Business activities are the key drivers of economic growth and development. In order to experience viable improvement in the economy, factors such as tariffs and other restrictions should be considered to lower their impacts. Following the competitive nature of the world, the US, Mexico, and Canada decided to form a trade bloc where the participants are entitled to trade benefits that would promote trading activities amongst them. The formulation of the North American Free Trade Agreement (NAFTA) was aimed at increasing the overall business investment in the three countries found in North America. The coming together to start NAFTA implied that agricultural, textile and automobile products would not be subjected to the import and export charges across the partners. The agreement targeted to raise the employment rate among the countries by creating massive job opportunities. The involved nations encountered both the benefits and side effects of free trade. America, through NAFTA, is receiving oil from Mexico at lower costs. Similarly, Mexico and Canada have more investment from their counterpart US, making them gain more revenue from the businesses.
Generally, trade barriers between different countries contribute to the low rate of economic activities amongst the nations. The need to eliminate possible hindrances has made various states formulate effective ate and viable agreements to enhance the relationship. In 1994, three countries: the US, Canada, and Mexico, opted to establish the North American Free Trade Agreement (NAFTA) to enable the countries to remove most of the tariffs that prevent business opportunities. NAFTA aimed to lower the textile, automobile, and agricultural product charges. The agreement ensured the import and export duties between members of the association had less impact on them. The creation and implementation of the NAFTA organization facilitated the economic growth of the three nations by promoting employment opportunities.
The performance of an economy is influenced by the rate of trade activities conducted, which includes both imports and export. Since the implementation of NAFTA, Canada, the US, and Mexico have had good trade relationships that allow them to freely export and import products across their respective borders (Komkova, 2019). For instance, the tariffs on covered goods were eliminated that is between México and Canada. Similarly, the US and Canada developed a duty-free trade following the agreement. The aspect facilitated the flow of commodities across the three nations leading to an increase in revenue.
The elimination of the tariffs on agricultural, automobile and textile products is a relief to most traders in the three countries. When there is no limitation, the flow of commodities increases in the economy, which significantly benefits the economy. The approach allows business organizations to have the ability to engage in different operations without fear of experiencing extreme taxation. Therefore, promoting overall economic growth due to enhanced economic output is essential.
The employment rate in the country is a significant determinant of how the economy is performing. The implementation of NAFTA has supported over 20 million job opportunities amongst the participant nations. This indicates the effectiveness of the agreement and how it impacts the lives of individuals in the respective countries. When more people have access to work, their productivity increases, thus making the whole economy experience favorable growth. For instance, an estimate of jobs that depend on the free trade between Mexico and Canada is about 14 million. However, in the case of the US, NAFTA caused some job loss because most of the production was transferred to México, where the cost involved is low. This made a good number of people within the states remain with no opportunities to rely on. Nonetheless, the consequence was less compared to the massive occupational activities resulting from the engagement.
The NAFTA has led to an increment in the Foreign Direct Investment (FDI) across Mexico, Canada, and the US. The withdrawal of trade restrictions has encouraged a number of companies to establish their operations in other countries. Several findings indicate that since the commencement of the NAFTA trade block, the rate of FDI has tripled. For example, between the years 1993 and 2012, the US increased its FDI in Mexico from $15 billion to over $104 billion, respectively (Hernandez-Trillo, 2018). Similarly, it raised the FDI from $69 billion to $352 billion between 1993 and 2015. Moreover, both Canada and Mexico increased their FDI by 1280% and 900%, correspondingly, during the same period of time (Hernandez-Trillo, 2018). FDI plays a vital role in the development and growth of economies. When a country has numerous FDI, unemployment declines following the increase in both the service and manufacturing sectors. Similarly, the level of human capital development improves because most foreign companies train their workers hence enhancing their knowledge and skills. The nation’s exchange rate also stabilizes due to the flow of other currencies in the economy.
Moreover, NAFTA facilitates the establishment of a competitive market through the entry of foreign firms into the domestic marketplace. The practice enables business organizations to break monopolies and develop a healthy environment for operations (Kikkawa et al., 2019). This promotes business activities and the production of goods leading to advancement in the level of innovation. Furthermore, customers can access a broader range of commodities in the market. The aspect improves the ability of the country’s economy to perform accordingly, leading to effective growth.
On the basis of government spending, NAFTA allowed the contracts from any country to be available to possible suppliers located in Mexico, Canada, or the US. The approach made it easier to reduce the cost following increased competition caused by more bidders. The practice enables the nations’ governments to use less capital in establishing their projects effectively. Therefore, the overall expenditure is lowered, leaving the respective state with reasonable finance to invest in other active sectors, thus promoting the preferred economic growth.
The reduction in prices following the removal of trade tariffs made the US access oil products at a cheaper cost from Mexico. The NAFTA, therefore, positively impacted the growth of the US economy because the reduced fuel prices translated to an overall increase in the production and lower prices of food products (Wei & Lahiri, 2019). Oil is the key driver of major sectors such as transport; when its cost is low, people can easily move from one place to another, thus increasing the trade activities. Furthermore, NAFTA saved America from relying excessively on petroleum products from the Middle East, thus making the country spend less, leaving it with more income. In general, the NAFTA trade bloc improved the living standards of Americans through low commodities prices.
The US economy experienced job loss in the manufacturing sector following the implementation of the trade agreement. The employment rate dropped by over 25%, whereby the job opportunities decreased from 17 million to 12 million in late 2016 (Morales, 2018). Most individuals believe that the US automobile industry was impacted significantly by the adoption of NAFTA. The trade agreement created a high level of competition in the sector since the Mexican had the ability to involve in the operations. The stiff competition resulted in a job shift to Mexico because several players in the US market chose to transfer their companies to the Mexico border, where the labor wage is almost half the payment in the US. Based on this perspective, NAFTA affected the growth of the American economy.
The NAFTA trade bloc made the farmers lose their business opportunities in Mexico. The inflow of US-based government-subsidized products into Mexico lowered the overall prices of the commodities. It became challenging for the Mexican farmers to compete with the imported goods. Thus their operations were affected. The impact made the NAFTA reduced the performance of Mexican producers, making them have no jobs and business opportunities to pursue. From this perspective, the agreement was a disadvantage to the economy of Mexico.
In summary, the establishment of NAFTA played a significant role in trade relations between Canada, Mexico, and the US. Based on the aim of the agreement, the countries managed to enjoy the benefits of reduced tariffs, whereby the overall imports and exports increased across the countries’ borders. The increment in trade activities amongst the nations prompted the creation of several job opportunities for the citizens of the states. It made the rate of FDI rise, which is essential in promoting the economic growth, advancement of human capital, and investment in general that, improves the revenue returns. Similarly, receiving products such as oil at a lower cost enables the rate of production within the nation to increase at a reduced cost, making the prices of goods and services decline. These factors allow the people to have better living conditions following the improvement in the performance of the economy. Despite the negative impact, such as loss of jobs, companies, and other limitations, the overall output of NAFTA is positive. Thus, it has a net benefit to the economies of the US, Mexico and Canada.
Hernandez-Trillo, F. (2018). Mexico, NAFTA, and beyond. The International Trade Journal, 32(1), 5-20. Web.
Kikkawa, A. K., Mei, Y., & Robles Santamarina, P. (2019). The Impact of NAFTA on prices and competition: Evidence from Mexican manufacturing plants. Web.
Komkova, E. G. (2019). With and without NAFTA: Economic impact on the USA, Canada and Mexico. A review of economic literature. USA & Canada: ekonomika, politika, kultura, (3), 68-84. Web.
Morales, I. (2018). NAFTA in a Comparative Perspective: A debate on trade diplomacy, economic policy, and regionalism. Web.
Wei, H., & Lahiri, R. (2019). The impact of commodity price shocks in the presence of a trading relationship: A GVAR analysis of the NAFTA. Energy Economics, 80, 553-569. Web.