Expanding the North American Free Trade Agreement

This paper looks at the feasibility of enlarging the recent negotiated North American Free Trade Agreement (NAFTA) to cover other Central and Latin American countries, assuming it is finally ratified and implemented. The paper makes three arguments. The first is that the incentives on all sides to participate in an expanded NAFTA are surprisingly small, and almost certainly weaker than in the Mexican case. U.S. trade with all other Latin and Central American countries is smaller than U.S. trade with Mexico. These countries, in turn, have considerably smaller trade shares with the U.S. than Mexico (around 70 percent for Mexico, and at the other extreme a little over 10 percent of exports for Argentina and Uruguay). The second is that if NAFTA itself is any guide, it will become progressively more difficult to expand country coverage as more countries become involved in the arrangement. Modifying existing agreements to accommodate new entrants will become increasingly difficult, if not virtually impossible. Rules of origin will be an especially difficult matter, with each successive entry into an existing network of complicated agreements exponentially compounding difficulties of administration. The third argument is that the sequential entry of each country into NAFTA will tend to dilute the benefits which have been obtained by previous entrants.