NAFTA OR SHAFTA A Glimpse of the North American Free Trade Agreement and the Geo-Economic effect on the United States. Keith White, TC Peoria Unified.

NAFTA OR “SHAFTA”A Glimpse of the North American Free Trade Agreement and the Geo-Economic effect on the United States.Keith White, TC Peoria Unified

Vocabulary: Trade Basics• Absolute Advantage (Adam Smith) = Specialization of

Labor & Production• Comparative Advantage (David Ricardo) = Lowest

mathematical opportunity cost• Import = goods/services in – Cash out• Export = goods/services out – Cash in• Free Trade = unrestricted trade across borders allowing

lower prices for consumers.• Protectionist = desires restrictions on trade (tariffs, trade

quotas, licensing regulations, etc.) to “protect” jobs and balance trade.

History: US Trade and Pre-NAFTA• The impetus for NAFTA actually began with President Ronald

Regan in 1980, who campaigned for a North American common market.

• In 1984, Congress passed the Trade and Tariff Act. It gave the President "fast-track" authority to negotiate free trade agreements, while only allowing Congress the ability to approve or disapprove, not change negotiating points.

• Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada-U.S. Free Trade Agreement, which was signed in 1988, went into effect in 1989 and is now suspended due to NAFTA.

• Mexican President Salinas and President George H.W. Bush began negotiations for a liberalized trade between the two countries.

• Prior to NAFTA, Mexican tariffs on U.S. imports were 250% higher than U.S. tariffs on Mexican imports.

History: NAFTA becomes law• NAFTA was signed by President George H.W. Bush,

Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992.

• It was ratified by the legislatures of the three countries in 1993: The US House approved it by 234 to 200 on November 17 and the US Senate by 60 to 38 on November 20, 1993.

• It was signed into law by President Bill Clinton on December 8, 1993 and entered force January 1, 1994. (Although it was initially signed by President Bush, it was a priority of President Clinton's, and its passage is considered one of his first successes of his Presidency.)

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The U.S. has $967 billion total trade with NAFTA. Exports were $412 billion

and imports were $555 billion.

NAFTA Overview• The North American Free Trade Agreement (January

1, 1994) is an agreement between Canada, the United States and Mexico stipulating that no tariffs, import duties, quotas or other protectionist trade tactics will be employed between the 3-member-nation reducing trade costs, increase business investment, and help North America be more competitive in the global marketplace.

• As of January 1, 2008, all tariffs between the three countries were fully eliminated and NAFTA’s 14-year implementation was completed.

• Between 1993-2009, trade tripled from $297 billion to $1.6 trillion, making it the world’s largest free trade area (in terms of GDP).

NAFTA is a $17 trillion market for 444 million consumers. [1,000 page document]NAFTA rolled back 20,000 tariffs by Jan. 1, 2008.

American consumers are saving $20 billion per year.

Trade within NAFTA totals over $1 trillion.

U.S. Canada MexicoGDP $14.6 Tr. $1.5 Trillion $1.1 Trillion

[30% live on less than $2 day]

Population 310 mil. 33 million 109 million [50% in poverty]

[Only 28% grad. high school]

Per Capita $48,000 $40,000 $13,500 [ave. ed. Level is 6th grade]

Ave. Hourly $16.00 $17.00 $2.00 [.60 min. wage]

North American Free Trade AgreementBenefits (Advantages)

• Each country boasts unique natural advantages that allows it to produce certain goods or services more cost-efficiently than others.

• By eliminating tariffs, NAFTA allows all three member countries to focus their productive efforts on their natural advantages.

• Consumer prices for imported goods are kept under control within NAFTA countries because import prices are not artificially inflated by tariffs.

• This allows importers to purchase more goods and services, which in turn allows the exporters to produce more, increasing their nations Gross Domestic Product. (GDP)

Costs (Disadvantages)

• A shift of industrial focus in each country naturally causes job losses on all sides but is increasingly evident in high-wage/benefit union labor.

• As each country shifts its demand for a certain product from domestic purchase to imports, the industry-in-question in the importing country loses business, leaving many without a job.

• Entire industries can weaken and possibly disappear over time due to free trade agreements due to lower wages.

• Governments rely on tariff revenue the same as any other tax, and eliminating tariffs can take a effect government budgets.

• Countries may be left with crippled industries or a lack of labor for certain industries if they rely on imports from each other for too long.

Article 102 of the NAFTA agreement outlines its purpose: • Grant the signatories Most Favored Nation status.• Eliminate barriers to trade and facilitate the cross-border

movement of goods and services.• Promote conditions of fair competition.• Increase investment opportunities.• Provide protection and enforcement of intellectual

property rights.• Create procedures for the resolution of trade disputes.• Establish a framework for further trilateral, regional and

multilateral cooperation to expand NAFTA's benefits.

U.S. – Canada TradeU.S. – Canada TradeU.S. exports to Canada $205 BU.S. imports from Canada $225 B

Canadian-Mexican TradeCanadian-Mexican TradeCanadian exports to Mexico $8.3 BCanadian imports from Mexico $16.5 B

U.S. - Mexico TradeU.S. - Mexico TradeU.S. exports to Mexico $129 BU.S. imports from Mexico $177 B

NAFTA, 2009NAFTA, 2009Population: 442 millionPopulation: 442 million

Combined GDP: 16 TrillionCombined GDP: 16 Trillion3-Way Trade: almost $800 B.3-Way Trade: almost $800 B.

Success?• NAFTA has eliminated trade barriers, increased

investment opportunities, and established procedures for resolution of trade disputes.

• It has increased the competitiveness of the member countries involved on the global marketplace: This has become especially important with the launch of the European Union.

• In 2007, the EU replaced the U.S. as the world's largest economy but NAFTA remains the largest economy world economy.

Mexico, the U.S., and Canada decided to get rid of import taxes between one another. They joined together to create the world’s largest free trade zone.

Labor unions Labor unions in Canada and the U.S. oppose oppose NAFTANAFTA. They see big companies taking jobs out of the U.S. & Canada because they can do business cheaper in Mexico.

Many workers feel that NAFTANAFTA is giving them the

ShaftaShafta

Companies can pay employees less in Mexico, since work is harder to get there.

Average factory wages:

United States Mexico China

$136 / day[factors in medical & pension]

$8 / day $3 / day

(And some companies have even left Mexico to move to Asia!)

Source: Univ. of Wisconsin, http://www.uwec.edu/geography/Ivogeler/w188/border/maquil.htm

Failure? (“That giant sucking sound” Ross Perot)• Since labor is cheaper in Mexico, many manufacturing

industries moved part of their production from high-cost of manufacturing in the U.S. states. Between 1994 and 2002, the U.S. lost 1.7 million jobs, gaining only 794,00, for a net loss of 879,000 jobs. Nearly 80% of these jobs were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances.

• Not all companies in these industries moved to Mexico. Many used the threat of moving during union organizing drives. When it became a choice between joining the union or losing the factory, workers chose to keep the factory open. Without union support, the workers had little bargaining power. This suppressed wage growth. Between 1993 and 1995, 50% of all companies in the industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate had grown to 65%.

What about NAFTA and Mexico?• The 2002 Farm Bill subsidized U.S. agribusinesses up to 40% of net

farm income. When NAFTA removed tariffs, U.S. corn and other grains were exported to Mexico below cost. At the same time, Mexico reduced its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001. Most of those subsidies went to Mexico's large farms. Many small Mexican farmers were put out of business.

• In response to NAFTA competitive pressure, Mexico agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into more marginal land, resulting in deforestation at a rate of 630,000 hectares per year. The cost to Mexico’s environment is enormous.

• Many Mexican border town workers were exploited: NAFTA expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico's labor force. These workers have "no labor rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job," according to Continental Social Alliance.

Mexico buys 70% of its imports from Texas. Texas’s exports to Mexico have increased from $19 billion in 1994 to $62 billion in 2008.

U.S. goods exported to Mexico have gone from $51 billion to $152 billion, supporting over 1 million jobs in the U.S. Imports from Mexico have more than tripled to $216 billion.

NAFTA encourages more world-wide investment in Mexico. This is enhancing their productivity and income. Some of this increased income is being used used to buy U.S. exports. It is believed that a higher standard of living in Mexico will help stem the flow of illegal immigrants to the U.S.

NAFTA and the future?• NAFTA should not impede industrial competitiveness, i.e. selective promotion

of industries and temporary preferences to national entrepreneurs in particular areas. Enhancing competitiveness will promote industrial development.

• NAFTA should engage in careful liberalization of sensitive goods, like the staple-food producing sector.

• NAFTA should include funding for development, like the EU does when it engages in trade agreements with developing countries. It helps developing countries to realistically compete with stronger trade partners. (expansion to Caribbean, Central & South American Nations.)

• NAFTA should not be a substitute for coherent national economic development strategies.

• NAFTA should pay close attention to how services can be used to promote

better environment and labor standards.

• NAFTA should focus more strongly on job creation, including meeting labor and environment standards and providing protection for migrants.

North American Map Activity1-Highlight the borders of US/Canada and US/Mexico in yellow marker. (2 pts)

2-Draw 2 actual routes for trucks or railroads to and from major cities in Mexico and Canada through the U.S. Label the highways with their numbers. (4 pts)

3-Research 4 major industries/products that benefit from NAFTA. Use symbols to show where these industries/products are located or originate. Make a legend for the map showing what these symbols mean. (4 pts)

4-Research 4 major manufacturing border cities in Mexico. Locate and label these cities on the map. (4 pts)

5-Locate and name 2 ocean ports that would be important to NAFTA trade. (2 pts)

6-Summarize 2 border obstacles that challenge NAFTA on the back of the map. (4 pts)

Total _________ (20 pts)

Compare/Contrast: The EU• The European Union (EU) is an economic and political

union of 27 member states which are located primarily in Europe.

• The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries in 1958.

• The Maastricht Treaty established the European Union under its current name in 1993. The last amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.

Started with Started with these 15these 15

[27 nations – 475 million people27 nations – 475 million people] [“Eurozone”“Eurozone” includes 13 Euro nationsEuro nations] [GDPsGDPs of 27 total27 total around $14.5 tril$14.5 trillion] *It's like a "U.S. of Europe” "U.S. of Europe” [imagine each state in the U.S. having its own currency. If you wanted to buy a product in Louisiana, you would have to buy Louisiana currency and pay a 1-2% fee for doing so.) [After independence, states printed their own money. FormerlyFormerly, there were tariffstariffs and quotasquotas against other European countries.

The single currency will create efficiencies leading toThe single currency will create efficiencies leading tofaster growth & facilitate the establishment of a kind of faster growth & facilitate the establishment of a kind of U.S. U.S. of Europeof Europe. There will be . There will be huge benefits from free tradehuge benefits from free trade. . The elimination of trade barriers alone will The elimination of trade barriers alone will boost European boost European GDPsGDPs an average of 6% an average of 6% && lower prices by about 6%. lower prices by about 6%. About About 4-5 million more jobs 4-5 million more jobs will be createdwill be created all over all over Europe.Europe.

Eurozone1. Austria 2. Belgium 3. Finland 4. France 5. Germany 6. Greece 7. Ireland

Eurozone8. Italy 9. Luxembourg 10. The Netherlands 11. Portugal 12. Slovenia 13. Spain

Eurozone population of 320 M.Eurozone population of 320 M.

The EU operates through a hybrid system of supranational independent institutions and intergovernmental decisions negotiated by the member states. Important institutions of the EU include

• The European Commission• The Council of the European Union• The European Council • The Court of Justice of the European Union • The European Central Bank. • The European Parliament is elected every five years by

EU citizens.• The political center of the EU is Brussels with branches in

Luxembourg and Strasbourg.

The EU has developed a single market through a standardized system of laws which apply in all member states.

• Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished.

• EU policies aim to ensure the free movement of people, goods, services, and capital.

• Enacts legislation in justice and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development.

• A monetary union, the Eurozone, was established in 1999 and is currently composed of 17 member states.

• Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defense.

• Permanent diplomatic missions have been established around the world and the EU is represented at the United Nations, the WTO, the G8 and the G-20.

• With a combined population of over 500 million inhabitants, in 2010 the EU generated an estimated 26% (US$16.282 trillion) of the global economy, larger than the United States.

European free trade increases production in two ways.

1. Lower costs which increase output.

2. Increase productivity of capital and labor as those factors are allocated on the basis of comparative advantage. Incomes will rise, increasing AD. Europe is more prosperous.

There is a central bank [European Central Bank] and a single defense force, or a kind of national sovereignty. This is the goal. Each nation still has its own central bank but they have no authority to conduct monetary policy. (They operate likeregional banks of the US Fed.)

The European Union (1993)• Motto: United in Diversity• Anthem: Ode to Joy• Flag: Stars = 12 original members of the 15 adopting the

Euro

Europe Map Activity1-Color (yellow) and label the original 15 members of the EU. Be sure to indicate what yellow means in your map legend. (3 pts)

2-Color (orange) and label the rest of the current 27 members of the EU. Be sure to indicate what orange means in your map legend. (5 pts)

3-Of the original 15 EU Nations, which three have not adopted the Euro Zone. Put a star on these countries. Be sure to indicate what a star means in your map legend. (3 pts)

4-Based now on your map what four European Countries are not in the EU? Color (green) and label these countries. Be sure to indicate what green means in your map legend (4 pts)

5-Based now on your map which five countries possibly could be future candidates to join the EU? Put a circle on these countries. Be sure to indicate what a circle means in your map legend. (5 pts)

6-At the present time, viewing your map, what are two EU members that require seaports to facilitate trade? (2 pts)

References• Economics: Principles and Practices, Clayton, Glencoe

McGraw-Hill (1999) with on-line updates• Macroeconomics K Norman, CD licensed to K White for

classroom educational use only. Slide frames used by permission.