Topic 02
NAFTA and CAFTA-DR: what trade agreements changed in the United States
For years, NAFTA was one of the main subjects in the argument over free trade in the United States. The debate was about tariffs, company costs and the position of workers, and how the agreement should be judged is still contested. What were these agreements, and what is their history? This article sets out the basic facts about NAFTA, CAFTA-DR and the USMCA, which replaced NAFTA.
What was NAFTA?
NAFTA entered into force on 1 January 1994 and joined three countries: the United States, Canada and Mexico. It was a free trade agreement whose aim was to lower tariffs on trade between them.
The agreement did not last forever. On 1 July 2020 NAFTA was replaced by the USMCA, so it applied for more than 26 years. This matters in practice, because data from after that date refer to a different agreement than data from earlier years. The detailed differences between the two lie beyond this article, so we do not discuss them here.
CAFTA-DR: the agreement with Central America and the Dominican Republic
CAFTA-DR is a free trade agreement between the United States, the Dominican Republic and five Central American countries: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. It has a different scope from NAFTA, because it covers seven countries instead of three. NAFTA concerned one part of North America, while CAFTA-DR links the United States with Central America and the Dominican Republic.
The timeline matters as well. CAFTA-DR did not enter into force on a single day but in stages, country by country. El Salvador implemented it on 1 March 2006, Honduras and Nicaragua on 1 April 2006, Guatemala on 1 July 2006, the Dominican Republic on 1 March 2007 and Costa Rica on 1 January 2009. Most countries followed their own schedule, with only Honduras and Nicaragua starting together, so the effects in individual countries are hard to compare over the same period.
For the reader this leads to a simple rule. When someone compiles data from different countries, they should check when the agreement took effect in each one. The same year can fall within the agreement's initial phase in El Salvador but before its entry into force in Costa Rica.
Free trade and jobs: why do economists disagree?
There is disagreement over how to assess the effect of trade agreements on the labor market. On one hand, agreements lower tariffs and change what it costs firms to operate. On the other, employment is also shaped by technology, exchange rates and competition from other countries.
For that reason it is hard to pin changes in the labor market on a single agreement. Economists analyze these links with different methods and do not always reach the same conclusions. Any figure about the effects of NAFTA is therefore best read with attention to the method used to calculate it and whether the author accounted for technology, exchange rates and competition from other countries. That test does not settle who is right, but it helps to separate a conclusion backed by data from a simplification that attributes every labor market change to one agreement.
Summary
NAFTA applied from 1 January 1994 until 1 July 2020, when the USMCA replaced it. CAFTA-DR covered the Dominican Republic and five Central American countries, and its entry into force was spread over the years 2006 to 2009. To judge the effect of NAFTA and CAFTA-DR for yourself, look also at the employment data in our article on the BLS figures.