Free Trade Agreements and Governance of the Global Trading System
- Robert Stern, Goldman School of Public Policy, University of California, Berkeley
- Andrew Brown, Independent
- Goldman School of Public Policy Working Paper: GSPP11-003 (February 2011)
This paper explores how far free trade agreements (FTAs) have strengthened or weakened global governance of the trading system. We open with an analysis of the altered political and economic context within which countries have come, in recent years, to assign a new importance to regional and bilateral trade agreements in their trade policies. We then consider each of the main provisions included in FTAs and comment on how these may separately affect the management of trade relations. We conclude with some observations of the broader trends affecting global governance that are associated with the spread of trade agreements as a whole.
Download a PDF(344KB)
This article concerns the North American Free Trade Agreement (NAFTA) that became effective in 1994. This is an agreement signed by the United States, Canada, and Mexico aimed at eliminating trade barriers among the three nations. Essentially, NAFTA is an extension of the Free Trade Agreement between Canada and the United States that was established in 1989. There are a number of other considerations beyond free trade under the scope of the NAFTA, including, but not limited to intellectual property, telecommunications, and environmental protection. This article will provide an overview of the history of NAFTA and its impact on trade and labor in North America. There will also be a discussion of the agreement's effect on certain industries in each signatory country as well as issues related to NAFTA.
Keywords Certificate of Origin; Common Tariff; Doha Round; Duty; Free Trade; Free Trade Agreement ("FTA"); General Agreement on Tariffs and Trade (GATT); Most favored nation; North American Free Trade Agreement (NAFTA); Products; Rules of Origination; Tariff; Uruguay Round; World Trade Organization (WTO)
International Business: North American Free Trade Agreement
History of NAFTA
In January of 1994, the United States, Canada, and Mexico entered into the North American Free Trade Agreement (NAFTA or the Agreement), and in so doing created the largest free trade zone in the world. At that time, NAFTA was the most comprehensive free trade agreement implemented by friendly nations. Moreover, the Agreement marked the first time that a developing nation entered into such a trade relationship with developed nations (Hirsch, 1995).
NAFTA was essentially an expansion of the Free Trade Agreement (FTA) entered into between the United States and Canada in 1989. Canada and the United States were already each other's largest trading partners and the FTA was aimed at eliminating tariffs between the two countries. Even though the U.S. and Canada had long established trading relations, there were numerous disputes over tariffs imposed on certain products. This was particularly the case with respect to trade of softwood lumber.
Softwood lumber is the largest product that Canada exports to the United States and is used extensively by U.S. homebuilders. Softwood lumber is produced from pine, spruce, firs, and other "softwood" trees. In addition to softwood lumber, Canada also supplies the United States with oil and natural gas while the United States exports significant amounts of beef as well as a broad array of agricultural products to Canada. So the FTA was aimed at eliminating barriers to trade between the two nations, and ultimately to make the agreement multilateral.
Prior to the enactment of NAFTA, goods traded between Canada and the United States received most favored nation treatment. This is the manner in which nations must treat each other's goods and services. Most favored nation status provides equal levels of "preferential" treatment to products manufactured in countries who are signatories to the General Agreement on Tariffs and Trade (GATT), an agreement initially negotiated in 1947 among 23 countries including the United States, Canada, and those in Western Europe. Over the ensuing years, GATT was expanded to include many of the developing nations. The so-called Uruguay Round of negotiations during the 1980s resulted in the establishment of the World Trade Organization (the WTO) in 1995. The purpose of this organization is to oversee the further implementation of GATT and the agreements established by the Uruguay Round. Included in those agreements were the elimination of duty restrictions and a timetable to eliminate tariffs on certain products. These are important developments to consider as the expansion of world trade has affected trade among the U.S., Mexico, and Canada.
In addition to goods and services traded between the United States and Canada being granted most favored nation treatment, under the terms of the FTA, Canadian manufactured goods that were made from products imported from the United States and which were subsequently exported back to the U.S. were entitled to the return of duty that had been imposed on the imported products. A duty is essentially a tax on an imported good or service, and in some ways is similar to a tariff. A tariff, moreover, is a fee imposed on imported goods that gives locally produced goods a price advantage over similar goods that are produced abroad. Essentially, there are two types of tariffs:
- An ad valorem tariff is a fee calculated as a percentage of the value of the imported good.
- A specific tariff, on the other hand, is a set dollar amount applied to each imported unit of a product.
With respect to products that were exported from Mexico to Canada, duty rates were decreased because Mexico is considered a developing country (Hirsch, 1995).
Including Mexico in a free trade agreement was a natural progression of the FTA since both the United States and Canada were trading with Mexico under separate bilateral agreements. Further, the fact that disputes still remained between Canada and the United States required revisions to the FTA. The main objectives of NAFTA were to eliminate trade barriers and expedite the shipment of products among the nations, to allow for fair competition and enhanced investment opportunities, to establish effective implementation procedures and a system to resolve disputes, and finally, to create a framework for the expansion of the Agreement to establish greater multi-lateral trade and cooperation (Hirsch, 1995).
Effects of NAFTA
NAFTA effectively eliminated duty rates for products flowing through the three nations and requires the importer to verify the origin of the goods. Since NAFTA was initially limited to the three signing nations, there was a need to establish strict controls to verify the country of origin of imported products. This was an especially sensitive issue for Canada, since certain wood products from the U.S. are manufactured with wood from other countries. Therefore, NAFTA established a system that places the burden on manufacturers and importers to verify the country of origin. The administrative procedures put into place require the completion of a certificate of origin. This is a statement provided by the supplier of a good or service that the product is in compliance with the rules of origin requirements of the agreement (Hirsch, 1995).
At the time NAFTA was being negotiated, it was a hot button political issue that played a role in the presidential campaigns in all three nations. However, since the Agreement was signed in 1994, there has been an increase in free trade among Canada, Mexico and the United States. Trade is considered "free" or open when goods or services can be delivered into markets without duty restrictions and, therefore, prices are ultimately determined by supply and demand. One of the objectives of free trade is to provide consumers expanded choices for goods and services. This increased competition should result in lower prices and improved quality of products and most importantly economic stability in the North American marketplace.
While each of the signatory nations to NAFTA has benefited from the pact, there have been complications. The establishment of the WTO in 1995 and the agreements of the Uruguay Round contained provisions for eliminating tariffs that replaced or superseded those established by NAFTA. Moreover, after China was granted most favored nation status by the U.S. and eventually admitted into the WTO, increased trade between China and the United States affected trading levels with Mexico and Canada. In fact, for a time, China became America's largest trading partner and American manufacturing jobs that many claimed would be lost to Mexico were actually lost to China; however, as of 2013, Canada and Mexico are again the largest trading partners with the United States (Bury, 2004; US Census, 2013).
Notwithstanding the foregoing impediments to the success of NAFTA, the Agreement has been positive for all three signatories. In addition to the benefits that have arisen for consumers, there have also been benefits for certain North American businesses and industries. From the perspective of the United States, many businesses gained access to...