North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA)

Updated June 14, 2018
North American Free Trade Agreement (NAFTA)
Overview
and other parts of the world, influencing negotiations in
NAFTA is a free trade agreement (FTA) among the United
areas such as market access, rules of origin, IPR, foreign
States, Canada, and Mexico that entered into force on
investment, dispute resolution, worker rights, and the
January 1, 1994 (P.L. 103-182). At the time it was
environment. NAFTA addressed new trade policy issues
negotiated, NAFTA was unusual because it was the first
and served as a catalyst for future FTAs and concluding
time that a U.S. FTA linked two advanced economies with
multilateral negotiations. The United States now has 14
a lower income country. For this reason, the agreement
FTAs with 20 countries.
sparked debate among policymakers, industries, labor
unions, and other stakeholders about its potential benefits
What Are Supporting Views? Past and present proponents
and costs. NAFTA-implementing legislation included
of NAFTA view the agreement as an opportunity for
revisions to the U.S. trade adjustment assistance program to
generating economic growth, creating jobs, increasing
address production shifts and assist dislocated workers.
productivity, reducing income disparity, and strengthening
trilateral relations. They ask that the Trump Administration
On May 18, 2017, the Trump Administration sent a 90-day
“do no harm” in the NAFTA renegotiations.
notification to Congress of its intent to renegotiate NAFTA,
as required by the 2015 Trade Promotion Authority (TPA).
What Are Opposing Views? Opponents argue that the
Negotiations began on August 16, 2017, and eight formal
agreement has caused job losses in the United States as
rounds of negotiations had taken place as of April 2018. In
companies moved production to Mexico to lower costs, put
May, the parties continued a “permanent round” of talks to
downward pressure on U.S. wages, increased income
resolve contentious issues related to U.S. proposals on
disparity, and has been an infringement on U.S.
automotive rules of origin, seasonal produce, dispute
sovereignty. Some labor groups ask that the NAFTA
settlement, and a sunset clause to reevaluate the agreement
renegotiations include stronger protection of worker rights.
every five years and to negotiate other issues such as labor
and intellectual property rights (IPR). The 115th Congress
Key NAFTA Provisions
may continue oversight of and its role in the negotiations,
Market Opening. An important aspect of NAFTA relates
consider whether the Administration is following
to national treatment and market access for goods and
consultation requirements and negotiating objectives under
services. The agreement eliminated tariffs over 10 years (15
TPA, and evaluate economic implications of a new
years for sensitive products) and most nontariff barriers on
agreement or possible NAFTA withdrawal.
North American goods, as long as they meet specific rules
of origin. Trade barriers on sensitive items, such as sugar
NAFTA Facts
and corn, received the longest phase-out periods.
Milestones. Negotiations began in February 1991. The
agreement was signed by President George H. W. Bush on
IPR Protection. NAFTA was the first trade agreement to
December 17, 1992. NAFTA side agreements were signed in
include a chapter on IPR. It set minimum standards of
August 1993. The NAFTA Implementation Act was approved by
protection and enforcement for patents, copyrights,
Congress on November 20, 1993. NAFTA entered into force on
trademarks, and other forms of IPR. It also served as a
January 1, 1994.
template for the World Trade Organization’s (WTO) Trade-
Prior Liberalization. NAFTA enhanced prior liberalization
Related Aspects of Intellectual Property Rights Agreement.
efforts. The U.S.-Canada FTA had been in effect since 1989, and
Mexico was in the process of substantive unilateral trade and
Foreign Investment. NAFTA removed significant
investment liberalization measures.
investment barriers, especially in Mexico, ensured basic
protections for NAFTA investors, and provided a
NAFTA Text. NAFTA includes eight parts consisting of 22
mechanism for dispute settlement. It includes country-
chapters. It contains provisions on tariff and nontariff barrier
specific liberalization commitments and exemptions such as
elimination, customs procedures, energy, agriculture, technical
Mexico’s energy sector and cultural industries in Canada.
barriers to trade, government procurement, foreign investments,
services trade, temporary entry for business persons, intellectual
Labor and Environmental Provisions. The original text
property rights protection, and dispute resolution procedures.
of the agreement did not include enforceable labor or
Labor and Environmental Side Agreements. NAFTA
environmental provisions. Due to congressional concerns at
parties approved additional side agreements on labor and the
the time, the three countries negotiated and signed separate
environment, which were included in the NAFTA
side agreements. NAFTA was the first U.S. FTA with labor
Implementation Act.
and environmental commitments and dispute settlement
provisions, but these do not go as far as more recent FTAs.
Why Is NAFTA Important? NAFTA initiated a new
generation of trade agreements in the Western Hemisphere
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North American Free Trade Agreement (NAFTA)
Economic Effects
Canada was the leading market for U.S. goods exports,
The overall net effect of NAFTA on the U.S. economy
while Mexico ranked second. The two countries accounted
appears to have been positive, though modest, primarily
for 34% of total U.S. exports and 35% of U.S. imports.
because trade with Canada and Mexico account for a small
Canada and Mexico ranked second and third (China was
percentage of U.S. GDP. Most economists contend that the
first), respectively, as suppliers of U.S. imports.
claims on both sides of the NAFTA debate were
Merchandise imports from NAFTA partners increased from
exaggerated. NAFTA did not cause the job losses feared by
$151 billion in 1993 to $614 billion in 2017 (307%), while
the critics or the employment gains predicted by the
exports increased from $142 billion to $525 billion (271%).
proponents.
Issues for Congress
Many economists and other observers credit NAFTA with
Congress may consider numerous policy issues related to
helping North American manufacturing industries become
the renegotiation of NAFTA and the future of U.S. trade
more globally competitive through greater economic
policy such as the roles of Congress and the President
integration, including through the development of supply
regarding the negotiations or potential NAFTA withdrawal,
chains. The deepening of manufacturing integration among
as well as the economic effects. It may also consider
NAFTA parties has significantly changed the nature of the
political and strategic implications of U.S. relations with
trilateral economic relationship. The three countries do not
Canada and Mexico, as well as the economic effects of their
simply sell finished products to one another, but
trade initiatives such as the Comprehensive and Progressive
increasingly produce them together. As a result of this
Agreement for Trans-Pacific Partnership (CPTPP). Canada,
unique trade relationship, supply chains have increasingly
Mexico, and the nine other remaining signatories of the
crossed national boundaries as manufacturing work is
Trans-Pacific Partnership (TPP) signed the CPTPP on
performed wherever it is most efficient.
March 8, 2018. The agreement has the potential to affect
the economic well-being of certain U.S. stakeholders, as
While NAFTA may have accelerated North American trade
well as U.S. global economic leadership and long-standing
since 1993, other factors, such as economic growth patterns
U.S. promotion of an open, rules-based trading system.
and Mexico’s unilateral liberalization measures, also
affected trade. Trade also has been affected by factors such
The outcome of NAFTA renegotiations has implications for
as currency fluctuations and economic growth. Job gains
the future of U.S. trade policy and the broader North
and losses since NAFTA’s entry into force may not be
American economic and strategic relationship. Some
totally attributable to the agreement. Trade and employment
economists estimate that if NAFTA were to terminate, real
levels tend to increase during cycles of economic growth
GDP, trade, investment, and employment would decline in
and tend to decrease as growth declines.
all three NAFTA countries. A successful conclusion of the
negotiations could modernize NAFTA with updated
Although the net economic effect was positive, there were
provisions in areas such as digital trade, labor, IPR
worker and firm adjustment costs as many industries
protection, and anti-corruption. A new FTA would likely be
adapted to the more open and competitive trade
considered by Congress under TPA. On the other hand,
environment. These losses tended to be more concentrated
NAFTA implementing legislation states that the President
in specific industries, such as the apparel industry in the
may proclaim modifications to certain rules of origin and
United States or the agricultural sector in Mexico.
tariffs under certain circumstances and subject to
Industries tend to be concentrated in certain geographical
Congressional consultation and lay-over provisions.
regions, making some communities more vulnerable than
others to adverse employment effects. In contrast, the gains
Some policy experts contend that maintaining an open trade
from trade tend to be more widespread.
relationship with NAFTA parties helps promote
cooperation and has a positive impact on the economy and
Figure 1. U.S. Merchandise Trade with NAFTA
overall relations. Labor groups and some consumer-
Partners (billions of US$)
advocacy groups argue that NAFTA needs to be
reconsidered because of possible job losses, negative effect
on U.S. wages, poor working conditions in Mexico, and the
perception that it weakens U.S. regulatory protections.
For more information see, CRS Report R44981, NAFTA
Renegotiation and Modernization, by M. Angeles Villarreal
and Ian F. Fergusson, CRS In Focus IF10038, Trade
Promotion Authority (TPA), by Ian F. Fergusson and CRS
In Focus IF10000, TPP: Overview and Current Status, by
Brock R. Williams and Ian F. Fergusson.

M. Angeles Villarreal, Specialist in International Trade
Source: Compiled by CRS using data from ITC.
and Finance
Trade Trends Since NAFTA
IF10047
Since NAFTA’s entry into force, U.S. merchandise trade
with Canada and Mexico has more than tripled. In 2017,
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North American Free Trade Agreement (NAFTA)

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