NAFTA OR “SHAFTA”
A Glimpse of the North American Free Trade
Agreement and the Geo-Economic effect on
the United States.
Keith White, TC
Peoria Unified
Vocabulary: Trade Basics
• Absolute Advantage (Adam Smith) = Specialization of
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Labor & Production
Comparative Advantage (David Ricardo) = Lowest
mathematical opportunity cost
Import = goods/services in – Cash out
Export = goods/services out – Cash in
Free Trade = unrestricted trade across borders allowing
lower prices for consumers.
Protectionist = desires restrictions on trade (tariffs, trade
quotas, licensing regulations, etc.) to “protect” jobs and
balance trade.
History: US Trade and Pre-NAFTA
• The impetus for NAFTA actually began with President Ronald
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Regan in 1980, who campaigned for a North American
common market.
In 1984, Congress passed the Trade and Tariff Act. It gave the
President "fast-track" authority to negotiate free trade
agreements, while only allowing Congress the ability to
approve or disapprove, not change negotiating points.
Canadian Prime Minister Mulroney agreed with Reagan to
begin negotiations for the Canada-U.S. Free Trade Agreement,
which was signed in 1988, went into effect in 1989 and is now
suspended due to NAFTA.
Mexican President Salinas and President George H.W. Bush
began negotiations for a liberalized trade between the two
countries.
Prior to NAFTA, Mexican tariffs on U.S. imports were 250%
higher than U.S. tariffs on Mexican imports.
History: NAFTA becomes law
• NAFTA was signed by President George H.W. Bush,
Mexican President Salinas, and Canadian Prime Minister
Brian Mulroney in 1992.
• It was ratified by the legislatures of the three countries in
1993: The US House approved it by 234 to 200 on
November 17 and the US Senate by 60 to 38 on
November 20, 1993.
• It was signed into law by President Bill Clinton on
December 8, 1993 and entered force January 1, 1994.
(Although it was initially signed by President Bush, it was
a priority of President Clinton's, and its passage is
considered one of his first successes of his Presidency.)
orth
merican
ree
rade
The U.S. has $967 billion total trade
with NAFTA. Exports were $412 billion
and imports were $555 billion.
greement
NAFTA Overview
• The North American Free Trade Agreement (January
1, 1994) is an agreement between Canada, the United
States and Mexico stipulating that no tariffs, import
duties, quotas or other protectionist trade tactics will be
employed between the 3-member-nation reducing trade
costs, increase business investment, and help North
America be more competitive in the global marketplace.
• As of January 1, 2008, all tariffs between the three
countries were fully eliminated and NAFTA’s 14-year
implementation was completed.
• Between 1993-2009, trade tripled from $297 billion to $1.6
trillion, making it the world’s largest free trade area (in
terms of GDP).
GDP
U.S.
Canada
Mexico
$14.6 Tr. $1.5 Trillion $1.1 Trillion
[30% live on less than $2 day]
Population 310 mil.
33 million
109 million [50% in poverty]
[Only 28% grad. high school]
Per Capita $48,000
$40,000
$13,500 [ave. ed. Level is 6
Ave. Hourly $16.00
$17.00
$2.00
th
grade]
[.60 min. wage]
NAFTA is a $17 trillion market for 444 million
consumers. [1,000 page document]
NAFTA rolled back 20,000 tariffs by Jan. 1, 2008.
American consumers are saving $20 billion per year.
Trade within NAFTA totals over $1 trillion.
North American Free Trade Agreement
Benefits (Advantages)
• Each country boasts unique natural
advantages that allows it to produce
certain goods or services more costefficiently than others.
• By eliminating tariffs, NAFTA allows
all three member countries to focus
their productive efforts on their
natural advantages.
• 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 nations Gross
Domestic Product. (GDP)
Costs (Disadvantages)
• A shift of industrial focus in each
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country naturally causes job losses on
all sides but is increasingly evident in
high-wage/benefit union labor.
As each country shifts its demand for
a certain product from domestic
purchase to imports, the industry-inquestion in the importing country
loses business, leaving many without
a job.
Entire industries can weaken and
possibly disappear over time due to
free trade agreements due to lower
wages.
Governments rely on tariff revenue
the same as any other tax, and
eliminating tariffs can take a effect
government budgets.
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.
Article 102 of the NAFTA agreement
outlines its purpose:
• Grant the signatories Most Favored Nation status.
• Eliminate barriers to trade and facilitate the cross-border
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movement of goods and services.
Promote conditions of fair competition.
Increase investment opportunities.
Provide protection and enforcement of intellectual
property rights.
Create procedures for the resolution of trade disputes.
Establish a framework for further trilateral, regional and
multilateral cooperation to expand NAFTA's benefits.
NAFTA, 2009
Population: 442 million
Combined GDP: 16 Trillion
3-Way Trade: almost $800 B.
U.S. – Canada Trade
U.S. exports to Canada
$205 B
U.S. imports from Canada $225 B
Canadian-Mexican Trade
Canadian exports to Mexico
$8.3 B
Canadian imports from Mexico $16.5 B
U.S. - Mexico Trade
U.S. exports to Mexico
$129 B
U.S. imports from Mexico $177 B
Success?
• NAFTA has eliminated trade barriers, increased
investment opportunities, and established procedures for
resolution of trade disputes.
• It has increased the competitiveness of the member
countries involved on the global marketplace: This has
become especially important with the launch of the
European Union.
• In 2007, the EU replaced the U.S. as the world's largest
economy but NAFTA remains the largest economy world
economy.
Mexico, the U.S., and Canada
decided to get rid of import taxes
between one another. They
joined together to create the
world’s largest free trade zone.
Many workers feel that
NAFTA is giving them the
Shafta
Labor unions in Canada and the U.S. oppose
NAFTA. They see big companies taking jobs out
of the U.S. & Canada because they can do
business cheaper in Mexico.
Companies can pay employees less in
Mexico, since work is harder to get there.
Average factory wages:
United States
Mexico
China
$136 / day
$8 / day
$3 / day
[factors in medical & pension]
(And some companies have even
left Mexico to move to Asia!)
Source: Univ. of Wisconsin,
http://www.uwec.edu/geography/Ivogeler/w188/border/maquil.htm
Failure?
(“That giant sucking sound” Ross Perot)
• Since labor is cheaper in Mexico, many manufacturing
industries moved part of their production from high-cost of
manufacturing in the U.S. states. Between 1994 and 2002, the
U.S. lost 1.7 million jobs, gaining only 794,00, for a net loss of
879,000 jobs. Nearly 80% of these jobs were in manufacturing.
California, New York, Michigan and Texas were hit the hardest
because they had high concentrations of the industries that
moved plants to Mexico. These industries included motor
vehicles, textiles, computers, and electrical appliances.
• Not all companies in these industries moved to Mexico. Many
used the threat of moving during union organizing drives. When
it became a choice between joining the union or losing the
factory, workers chose to keep the factory open. Without union
support, the workers had little bargaining power. This
suppressed wage growth. Between 1993 and 1995, 50% of all
companies in the industries that were moving to Mexico used
the threat of closing the factory. By 1999, that rate had grown
to 65%.
What about NAFTA and Mexico?
• The 2002 Farm Bill subsidized U.S. agribusinesses up to 40% of net
farm income. When NAFTA removed tariffs, U.S. corn and other
grains were exported to Mexico below cost. At the same time, Mexico
reduced its subsidies to farmers from 33.2% of total farm income in
1990 to 13.2% in 2001. Most of those subsidies went to Mexico's
large farms. Many small Mexican farmers were put out of business.
• In response to NAFTA competitive pressure, Mexico agribusiness
used more fertilizers and other chemicals, costing $36 billion per year
in pollution. Rural farmers expanded into more marginal land,
resulting in deforestation at a rate of 630,000 hectares per year. The
cost to Mexico’s environment is enormous.
• Many Mexican border town workers were exploited: NAFTA
expanded the maquiladora program, in which U.S.-owned companies
employed Mexican workers near the border to cheaply assemble
products for export to the U.S. This grew to 30% of Mexico's labor
force. These workers have "no labor rights or health protections,
workdays stretch out 12 hours or more, and if you are a woman, you
could be forced to take a pregnancy test when applying for a job,"
according to Continental Social Alliance.
Mexico buys 70% of its imports from Texas.
Texas’s exports to Mexico have increased from
$19 billion in 1994 to $62 billion in 2008.
U.S. goods exported to Mexico have gone from
$51 billion to $152 billion, supporting over
1 million jobs in the U.S. Imports from Mexico
have more than tripled to $216 billion.
encourages more world-wide investment
in Mexico. This is enhancing their productivity and
income. Some of this increased income is being used
used to buy U.S. exports. It is believed that a
higher standard of living in Mexico will help stem
the flow of illegal immigrants to the U.S.
NAFTA
NAFTA
and
the
future?
NAFTA should not impede industrial competitiveness, i.e. selective promotion
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of industries and temporary preferences to national entrepreneurs in
particular areas. Enhancing competitiveness will promote industrial
development.
• NAFTA should engage in careful liberalization of sensitive goods, like the
staple-food producing sector.
• NAFTA should include funding for development, like the EU does when it
engages in trade agreements with developing countries. It helps developing
countries to realistically compete with stronger trade partners. (expansion to
Caribbean, Central & South American Nations.)
• NAFTA should not be a substitute for coherent national economic
development strategies.
• NAFTA should pay close attention to how services can be used to promote
better environment and labor standards.
• NAFTA should focus more strongly on job creation, including meeting labor
and environment standards and providing protection for migrants.
North American Map Activity
1-Highlight the borders of US/Canada and US/Mexico in yellow marker. (2 pts)
2-Draw 2 actual routes for trucks or railroads to and from major cities in Mexico and Canada
through the U.S. Label the highways with their numbers. (4 pts)
3-Research 4 major industries/products that benefit from NAFTA. Use symbols to show
where these industries/products are located or originate. Make a legend for the map
showing what these symbols mean. (4 pts)
4-Research 4 major manufacturing border cities in Mexico. Locate and label these cities on
the map. (4 pts)
5-Locate and name 2 ocean ports that would be important to NAFTA trade. (2 pts)
6-Summarize 2 border obstacles that challenge NAFTA on the back of the map. (4 pts)
Total _________ (20 pts)
Compare/Contrast: The EU
• The European Union (EU) is an economic and political
union of 27 member states which are located primarily in
Europe.
• The EU traces its origins from the European Coal and
Steel Community (ECSC) and the European Economic
Community (EEC) formed by six countries in 1958.
• The Maastricht Treaty established the European Union
under its current name in 1993. The last amendment to
the constitutional basis of the EU, the Treaty of Lisbon,
came into force in 2009.
Started with
these 15
Eurozone
Eurozone
1. Austria
2. Belgium
3. Finland
4. France
5. Germany
6. Greece
7. Ireland
8. Italy
9. Luxembourg
10. The Netherlands
11. Portugal
12. Slovenia
13. Spain
Eurozone population of 320 M.
[27 nations – 475 million people] [“Eurozone” includes 13
Euro nations] [GDPs of 27 total around $14.5 trillion]
*It's like a "U.S. of Europe” [imagine each state in the U.S.
having its own currency. If you wanted to buy a product in
Louisiana, you would have to buy Louisiana currency and pay
a 1-2% fee for doing so.) [After independence, states
printed their own money. Formerly, there were tariffs and
quotas against other European countries.
The single currency will create efficiencies leading to
faster growth & facilitate the establishment of a kind of U.S.
of Europe. There will be huge benefits from free trade.
The elimination of trade barriers alone will boost European
GDPs an average of 6% & lower prices by about 6%.
About 4-5 million more jobs will be created all over
Europe.
The EU operates through a hybrid system of supranational independent
institutions and intergovernmental decisions negotiated by the member states.
Important institutions of the EU include
• The European Commission
• The Council of the European Union
• The European Council
• The Court of Justice of the European Union
• The European Central Bank.
• The European Parliament is elected every five years by
EU citizens.
• The political center of the EU is Brussels with branches in
Luxembourg and Strasbourg.
The EU has developed a single market through a standardized
system of laws which apply in all member states.
• Within the Schengen Area (which includes EU and non-EU states)
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passport controls have been abolished.
EU policies aim to ensure the free movement of people, goods,
services, and capital.
Enacts legislation in justice and home affairs, and maintains common
policies on trade, agriculture, fisheries and regional development.
A monetary union, the Eurozone, was established in 1999 and is
currently composed of 17 member states.
Through the Common Foreign and Security Policy the EU has
developed a limited role in external relations and defense.
Permanent diplomatic missions have been established around the
world and the EU is represented at the United Nations, the WTO, the
G8 and the G-20.
With a combined population of over 500 million inhabitants, in 2010
the EU generated an estimated 26% (US$16.282 trillion) of the global
economy, larger than the United States.
European free trade increases production in two ways.
1. Lower costs which increase output.
2. Increase productivity of capital and labor as those
factors are allocated on the basis of comparative advantage.
Incomes will rise, increasing AD. Europe is more
prosperous.
There is a central bank [European Central Bank] and a single
defense force, or a kind of national sovereignty. This is the
goal. Each nation still has its own central bank but they have no
authority to conduct monetary policy. (They operate like
regional banks of the US Fed.)
The European Union (1993)
• Motto: United in Diversity
• Anthem: Ode to Joy
• Flag: Stars = 12 original members of the 15 adopting the
Euro
Europe Map Activity
1-Color (yellow) and label the original 15 members of the EU. Be sure to indicate what yellow
means in your map legend. (3 pts)
2-Color (orange) and label the rest of the current 27 members of the EU. Be sure to indicate
what orange means in your map legend. (5 pts)
3-Of the original 15 EU Nations, which three have not adopted the Euro Zone. Put a star on
these countries. Be sure to indicate what a star means in your map legend. (3 pts)
4-Based now on your map what four European Countries are not in the EU? Color (green) and
label these countries. Be sure to indicate what green means in your map legend (4 pts)
5-Based now on your map which five countries possibly could be future candidates to join the
EU? Put a circle on these countries. Be sure to indicate what a circle means in your map
legend. (5 pts)
6-At the present time, viewing your map, what are two EU members that require seaports to
facilitate trade? (2 pts)
References
• Economics: Principles and Practices, Clayton, Glencoe
McGraw-Hill (1999) with on-line updates
• Macroeconomics K Norman, CD licensed to K White for
classroom educational use only. Slide frames used by
permission.