The Importance of NAFTA’s Economic Influence

The North American Free Trade Agreement (NAFTA) was implemented in 1994, almost 23 years ago. The agreement was negotiated between Canada, United States, and Mexico to eliminate the majority of tariffs between the countries and to promote the trade of manufacturing, agriculture, and more. Canada and the United States exchange $750 billion each year in trade, with Canada being the largest trade partner to the U.S. The trilateral trade between the countries in 2015 had exceeded USD$1 trillion [1]. NAFTA is arguably the most important trade agreement for Canada and is credited for increased economic growth, investment opportunities, job growth, and much more.

However, with the successful election campaign of President-elect Donald Trump, the fate of NAFTA is now in the spotlight. It is no denying that the trade agreement between our three countries has an enormous economic impact, however Trump and others like him have been very vocal against the agreement, believing it has a negative effect on their economy. While we wait for the governments to discuss NAFTA’s fate, here is why it benefits Canada and the other countries:

NAFTA creates jobs: Many people argue the opposite, that free trade will shift jobs to places that have cheaper labour and production costs, leading to the loss of many jobs where they live. It is true that corporations will make changes to lower costs of production, however jobs are also created in the export industry. In Canada, 5.2 million net new jobs were added during 1993-2015 and one in five jobs are related to the exports industry (Statistics Canada). High skilled jobs will not be as affected by lower minimum wages and increasing the export destinations with lower tariffs creates higher demand for these products. Companies also profit from lower costs, allowing domestic companies to expand operations, potentially increasing their workforce.

Increased investment opportunities: NAFTA has helped influence Canada as an attractive destination for foreign investment. Investments from the United States into Canada in 2015 was CA$387.7 billion and the investments from Canada to the other NAFTA countries was CA$463.3 billion [2]. Many of the provisions set by NAFTA require fairness and transparency for investors. The agreement also sets out to protect intellectual property rights, allowing companies to enact legal action and reducing the risks when investing in another NAFTA country [3]. Greater investment opportunities will boost employment and productivity, positively affecting economic growth.

Lowering tariffs and consumer prices: The decrease of tariffs as a result of NAFTA incentivized trade between the three countries. Tariffs have the effect of increasing costs of imported goods and as a result causes lower consumption demand. Free trade allows Canadians to purchase more American and Mexican goods, many of which we depend on, such as oil, manfactured goods, food, and more. Cheaper prices improve the welfare of individuals and households, allowing people to afford basic living necessities as well as products that can improve quality of life.

There are other factors like reducing government spending, improved government relations between member countries, improved industry integration (Ex. automotive manufactoring), and more. All of these factors contribute to improving economic growth in each of our member countries. NAFTA affects everything from the day to day products we consume to the jobs we work. There are also many arguments people can make against the agreement, and that is important as well. It is important to consider the pros and cons of NAFTA before making any decision on changing or removing it.


1 Comment on "The Importance of NAFTA’s Economic Influence"

  • […] In economics, we learn about elasticity in several different forms such as price elasticity of demand, income elasticity of demand, elasticity and cross-elasticity of demand. In analyzing the elasticity of a certain commodity, we evaluate how influential a factor is in determining the new price or demand of the commodity. These concepts are key to understanding the effects that take place in the marketplace. George Liu wrote an important article regarding the influence of NAFTA to our economy that can be found here. […]

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