The North American Free Trade Agreement (NAFTA /ˈnæftə/ NAF-tə; Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that created a trilateral trade bloc in North America. The agreement came into force on January 1, 1994, and superseded the 1988 Canada–United States Free Trade Agreement between the United States and Canada. The NAFTA trade bloc formed one of the largest trade blocs in the world by gross domestic product.
The impetus for a North American free trade zone began with U.S. president Ronald Reagan, who made the idea part of his 1980 presidential campaign. After the signing of the Canada–United States Free Trade Agreement in 1988, the administrations of U.S. president George H. W. Bush, Mexican President Carlos Salinas de Gortari, and Canadian prime minister Brian Mulroney agreed to negotiate what became NAFTA. Each submitted the agreement for ratification in their respective capitals in December 1992, but NAFTA faced significant opposition in both the United States and Canada. All three countries ratified NAFTA in 1993 after the addition of two side agreements, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC).
Passage of NAFTA resulted in the elimination or reduction of barriers to trade and investment between the United States, Canada, and Mexico. The effects of the agreement regarding issues such as employment, the environment, and economic growth have been the subject of political disputes. Most economic analyses indicated that NAFTA was beneficial to the North American economies and the average citizen,[2][3][4] but harmed a small minority of workers in industries exposed to trade competition.[5][6] Economists held that withdrawing from NAFTA or renegotiating NAFTA in a way that reestablished trade barriers would have adversely affected the U.S. economy and cost jobs.[7][8][9] However, Mexico would have been much more severely affected by job loss and reduction of economic growth in both the short term and long term.[10]
After U.S. President Donald Trump took office in January 2017, he sought to replace NAFTA with a new agreement, beginning negotiations with Canada and Mexico. In September 2018, the United States, Mexico, and Canada reached an agreement to replace NAFTA with the United States–Mexico–Canada Agreement (USMCA), and all three countries had ratified it by March 2020. NAFTA remained in force until USMCA was implemented.[11] In April 2020, Canada and Mexico notified the U.S. that they were ready to implement the agreement.[12] The USMCA took effect on July 1, 2020, replacing NAFTA. The new law involved only small changes.[13]
The impetus for a North American free trade zone began with U.S. president Ronald Reagan, who made the idea part of his campaign when he announced his candidacy for the presidency in November 1979.[14] Canada and the United States signed the Canada–United States Free Trade Agreement (FTA) in 1988, and shortly afterward Mexican President Carlos Salinas de Gortari decided to approach U.S. president George H. W. Bush to propose a similar agreement in an effort to bring in foreign investment following the Latin American debt crisis.[14] As the two leaders began negotiating, the Canadian government under Prime Minister Brian Mulroney feared that the advantages Canada had gained through the Canada–US FTA would be undermined by a US–Mexican bilateral agreement, and asked to become a party to the US–Mexican talks.[15]
Following diplomatic negotiations dating back to 1990, the leaders of the three nations signed the agreement in their respective capitals on December 17, 1992.[16] The signed agreement then needed to be ratified by each nation's legislative or parliamentary branch.
The earlier Canada–United States Free Trade Agreement had been controversial and divisive in Canada, and featured as an issue in the 1988 Canadian election. In that election, more Canadians voted for anti-free trade parties (the Liberals and the New Democrats), but the split of the votes between the two parties meant that the pro-free trade Progressive Conservatives (PCs) came out of the election with the most seats and so took power. Mulroney and the PCs had a parliamentary majority and easily passed the 1987 Canada–US FTA and NAFTA bills. However, Mulroney was replaced as Conservative leader and prime minister by Kim Campbell. Campbell led the PC party into the 1993 election where they were decimated by the Liberal Party under Jean Chrétien, who campaigned on a promise to renegotiate or abrogate NAFTA. Chrétien subsequently negotiated two supplemental agreements with Bush, who had subverted the LAC[17] advisory process[18] and worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing of the implementation law to incoming president Bill Clinton.[19]
Before sending it to the United States Senate, Clinton added two side agreements, the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC), to protect workers and the environment, and to also allay the concerns of many House members. The U.S. required its partners to adhere to environmental practices and regulations similar to its own.[citation needed] After much consideration and emotional discussion, the U.S. House of Representatives passed the North American Free Trade Agreement Implementation Act on November 17, 1993, 234–200. The agreement's supporters included 132 Republicans and 102 Democrats. The bill passed the Senate on November 20, 1993, 61–38.[20] Senate supporters were 34 Republicans and 27 Democrats. Republican Representative David Dreier of California, a strong proponent of NAFTA since the Reagan administration, played a leading role in mobilizing support for the agreement among Republicans in Congress and across the country.[21][22]
Chicago Congressman Luis Gutiérrez in particular was a vocal opponent of NAFTA, ultimately voting against the measure because of what he considered its failure to sufficiently provide for displaced worker retraining, protections against American job loss, and protections of collective bargaining rights for Mexican workers.[23] He criticized the role of Rahm Emanuel in particular for the deficiencies.[24]
The U.S. required its partners to adhere to environmental practices and regulations similar to its own.[25]
Clinton signed it into law on December 8, 1993; the agreement went into effect on January 1, 1994.[26][27] At the signing ceremony, Clinton recognized four individuals for their efforts in accomplishing the historic trade deal: Vice President Al Gore, Chairwoman of the Council of Economic Advisers Laura Tyson, Director of the National Economic Council Robert Rubin, and Republican Congressman David Dreier.[28] Clinton also stated that "NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement."[29] NAFTA replaced the previous Canada-US FTA.
NAFTA (TLCAN in Spanish) was approved by the Mexican Senate on November 22, 1993, and was published in the Official Gazette of the Federation on December 8, 1993.[30]
The decree implementing NAFTA and the various changes to accommodate NAFTA in Mexican law was promulgated on December 14, 1993, with entry into force on January 1, 1994.[30]
The goal of NAFTA was to eliminate barriers to trade and investment between the United States, Canada and Mexico. The implementation of NAFTA on January 1, 1994, brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.–Mexico tariffs were to be eliminated except for some U.S. agricultural exports to Mexico, to be phased out within 15 years.[31] Most U.S.–Canada trade was already duty-free. NAFTA also sought to eliminate non-tariff trade barriers and to protect the intellectual property rights on traded products.
Chapter 20 provided a procedure for the international resolution of disputes over the application and interpretation of NAFTA. It was modeled after Chapter 69 of the Canada–United States Free Trade Agreement.[32]
NAFTA is, in part, implemented by Technical Working Groups composed of government officials from each of the three partner nations.[33]
The North American Free Trade Agreement Implementation Act made some changes to the copyright law of the United States, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within the NAFTA nations) on certain motion pictures which had entered the public domain.[34][35]
The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the commission was mandated to conduct ongoing ex post environmental assessment,[36] It created one of the first ex post frameworks for environmental assessment of trade liberalization, designed to produce a body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a "race to the bottom" in environmental regulation among the three countries, or that NAFTA would pressure governments to increase their environmental protections.[37] The CEC has held[when?] four symposia to evaluate the environmental impacts of NAFTA and commissioned 47 papers on the subject from leading independent experts.[38]
Proponents of NAFTA in the United States emphasized that the pact was a free-trade, not an economic-community, agreement.[39] The freedom of movement it establishes for goods, services and capital did not extend to labor. In proposing what no other comparable agreement had attempted—to open industrialized countries to "a major Third World country"[40]—NAFTA eschewed the creation of common social and employment policies. The regulation of the labor market and or the workplace remained the exclusive preserve of the national governments.[39]
A "side agreement" on enforcement of existing domestic labor law, concluded in August 1993, the North American Agreement on Labour Cooperation (NAALC),[41] was highly circumscribed. Focused on health and safety standards and on child labor law, it excluded issues of collective bargaining, and its "so-called [enforcement] teeth" were accessible only at the end of "a long and tortuous" disputes process".[42] Commitments to enforce existing labor law also raised issues of democratic practice.[39] The Canadian anti-NAFTA coalition, Pro-Canada Network, suggested that guarantees of minimum standards would be "meaningless" without "broad democratic reforms in the [Mexican] courts, the unions, and the government".[43] Later assessment, however, did suggest that NAALC's principles and complaint mechanisms did "create new space for advocates to build coalitions and take concrete action to articulate challenges to the status quo and advance workers’ interests".[44]
From the earliest negotiation, agriculture was a controversial topic within NAFTA, as it has been with almost all free trade agreements signed within the WTO framework. Agriculture was the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The Canada–U.S. agreement contained significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico–U.S. pact allowed for a wider liberalization within a framework of phase-out periods (it was the first North–South FTA on agriculture to be signed).[clarification needed]
NAFTA established the CANAMEX Corridor for road transport between Canada and Mexico, also proposed for use by rail, pipeline, and fiber optic telecommunications infrastructure. This became a High Priority Corridor under the U.S. Intermodal Surface Transportation Efficiency Act of 1991.
Another contentious issue was the investor-state dispute settlement obligations contained in Chapter 11 of NAFTA.[45] Chapter 11 allowed corporations or individuals to sue Mexico, Canada or the United States for compensation when actions taken by those governments (or by those for whom they are responsible at international law, such as provincial, state, or municipal governments) violated international law.[46]
This chapter has been criticized by groups in the United States,[47] Mexico,[48] and Canada[49] for a variety of reasons, including not taking into account important social and environmental[50] considerations. In Canada, several groups, including the Council of Canadians, challenged the constitutionality of Chapter 11. They lost at the trial level[51] and the subsequent appeal.[52]
Methanex Corporation, a Canadian corporation, filed a US$970 million suit against the United States. Methanex claimed that a California ban on methyl tert-butyl ether (MTBE), a substance that had found its way into many wells in the state, was hurtful to the corporation's sales of methanol. The claim was rejected, and the company was ordered to pay US$3 million to the U.S. government in costs, based on the following reasoning: "But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation."[53]
In another case, Metalclad, an American corporation, was awarded US$15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste landfill it intended to construct in Guadalcázar, San Luis Potosí. The construction had already been approved by the federal government with various environmental requirements imposed (see paragraph 48 of the tribunal decision). The NAFTA panel found that the municipality did not have the authority to ban construction on the basis of its environmental concerns.[54]
In Eli Lilly and Company v. Government of Canada[55] the plaintiff presented a US$500 million claim for the way Canada requires usefulness in its drug patent legislation.[56] Apotex sued the U.S. for US$520 million because of opportunity it says it lost in an FDA generic drug decision.[56]
Lone Pine Resources Inc. v. Government of Canada[57] filed a US$250 million claim against Canada, accusing it of "arbitrary, capricious and illegal" behaviour,[58] because Quebec intends to prevent fracking exploration under the St. Lawrence Seaway.[56]
Lone Pine Resources is incorporated in Delaware but headquartered in Calgary,[58] and had an initial public offering on the NYSE May 25, 2011, of 15 million shares each for $13, which raised US$195 million.[59]
Barutciski acknowledged "that NAFTA and other investor-protection treaties create an anomaly in that Canadian companies that have also seen their permits rescinded by the very same Quebec legislation, which expressly forbids the paying of compensation, do not have the right (to) pursue a NAFTA claim", and that winning "compensation in Canadian courts for domestic companies in this case would be more difficult since the Constitution puts property rights in provincial hands".[58]
A treaty[clarification needed] with China would extend similar rights to Chinese investors, including SOEs.[58]
NAFTA's Chapter 19 was a trade dispute mechanism which subjects antidumping and countervailing duty (AD/CVD) determinations to binational panel review instead of, or in addition to, conventional judicial review.[60] For example, in the United States, review of agency decisions imposing antidumping and countervailing duties are normally heard before the U.S. Court of International Trade, an Article III court. NAFTA parties, however, had the option of appealing the decisions to binational panels composed of five citizens from the two relevant NAFTA countries.[60] The panelists were generally lawyers experienced in international trade law. Since NAFTA did not include substantive provisions concerning AD/CVD, the panel was charged with determining whether final agency determinations involving AD/CVD conformed with the country's domestic law. Chapter 19 was an anomaly in international dispute settlement since it did not apply international law, but required a panel composed of individuals from many countries to re-examine the application of one country's domestic law.[citation needed]
A Chapter 19 panel was expected to examine whether the agency's determination was supported by "substantial evidence". This standard assumed significant deference to the domestic agency. Some of the most controversial trade disputes in recent years, such as the U.S.–Canada softwood lumber dispute, have been litigated before Chapter 19 panels.
Decisions by Chapter 19 panels could be challenged before a NAFTA extraordinary challenge committee. However, an extraordinary challenge committee did not function as an ordinary appeal.[60] Under NAFTA, it only vacated or remanded a decision if the decision involveed a significant and material error that threatens the integrity of the NAFTA dispute settlement system. Since January 2006, no NAFTA party had successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.
The roster of NAFTA adjudicators included many retired judges, such as Alice Desjardins, John Maxwell Evans, Constance Hunt, John Richard, Arlin Adams, Susan Getzendanner, George C. Pratt, Charles B. Renfrew and Sandra Day O'Connor.
In 2008, Canadian exports to the United States and Mexico were at $381.3 billion, with imports at $245.1 billion.[61] According to a 2004 article by University of Toronto economist Daniel Trefler, NAFTA produced a significant net benefit to Canada in 2003, with long-term productivity increasing by up to 15 percent in industries that experienced the deepest tariff cuts.[62] While the contraction of low-productivity plants reduced employment (up to 12 percent of existing positions), these job losses lasted less than a decade; overall, unemployment in Canada has fallen since the passage of the act. Commenting on this trade-off, Trefler said that the critical question in trade policy is to understand "how freer trade can be implemented in an industrialized economy in a way that recognizes both the long-run gains and the short-term adjustment costs borne by workers and others".[63]
A study in 2007 found that NAFTA had "a substantial impact on international trade volumes, but a modest effect on prices and welfare".[64]
According to a 2012 study, with reduced NAFTA trade tariffs, trade with the United States and Mexico only increased by a modest 11% in Canada compared to an increase of 41% for the U.S. and 118% for Mexico.[65]: 3 Moreover, the U.S. and Mexico benefited more from the tariff reductions component, with welfare increases of 0.08% and 1.31%, respectively, with Canada experiencing a decrease of 0.06%.[65]: 4
According to a 2017 report by the New York City based public policy think tank report, Council on Foreign Relations (CFR), bilateral trade in agricultural products tripled in size from 1994 to 2017 and is considered to be one of the largest economic effects of NAFTA on U.S.-Canada trade with Canada becoming the U.S. agricultural sectors' leading importer.[66] Canadian fears of losing manufacturing jobs to the United States did not materialize with manufacturing employment holding "steady". However, with Canada's labour productivity levels at 72% of U.S. levels, the hopes of closing the "productivity gap" between the two countries were also not realized.[66]
According to a 2018 Sierra Club report, Canada's commitments under NAFTA and the Paris agreement conflicted. The Paris commitments were voluntary, and NAFTA's were compulsory.[67]
According to a 2018 report by Gordon Laxter published by the Council of Canadians, NAFTA's Article 605, energy proportionality rule ensures that Americans had "virtually unlimited first access to most of Canada's oil and natural gas" and Canada could not reduce oil, natural gas and electricity exports (74% its oil and 52% its natural gas) to the U.S., even if Canada was experiencing shortages. These provisions that seemed logical when NAFTA was signed in 1993 are no longer appropriate.[68]: 4 The Council of Canadians promoted environmental protection and was against NAFTA's role in encouraging development of the tar sands and fracking.[68]
US President Donald Trump, angered by Canada's dairy tax of "almost 300%", threatened to leave Canada out of the NAFTA.[69] Since 1972, Canada has been operating on a "supply management" system, which the United States is attempting to pressure it out of, specifically focusing on the dairy industry. However, this has not yet taken place, as Quebec, which holds approximately half the country's dairy farms, still supports supply management.[69]
Maquiladoras (Mexican assembly plants that take in imported components and produce goods for export) became the landmark of trade in Mexico. They moved to Mexico from the United States[citation needed], hence the debate over the loss of American jobs. Income in the maquiladora sector had
