North American Free Trade Agreement

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Countries do not produce everything their people need or want. Climate, natural resources, technology, available workers, and manufacturing costs differ from place to place.

As a result, countries trade.

An import is a good or service brought into a country from somewhere else.

An export is a good or service sold to another country.

Imagine that a company in Mexico grows avocados and sells them to stores in the United States. The avocados are:

• exports from Mexico

• imports to the United States

Trade works in both directions. The United States might export farm equipment to Mexico while importing produce from Mexico.

What Is a Tariff?

Countries sometimes place taxes called tariffs on imported goods. A customs duty is another name for a tariff charged when goods cross an international border.

Suppose a business imports a bicycle that costs $200. If the government places a 10 percent tariff on that bicycle, the importer must pay an additional $20.

That cost may be handled in several ways:

• The business may raise the bicycle’s price.

• The business may accept a smaller profit.

• The business may buy bicycles from another country.

• The business may switch to a bicycle made within its own country.

Governments use tariffs for several reasons. A tariff may raise government revenue, protect certain industries from foreign competition, or encourage businesses to produce goods domestically.

However, tariffs can also raise prices and make international trade more difficult. That is why tariffs are sometimes described as trade barriers.

What Is a Free Trade Agreement?

A free trade agreement is an arrangement in which countries agree to reduce or remove certain barriers to trade.

The word free does not mean that every product crosses every border without rules or costs. Countries may still:

• inspect goods

• enforce safety standards

• limit certain products

• require paperwork

• apply tariffs to goods that do not meet the agreement’s requirements

Trade agreements establish rules that participating countries agree to follow. They may address subjects such as agriculture, manufacturing, worker protections, environmental standards, digital trade, and how disagreements will be settled.

The Creation of NAFTA

During the 1980s and early 1990s, the United States, Canada, and Mexico negotiated an agreement intended to increase trade across North America.

The North American Free Trade Agreement, commonly called NAFTA, took effect on January 1, 1994. It gradually removed many tariffs on qualifying goods traded among the three countries.

For a product to receive NAFTA’s benefits, it generally had to meet rules showing that it originated in North America. A company could not simply ship a product from another part of the world through Canada or Mexico and automatically avoid a tariff.

NAFTA encouraged businesses to treat North America as a connected market. Materials, parts, and completed products could cross borders at different stages of production.

For example, an automobile part might be manufactured in one country, added to a vehicle in another, and sold in the third.

Support for NAFTA

Supporters argued that NAFTA:

• increased trade among the three countries

• gave businesses access to more customers

• reduced the cost of some imported goods

• encouraged investment and economic cooperation

• created jobs connected to exporting, transportation, and international business

• allowed companies to build supply chains across North America

Consumers also gained access to a wider selection of products, including food, vehicles, machinery, and household goods.

Concerns About NAFTA

Critics argued that the agreement’s benefits were not shared equally.

Some businesses moved production to places where wages and operating costs were lower. When factories relocated or faced stronger competition, some communities lost manufacturing jobs.

Critics also raised concerns about:

• lower wages in certain industries

• working conditions

• environmental harm

• competition faced by small farms and businesses

• dependence on long international supply chains

• the power of large corporations

This means the effects of NAFTA depended partly on a person’s job, industry, community, and country. An agreement that helped one business reach new customers could make it harder for another business to compete.

Trade agreements are complicated. They rarely produce only winners or only losers. Economics apparently did not receive the memo about keeping things simple.

What Replaced NAFTA?

After years of debate, the three countries negotiated a new agreement.

The United States–Mexico–Canada Agreement, or USMCA, replaced NAFTA on July 1, 2020. The newer agreement preserved much of the trade relationship established by NAFTA while updating rules governing areas such as automobile manufacturing, agriculture, labor protections, intellectual property, and digital commerce.

The USMCA requires the three countries to review the agreement periodically. During its July 2026 review, the United States did not agree to renew the agreement in its current form.

However, the USMCA remains in force while the countries continue discussing possible changes.

From NAFTA to Today

NAFTA is no longer the current North American trade agreement, but it remains historically significant. It changed how the United States, Canada, and Mexico traded and helped create the closely connected North American economy that exists today.

As you evaluate a trade agreement, consider several perspectives:

• Do consumers have more choices or lower prices?

• Do businesses gain new customers?

• Are workers and communities affected differently?

• Are labor and environmental rules strong enough?

• Does the agreement make supply chains stronger or more dependent?

• Are the benefits and costs shared fairly?

There may not be one answer that satisfies everyone. Your job is to examine the evidence, recognize different perspectives, and develop a conclusion you can support.

Continue to the Got It? section to review NAFTA’s history and weigh some of the possible benefits and drawbacks of free trade.