Stock Market Guide to the North American Free Trade Agreement

NAFTA is an acronym standing for either the North American Free Trade Agreement or the trade bloc called into existence by the agreement known as the North American Free Trade Area. The NAFTA treaty was signed by the United States, Canada and Mexico on January 1, 1994 after many years of difficult and protracted negotiations, resulting in the creation of a continent-wide free trade area. The NAFTA treaty is in many respects an expansion of the 1988 Canada-US Free Trade Agreement to include Mexico, whose economy was already beginning to mesh with those of its northern neighbors.

Unlike the European Union, NAFTA does not affect the sovereignty of any of the signatories to the treaty and establishes no laws that override the existing laws of the three participating nations. As well, the treaty calls for gradual measures that liberalize trade between the three nations over a long period of time, in order to give various industries time to adjust to the new trading conditions specified in the terms of the treaty.

The benefits of the NAFTA treaty are in many ways difficult to quantify. Although the treaty is over 10 years old, its provisions have been implemented over time, so in order to judge its relative effects it is necessary to focus on specific industry sectors. The automobile and auto parts industries have shown the effects of NAFTA to the greatest effect, with Mexico definitely benefiting and Canada suffering, though to a comparatively minor degree. The establishment of so-called “maquiladoras” along the southern side of the US-Mexico border has brought astonishing employment and social gains to Mexico. The maquiladoras are factories that import raw materials and export finished goods, and they have transformed the border towns into industrial powerhouses. In Canada, on the other hand, longstanding auto production and assembly plants are closing and it has taken the establishment of Japanese assembly plants to stem the resulting loss of skilled manufacturing jobs.

NAFTA has, on balance, been a successful venture and has sparked the creation of similar trade blocs in other parts of the world, notably the MERCOSUR bloc in South America. It is possible that some day, the proposed Free Trade Area of the Americas (FTAA) agreement will extend NAFTA-style trade and industry cooperation in the Western Hemisphere virtually from pole to pole.

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