Covering the North American Free Trade Agreement (NAFTA)
Covering the North American Free Trade Agreement (NAFTA)
I. The Origins of NAFTA
The underlying rationale not only of NAFTA, but of all free trade agreements is the belief that international trade is a win-win proposition. This belief is based on theories developed by theorists such as Adam Smith and David Ricardo, who dismissed the mercantilist view that a country could only gain at the expense of its rival. In their view, mutual gains for all parties involved would be created if two conditions were met: 1. If each country specialized in producing and selling the goods that it could produce most efficiently relative to another country (= law of comparative advantage) and 2. If there were a free and unregulated flow of goods among and between countries.
Though the belief in the economic and moral rightness of free trade became a national dogma in Britain in 1846, it took a while for the free trade fever to hit the Americas, where the governing class held long and hard to protectionism and where Alexander Hamilton’s Infant Industry Argument raised in 1792 was still very popular. This trend finally climaxed in the infamous Smoot Hawley Act of 1930, which raised U.S. tariff rates by almost 50 % between 1930 and 1932. What followed was the great depression of the 1930´s with astronomic unemployment rates, deteriorating living standards and a total collapse of international trade. As a result, the world economy was reassessed and restructured after it was found that trade barriers had contributed a great deal to causing the problems.
Hence, a new trend towards free trade emerged and, finally, the necessary steps to secure free trade were taken: First, the Bretton Woods conference of 1944 created the International Monetary Fund (IMF) and the World Bank. Then, in 1946, the General Agreement on Tariff and Trade (GATT) was created at the first session of the Preparatory Committee of UN Conference on Trade and Employment. Conventional wisdom attributes much of the prosperity that occurred in the global economy since the 1940´s to the existence of GATT. In particular, GATT is considered to be responsible for the dramatic increase in world trade and the absence of any serious trade friction. In the face of this, today’s numerous free trade agreements, such as NAFTA and ASEAN, have been founded in the spirit of GATT and free trade.
Apart from these general reasons, there...