A Dynamic Macroeconomic Analysis of NAFTA

By Kouparitsas, Michael A. | Economic Perspectives, January-February 1997 | Go to article overview

A Dynamic Macroeconomic Analysis of NAFTA


Kouparitsas, Michael A., Economic Perspectives


On December 8, 1993, President Clinton signed into law the North American Free Trade Agreement Implementation Act. The United States' action was soon followed by Canada and Mexico and the North American Free Trade Agreement (NAFTA) came into force on January 1, 1994. NAFTA represents the first far-reaching free trade agreement between major industrial countries and a developing country. Throughout the development of NAFTA, there was intense domestic debate about the desirability of pursuing expanded trade ties within North America.

From the U.S. perspective, one of the foremost objectives of NAFTA was to ensure that Mexico would lock in the economic and political reforms it has instituted since 1985. These reforms have created a more predictable business environment for U.S. exporters and investors. The U.S. negotiators believed that the agreement would also benefit the U.S. economy by accelerating Mexico's trade liberalization process and give U.S. exporters and investors increased access to Mexico's growing marketplace.

Canada hopes NAFTA will improve its access to the Mexican market. NAFTA avoids separate U.S. agreements with Canada and Mexico. Canadian negotiators realized that trade reforms between the U.S. and Mexico (along the lines of the U.S.-Canada Free Trade agreement [CFTA] signed in 1989) would affect Canada's share of the North American market whether Canada participated in NAFTA or not. Canadian officials believed that by joining NAFTA, Canada would be better positioned to keep what it achieved through the CFTA and to take advantage of closer economic ties with the growing Mexican marketplace.

For Mexico, NAFTA offered an opportunity to lock in the extensive market-oriented policy reforms of the late 1980s. Mexico hoped to gain credibility for its reform process and encourage foreign investment in Mexican industry and trade. At the same time, Mexico viewed NAFTA as a means of reducing the threat of U.S. protectionism and further enhancing export opportunities in the U.S. and Canadian markets. Mexico also anticipated greater access to U.S. and Canadian technology and capital.

In its most basic form, the trilateral agreement will eliminate all tariffs and significantly reduce nontariff barriers (NTBs), such as quotas and import licenses, between the U.S., Canada, and Mexico. Tariff duties will be phased out in stages over a period of 15 years, with the majority of tariff reductions taking place within ten years. In addition to tariff reform, there are three broad agreements on NTBs. First, all countries will eliminate prohibitions and quantitative restrictions applied at the border, such as quotas and import licenses. Second, the three countries have agreed not to impose new user fees and to phase out existing user fees by June 1999. Third, NAFTA will permit eligible businesspeople to bring in the tools of their trade, such as professional samples and other goods, on a duty free basis. NAFTA also includes investment provisions that reduce the barriers to capital flows between the parties.

One of the costs of a limited-participation free trade area is that agreements like NAFTA must develop rules of origin that define which goods are entitled to preferential tariff treatment. As such, goods that are wholly produced in the U.S., Canada, or Mexico will qualify for NAFTA treatment. Most goods containing nonagricultural components will qualify, if those goods are sufficiently transformed in the NAFTA region that the ultimate article undergoes a specified change in tariff classification. In some cases, NAFTA establishes set percentages of North American content in addition to the tariff classification requirement.

NAFTA adds to the worldwide trend toward regional trade agreements, which is no doubt related to the General Agreement on Tariffs and Trade (GATT). Over its long history, GATT has fostered and achieved a lowering of trade barriers across most countries/regions. …

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