NAFTA: North American Free Trade Agreement

Peaceful, constructive business relationships between nations are always preferable to antagonistic relationships that may lead to wars. Trade-based international relationships save lives because the countries involved tend to avoid fighting over petty disagreements. In this spirit, the United States, Canada, and Mexico have come together in what is known at the North American Free Trade Agreement. This agreement, usually called NAFTA, seeks to encourage economic growth by giving individuals and businesses in the three member countries broad freedom to trade goods, products, and services across their borders. NAFTA went into effect on January 1, 1994.

Canada and the United States had already signed a trade agreement in 1988—called the Canada-United States Free Trade Agreement—but the United States wanted to negotiate a similar agreement with Mexico. Canada didn't want to be left out of the deal, so all three countries decided to adopt a treaty that would override the Canada-United States Free Trade Agreement. U.S. President George H. W. Bush, Mexican President Carlos Salinas, and Canadian Prime Minister Brian Mulroney met in San Antonio on October 7, 1992, to express their approval of the new treaty, and the three leaders signed it on December 17.

Two power shifts occurred while NAFTA was in the ratification process. Jean Chretien, the new prime minister of Canada, negotiated two supplemental agreements with the U.S. within NAFTA: the North American Agreement on Labor Cooperation and the North American Agreement on Environmental Cooperation. In the U.S., new President Bill Clinton guided the treaty through Congress and signed its final version.

NAFTA's main objective was to break trading constraints between the three countries: tariffs between the United States, Mexico, and Canada were officially eliminated by January 1, 2008. NAFTA has had an enormous impact on the economies of its member nations. Between 1992 and 2007, U.S. worldwide exports of agricultural products grew by 65 percent—but exports to its NAFTA partners grew by 156 percent. In fact, in 2007 Mexico was estimated to have imported over $11.5 billion of food and other agricultural goods from the U.S. This boost to U.S. agricultural trade extended to Canada as well: The U.S. went from exporting $4.2 billion of goods to Canada in 1990 to $11.9 billion in 2006. In all, agricultural trade between the three countries increased from $7.3 billion in 1994 to $20.1 billion in 2006.

The treaty has given rise to a few disputes and controversies in the years since it went into effect. Some politicians and critics claim that NAFTA has failed to live up to its standards, and has caused illegal immigration to the U.S. But others say the agreement has increased the unity between the three allied nations and has helped the agricultural sector. One of the main disagreements occurred between the U.S. and Canada. For years, the two countries argued over the United States' desire to implement a 27 percent duty on Canada's softwood imports. But this dispute was eventually resolved.

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Written by Michael Marcin of Crest Capital. Michael oversees all operations and finance for this national equipment finance lender. He is an excellent technical writer on topics including equipment, vehicle, and software finance and associated tax implications.