The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada-United States Free Trade Agreement between the U.S. and Canada. In terms of combined purchasing power parity GDP of its members, as of 2007^[update] the trade bloc is the largest in the world and second largest by nominal GDP comparison.

The North American Free Trade Agreement (NAFTA) has two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).

In 1988 Canada and the United States signed the Canada-United States Free Trade Agreement after which the U.S. Congress approved implementing legislation. The American government then entered into negotiations with the Mexican government for a similar treaty, and Canada asked to join the negotiations in order to preserve its perceived gains under the 1988 deal. The climate at the time favored expanding trade blocs, such as the Maastricht Treaty, which created the European Union in 1992.

Following diplomatic negotiations dating back to 1986 among the three nations, the leaders met in San Antonio, Texas, on December 17, 1992, to sign NAFTA. U.S. President George H. W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas, each responsible for spearheading and promoting the agreement, ceremonially signed it. The agreement then needed to be ratified by each nation's legislative or parliamentary branch.

Before the negotiations were finalized, Bill Clinton came into office in the U.S. and Kim Campbell in Canada, and before the agreement became law, Jean Chrétien had taken office in Canada.

The proposed Canada-U.S.trade agreement had been extremely controversial and divisive in Canada, and the 1988 Canadian election was fought almost exclusively on that issue. In that election more Canadians voted for anti-free trade parties (the Liberals and the New Democrats) but more seats in parliament were won by the pro-free trade Progressive Conservatives (PCs). Mulroney and the PCs had a parliamentary majority and were able to easily pass the Canada-U.S. FTA and NAFTA bills. However Mulroney himself had become deeply unpopular and resigned on June 25, 1993. He was replaced as Conservative leader and prime minister by Kim Campbell, who then led the PC party into the 1993 election where they were decimated by the Liberal party under Jean Chrétien. Chrétien had campaigned on a promise to renegotiate or abrogate NAFTA but instead negotiated the two supplemental agreements with the new U.S. president. In the U.S., Bush, who had worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing into law to incoming president Bill Clinton.

Prior to sending it to the United States Senate, Clinton introduced clauses to protect American workers and allay the concerns of many House members. It also required U.S. partners to adhere to environmental practices and regulations similar to its own. The ability to enforce these clauses, especially with Mexico, and with much consideration and emotional discussion the House of Representatives approved NAFTA on November 17, 1993, by a vote of 234 to 200. The agreement's supporters included 132 Republicans and 102 Democrats. NAFTA passed the Senate 61-38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; it went into effect on January 1, 1994.

The goal of NAFTA was to eliminate barriers of trade and investment between the US, Canada and Mexico. The implementation of NAFTA on January 1, 1994, brought the immediate elimination of tariffs on more than one half of U.S. imports from Mexico and more than one third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all US-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out in 15 years. Most US-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers.

Chapter 20 provides a procedure for the interstate resolution of disputes over the application and interpretation of the NAFTA. It was modeled after Chapter 18 of the Canada-United States Free Trade Agreement.

NAFTA's effects, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, and NAFTA Revisited by the Institute for International Economics. Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S. workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U.S. and Mexico. Some economists believe that NAFTA has not been enough (or worked fast enough) to produce an economic convergence, nor to substantially reduce poverty rates. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture.

According to Issac (2005), overall, NAFTA has not caused trade diversion, aside from a few industries such as textiles and apparel, in which rules of origin negotiated in the agreement were specifically designed to make U.S. firms prefer Mexican manufacturers. The World Bank also showed that the combined percentage growth of NAFTA imports was accompanied by an almost similar increase of non-NAFTA exports.

Maquiladoras (Mexican factories that take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla; all three larger in population than Tijuana, Ciudad Juárez, and Reynosa.

Securing U.S. congressional approval for NAFTA would have been impossible without addressing public concerns about NAFTA’s environmental impact. The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the CEC was given a mandate to conduct ongoing ex post environmental assessment of NAFTA.

In response to this mandate, the CEC created a framework for conducting environmental analysis of NAFTA, one of the first ex post frameworks for the environmental assessment of trade liberalization. The framework was designed to produce a focused and systematic body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a “race to the bottom” in environmental regulation among the three countries, or the hope that NAFTA would pressure governments to increase their environmental protection mechanisms. The CEC has held four symposia using this framework to evaluate the environmental impacts of NAFTA and has commissioned 47 papers on this subject. In keeping with the CEC’s overall strategy of transparency and public involvement, the CEC commissioned these papers from leading independent experts.

Overall, none of the initial hypotheses was confirmed. NAFTA did not inherently present a systemic threat to the North American environment, as was originally feared, apart from potentially the Investor state dispute settlement provisions of Ch 11. NAFTA-related environmental threats instead occurred in specific areas where government environmental policy, infrastructure, or mechanisms, were unprepared for the increasing scale of production under trade liberalization. In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA's measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers, threatened to discourage more vigorous environmental policy. The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada.

From the earliest negotiation, agriculture was (and still remains) a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The Canada–U.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico–U.S. pact allows for a wider liberalization within a framework of phase-out periods (it was the first North–South FTA on agriculture to be signed).

The overall effect of the Mexico–U.S. agricultural agreement is a matter of dispute. Mexico did not invest in the infrastructure necessary for competition, such as efficient railroads and highways, creating more difficult living conditions for the country's poor. Still, the causes of rural poverty cannot be directly attributed to NAFTA; in fact, Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.

One of the most affected agricultural sectors is the meat industry. Mexico has gone from a small-key player in the pre-1994 U.S. export market to the 2nd largest importer of U.S. agricultural products in 2004, and NAFTA may be credited as a major catalyst for this change. The allowance of free trade removed the hurdles that impeded business between the two countries. As a result, Mexico has provided a growing meat market for the U.S., leading to an increase in sales and profits for the U.S. meat industry. This coincides with a noticeable increase in Mexican per capita GDP that has created large changes in meat consumption patterns, implying that Mexicans can now afford to buy more meat and thus per capita meat consumption has grown.

Production of corn in Mexico has increased since NAFTA's implementation. However, internal corn demand has increased beyond Mexico's sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of subsidies expanded by former president Vicente Fox, production has remained stable since 2000.

The logical result of a lower commodity price is that more use of it is made downstream. Unfortunately, many of the same rural people who would have been likely to produce higher-margin value-added products in Mexico have instead emigrated. The rise in corn prices due to increased ethanol demand may improve the situation of corn farmers in Mexico.

In a study published in the August 2008 issue of the American Journal of Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification. The study focused on the effects that gradual "phase-in" periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increase in members’ agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.

According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status. Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier).

Canadian authorities estimated that, as of December 1, 2006, a total of 24,830 U.S. citizens and 15,219 Mexican citizens were present in Canada as "foreign workers". These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law. New entries of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans).

There is much concern in Canada over the provision that if something is sold even once as a commodity, the government cannot stop its sale in the future. This applies to the water from Canada's lakes and rivers, fueling fears over the possible destruction of Canadian ecosystems and water supply.

In 1999, Sun Belt Water Inc., a company out of Santa Barbara, California, filed an Arbitration Claim under Chapter 11 of the NAFTA claiming $105 million as a result of Canada's prohibition on the export of bulk water by marine tanker, a move that destroyed the Sun Belt business venture. The claim sent shock waves through Canadian governments that scrambled to update water legislation and remains unresolved.

Other fears come from the effects NAFTA has had on Canadian lawmaking. In 1996, the gasoline additive MMT was brought into Canada by an American company. At the time, the Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million, and by Canadian provinces under the Agreement on Internal Trade ("AIT"). The American company argued that their additive had not been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT, the Canadian federal government repealed the ban and settled with the American company for US$13 million. Studies by Health and Welfare Canada (now Health Canada) on the health effects of MMT in fuel found no significant health effects associated with exposure to these exhaust emissions. Other Canadian researchers and the U.S. Environmental Protection Agency disagree with Health Canada, and cite studies that include possible nerve damage.

The United States and Canada had been arguing for years over the United States' decision to impose a 27 percent duty on Canadian softwood lumber imports, until new Canadian Prime Minister Stephen Harper compromised with the United States and reached a settlement on July 1, 2006. The settlement has not yet been ratified by either country, in part due to domestic opposition in Canada.

Canada had filed numerous motions to have the duty eliminated and the collected duties returned to Canada. After the United States lost an appeal from a NAFTA panel, it responded by saying "We are, of course, disappointed with the [NAFTA panel's] decision, but it will have no impact on the anti-dumping and countervailing duty orders." (Nick Lifton, spokesman for U.S. Trade Representative Rob Portman) On July 21, 2006, the United States Court of International Trade found that imposition of the duties was contrary to U.S. law.

On October 30, 2007, American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under NAFTA. The couple claims thousands of U.S. investors lost a total of $5 billion dollars in the fall-out from the Conservative Government's decision the previous year to change the tax rate on income trusts in the energy sector. On April 29, 2009, a determination was made that this change in tax law was not expropriation.

A book written by Mel Hurtig published in 2002 called The Vanishing Country charged that since NAFTA's ratification more than 10,000 Canadian companies had been taken over by foreigners, and that 98% of all foreign direct investments in Canada were for foreign takeovers.

An increase in domestic manufacturing output and a proportionally greater domestic investment in manufacturing does not necessarily mean an increase in domestic manufacturing jobs; this increase may simply reflect greater automation and higher productivity. Although the U.S. total civilian employment may have grown by almost 15 million in between 1993 and 2001, manufacturing jobs only increased by 476,000 in the same time period. Furthermore from 1994 to 2007, net manufacturing employment has declined by 3,654,000, and during this period several other free trade agreements have been concluded or expanded.

In 2000, U.S. government subsidies to the corn sector totaled $10.1 billion. These subsidies have led to charges of dumping, which jeopardizes Mexican farms and the country's food self-sufficiency.

Other studies reject NAFTA as the force responsible for depressing the incomes of poor corn farmers, citing the trend's existence more than a decade before NAFTA's existence, an increase in maize production after NAFTA went into effect in 1994, and the lack of a measurable impact on the price of Mexican corn due to subsidized corn coming into Mexico from the United States, though they agree that the abolition of U.S. agricultural subsidies would benefit Mexican farmers. According to Graham Purchase in Anarchism and Environmental Survival, NAFTA could cause "the destruction of the ejidos (peasant cooperative village holdings) by corporate interests, and threatens to completely reverse the gains made by rural peoples in the Mexican Revolution."

Canada gained the most from NAFTA with Canada's GDP rate at 3.6%, growing faster than the United States at 3.3% and Mexico at 2.7%. Canadian employment levels have also shown steady gains in recent years, with overall employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian manufacturing employment held steady. One of NAFTA's biggest economic effects on U.S.-Canada trade has been to boost bilateral agricultural flows. 

In the year 2008 alone, Canada exports to the United States and Mexico was at CAN$381.3 Billion Dollars and imports from NAFTA was at CAN$245.1 Billion Dollars. The Canadian mainstream has been so unanimous in its recognition of NAFTA's advantages despite a few odd detractors that even former NDP Gary Doer of Manitoba openly praises the benefits of NAFTA.