ECO 615 – Regional Trade Agreements
ECO 615 Week 5 Assignment Case Analysis
Countries are interdependent because of the wide distribution of resources across the globe. Most countries join in establishing agreements that ease interaction and trade across their borders and enhance mutual benefits. In this regard, there is an increased integration of international economic markets as people realize that situations and events happening outside their countries also affect them. Multiple treaties and agreements have been signed, including the North American Free Trade Agreement (NAFTA), designed to streamline trading relationships between the US, Canada, and Mexico. This paper discusses the history of trade between the US, Canada, and Mexico before NAFTA, the implications of NAFTA, the comparison between NAFTA and the Trans-Pacific Partnership (TPP), and how the current political environment and associated changes impact U.S. global relations.
The History of Trade Between the United States and Canada, and Mexico
The U.S. shares maritime and land borders with Canada and Mexico, which enhances trade relations between the three countries. The U.S. has had longstanding trade relations and agreements with Canada and Mexico, going way back to the 17th century. However, trade relations were more established in the 20th century as the countries sought to increase cross-border trade. Economic relations between America and Canada were stronger during and after the Second World War (Crane, 2019). Canada needed access to U.S. industrial products and currency to carry out its war effort. The Foreign Exchange Control Act, passed by Canada in 1939, restricted using its reserve of U.S. dollars for crucial wartime needs. To avoid redundancy and allow each nation to specialize, Canada and the U.S. agreed to collaborate on the manufacture of war materiel under the terms of the ensuing Hyde Park Accord.
For national security reasons, the Cold War and Second World War intensified U.S. commitment to Canadian natural resources, especially oil and gas. The U.S. could access more secure oil supplies carried overland instead of in ocean-going boats thanks to the 1947 oil discoveries at Leduc, Alberta, and other finds in western Canada (Crane, 2019). In a heavily regulated market at the time, the U.S. treated Canadian oil preferentially. New discussions about a free trade agreement between Canada and the U.S. began due to the mid-1940s economic crisis and increasing interdependence in trade and resource development (Crane, 2019). However, in 1948, Prime Minister Mackenzie King stopped negotiations out of concern for Canadians’ possible rejection and fear of integration into the U.S.
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With the signing of the Canada-US Automotive Products Agreement and the Auto Pact in 1965, Canada took a significant step toward furthering cross-border economic cooperation. The Auto Pact aimed to create one continental marketplace for the sector. Rebuilding relations between Canada and the U.S. was a primary objective of Prime Minister Brian Mulroney’s newly elected administration in 1984 (Crane, 2019). Investment Canada, whose mission was to encourage investment in Canada and authorize foreign ventures that offered a “net benefit” to Canada, supplanted the Foreign Investment Review Agency, and undid a large portion of the National Energy Program. A free trade agreement between the U.S. and Canada was finalized towards the close of 1987; implemented on January 1, 1989 (Crane, 2019). Reagan referred to the free trade deal as an “economic constitution” for the two countries, even though most trade between Canada and the U.S. by that point was already tariff-free or merely subject to nuisance-level duties. NAFTA followed in 1994, including Mexico into the agreement.
With a war in the 1840s and the American purchase of over fifty percent of previous Mexican territory, notably Texas, California, and New Mexico, saw Mexico and the United States share a complicated history. However, the two nations have had strong diplomatic and commercial connections since President Porfirio Dáz’s (1876–1911) administration in the late nineteenth century. Business people from the United States bought mining and agricultural assets in Mexico during Dáz’s protracted reign. The U.S. actively influenced the result of the Mexican Revolution (1910–20) and played a significant role in its development. During World War II, Mexico and the U.S. formed an alliance that resulted in a much more cordial relationship between the two nations. The United States and Mexico signed a deal on January 14, 1964, under Mexican President Adolfo López Mateos, to settle the Chamizal dispute over their shared border. The United States surrendered the disputed territory. Further disputes between the two countries were settled by the Boundary Treaty of 1970. Several other treaties, most notably the Gadsden Purchase, have been signed between the two countries due to their shared history, which dates back to the Texas Revolution (1835–1836) and the Mexican–American War (1846–1848). One of the most recent is NAFTA, which went into force in 1994.
The Implications of The NAFTA Agreement Today Given the Changes in The Political Environment
The political environment between the US, Canada, and Mexico is not tense, and trade between these countries has proceeded uninterrupted by global situations like the Ukraine war. The governments of Canada, Mexico, and the United States negotiated the North American Free Trade Agreement (NAFTA), which became effective in January 1994 (Chatzky et al., 2020). Most tariffs on goods exchanged between the three nations were eliminated due to NAFTA, which placed particular emphasis on opening up trade in agriculture, textiles, and the production of automobiles. The accord also aimed to enforce labor and environmental safeguards via side agreements, protect intellectual property, and provide dispute resolution procedures (Chatzky et al., 2020). By fostering unparalleled integration among the advanced economies of Canada and the United States and the emerging economy of Mexico, NAFTA radically altered North American economic ties.
(ECO 615 – Regional Trade Agreements)
Most economists concur that NAFTA helped the economy of North America. Over the initial two decades of the treaty, regional trade grew significantly, from about $290 billion in 1993 to over $1.1 trillion in 2016 (Chatzky et al., 2020). Cross-border investment also increased significantly over that time, with the U.S. foreign direct investment (FDI) stock in Mexico rising from $15 billion to over $100 billion (Chatzky et al., 2020). However, experts also note that it has proven challenging to distinguish the direct effects of the agreement from other factors, such as swift technological advances and increased trade with nations like China. While this is happening, the impact of NAFTA on wages and employment is still up for debate (Chatzky et al., 2020). While others benefited from the established market opportunities, some workers and industries endured aggravating challenges as they lost market share due to more competition.
Since the implementation of NAFTA, commerce between the United States and its neighbors in North America has increased by over threefold, expanding more quickly than trade between the United States and the world’s remaining nations (Chatzky et al., 2020). Over a third of all U.S. exports go to Mexico and Canada, accounting for more than two-thirds of the total. According to most estimates, the agreement raised the country’s GDP by less than 0.5%, adding up to $80 billion to the country’s economy after its complete implementation or several billion dollars in additional growth annually (Chatzky et al., 2020). According to Chatzky et al. (2020), supporters of NAFTA claim that 14 million American jobs depend on trade with Canada or Mexico and that the almost 200,000 export-related employment that the agreement creates each year pays 15 to 20% more on average than those that are lost.
(ECO 615 – Regional Trade Agreements)
There have been significant gains by signatory countries and severe losses in terms of employment. Even though following NAFTA’s implementation, the United States, Canada, and Mexico have each seen boosted trade, economic growth, and greater wages (primarily in the northern countries), experts differ on how much, if any, the agreement has actually contributed to U.S. manufacturing, jobs, immigration, and the cost of consumer goods (Chatzky et al., 2020). Also, NAFTA has not had an identical impact on its member countries. The United States-Mexico-Canada Agreement (USMCA) essentially supplanted NAFTA. On July 1, 2020, it became fully operational after being signed on November 30, 2018.
How The NAFTA Agreement Differs from The Proposed Trans-Pacific Partnership
Two of the biggest (and most contentious) international accords promoting free trade and urging the elimination of tariffs and barriers among the signatories are NAFTA and the Trans-Pacific Partnership (TPP). The North American Free Trade Agreement (NAFTA), signed by Canada, Mexico, and the United States, came into effect in 1994 (Squadrin, 2018). The Trans-Pacific Partnership (TPP) is a trade pact signed by the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam in 2016. However, the U.S. abandoned it shortly after, and the TPP was never implemented.
(ECO 615 – Regional Trade Agreements)
Despite sharing similar objectives, NAFTA and TPP differ specifically in their content and safeguards and were developed during dissimilar historical movements. Due to President Donald Trump’s signing of a memorandum to formally withdraw the United States from the pact, the original TPP never went into effect (Squadron, 2018). Trump’s strategy of putting America first included the withdrawal from the pact, and the president expressed interest in signing “fair, bilateral trade deals” that would advance the American economy and create new employment. After the United States withdrew, some of the other nations expressed a desire to continue talks. Eventually, a deal was reached in January 2018, when the Trans-Pacific Partnership Deal (TPP) rebranded to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
NAFTA, which involves the three North American nations of Mexico, Canada, and the United States, aims to establish a North American free trade bloc to encourage regional trade and eliminate most of the impediments to imports and exports in place. The TPP, on the other hand, involves a significantly greater number of nations. Its main objective is to improve ties between the United States and some major Asian economies (Squadron, 2018). In other words, the TPP was developed to increase American dominance in the Asia-Pacific area and lessen Chinese influence on its neighbors. U.S. withdrawal from the TPP created a tense relationship with other countries involved in the agreement, impacting U.S. relations with countries such as China (Squadrin, 2018). Because the TPP was never implemented, it may be difficult to analyze the results and effects of the two agreements. However, there are divergent views on how NAFTA affected the economies of various countries and global alliances. Some claim that removing trade barriers in North America has increased foreign investment (primarily in Mexico) and led to a considerable increase in domestic GDP, while others counter that the benefits of NAFTA have not been as great, notably for the United States (Squadron, 2018). The TPP’s opponents frequently use the same justification to argue against the agreement’s financial viability.
Changes That Have Taken Place in Trade Policies and Agreements in The Current Political Environment and How They Might That Impact U.S. Relations Globally
The current political climate is tense, considering what is happening with the Ukraine war, which has created a divide among major economies. Trade policy, scientific advancements, and economic progress have all been influenced by geopolitical conflicts progressively (World Trade Organization, 2022). For instance, the conflict in Ukraine is exacerbating a great deal of misery. Additionally, it has presented the world economy with yet another formidable obstacle after COVID-19. However, the multilateral trading system has remained robust despite this obstacle, with trade growth significantly outpacing more negative estimates for 2022 (World Trade Organization, 2022). Although less than anticipated at the outset of the war, prices increased for the most affected goods. The capacity of countries that depend on imports from Russia and Ukraine to relocate their import supply to unaltered economies contributed to their favorable trade results.
(ECO 615 – Regional Trade Agreements)
New simulations show how crucial it is to strengthen the multilateral trading system over the long term. According to the most recent simulations performed by WTO economists to model the long-term scenario of the separation of the world economy into two rival blocs, the opportunity cost of shifting to the geopolitical competition is estimated to be 8.7% of real income at the international level, with opportunity costs rising to as much as 11.3% for the weaker economies (World Trade Organization, 2023). Recently, the U.S. and E.U. have sectioned Russia, which has retaliated by increasing trade with China, India, Brazil, and African countries. There are concerns about shifts in globalization as it is known today and the presence of multiple trading platforms, including currency exchange systems. The U.S. has to respond by developing policies that favor its economy and trade with other countries as major economies seek their way out of the dollar system. The current political environment has global repercussions for U.S. relations, which might extend to the long term as more countries try to shift to a different currency approach, such as the BRICS. The U.S. trade with Western allies has increased, but trade with Asia and African countries might decline due to inclinations and support of the Ukraine war. Conclusively, newer and modernized policies are needed to respond to the shifting global relations.
(ECO 615 – Regional Trade Agreements)
Conclusion
Regional trade agreements are established to facilitate trade among the signatories. Examples include NAFTA and TPP, which are often comparable although developed in different historical periods. Most countries join such agreements to promote free trade. Most people believe that NAFTA benefited the U.S. economy, raising its GDP. Still, others argue it was more beneficial to Canada and Mexico than the U.S., and it caused unemployment in the U.S. The current political climate has not significantly impacted NAFTA, currently USMCA. However, it has affected U.S. relations globally, especially due to its involvement and support in the Ukraine war.
References
Chatzky, A., McBride, J., & Sergie, M. A. (2020). NAFTA and the USMCA: Weighing the Impact of North American Trade. Council on Foreign Relations. https://www.cfr.org/backgrounder/naftas-economic-impact
Crane, D. (2019). Canada–US Economic Relations. The Canadian Encyclopedia. https://www.thecanadianencyclopedia.ca/en/article/economic-canadian-american-relations
Squadrin, G. (2018, March 20). Difference Between NAFTA and TPP. Difference Between Similar Terms and Objects. http://www.differencebetween.net/business/difference-between-nafta-and-tpp/.
World Trade Organization. (2022). The Impact of Geopolitical Conflicts on Trade, Growth, and Innovation. https://www.wto.org/english/res_e/reser_e/ersd202209_e.htm
World Trade Organization. (2023). One year of war in Ukraine: Assessing the impact on global trade and development. https://www.wto.org/english/res_e/publications_e/oneyukr_e.htm
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