Why NAFTA Was Replaced: Exploring The Reasons Behind Its Demise


The North American Free Trade Agreement (NAFTA), in effect from 1994 to 2020, was replaced by the Canada-United States-Mexico Agreement–also known as the ‘CUSMA agreement.’ While NAFTA had positive economic impacts, significant shortcomings led to its replacement. 

A Closer Look at NAFTA Deficits

NAFTA’s failures, including its negative effects on small businesses, labour rights, the automotive industry, and environment are worth exploring. It’s also worth discussing what the cons of CUSMA are, as well as its advantages in creating a more balanced and equitable trading system for all three countries.

Trade Deficits and Job Losses

Under NAFTA, it has been reported that trade deficits increased significantly, particularly for the U.S. This agreement is associated with displacing domestic production and contributing to job losses in high-wage manufacturing sectors, making it challenging for businesses to compete against cheaper imports. 

This scenario is often cited as contributing to worsening income inequality and potentially suppressing wages for production workers. Despite its promises of job creation and higher incomes, the trade deficit increased substantially under NAFTA, undermining economic stability. 

In discussions about NAFTA’s impact in Canada, it’s often highlighted that there were both gains and losses. Observations suggest that certain sectors, such as manufacturing in automotive and textiles, may have experienced job shifts as companies sought cost efficiencies in the U.S. and Mexico. Similarly, the agricultural sector, particularly in dairy and poultry, reportedly faced challenges competing with subsidized U.S. industries, which some analysts believe led to a reduction in market share and financial pressures for Canadian farmers.

CUSMA aims to correct these problems. It grants the U.S. improved access to some of the Canadian dairy market while providing safeguards for certain dairy products. CUSMA enhances labour rights to improve working conditions and wages, discouraging offshoring to the use of cheaper labour regions; it also safeguards crucial sectors like the Canadian automotive industry by increasing the regional supply requirements for vehicles and auto parts.

Supply Chain Certification

The origin criterion in CUSMA is pivotal in facilitating trade between member nations. It is a cornerstone of the agreement and determines whether goods qualify for preferential tariff treatment. The certification of origin, a crucial document of the CUSMA framework, is completed based on the criterion. 

CUSMA simplifies the process of who completes the CUSMA form by clearly indicating that it can be done by the exporter, producer, or importer of the goods. That said, it’s the exporter or producer who typically possesses the required information to complete the form accurately. The streamlining of the trade process ensures that businesses grasp the intricacies of cross-border transactions and contribute to a more efficient and equitable trading environment, addressing some of the shortcomings of NAFTA.

Disproportionate Impact on Small Businesses

NAFTA boosted trade but hurt small and medium-sized business enterprises in the U.S., Canada, and Mexico. Big corporations with ample resources outcompeted against smaller businesses. This market power concentration worsened income inequality and hampered smaller enterprises, such as Mexican farmers who faced subsidized U.S. corn imports.

In Canada, market power concentration impacted agriculture, manufacturing, and services, and it hit small businesses hard. Smaller enterprises struggled against larger American and Mexican firms. 

Due to strict rules of origin, the automotive sector faced particular challenges. Weak enforcement of labour and environmental standards also allowed some firms to cut costs at the expense of Canadian organizations that had to meet higher standards, limiting growth and causing job losses and wage suppression in certain sectors.

CUSMA has a dedicated chapter on small business enterprises that aims to promote cooperation among the three countries to increase trade and investment opportunities for this group. It includes provisions for establishing a ‘Small and Medium-sized Dialogue,’ which includes regular meetings between government officials and private sector representatives to discuss ways to support these entities.

Environment Degradation 

Environmental degradation is often cited as a significant issue that grew during the NAFTA era. Due to perceived inadequacies in environmental protections, there are concerns that the agreement may have encouraged businesses to seek cheaper production in areas with lax regulations, potentially contributing to increased pollution, deforestation, and broader environmental challenges.

For instance, mining expanded in Mexico, often at the expense of local communities and the environment. Deforestation also increased as land was cleared for commercial activities. Canada also faced issues with rising oil sands production impacting water quality and greenhouse gas emissions.

CUSMA tackles these problems by ensuring the three nations enact environmental protections and enforce their laws. The agreement addresses illegal wildlife trade, logging, and fishing, while fostering cooperation on shared environmental concerns. It also deals with global issues like air quality and marine pollution.

Reflecting on NAFTA and CUSMA

Ultimately, NAFTA failed to deliver on all of its promises, resulting in trade deficits, job losses, wage suppression, and inadequate environmental and labour protections. This prompted the agreement’s renegotiation and the creation of CUSMA.

CUSMA, while beneficial in many aspects, has its own drawbacks, such as heightening competition impacting certain industries, and contributing to potential job displacement. Critics have also raised concerns about dispute resolution mechanisms and the enforcement of labour and environmental standards. 

Additionally, the agreement introduces complexities and administrative burdens, particularly for smaller businesses. Nevertheless, CUSMA strives to balance these concerns with the goals of promoting trade and fostering a fair trading environment among member nations.

About the author

Author: FITT Team

The Forum for International Trade Training (FITT) is the standards, certification and training body dedicated to providing international business training, resources and professional certification to individuals and businesses. Created by business for business, FITT’s international business training solutions are the standard of excellence for global trade professionals around the world.

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