The North American Free Trade Agreement, referred to as NAFTA, is the most comprehensive regional trade agreement ever negotiated by the United States. Entered into January1, 1994, NAFTA was designed to remove tariff barriers between the United States, Canada, and Mexico over a fifteen year time span. Two important side agreements were also a part of NAFTA – environmental and labor issues – which sought two reconcile policies and procedures for dispute resolutions between the three counties.
Why Was NAFTA Established and Why Was NAFTA Important to International Business?
During the time that Canada and the United States were creating the U.S./Canada Free Trade Agreement, the Mexican government was overhauling its approach to international trade. This was brought on by the collapse of oil prices and the foriegn debt crisis that Mexico experienced in the early 1980s. As a result of those problems, as well as the country’s other economic problems, Mexico joined the General Agreement on Tariffs and Trade (GATT) during the administration of Mexican President Miguel de la Madrid Hurtado.
After joining the GATT in 1986, Mexico was asked to reduce trade barriers and comply with international trade standards. This, combined with some of the economic reform actions taken by President Madrid’s successor, Carlos Salinas de Gortari, made the country of Mexico ready to join the United States and Canada in establishing a trade agreement.
The United States, Canada and Mexico announced their intention to create a free trade zone – NAFTA – on August 12, 1992. The North American Free Trade Agreement stretched from the Arctic Circle to the southern Mexican borders near Guatemala and Belize, creating the largest trilateral trade relationship in the world.
Provisions of the NAFTA
At the time that NAFTA was created, Canada was the largest trading partner with the United States, and Mexico was its second-largest trading partner. While the countries already had a strong trading relationship prior to NAFTA, the agreement enhanced the current trading partnership with Canada. The trading with Mexico, however, nearly doubled as a result of NAFTA.
Some of the ways that NAFTA liberalized trade:
- Eliminated or phased out tariffs over periods of up to fifteen years. As much as 50% of the exports from the United States to Mexico and 70% of Mexican exports to the United States became tariff and quota free.
- Limits on investments were removed. Investors from the three countries within the NAFTA were treated equally. Currency was freely transferred at market rates and over time, financial services institutions were allowed to establish foreign-owned institutions, as well as invest in Mexican financial firms.
- Trade in services was expanded and equal treatment was in place for sevice providers and professionals from each country.
- Transportation regulations were liberalized, allowing truck and bus operators to have almost unlimited access to the NAFTA countries by the year 2000.
NAFTA and Environmental Impact
NAFTA included an Environmental Side Accord when it was passed. The environmental issues are addressed in the preamble of NAFTA, in article 104 of its objectives, as well as its chapters on investment, agriculture, dispute settlement, and sanitary and phytosanitary measures. The blatant inclusion of environmental issues in the dispute settlement section is one of the more significant and controversial links between trade and environmental policy in the entire agreement.
The Environmental Side Accord established an environmental cooperation commission, in addition to each country’s right to set its own standards and encouraging each country to improve and enforce standards and laws. Among the commission’s duties are to mediate disputes over any “persistent pattern of failure to effectively enforce an environmental law relating to a situation involving the production of goods or services traded between the Parties,” according to the summary of the environmental side agreement.