The North Atlantic Free Trade Agreement (NAFTA) and the European Union (EU) are major world trading powers. The first difference between the EU and NAFTA is a different degree of economic integration. There are five levels of regional trade agreements. NAFTA has the first level of economic integration, free trade agreement. The EU has the highest level of economic integration, economic union.
In addition, the EU is also a political union. Since it is a free trade area, the only feature of NAFTA is free trade among members (Lester, Mercurio, & Bartels, 2016). By contrast, since the EU is an economic and political union, it has the following four other features in addition to free trade among members: common external commercial policy, free factor mobility within the market, harmonized economic policies, and super-national organizational structure (Lester et al., 2016).
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The EU operates as a single market. Under its single market operations, the EU has a single currency, the euro. The advantage of adopting the euro is the elimination of transaction costs. This stimulates trade among member states of the EU and strengthens the single market. Another advantage of having a single currency for members is the elimination of exchange rate fluctuations of national currencies (“European Commission,” 2018). Moreover, the exchange rate fluctuations of euro are more predictable than fluctuations of certain national currencies.
However, not all EU members are in Eurozone, which suggests that there are some disadvantages of a single currency. For example, members of the Eurozone are overly depended on one another. Another disadvantage of a single currency is an increased risk of higher unemployment during an economic contraction because wages remain high and the national government cannot devaluate the currency of the whole union.
When it comes to data related to trade between the U.S. and other members of NAFTA, Canada and Mexico each account for nearly 15% of U.S. total trade in 2018 (“Top Trading Partners,” 2018). Canada accounts for 18.2% of the U.S. exports in 2018, while Mexico accounts for 15.9%. Also, Mexico and Canada account for 13.7% and 12.8% percent of U.S. imports in 2018. For the years 2014-2017, Mexico and Canada were always in the top three of the U.S. trade partners.
The advantages of being a member of NAFTA are increased trade with neighboring counties, the creation of jobs, lowered prices due to lifted tariffs, increased exports in food, finance, and health care services, as well as more cost-effective government spending since all members can apply for government contracts of other members. The drawbacks of being a member of NAFTA are the indirect encouragement of immigration, lost jobs in some manufacturing sectors. As a result, the benefits of being a member of NAFTA significantly overweight the drawbacks.
- European Commission. (2018). The benefits of the euro. https://ec.europa.eu/info/about-european-commission/euro/benefits-euro_en
- Lester, S., Mercurio, B., & Bartels, L. (Eds.). (2016). Bilateral and regional trade agreements: Commentary and analysis (Vol. 1). Cambridge University Press.
- Top Trading Partners – September 2018. (2018). U.S. Census Bureau. Retrieved from https://www.census.gov/foreign-trade/statistics/highlights/top/top1809yr.html
