ABSTRACT
The North American Free Trade Agreement (NAFTA) reduced or eliminated trade barriers (with exceptions in certain sectors) between Canada, Mexico and the USA. NAFTA also broke new ground by incorporating provisions related to property rights of foreign investors, intellectual property rights and dispute settlement mechanisms. Trade and investment flows between the three member countries have mushroomed since NAFTA was created in 1994, although some studies have estimated that NAFTA’s tariff reductions explain only a small share of these increases. The impact of NAFTA on employment, wages, productivity and inequality in the member countries has been hotly debated since the inception of the agreement. Recent estimates suggest that NAFTA had modest effects in relocating manufacturing jobs between the USA and Mexico and contributed to significantly lower wages for less-skilled workers in the USA in the most affected industries and regions, while net welfare gains have been small at best. Contrary to ex ante expectations, average real wages have not increased in Mexico since 1994 despite increased productivity in export industries. Moreover, NAFTA did not lead to the expected convergence of Mexico with the USA in average productivity, per caput income or manufacturing wages. In 2017 the three countries began a process of renegotiating NAFTA at the behest of US president Donald Trump. The outcome of this process is very uncertain and could possibly lead to a US withdrawal from NAFTA with unpredictable consequences.
