[Writer's Name]

[Supervisor Name]

[Subject]

[Date]

Canada and US Free Trade Agreement

Introduction

Act of Congress approving an agreement between the United States and Canada designed to promote free trade between the two countries. The agreement itself was signed on January 2, 1988, in Palm Springs, California, by U.S. president Ronald Reagan and in Ottawa by Prime Minister Brian Mulroney of Canada. This landmark treaty provided that remaining tariffs on most items would be eliminated within a ten-year period, and as early as January 1989 for some items; that regulations governing cross-border banking and investing would be relaxed; that trade disputes would be submitted to U.S.-Canadian commissions for arbitration; and that restrictions on trade of crude oil and natural gas would be eliminated (Manhant , pp 50-65).

The North American Free Trade Agreement (NAFTA) was ratified in 1994, linking Canada, Mexico, and the United States under a regime of liberalized trilateral commerce that harmonized procedures for defining rules of origin, expedited customs clearance for cross-border trade, and provided for a wide variety of institutional reforms to safeguard environmental interests and the rights of workers (sidebar agreements). The accord also included provisions to maintain stable flows of energy products, easier business travel, and reduced restrictions on foreign direct investment (FDI) across major sectors outside the energy domain. Despite many side agreements covering spheres such as labor conditions and environmental protection, a central goal of the accord was to achieve a phased elimination of import duties for most products and services by 2004. This goal has been achieved, though many nontariff trade barriers are still in place. A further goal was to dilute long-standing restrictions on capital mobility (FDI) and pave the way for new investment across the trilateral region. The net result over the past 15 years has been a dramatic expansion of intra-industry trade (IIT) between the three nations, with much of this IIT being conducted on an intra-corporate basis (Manhant , pp 50-65).

Discussion

Merchandise trade within the NAFTA area is now more than 70% IIT in nature. For example, Ford USA can import components or final assemblies on a duty-free basis from its subsidiaries located in Canada or Mexico provided that such inputs qualify as 50% North American (i.e., “local content”). Automotive companies from outside NAFTA can also compete on the same basis, provided that 50% NAFTA content can be demonstrated. Since 1994, IIT within the trilateral partnership has witnessed explosive growth. Transnational corporations headquartered outside the NAFTA zone have played an important role too, especially in sectors such as automotive products, aerospace, and electronics (Kreinin, pp. 90-100).

From the perspective of classical or traditional trade theory, the NAFTA concept made good sense in 1994. With respect to relative factor proportions (comparative advantage), Mexico was cast as labor abundant (low skills), Canada had lots of natural resources, while the United States was capital rich (with high labor skills). Linking the three economies together via free trade would theoretically allow for factor specialization, expanded output, and an aggregate rise in consumer welfare. Specialization would also promote economies of scale ...