Introduction to Manufacturing Under the North American Free Trade Agreement

Team Leader: Brandon Robinson

Article Analysts: Dante Fanian, Ruaridh McCartney, Patrick Pinho, Matthew Schweers, Lucas Tersigni, Mohammed Rajpar


The United States:

            With a population of 326 million people, the United States of America (US)       ranks as the world’s third largest country based on population. The United States has three independent branches of government including the executive which is headed by the president who acts as both the head of state and political executive. The legislative branch is a bicameral body divided into the House of Representatives and the Senate.  The judiciary is the third branch which is overseen by US Supreme Court.

            In terms of economic strength, the US is one of the world’s leading economies with a nominal Gross Domestic Product (GDP) of $18.57 trillion USD and a per capita GDP of $57,400 USD. Manufacturing industries represent $2.1 trillion USD of America’s GDP, representing 12.5% of their total GDP. More than one-fifth of the labour market in the US is dependent upon manufacturing. 12 million jobs are directly related to manufacturing firms and an additional 17.1 million jobs are indirectly related.

            The current President of the United States, Donald Trump, has been a vocal opponent to the North American Free Trade Agreement (NAFTA). President Trump’s promises to re-negotiate NAFTA and put American workers first won him a large proportion of the blue-collar vote in the last presidential election. Since the inception of the free trade deal, many industrial workers have blamed NAFTA for the loss of jobs and cuts in wages that the sector has recently faced. Many manufacturing companies have been outsourcing their manufacturing jobs to Mexico because the costs of labour there are significantly less than in the US and Canada leading for higher returns by companies.

            Economists Shushanik Hakobyan and John McLaren studied the effects of NAFTA, in relation to the manufacturing sector in the United States in their journal “Looking for Local Labor Market Effects of NAFTA.” They found evidence that the NAFTA trade deal heavily impacted wage cuts for blue-collar workers in manufacturing jobs. Employees who worked for industries that relied on tariff protection before the passing of NAFTA were seen to have been affected the most. They had a wage drop of almost 17% in comparison to other industries that were not affected by the trade deal.  This created a ripple effect that negatively impacted not only the workers but the factory towns that relied heavily on industrial workers as customers. While benefiting some sectors in the US, NAFTA has hurt the manufacturing industry in America by allowing a loss of jobs and wage cuts brought on by the option to outsource to Mexico.



            Canada is one of the most ethnically and culturally diverse countries in the world with a population of over 35 million people. The Canadian government is a constitutional monarchy which consists of a head of state, Queen Elizabeth II, who is represented in Canada by the Governor-General, and a head of government, who is an elected Member of Parliament, in maximum five-year terms. The current head of government in Canada is Prime Minister Justin Trudeau. The legislature in Canada is a bicameral system which consists of the Senate, whose members are appointed by the Governor General, and the House of Commons whose members are elected for five-year terms.

            Canada has the 10th largest world economy with a nominal GDP of $1.68 trillion USD and a per capita GDP of $46,400 UDS. Manufacturing firms in Canada generate $180.4 million CAD and represent 10% of the overall Canadian labour force with 1.85 million jobs directly related to manufacturing.  

            Canada’s manufacturing sector has not been powering economic growth lately – manufacturing growth has stagnated and many positions have been shifted as investment has recently been heading towards Mexico, where the lower cost of human capital favours labour-intensive processes. Mexican plants have received five times the amount of investment since 2007 when automotive plant payrolls diverged rapidly between Canada and Mexico.

            One of Canada’s largest manufacturing sectors, automotive, stands to potentially be hit the hardest if US President Donald Trump’s anti-Mexico trade rhetoric succeeds in NAFTA negotiations. The greatest risk facing Canada is a decline in exports to the USA and Mexico, as the most tightly integrated supply chain in NAFTA could be disrupted, and a renegotiation could result in as many as two million manufacturing jobs being lost. About 85% of Canadian-made automobiles are exported to North America, and Canada is the top buyer of American exports while being the top trading partner of numerous states. US Protectionism is clearly the greatest threat facing Canada, as the already stagnating manufacturing sector must compete for foreign investment that is increasingly residing in Mexico and the US while maintaining strong relations in a period of potential US protectionism.



            Mexico is the 11th largest country based on population in the world with an estimated 124 million. Currently governed by President Enrique Peña Nieto, the government, although democratic, maintain high levels of corruption, reported by both Transparency International and the WEF. The legislative branch is a bicameral chamber made of the Camara de Senadores and the Chamber of Deputies.

            As of 2016, Mexico is the thirteenth largest economy in the world, with a GDP of $1.05 trillion USD and a per capita GDP of $17,900 USD. Machines and transportation dominate Mexico’s exports, accounting for 62% of its US $373B of exports. The US is the destination of 81% of all Mexican exports and serves as the origin for 47% of all imports. Mexico’s economy is driven by manufacturing, through the imports of primary goods and the exports of secondary goods. However, exports have decreased 1.8% per year since 2011, and imports have decreased 2.2% (annualized).

            Under current NAFTA legislation, member nations are able to sell goods to each other tariff free, preventing businesses from incurring extra costs. If NAFTA is amended in the near future it could affect several of Mexico’s largest industries such as the auto manufacturing, sugar and energy industries. These industries rely heavily on free trade with the United States, who purchase over 80 percent of all Mexican exports. Mexico is making an effort to diversify its trade; aiming to boost trade with China amidst NAFTA speculation. The above-noted slowdown in exports seems to be temporary, as the OECD reports that Mexico’s economy is picking up, with inflation rising as well. It also reports the increase in consumer expenditure as its economy matures, citing it as the main driver of economic growth over the past two years.

            Mexico is a trading nation and benefits from a stable domestic currency and strong trade relations. Its economy is growing and maturing and has maintained relative stability in terms of fiscal balances compared to other Latin American countries. Currently, the strong US dollar is benefiting Mexico as its exports are comparatively cheaper.

            Current goals for government officials are to maintain or increase the flexibility of national content rules along with maintaining or strengthening the current Dispute Settlement Mechanisms.  Achieving these goals and along with preventing protectionism and tariff hikes will prevent a trade shock from occurring.

            One of the primary reasons the NAFTA negotiations appear to be hurried is because Mexican politicians are about to enter an election year. This has created pressure on President Trump who must speed the process along or face two possible consequences.  First, if the NAFTA negotiations are not finalized soon and President Niento is not faring well in the polls come the election, it will be hard to get any deal finalized. Second, a strong contender to replace President Niento is long-time politician Andres Manuel Lopez Obrador, who is a harsh critic of President Trump and has even filed a lawsuit against Trump in the Inter-American Commission on Human Rights about Trump's treatment of migrants, and his plans for a border wall.  If either of these events occurs Trump may have to break his promise to American voters on revisiting NAFTA negotiations which may then hurt the Republicans during the 2018 midterm elections.