1. NAFTA or “SHAFTA”
A Glimpse of the North American Free Trade Agreement and the Geo-Economic effect on the United States.
Keith White, TC
Peoria Unified
NAFTA can be a politically charged topic. The teacher should use care to avoid personal opinion about Free Trade and Protectionism and attempt to fairly and objectively present the material with little bias. NAFTA has a number of strengths as well as a number of weaknesses, all depending on your point of view. Advanced students can effectively (1) be assigned a position statement paper with supporting material defending their position. (2) a Trade Court composed of an opposition team and a defense team. (3) Hold a Labor Union vs. consumer benefit debate.

2. Vocabulary: Trade Basics
Absolute Advantage (Adam Smith) = Specialization of Labor & Production
Comparative Advantage (David Ricardo) = Lowest mathematical opportunity cost
Import = goods/services in – Cash out
Export = goods/services out – Cash in
Free Trade = unrestricted trade across borders allowing lower prices for consumers.
Protectionist = desires restrictions on trade (tariffs, trade quotas, licensing regulations, etc.) to “protect” jobs and balance trade.
Bell Warm Up: The United States has great wealth and natural resources. Make a list of goods or services you think we must import. Be prepared to share with the class.
Essential Question: Why do you think trade improves our standard of living?

3. History: US Trade and Pre-NAFTA
The impetus for NAFTA actually began with President Ronald Regan in 1980, who campaigned for a North American common market.
In 1984, Congress passed the Trade and Tariff Act. It gave the President "fast-track" authority to negotiate free trade agreements, while only allowing Congress the ability to approve or disapprove, not change negotiating points.
Canadian Prime Minister Mulroney agreed with Reagan to begin negotiations for the Canada-U.S. Free Trade Agreement, which was signed in 1988, went into effect in 1989 and is now suspended due to NAFTA.
Mexican President Salinas and President George H.W. Bush began negotiations for a liberalized trade between the two countries.
Prior to NAFTA, Mexican tariffs on U.S. imports were 250% higher than U.S. tariffs on Mexican imports.

4. History: NAFTA becomes law
NAFTA was signed by President George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney in 1992.
It was ratified by the legislatures of the three countries in 1993: The US House approved it by 234 to 200 on November 17 and the US Senate by 60 to 38 on November 20, 1993.
It was signed into law by President Bill Clinton on December 8, 1993 and entered force January 1, (Although it was initially signed by President Bush, it was a priority of President Clinton's, and its passage is considered one of his first successes of his Presidency.)

5. orth merican ree rade greement NAFTA N A F T
The U.S. has $967 billion total trade with NAFTA. Exports were $412 billion and imports were $555 billion.
rade
greement

6. NAFTA Overview
The North American Free Trade Agreement (January 1, 1994) is an agreement between Canada, the United States and Mexico stipulating that no tariffs, import duties, quotas or other protectionist trade tactics will be employed between the 3-member-nation reducing trade costs, increase business investment, and help North America be more competitive in the global marketplace.
As of January 1, 2008, all tariffs between the three countries were fully eliminated and NAFTA’s 14-year implementation was completed.
Between , trade tripled from $297 billion to $1.6 trillion, making it the world’s largest free trade area (in terms of GDP).

7. NAFTA [January 1, 1994] U.S. Canada Mexico
GDP $14.6 Tr. $1.5 Trillion $1.1 Trillion
[30% live on less than $2 day]
Population 310 mil. 33 million 109 million [50% in poverty]
[Only 28% grad. high school]
Per Capita $48,000 $40,000 $13,500 [ave. ed. Level is 6th grade]
Ave. Hourly $16.00 $17.00 $2.00 [.60 min. wage]
NAFTA is a $17 trillion market for 444 million
consumers. [1,000 page document]
NAFTA rolled back 20,000 tariffs by Jan. 1, 2008.
American consumers are saving $20 billion per year.
Trade within NAFTA totals over $1 trillion.

8. North American Free Trade Agreement
Costs (Disadvantages)
Benefits (Advantages)
A shift of industrial focus in each country naturally causes job losses on all sides but is increasingly evident in high-wage/benefit union labor.
As each country shifts its demand for a certain product from domestic purchase to imports, the industry-in-question in the importing country loses business, leaving many without a job.
Entire industries can weaken and possibly disappear over time due to free trade agreements due to lower wages.
Governments rely on tariff revenue the same as any other tax, and eliminating tariffs can take a effect government budgets.
Countries may be left with crippled industries or a lack of labor for certain industries if they rely on imports from each other for too long.
Each country boasts unique natural advantages that allows it to produce certain goods or services more cost-efficiently than others.
By eliminating tariffs, NAFTA allows all three member countries to focus their productive efforts on their natural advantages.
Consumer prices for imported goods are kept under control within NAFTA countries because import prices are not artificially inflated by tariffs.
This allows importers to purchase more goods and services, which in turn allows the exporters to produce more, increasing their nations Gross Domestic Product. (GDP)

9. Article 102 of the NAFTA agreement outlines its purpose:
Grant the signatories Most Favored Nation status.
Eliminate barriers to trade and facilitate the cross-border movement of goods and services.
Promote conditions of fair competition.
Increase investment opportunities.
Provide protection and enforcement of intellectual property rights.
Create procedures for the resolution of trade disputes.
Establish a framework for further trilateral, regional and multilateral cooperation to expand NAFTA's benefits.

10. Combined GDP: 16 Trillion
North American Free Trade Agreement [NAFTA]
NAFTA, 2009
Population: 442 million
Combined GDP: 16 Trillion
3-Way Trade: almost $800 B.
U.S. – Canada Trade
U.S. exports to Canada $205 B
U.S. imports from Canada $225 B
Canadian-Mexican Trade
Canadian exports to Mexico $8.3 B
Canadian imports from Mexico $16.5 B
U.S. - Mexico Trade
U.S. exports to Mexico $129 B
U.S. imports from Mexico $177 B

11. Success?
NAFTA has eliminated trade barriers, increased investment opportunities, and established procedures for resolution of trade disputes.
It has increased the competitiveness of the member countries involved on the global marketplace: This has become especially important with the launch of the European Union.
In 2007, the EU replaced the U.S. as the world's largest economy but NAFTA remains the largest economy world economy.

12. Many workers feel that NAFTA is giving them the
Mexico, the U.S., and Canada decided to get rid of import taxes between one another. They joined together to create the world’s largest free trade zone.
Many workers feel that NAFTA is giving them the
Shafta
Labor unions in Canada and the U.S. oppose NAFTA. They see big companies taking jobs out of the U.S. & Canada because they can do business cheaper in Mexico.

13. [factors in medical & pension]
Companies can pay employees less in Mexico, since work is harder to get there. Average factory wages:
United States
Mexico
China
$136 / day
[factors in medical & pension]
$8 / day
$3 / day
(And some companies have even left Mexico to move to Asia!)
Source: Univ. of Wisconsin,

14. Failure? (“That giant sucking sound” Ross Perot)
Since labor is cheaper in Mexico, many manufacturing industries moved part of their production from high-cost of manufacturing in the U.S. states. Between 1994 and 2002, the U.S. lost 1.7 million jobs, gaining only 794,00, for a net loss of 879,000 jobs. Nearly 80% of these jobs were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico. These industries included motor vehicles, textiles, computers, and electrical appliances.
Not all companies in these industries moved to Mexico. Many used the threat of moving during union organizing drives. When it became a choice between joining the union or losing the factory, workers chose to keep the factory open. Without union support, the workers had little bargaining power. This suppressed wage growth. Between 1993 and 1995, 50% of all companies in the industries that were moving to Mexico used the threat of closing the factory. By 1999, that rate had grown to 65%.
Ross Perot is an billionaire Texas businessman who ran on the Independent ticket in the 1992 presidential election (18.9% of the popular vote and no electoral votes, never carrying a single state) against Incumbent Republican George HW Bush and Arkansas Governor Democrat Bill Clinton. In one of several debates Ross Perot is famous for his statement regarding NAFTA and US jobs going South as “that giant sucking sound.” Many political science analysts feel Ross Perot took votes away from President Bush (37.5% of the popular vote and 168 electoral votes) handing the election to Bill Clinton winning with 43% of the popular vote and 370 electoral votes.

15. What about NAFTA and Mexico?
The 2002 Farm Bill subsidized U.S. agribusinesses up to 40% of net farm income. When NAFTA removed tariffs, U.S. corn and other grains were exported to Mexico below cost. At the same time, Mexico reduced its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in Most of those subsidies went to Mexico's large farms. Many small Mexican farmers were put out of business.
In response to NAFTA competitive pressure, Mexico agribusiness used more fertilizers and other chemicals, costing $36 billion per year in pollution. Rural farmers expanded into more marginal land, resulting in deforestation at a rate of 630,000 hectares per year. The cost to Mexico’s environment is enormous.
Many Mexican border town workers were exploited: NAFTA expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. This grew to 30% of Mexico's labor force. These workers have "no labor rights or health protections, workdays stretch out 12 hours or more, and if you are a woman, you could be forced to take a pregnancy test when applying for a job," according to Continental Social Alliance.

16. NAFTA’s Benefits for Mexico
Mexico buys 70% of its imports from Texas.
Texas’s exports to Mexico have increased from
$19 billion in 1994 to $62 billion in 2008.
U.S. goods exported to Mexico have gone from
$51 billion to $152 billion, supporting over
1 million jobs in the U.S. Imports from Mexico
have more than tripled to $216 billion.
NAFTA encourages more world-wide investment
in Mexico. This is enhancing their productivity and
income. Some of this increased income is being used
used to buy U.S. exports. It is believed that a
higher standard of living in Mexico will help stem
the flow of illegal immigrants to the U.S.

17. NAFTA and the future?
NAFTA should not impede industrial competitiveness, i.e. selective promotion of industries and temporary preferences to national entrepreneurs in particular areas. Enhancing competitiveness will promote industrial development.
NAFTA should engage in careful liberalization of sensitive goods, like the staple-food producing sector.
NAFTA should include funding for development, like the EU does when it engages in trade agreements with developing countries. It helps developing countries to realistically compete with stronger trade partners. (expansion to Caribbean, Central & South American Nations.)
NAFTA should not be a substitute for coherent national economic development strategies.
NAFTA should pay close attention to how services can be used to promote better environment and labor standards.
NAFTA should focus more strongly on job creation, including meeting labor and environment standards and providing protection for migrants.

18. North American Map Activity
1-Highlight the borders of US/Canada and US/Mexico in yellow marker. (2 pts)
2-Draw 2 actual routes for trucks or railroads to and from major cities in Mexico and Canada through the U.S. Label the highways with their numbers. (4 pts)
3-Research 4 major industries/products that benefit from NAFTA. Use symbols to show where these industries/products are located or originate. Make a legend for the map showing what these symbols mean. (4 pts)
4-Research 4 major manufacturing border cities in Mexico. Locate and label these cities on the map. (4 pts)
5-Locate and name 2 ocean ports that would be important to NAFTA trade. (2 pts)
6-Summarize 2 border obstacles that challenge NAFTA on the back of the map. (4 pts)
Total _________ (20 pts)
1- US/Canada and US/Mexico
2- Follow an Eastern route from Mexico City, Monterrey and thru San Antonio and Dallas splitting up to Chicago, Detroit, Toronto and Montreal, and the 2nd split to the Northeast US and into Montreal.
3- Varied Answers: Canada: Oil Shale, Grains, Lumber, Iron Ore, Gold, Silver. US: Oil, Coal, Copper, Lumber, Grains, Cotton, Rice. Mexico: Agriculture (fruits/vegetables), tourism, Copper, Oil.
4- Varied Answers: Cities South of California, Arizona, New Mexico and Texas.
5- Varied Answers: Maya and Baja (Mexico), New Orleans, Houston/Galveston, Mobile (US)
6- Varied Answers: Homeland security, drug trafficking, human trafficking, illegal alien labor, lower standards (inspection/safety) in the trucking industry, environmental violations, border pollution, border crime, poverty and slums.

19. Compare/Contrast: The EU
The European Union (EU) is an economic and political union of 27 member states which are located primarily in Europe.
The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries in 1958.
The Maastricht Treaty established the European Union under its current name in The last amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.

20. European Union - 27 Nations
Started with
these 15

21. Eurozone population of 320 M.
1. Austria
2. Belgium
3. Finland
4. France
5. Germany
6. Greece
7. Ireland
European Union
Eurozone
8. Italy
9. Luxembourg
10. The Netherlands
11. Portugal
12. Slovenia
13. Spain
Eurozone population of 320 M.
[27 nations – 475 million people] [“Eurozone” includes 13 Euro nations] [GDPs of 27 total around $14.5 trillion]
*It's like a "U.S. of Europe” [imagine each state in the U.S. having its own currency. If you wanted to buy a product in Louisiana, you would have to buy Louisiana currency and pay
a 1-2% fee for doing so.) [After independence, states
printed their own money. Formerly, there were tariffs and quotas against other European countries.
The single currency will create efficiencies leading to
faster growth & facilitate the establishment of a kind of U.S.
of Europe. There will be huge benefits from free trade.
The elimination of trade barriers alone will boost European
GDPs an average of 6% & lower prices by about 6%.
About million more jobs will be created all over
Europe.

22. The European Commission The Council of the European Union
The EU operates through a hybrid system of supranational independent institutions and intergovernmental decisions negotiated by the member states. Important institutions of the EU include
The European Commission
The Council of the European Union
The European Council
The Court of Justice of the European Union
The European Central Bank.
The European Parliament is elected every five years by EU citizens.
The political center of the EU is Brussels with branches in Luxembourg and Strasbourg.

23. The EU has developed a single market through a standardized system of laws which apply in all member states.
Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished.
EU policies aim to ensure the free movement of people, goods, services, and capital.
Enacts legislation in justice and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development.
A monetary union, the Eurozone, was established in 1999 and is currently composed of 17 member states.
Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defense.
Permanent diplomatic missions have been established around the world and the EU is represented at the United Nations, the WTO, the G8 and the G-20.
With a combined population of over 500 million inhabitants, in 2010 the EU generated an estimated 26% (US$ trillion) of the global economy, larger than the United States.

24. European Union European free trade increases production in two ways.
1. Lower costs which increase output.
2. Increase productivity of capital and labor as those
factors are allocated on the basis of comparative advantage. Incomes will rise, increasing AD. Europe is more prosperous.
There is a central bank [European Central Bank] and a single defense force, or a kind of national sovereignty. This is the goal. Each nation still has its own central bank but they have no authority to conduct monetary policy. (They operate like
regional banks of the US Fed.)

25. The European Union (1993) Motto: United in Diversity
Anthem: Ode to Joy
Flag: Stars = 12 original members of the 15 adopting the Euro

26. Europe Map Activity
1-Color (yellow) and label the original 15 members of the EU. Be sure to indicate what yellow means in your map legend. (3 pts) 2-Color (orange) and label the rest of the current 27 members of the EU. Be sure to indicate what orange means in your map legend. (5 pts) 3-Of the original 15 EU Nations, which three have not adopted the Euro Zone. Put a star on these countries. Be sure to indicate what a star means in your map legend. (3 pts) 4-Based now on your map what four European Countries are not in the EU? Color (green) and label these countries. Be sure to indicate what green means in your map legend (4 pts) 5-Based now on your map which five countries possibly could be future candidates to join the EU? Put a circle on these countries. Be sure to indicate what a circle means in your map legend. (5 pts) 6-At the present time, viewing your map, what are two EU members that require seaports to facilitate trade? (2 pts)
1- Belgium, France, Germany, Italy, Luxembourg, Netherlands, (original ) United Kingdom, Ireland, Denmark, (1973) Greece, (1981) Spain, Portugal, (1986) Austria, Finland, & Sweden. (1995)
2- The European Union is composed of 27 sovereign Member States: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
3- United Kingdom, Denmark, Sweden
4- Four Western European countries that are not EU members have partly committed to the EU's economy and regulations: Iceland (a candidate country for EU membership), Liechtenstein and Norway, which are a part of the single market through the European Economic Area, and Switzerland, which has similar ties through bilateral treaties.
5- There are five official candidate countries, Croatia, Iceland, Macedonia, Montenegro and Turkey. Albania, Bosnia and Herzegovina and Serbia are officially recognized as potential candidates. Kosovo is also listed as a potential candidate but the European Commission does not list it as an independent country because not all member states recognize it as an independent country separate from Serbia.
6- United Kingdom, Ireland, Sweden (although an 2-lane auto bridge connects with Denmark), Finland, and Greece (Although round about land via Austria, Hungary, Romania, and Bulgaria.)

27. References
Economics: Principles and Practices, Clayton, Glencoe McGraw-Hill (1999) with on-line updates
Macroeconomics K Norman, CD licensed to K White for classroom educational use only. Slide frames used by permission.
Close: List key benefits of importing and exporting goods and services.