Capturing the Impacts of North American Free Trade Agreement on South Dakota\u27s Economy

In August 1992, representatives of Canada, Mexico, and the United States concluded their negotiations of the North American Free Trade Agreement (NAFTA). The treaty has been subsequently signed and ratified by all three countries. As of January 1, 1994, NAFTA created the largest free trade area in the world, with more than 360 million people and a combined gross domestic product of roughly $6.5 trillion (in U.S. dollars). A comparison of NAFTA with the European Union (EU) is provided in appendix A. NAFTA essentially lifts trade barriers between Mexico, Canada, and the United States. At the time of signing of the NAFTA, Canada and United States had eliminated tariffs on most of their bilateral trade as a result of free trade agreement between these two countries. In 1992, Mexican tariffs on imports from United States averaged about 10 percent whereas U.S. tariffs on imports from Mexico averaged about 4 percent. NAFTA eliminates tariffs on trade among the three countries over the period of 15 years, and substantially reduces nontariff trade barriers (such as import quotas, sanitary regulations, and licensing requirements) over the same period (Kehoe and Kehoe, 1994b, p.21). NAFTA also addresses the issue of capital mobility. Before NAFTA, the U.S. and Canada had few restrictions on capital flows. Prior to NAFTA, Mexican laws prohibited private ownership, foreign or domestic, in the petroleum industry and parts of the petrochemical industry. Mexican laws also restricted foreign investment in the financial and insurance sectors and had institutionalized communal ownership of much agricultural lands. NAFTA immediately ensures the free flow of capital throughout the region (Kehoe and Kehoe, 1994b, p.21). A summary of the important provisions of NAFTA, by sector, can be found in Appendix B. The main objective of this paper is to identify the economic impacts of NAFTA on the U.S. economy, the South Dakota economy, and the agricultural sector of the South Dakota economy in particular. Following the introduction, a discussion of why nations trade, and the expected impacts of NAFTA are provided in sections II, and III, respectively. We then discuss the economy wide impacts in section IV and impacts on U.S. agriculture in section V. Impacts on South Dakota\u27s economy are presented in section VI. Finally, section VII is devoted to summary and conclusions