Principles of Business, Finance, and Marketing
Fall 2011
NAFTA Pros & Cons
The North American Free Trade Agreement is an agreement between Canada, the United States and
Mexico stipulating that no tariffs, import duties or protectionist trade tactics will be employed between the
member-nations. This agreement, in effect since 1994, has led to increased trading between all countries
as demonstrated by the table below:
Largest US Trading Partners (in billions for year 2010)
Country
Exports
Imports Total
Trade
Balance
Canada
248.8
276.5
525.3
-27.7
China
91.9
364.9
456.8
-273
Mexico
163.3
229.7
393.0
-66.4
Japan
60.5
120.3
180.9
-59.8
Although an agreement like this offers distinct benefits to all parties, opponents of the agreement have
legitimate concerns about its true economic effects.
Comparative Advantage
Each country boasts unique natural advantages that allows it to produce certain goods or services more
cost-efficiently than others. By eliminating tariffs, NAFTA allows all three member countries to focus their
productive efforts on their natural advantages. The U.S., for example, produces high-quality consumer
goods at low cost, while Mexico produces certain foods and crops at low cost. Eliminating tariff barriers
allows Mexicans to purchase cheap consumer goods from the U.S. while allowing U.S. Food distributors
to purchase cheap Mexican crops. This shift of industrial focus in each country naturally causes job
losses on all sides. As each country shifts its demand for a certain product from domestic purchase to
imports, the industry-in-question in the importing country loses business, leaving many people without a
job. Entire industries can weaken and possibly disappear over time due to free trade agreements, such as
NAFTA.
Political Ties
Free trade agreements can help to encourage coordination and cooperation among member states,
according to southerncenter.org. Some may argue that NAFTA has, for example, increased Mexico’s
willingness to cooperate in the U.S.s crackdown on illegal immigration and international smuggling; others
would argue that these problems have not diminished enough to prove that the cooperation is helpful.
Strong ties between North American countries grant each nation a defensive tactic against protectionist
actions from other foreign nations. If a NAFTA member relies on an outside nation for a particular import,
and the exporting nation suddenly imposes aggressive tariffs or other measures, the importer can switch
demand to one of its domestic allies, alleviating the effects of the original exporters actions. Although the
interdependence created by free trade agreements carries powerful benefits, all nations can suffer if the
ties are ever broken. Countries may be left with crippled industries or a lack of labor for certain industries
if they rely on imports from each other for too long.
Prices
Consumer prices for imported goods are kept under control within NAFTA countries because import
prices are not artificially inflated by tariffs. This allows importers to purchase more goods and services,
which in turn allows the exporters to produce more, increasing their nation’s Gross Domestic Product. The
very factor that is a pro to consumers, however, is a con to governments. Governments rely on tariff
revenue the same as any other tax, and eliminating tariffs can effect government budgets. When imports
from a member-country increase, imports from other foreign nations tend to decrease, which has an
additional negative effect on tariff revenue.
Principles of Business, Finance, and Marketing
Fall 2011
Assignment
1. Define Comparative Advantage and give an example (different than the one given in text) of when it
may be used between NAFTA countries.
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2. List 3 pros of the North American Free Trade Agreement:
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3. List 3 cons of the North American Free Trade Agreement:
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4. What do you think is more helpful to an economy – Encouraging International Trade (via a Free Trade
Zone, Free Trade Agreement, or Common Market) or imposing International Trade Barriers (Quotas,
Tariffs, or Embargos)? Explain your answer.
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5. What do you think of Congress passing the 3 new Free Trade Agreements with South Korea,
Panama, Columbia? What impact do you think that will have for the participating countries?
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