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Toby Walters specializes in accounting, banking, credit cards, investing, and a variety of finance topics. He has more than two decades of experience in finance and is a chartered financial analyst.
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The North American Free Trade Agreement (NAFTA) created the world’s largest free trade area of 454 million people. It links the economies of the United States, Canada, and Mexico. In 2018, the U.S. GDP was $20.5 trillion. Canada's was $1.8 trillion, and Mexico's GDP was $1.2 trillion. NAFTA's trade area has a higher GDP than the $18.8 trillion produced by the 28 countries in the European Union.
Between 1993 and 2019, trade among the three members quadrupled from $290 billion to $1.23 trillion. That boosted economic growth, profits, and jobs for all three countries. It also lowered prices for consumers.
During that time, the United States increased its exports of goods to the other two from $142 billion to $549 billion. That's 33% of its total exports, making Canada and Mexico its top two export markets. It shipped $293 billion to Canada and $256 billion to Mexico.
U.S. imports from its NAFTA partners were $678 billion. That's 27% of total U.S. imports. It's also more than quadruple the $151 billion imported in 1993. Mexico shipped $358 billion to the United States, and Canada shipped $320 billion.
NAFTA boosted trade by eliminating all tariffs among the three countries. It also created agreements on international rights for business investors. That reduced the cost of commerce. It spurs investment and growth, especially for small businesses.
| 2019 NAFTA Trade in Goods | |||
|---|---|---|---|
| (In Billions of US$) | Mexico | Canada | NAFTA Partners |
| U.S. Exports to: | $256.6 | $292.6 | $549.2 |
| U.S. Imports from: | $358.0 | $319.4 | $677.4 |
| Total U.S. Trade: | $614.6 | $612.0 | $1,226.6 |
Lower tariffs also reduced import prices. That lessened the risk of inflation and allowed the Federal Reserve to keep interest rates low.
That's especially important for oil prices since America's largest import is oil. The U.S. Census reports that Mexico shipped $15 billion in oil and petroleum products in 2017. Thanks to greater U.S. shale oil production, this figure was down from $24 billion in 2009. Canada shipped $75 billion. That's up from $49 billion in 2009. Canada also boosted its production of shale oil.
NAFTA reduced U.S. reliance on oil imports from the Middle East and Venezuela. It was especially important when the United States banned oil imports from Iran. Why? Mexico and Canada are friendly countries. Other oil exporters, such as Venezuela and Iran, use oil as a political chess piece. For example, both started selling oil in currencies other than the petrodollar.
NAFTA lowered food prices in much the same way. In 2017, food imports from Mexico were $26 billion and from Canada were $24 billion, to total $50 billion. That's a 67% increase from the $30 billion imported in 2008. Without NAFTA, it's estimated that the food industry would have to pay $2.7 billion more annually to import goods—a cost that would likely be passed on to consumers in the form of raised prices.
NAFTA boosted U.S. economic growth by as much as 0.5% a year. The sectors that benefited the most were agriculture, automobiles, and services.
U.S. farm exports to Canada and Mexico quadrupled from $11 billion in 1993 to $43 billion in 2016. It made up 25% of total food exports and supported 20 million jobs. This trade leveraged another $54.6 billion in business investment.
NAFTA increased farm exports because it eliminated high Mexican tariffs. Mexico is the top export destination for U.S. beef, rice, soybean meal, corn sweeteners, apples, and beans. It is the second-largest export destination for corn, soybeans, and oils.
NAFTA modernized the U.S. auto industry by consolidating manufacturing and driving down costs.
Most cars made in North America now have parts sourced from all three countries. The increase in competitiveness allows the industry to fend off Japanese imports. Mexico exports more cars to the United States than Japan. Before the 2008 recession, Japan exported twice as many as Mexico.
NAFTA boosted U.S. service exports to Canada and Mexico from $25 billion in 1993 to a peak of $106.8 billion in 2007. The recession hit financial services hard. By 2009, they had only risen to $63.5 billion. By 2018, service exports had improved to $95.9 billion. That includes $34.1 billion to Mexico and $61.8 billion to Canada.
An estimated 80% of U.S. GDP is comprised of services, such as financial services and health care. NAFTA eliminates trade barriers in most service sectors, which are regulated. NAFTA requires governments to publish all regulations, lowering the hidden costs of doing business.
Some sources say that NAFTA exports created 5 million net new U.S. jobs. Most of those jobs went to 17 states, but all states saw some increases. U.S. manufacturers added more than 800,000 jobs between 1993 and 1997. Manufacturers exported $487 billion in 2014. It generated $40,000 in export revenue for each factory worker.
Even imports from NAFTA partners created jobs. Almost 40% of U.S. imports from Mexico originated from American companies. They designed the products domestically, then outsourced some portion of the process in Mexico. Without NAFTA, they would have gone to China. They may not have been created at all.
Since NAFTA was enacted, U.S. foreign direct investment (FDI) in Canada and Mexico has more than tripled to $500.9 billion. In 2017, U.S. investors poured $391.2 billion into Canada and $109.7 billion into Mexico. That boosted profits for U.S. businesses by giving them more opportunities to develop and markets to explore.
Canadian and Mexican FDI in the United States grew to $471.1 billion. Canadian investors sank $453.1 billion while Mexican companies invested $18 billion. That's up from $219.2 billion in 2007. That’s an additional investment that went mostly to U.S. manufacturing, insurance, and banking companies.
NAFTA protected intellectual properties. It helped innovative businesses by discouraging pirating. It boosted FDI because companies know that international law will safeguard their rights. NAFTA reduced investors' risk by guaranteeing that 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.
NAFTA allowed firms in member countries to bid on all government contracts. That created a level-playing field for all companies within the agreement's borders. It cut government budget deficits by allowing more competition and lower-cost bids.
Despite these advantages, the United States, Mexico, and Canada renegotiated NAFTA on Nov. 30, 2018. The new deal is called the United States-Mexico-Canada Agreement. (USMCA) Mexico ratified the agreement in 2019. The agreement was signed by Donald Trump on Jan. 29, 2020. Canada's Parliament ratified it on Mar. 13, 2020.
The Trump administration wanted to lower the trade deficit between the United States and Mexico. The new deal changes NAFTA in six areas. The most important is that auto companies must manufacture at least 75% of the car's components in the USMCA's trade zone.
President Bill Clinton signed the North American Free Trade Agreement Implementation Act in December 1993. This bill, passed by Congress, enacted NAFTA for the U.S. It came after government representatives from all three countries negotiated the details of the plan.
NAFTA increased foreign direct investment in Mexico. It also boosted wages for Mexican workers, although those wage increases primarily benefited industrial workers in Northern Mexico.
