What is the North American Free Trade Agreement and how has it evolved?

Origin Calculation | | MIC Customs Solutions |

Here, we'll look in-depth at what the North American Free Trade Agreement is - and how it is changing.

The North American Free Trade Agreement (Nafta) was one of the biggest trade agreements ever negotiated when it came into force more than 20 years ago. As it continues to evolve and now faces a major upheaval, we thought we'd take a look at exactly what Nafta is - and what it has meant for the countries involved.

What is Nafta?

Nafta is a treaty between Canada, Mexico and the United States that was signed in 1994 to create a trilateral trade bloc in North America. It was the world's largest free trade agreement and marked the first time that two developed nations had entered into such a treaty with a developing country.

Its goal was to remove trade barriers to boost trade and investment between the three nations. As soon as the treaty was implemented, tariffs were removed on more than half of exports from Mexico to the US and a third of US exports going to Mexico.

This allowed for the easy flow of goods and services across the borders. Today, around $1.4 billion in goods cross the US-Mexico border each day.

What did Nafta involve?

Among the conditions of Nafta was that exporters must get Certificates of Origin in order to be able to waive tariffs, with the products required to originate in the US, Canada or Mexico.

Another aspect of Nafta was Chapter 52, which protects businesses from unfair practices and puts procedures into place to resolve trade disputes.

Simply, Nafta was designed to encourage economic growth, increase imports and raise the competitive nature of these countries in the global marketplace. The GDP of the three members is now more than $20 trillion.

Advantages of Nafta

According to an Associated Press report from 2013, Nafta has multiplied trade between Canada, the US and Mexico by around 3.5 times compared to 1994. Mexico's Embassy in Canada also reported significant growth in trade since the treaty was signed.

Grocery prices would also be higher in the US without tariff-free imports, while imported oil prices have been kept relatively low at the same time.

Although some of these advantages may have come about without Nafta, the treaty has almost certainly helped.

Disadvantages of Nafta

Critics of Nafta say the agreement sent US manufacturing jobs to Mexico and forced people working in those industries to accept lower wages.

It is also claimed that Mexican workers have been exploited as a result of maquiladora programs, where a majority of products made in factories must be exported.

Nafta becomes controversial

It became clear that Nafta may experience upheaval when then-presidential candidate in the US Donald Trump called it "the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country" during a 2016 debate.

When he got into power, he published a list of proposed changes to Nafta that has led to a lengthy round of negotiations.

The US and Mexico have now all but agreed a deal that will see Nafta revamped, but Canada has not yet signed its name on the dotted line.

With only days left before the deadline for negotiations and the delivery of the text of a deal on September 30th, it may be that a bilateral agreement goes ahead without Canada. Indeed, Canada has said it would rather have no deal than bind itself to a bad one.

However, Canada could continue negotiating after September 30th and insert itself into a bilateral deal after this deadline, meaning this date actually only marks the end of a round of talks as opposed to the real end of an era.

Its future may be uncertain, but it cannot be denied that Nafta was an economic game-changer that set a precedent for trade agreements going forward.