North American Free Trade: An assessment

Document Type

Article

Department

Economics (CMC)

Publication Date

1996

Abstract

The North American Free Trade Agreement (NAFTA) took effect on January 1, 1994. Its anticipated benefits are expected to flow from traditional trade creation, which is ilkely to outweigh trade diversion, and from scale economies, intraindustry specialization, foreign investment, and endogenous growth. A trade agreement inevitably has implications for the exchange rate and current account and for many other policies. Conversely, the success of its implementation depends on the broader policy environment, as the peso crisis of late 1994 made clear. Although implementation of the agreement will take many years, demands for "widening and deepening" it are already on the table. Late in 1994, President Clinton formally endorsed NAFTA's widening at the summit of hemispheric leaders in Miami. Meanwhile, like it or not, the peso crisis has obliged the two countries to intensify or deepen their policy coordination. This paper evaluates NAFTA's achievements and prospects. Section 2 examines the static and dynamic effects and reviews the pertinent evidence. Section 3 considers the relation between trade liberalization and environmental protection and labor standards. Section 4 evaluates regionalism as (strategic) trade policy. Section 5 takes up macroeconomic and exchange-rate issues raised by NAFTA. Section 6 considers the overall prospects, while Section 7 draws some conclusions.

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© 1996 Kluwer Academic Publishers. Printed in The Netherlands.

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