NAFTA went into effect in 1994 and will be fully implemented in 2008. Much of the agreement was patterned after the Canada-U.S. Free Trade Agreement which began to be implemented in 1989 and was superseded by NAFTA in 1994.

NAFTA is the most important free trade agreement entered into by each of three major North American nations, Canada, the United States, and Mexico. Three-way merchandise trade (excluding services) among the member states easily surpassed 800 billion dollars in 2005, with almost all of the trading activity being between Canada and the United States, and Mexico and the United States. Trade between Canada and Mexico has grown rapidly in percentage terms, but remains relatively low in dollar terms.

Another component of NAFTA has been the accelerated foreign direct investment (FDI) flows within North America, with U.S. FDI in Canada, measured in historical cost terms, totaling 235 billion dollars in 2005, Canadian FDI in the United States 144 billion dollars, U.S. FDI in Mexico 71 billion dollars, and Mexican FDI in the U.S. 9 billion dollars. FDI occurs when an investor in one country takes control of the management of a company in another country through a merger or acquisition, or establishes from scratch its own subsidiary in another country (known as a “greenfield” investment). Although the service is deteriorating, useful statistics on economic ties with Canada and Mexico are found on the U.S. Department of Commerce website, under the International Trade Administration subdivision, and the Bureau of Economic Analysis subdivision. Statistics Canada also offers useful data, and Mexican sources in Spanish and some in English can be found using links from the Government of Mexico or Mexican Embassy websites.

The immigration issue is especially important in U.S.-Mexican relations. New studies estimate that 14 percent of Mexico’s labor force is now working in the United States. The largest group of immigrants to the United States, documented and undocumented, also comes from Mexico. This should be a big issue in Washington over the next few years. Before leaving office, President Vicente Fox visited California, Washington state, and Utah in an effort to drum up support among state leaders for immigration reform which would allow Mexicans living in the United States to obtain permanent residency, and to encourage the development of a large temporary worker program permitting Mexicans to enter the United States and work for stipulated periods of time.

Energy interdependence is another dimension of North American integration. President Bush has pushed for the creation of a North American Energy Market which would help diminish the American dependency on Middle East oil. Already, Canada has emerged as the largest foreign supplier of energy to the United States, and the expansion and modernization of Mexico’s energy infrastructure could pay big dividends for U.S. consumers in the future. Canadians and Mexicans have to make hard choices whether to preserve their own non-renewable oil and natural gas resources for future generations of their own people, or to sell many of these resources to the United States at historically high prices. All three nations could benefit from upgrading and expanding their electrical grid networks which in certain segments now cross the Canada-U.S. and Mexico-U.S. borders.

Finally, now that NAFTA is almost fully implemented, what happens next? Some suggest a NAFTA Plus arrangement which would be modest in scope, or some want to be more ambitious and aim at a customs union and other integrative efforts similar to what is occurring in Europe. Even others want a moratorium on future economic integration efforts. Those on the left side of the political spectrum in Canada and Mexico have never been strong supporters of NAFTA but are unlikely to abrogate the agreement if they ever come to power. In the United States, various groups argue that NAFTA’s unique dispute-settlement mechanism erodes U.S. judicial powers and should be annulled. This is also unlikely to occur.