NAFTA Pros and Cons

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

When it was approved in 1993, the North American Free Trade Agreement was the world's most comprehensive free trade agreement. It covered the United States, Canada, and Mexico. In 2022, its member economies generated nearly $29.1 trillion in gross domestic product.

NAFTA was also controversial. Politicians don't agree on whether the free trade agreement's benefits outweigh its drawbacks, but many agree on what those benefits and drawbacks ultimately are. Learn more about those pros and cons, which include job creation and economic growth, as well as job losses in certain industries and environmental damage.

Key Takeaways

• Some of the positive effects of NAFTA include increased trade, economic output, foreign investment, and better consumer prices.
• U.S. jobs were lost when domestic manufacturers relocated to lower-wage Mexico, which also suppressed wages in U.S. manufacturing plants.
• NAFTA renegotiations in 2018 led to the U.S.-Mexico-Canada Agreement (USMCA), which took effect in July 2020. The USMCA addresses some 21st-century issues like digital trade and the environment.

Pros and Cons of of NAFTA

• Increased trade
• Increased economic output
• Created jobs
• Foreign direct investment
• Lower prices
• Helped government spending

• Job losses
• Lower wages
• Farmers out of business
• Poorer working conditions
• Environmental damage
• Decreased truck safety

Pros Explained

NAFTA has six main advantages, according to a Congressional Research Service report prepared in 2017.

• Increased trade: NAFTA more than tripled trade between Canada, Mexico, and the United States after it was enacted. The agreement reduced and eliminated tariffs.
• Increased economic output: Greater trade increased economic output. The U.S. International Trade Commission found that full NAFTA implementation would increase U.S. growth by as much as 0.5% a year.
• Created jobs: NAFTA's stronger growth created jobs. According to a Chamber of Commerce report, U.S. free trade agreements—the lion's share of which stemmed from NAFTA—directly supported 5.4 million jobs. Trade with these countries also supported 17.7 million jobs.
• Foreign direct investment: This kind of investment, also known as FDI, has more than tripled. The United States increased FDI in Mexico from $15.2 billion in 1993 to $104.4 billion in 2012, and from $69.9 billion in Canada in 1993 to $352.9 billion in 2015. Mexico ramped up investment in the United States by 1,283% over the same period, while Canada's FDI increased by 911%.
• Lower prices: NAFTA lowered prices. U.S. oil imports from Mexico cost less because NAFTA got rid of tariffs. That reduced America's reliance on oil from the Middle East. Low-cost oil means lower gas prices. This creates lower costs of living, including lower food prices.
• Helped government spending: NAFTA helped with government spending. Each nation's government contracts became available to suppliers in all three member countries. That increased competition and lowered costs.

Cons Explained

• Job losses: Certain estimates indicate that it led to job losses. A report from the Economic Policy Institute estimated a loss of 682,900 jobs within the agreement's first 16 years. California, New York, Michigan, and Texas were among the hardest-hit states. Though the estimated job gains exceed those lost, certain industries were particularly impacted. These included the manufacturing, automotive, textile, computer, and electrical appliance industries.
• Lower wages: Job migration suppressed wages. Companies threatened to move to Mexico to keep workers from joining unions. Without the unions, workers could not bargain for better wages. This strategy was so successful that it became standard operating procedure across many industries.
• Farmers out of business: NAFTA put Mexican farmers out of business. It allowed U.S. government-subsidized farm products into Mexico. Local farmers could not compete with the subsidized prices. As a result, some statistics estimate that 1.3 million farmers were put out of business. Though NAFTA was meant to create enough high-wage jobs in Mexico that immigration would decrease, Mexican immigration to the U.S. increased by 79% from 1994 to 2000. The recession drove that figure to 6.9 million in 2007. In 2017, it fell to 4.9 million, roughly double where it was before NAFTA.
• Poorer working conditions: Unemployed Mexican farmers went to work in substandard conditions in the maquiladora program. Maquiladora is where United States-owned companies employ Mexican workers near the border. They cheaply assemble products for export back into the United States. Employment in maquiladoras reached 1.2 million in 2006.
• Environmental damage: U.S. companies degraded the Mexican environment to keep costs low. Agribusiness in Mexico uses more fertilizers and other chemicals, thereby increasing levels of pollution. Rural farmers were forced into marginal land to stay in business, which increased deforestation rates and contributed to global warming.
• Decreased truck safety: NAFTA allowed Mexican trucks access to the United States. Mexican trucks are not held to the same safety standards as American trucks. This provision was delayed and never fully implemented, though the U.S. did offer a pilot program for Mexican trucks to operate in the U.S. temporarily.

Do NAFTA's Pros Outweigh Its Cons?

NAFTA's disadvantages are significant, particularly as you consider the loss of entire industries in New York or Michigan. Worker mistreatment in the maquiladora program and severe environmental damage are also major drawbacks.

From a purely economic perspective, though, NAFTA could be considered a success. Without it, the impacts of competition from the growing economies of the European Union or China could be felt more acutely.

Evaluating NAFTA's value is not an easy or simple question. However, many experts believe that free trade agreements are a necessity for the United States, helping the country compete in an ever more globalized world.

The United States-Mexico-Canada Agreement

The United States, Mexico, and Canada renegotiated NAFTA on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement (USMCA). It has been ratified by each country's legislature.

Mexico was the first to ratify the agreement in 2019. The U.S. Congress passed the agreement in mid-January 2020; Donald Trump officially signed it on Jan. 29, 2020. Canada ratified it on March 13, 2020.

The Trump administration renegotiated, intending to lower the trade deficit between the United States and Mexico. The new deal is largely similar to NAFTA. There are new rules, though, in seven areas:

• Intellectual property
• Digital trade
• De minimis shipment value (the value of goods that can be traded without customs duties)
• Financial services
• Currency
• Labor (including a requirement that at least 40% of auto content be made by workers earning at least $16 per hour)
• Environment (addressing illegal trafficking of wildlife, timber, and fish)

Frequently Asked Questions (FAQs)

What was the purpose of NAFTA?

NAFTA was designed to decrease trade costs and increase business investment among the three North American nations. Its ultimate goal was to make North America more competitive on the world stage.

Which U.S. president signed NAFTA into law?

President George H.W. Bush originally approved NAFTA in December 1992. President Bill Clinton officially signed it into law on December 8, 1993.