After several years of negotiations and opposition (in the US Congress and Mexico), the United States of America, Canada and Mexico signed the North American Free Trade Agreement, which came into being from January 1, 1994.
NAFTA created a free trade area among the US, Canada (two richest countries) and Mexico (a poor and underdeveloped country). Some of the important features of this agreement include the following:
i. Most forms of trade barriers came down. It was agreed that within 10 years tariff on 99% of the goods would be abolished. As the US and Canada were already relatively open economies, most of the changes took place in Mexico. But Mexico had also started the process even before NAFTA came into being.
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For example, between 1983 and 1992 licensing requirements on imports had declined from 100 to 11%. Similarly, tariffs came down from an average level of 27 to 13.5%. This phase out reduction from the remaining tariffs and investment restrictions varies from sector to sector.
Higher the competition involved more phase out time was given. In the process of removal, however, no country wanted to face sudden disruption of its economy. Like that of goods, services were also to flow freely across the borders.
ii. The agreement specified North American content requirements for goods that are subject to free trade. In order to qualify for free trade or reduced tariff, a specified percentage (normally 50%) of the value of good must be made in North America. It was necessary to deter non- NAFTA countries from taking advantage of low tariffs in any one of the NAFTA countries so as to gain access to all three. Content requirement was a political necessity for the US and Canada.
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iii. Protection of intellectual property rights, while ensuring that enforcement measures in themselves do not become barriers to legitimate trade.
iv. Removal of most restrictions on foreign direct investment, portfolio investment, and real property. An investment by non-NAFTA country firm shall be treated at par with local company. Special treatment would be given Mexican energy and railway industries, American airline and radio communications and Canadian culture industries, for their protection.
v. A system of dispute settlement was established to avoid any unilateral action against an offending party. The parties to dispute will be bound with the judgment.
vi. Two side agreements – one North American Agreement on Labor Cooperation (US and Mexico to enforce their own labor laws relating to child labor, minimum wages, and workplace safety); and two, North American Agreement on Environmental Cooperation (to prevent relocation of US and Canadian firms to Mexico and growth of environmental pollution along the US-Mexico border) were also signed.