NAFTA Confronts Trade Barriers
Parties to North American Free Trade Agreement Enjoy Privileges
Aug 4, 2009
The North American Free Trade Agreement (NAFTA) is a three-party agreement that Canada, Mexico and the United States signed on January 1, 1994.
Partly formulated as a competitive answer to the powerful European Union, NAFTA is based on the World Trade Organization’s commitment to reduce or eliminate trade barriers.
NAFTA-member countries export and import goods free from customs duties and excise taxes, provided that the traded goods are mostly produced within the borders of the three participating nations. Specifically, 60% of the imported goods transactional value or 50% of their net cost must originate in Canada, Mexico and America.
To prove that imported goods qualify for free trade, the exporter must fill out a NAFTA certificate of origin (form B232E).
NAFTA Objectives
The most obvious objective of NAFTA is to encourage free trade among participating nations. That is, NAFTA reduces or eliminates customs duties and excise taxes. However, NAFTA allows participants to impose other internal taxes like the General Sales Tax (GST).
Other objectives are to:
- Increase the Gross Domestic Products of participating trade economies
- Promote investment within NAFTA nations
- Grow employment
- Protect intellectual rights
- Improve North American labor mobility
- Invest in and promote manufacturing services and telecommunications.
NAFTA has special provisions to nurture employment in agriculture, automotive and textile industries.
NAFTA is Not a Common Market
NAFTA leads to a free market in goods, services and capital. Unlike a common market, individual sovereign governments control the labor components of their respective economies under NAFTA. Each NAFTA nation has the right to control its own domestic immigration policies.
NAFTA does define mobility rights among the three participating countries. For example, Canadians can work in the U.S. for one year under a TN-1 Visa (treaty national visa). Americans can work in Canada for a one-year term under that same agreement.
NAFTA Documentation
Details about NAFTA are found in a 5-volume set of documents. The main portion of the agreement is discussed in 22 chapters. Article 401 defines rules of origin, the heart of the agreement. Article 302.2 deals with tariff rate reductions.
NAFTA has three main themes:
- Administration of the agreement
- Rules of the agreement
- Dispute resolution.
NAFTA also has an accession clause that allows other countries to join. This is subject to unanimous approval from the 3 original countries.
Why NAFTA is Important
NAFTA is the first trade agreement of its kind that integrates the economies of developed and developing nations.
NAFTA is also importance because the agreement:
- Creates a significant trade agreement dealing with goods, investments and services
- Incorporates international agreements that allow individual investors to challenge governments before international tribunals and arbitrators
- Openly acknowledges the relationship between international trade and the environment.
NAFTA has done an acceptable job of encouraging free trade among its North American trade partners.
However, changes to the global economy necessitate changes that better protect North American employment in the agricultural, automotive and textile sectors- the very industries where NAFTA purports to bestow comparative advantages.
Sources for this Article
This article presents independent insights and comments based on a review of Dr. Harmeet Singh Kohli’s analysis titled International Trade – A Simple View to a Complex Process (Global Training Center, Inc).
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