Nafta

13 Pages 3308 Words

NAFTA: Are We Better Off Because of It?
By Nick Campolo, May 1998
The North American Free Trade Agreement was approved by the U.S. Congress, the U.S. Senate, and the Mexican Senate in November 1993. The Canadian government's approval followed shortly after in December 1993. This agreement called for a complete removal of trade barriers within 15 years. Many trade barriers have already been removed.
There has been much debate among different interest groups and individuals as to what the overall effect of this agreement would be. Although the agreement includes the countries of the U.S., Canada, and Mexico, the major debate in the U.S. focuses on the issue of Trade with Mexico. For this reason, this paper focuses on that part of the agreement.
First, it makes sense to discuss why the prediction was that we would all be better off with this trade pact than we were without it. Ricardo's Theory of Comparative Advantage predicts we would be better off with free trade as participants specialize in their areas of greater factor productivity's. The Heckscher Ohlin (HO) Theory agrees with this, and elaborates on it. The HO theory argued countries with different factor endowments could benefit from free trade. The theory shows that if one nation is capital abundant and another is labor abundant, each nation will specialize in producing goods that uses its most abundant resource. The U.S. is capital abundant, and Mexico is labor abundant. While greater output is predicted with free trade, it is also predicted that in the U.S., owners of capital will benefit while laborers will loose. However, the gains are large enough that if the winners would compensate the loosers, all would still be better off. So, while gains from trade are predicted, there is still a valid argument for trade adjustment assistance in the U.S. In Mexico, it is predicted that laborers will gain at the expense of capitalists. The HO Theory model makes several assumptions, ...