The North American Free Trade Agreement (NAFTA) is an agreement governing trade among the United States, Canada, and Mexico in effect since January 1, 1994. NAFTA negotiations began in July 1991 and were completed in August 1992 under the George H. W. Bush administration. The agreement was negotiated under FAST TRACK authorization, meaning Congress agreed to vote yes or no on the trade agreement as negotiated, without making changes to it. North American Free Trade Agreement is both a radical change in U.S. policy and a minor “tinkering” of an existing U.S. trade policy. To understand it, it is necessary to review the context within which the agreement was negotiated.
NAFTA is an expansion of the United States–Canada Free Trade Agreement (CFTA) of 1989. The United States and Canada have a long history of trade, with the U.S. accounting for more than 70 percent of Canadian exports. In the mid-1980s, trade negotiations under the General Agreement on Tariffs and Trade ( see World Trade Organization) were stalled. Traditionally Canada had found it to its advantage to negotiate trade agreements with the United States as part of a larger world organization rather than as a smaller nation negotiating with a larger nation (Canada’s economy is about one-tenth the size of the United States). Before North American Free Trade Agreement, Canada and Mexico engaged in very little trade. (Some products made or assembled in Mexico were used in producing products in the United States, which were then shipped to Canada.) But when President Bush indicated interest in including Mexico in a trade agreement, Canadian leaders joined the initiative rather than being left out of the process.
For Mexico, NAFTA represented a radical change in trade policy. Trade relations between Mexico and the United States have often been strained or at best minimal. (The Mexican economy is approximately one-twentieth the size of the U.S. economy.) While Mexico is a huge country with over 100 million citizens, has vast quantities of oil and gas resources, and is contiguous to the United States, until the 1980s its trade was largely limited to energy and agricultural commodities. Though the U.S.- Canada border is open and largely unmonitored, the U.S.-Mexican border is highly monitored. An old story illustrates the traditional relationship between the United States and Mexico (as well as other Latin American countries). If a Latin American manager is asked what he watches, he will say he keeps one eye on his cash register and the other eye looking north to see what is happening in the United States. Although Mexicans know they cannot control what the United States does, they also know changes there will affect them.
Part of the strained relationship between the United States and Mexico dates back to the Treaty of Guadalupe Hidalgo (1848) and the Gadsden Purchase (1853), which together Mexicans refer to as the “War of North American Invasion.” Following the defeat of General Santa Anna in the Texas Revolution (1836) and the addition of Texas to the United States (1845), war broke out, and U.S. forces were sent to Vera Cruz, Monterey, and Mexico City. After gaining control of most of Mexico, the United States negotiated the Treaty of Guadalupe Hidalgo and subsequently the Gadsden Purchase, acquiring much of what are now parts of Arizona, New Mexico, and California.
Another reason for the historically limited trade relations between Mexico and the United States was due to past Mexican trade policies. During World War II, the United States sought support from Mexico, primarily for oil resources, but trade relations were neglected after the war. Mexico then instituted a policy of importsubstitution- industrialization (ISI), protective tariffs, and other trade barriers, targeted to reduce their dependence on foreign imports and growth through domestic production of what was previously imported. The three major problems with ISI are that it limits competition to just domestic producers, does not require domestic manufacturers to be competitive on a global basis, and limits growth to the size of the domestic market.
Mexican interest in a free trade agreement with the United States was initiated by President Carlos Salinas. After being rebuffed in attempts to attract greater investment from Europeans and with a stagnating domestic economy, President Salinas contacted President George H. W. Bush in 1990, and NAFTA discussions began.
A free-trade agreement is much less than what it first appears. Countries agree to reduce and/or eliminate trade barriers among members of the agreement. Each country retains its own trade agreements (and barriers) with respect to trade with other countries, and restrictions on the movement of labor among the trade partners typically are retained.
With more than 1,000 pages, North American Free Trade Agreement contains 22 “chapters” and two major side agreements. Although it was negotiated in a little over a year, each sentence of the agreement was closely scrutinized both by the government representatives negotiating the agreement and business interests affected by the agreement’s terms. The objectives of North American Free Trade Agreement (NAFTA) listed in Article 102 are to

• a. eliminate barriers to trade in, and facilitate the crossborder movement of, goods and services between the territories of the Parties;
  
• b. promote conditions of fair competition in the free trade area;
  
• c. increase substantially investment opportunities in the territories of the Parties;
  
• d. provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory;
  
• e. create effective procedures for the implementation and application of the Agreement, for its joint administration and for the resolution of disputes; and
  
• f. establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the Agreement.

One significant aspect of NAFTA is that it emphasizes trade in services as well as goods. At the time, GATT negotiations were stalled, and U.S. negotiators saw NAFTA as a model for future GATT treaties. (The United States is a dominant force in international trade in services, and while it has a large trade deficit, it also has long had a trade surplus in services.) North American Free Trade Agreement also emphasizes increasing investment opportunities. At the time the agreement was signed, Mexico had significant barriers to international investment and bans on foreign investment in certain industries, particularly oil. In addition, NAFTA is envisioned as a blueprint for expansion of trade throughout the Americas. In the 1995 Summit of the Americas, President Bill Clinton promised Chile it would be the next nation allowed to join NAFTA. (The U.S. Congress then failed to renew the president’s fast-track authorization, effectively ending North American Free Trade Agreement’s expansion for the rest of the Clinton administration.)
Just a month before North American Free Trade Agreement’s implementation, Mexico succumbed to what is known as the peso crisis: an overvalued peso leading to an international financial crisis and a huge $50 billion bailout. Because the peso crisis occurred at the same time as NAFTA, many people blamed the agreement for the crisis. However, many economists think that because Mexican leaders chose to adhere to NAFTA during the crisis, it was not as prolonged as previous financial crashes in the country had been. As the Mexican peso lost its value relative to the U.S. dollar, maquiladoras (Mexican factories of goods intended primarily for the U.S. market) rapidly expanded, creating jobs and income.
In addition to the 22 chapters in the agreement, North American Free Trade Agreement included two unique side agreements creating the Border Environmental Cooperation Commission and the North American Agreement on Labor Cooperation. Although President Bush negotiated NAFTA, after the 1992 presidential election, it was left to President Clinton to gain ratification of the agreement from Congress. The two side agreements on labor and the environment mollified traditional Democratic opposition to free trade and allowed for the treaty’s passage.
Most economists consider NAFTA a success. It has led to increased trade among the participating countries; trade diversion, particularly the movement of production facilities out of Asian countries and into Mexico to gain access to the U.S. market; and expanded investment opportunities. North American Free Trade Agreement has also contributed to declines in some U.S. industries, particularly textiles and other labor-intensive manufacturing.
See also free-trade areas.