NAICS, they are also responsible for its maintenance.

The Impact of NAFTA

NAFTA has a number of significant impacts on the countries that signed it, these impacts are largely positive. However, some experts are at divergence on how NAFTA has contributed to economic growth and higher wages that these countries experience. It is therefore difficult to weigh the impacts of NAFTA due to certain factors involved. For instance, many businesses were allowed to relocate to countries or regions with lower labor costs despite the existence of supplementary trade agreements like NAALC and NAAEC. This relocation affected many employees, especially in the United States. This is one of the reasons that a motion was moved for the replacement of NAFTA by USMCA to put an end to the concerns of NAFTA.

Related Topics

• Trade Balance: Surplus and Deficit
• Mercantilism
• J Curve
• National Trade Data Bank
• Capital Account (Economics)
• Merchandise Trade Balance
• Current Account 
• Income Payments
• Unilateral Transfer
• Is it better to have a trade surplus or a trade deficit? 
• Export of Goods and Services and Percentage of GDP
• Heckscher-Ohlin Model 
• Linder Hypothesis
• The Balance of Trade as a Balance of Payments
• National Savings and Investment Identity
• Circular Flow of Money
• Financial Capital
• Supply and Demand Sides for Financial Capital? 
• Flow of Capital
• Domestic Saving and Investment Determine the Trade Balance
• National Savings Identity and Trade Deficits
• How the Business Cycle Affects Trade Balances
• Trade Balance or Trade Surplus
• Level of Trade
• Comparative Advantage
• Absolute Advantage
• Specialization and Gain from Trade
• Absolute Advantage in All Goods
• Production Possibilities Frontier and Comparative Advantage
• Comparative Advantage and Mutually Beneficial Trade
• Gain from Trade
• Opportunity Costs and International Trade
• Intra-Industry Trade
• Splitting Up the Value Chain
• How Economies of Scale Lead to Trading Advantages
• Protectionism
• Closed Economy
• Tariffs 
• Double Column Tariff
• Import Quotas
• Double Column Tariff
• Infant Industry Theory
• National Interest Argument
• Race to the Bottom
• Anti-Dumping Laws
• Dumping
• Trade War
• Race to the Bottom
• Non-Tariff Barriers
• Effects of Trade Barriers
• Who Is Benefited and Who is Harmed by Protectionism?
• Infant Industry Theory for Restricting Imports
• What is the Anti-Dumping Argument for Restricting Imports?

• Anti-Dumping Laws
• Dumping

• What is the Environmental Protection Argument for Restricting Imports?
• Race to the Bottom
• Unsafe Consumer Products Argument for Restricting Imports?
• National Interest Argument for Restricting Imports
• What is the WTO?
• What is the GATT?
• What are Free Trade Agreements?
• North American Free Trade Agreement
• Central European Free Trade Agreement
• General Agreement on Free Tariff and Trade (GATT)
• Common Market
• Common Market for Eastern and Southern Africa
• Central American Common Market
• Caribbean Community and Common Market
• What are Economic Unions?
• WTO
• International Monetary Fund
• World Economic Forum
• Inter-American Development Bank
• Davos World Economic Forum 
• Chamber of Commerce
• Jackson Hole Economic Symposium