Trade in Colonial America / NAFTA
Often teachers and students are able to internalize historical and economic concepts through a more recent event that has occurred within their time frame. This lesson is an extension for the lesson, "Understanding the Colonial Economy." It examines the role and effect of NAFTA in the Mexican and US economies.
Concepts from history and economics often seem remote and abstract. Most students find it easier to grasp such concepts if they can relate them to events that have occurred recently. This lesson revisits Understanding the Colonial Economy, from Eyes on the Economy. It examines ideas from that lesson in light of NAFTA, the North American Free Trade Agreement. It seeks to clarify the role and effect of NAFTA in the Mexican and U.S. economies.
- Explain the role and effect of NAFTA in the United States and Mexican Economies.
- Explain the purpose of tariffs, quotas and subsidies.
Understanding the Colonial Economy: The students examine data on visuals to gain an overview of the colonial economy. They read and discuss a handout to gain a more complete picture. The lesson concludes with several applications.
Understanding the Colonial Economy
Screen 1: This page provides a quote from Adam Smith.
Screen 3: This page reviews some of NAFTA's implications for the U.S. and Mexico.
NAFTA: Issues and developments related to the NAFTA treaty, as well as contacts and on-line access to a copy of the accord.
Review main ideas from "Understanding the Colonial Economy": Colonists produced goods they were best able to produce, given their resources, and goods they could export at a competitive price. They traded these goods and earned more income. Additional income enabled the colonists to expand their output. Through trade, the colonists and their trading partners gained more products and were better off than they would have been without trade.
Display Screen 1 and read the quote from Adam Smith to your students:
In 1776 Adam Smith said:
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes but employs a Tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
-Adam Smith, Wealth of Nations (New York: Modern Library, Inc. 1937), p.424.
Pose the question: 'How does Adam Smith's philosophy relate to what you have learned in the lesson, "Understanding the Colonial Economy"? [The Tailor (spelling reflects Adam Smith's time) has special skills that enables him/her to produce clothes whereas the shoe maker has special skills in the production of shoes. Through trade both the shoemaker and Tailor gain (more clothes for shoemaker and more shoes for the Tailor). Like the Tailor and the shoemaker, the colonists and the Europeans each produced what each could produce best (given their individual resources) and what the other party wanted. By trading, both parties, the Europeans and the colonists, were better off.]
Ask students if they think this theory still hold true today, and why or why not.[Answers will vary.]
Review with students the following definitions:
- Tariff: A tax levied on goods imported into a country. For example, a 10 percent tariff levied on an imported car priced at $20,000 would increase the price to $22,000.
- Quota: A specifies maximum amounts of goods that can be imported in a specific period of time.
- Subsidy: A payment made to a producer. For example, the Wool Act, in 1990 provided for a subsidy rate of 127 percent. The farmer who got $1,000 for selling wool in the market would receive an additional payment from the government of $1,270.
Tell the students about NAFTA, the North American Free Trade Agreement. NAFTA was originally a treaty; it was ratified by the U.S. Congress in 1993. The purpose of NAFTA is to remove some tariffs and quotas in order to improve trade among the three NAFTA partners — the United States, Canada and Mexico. Display Screen 3 reviewing the key points.
What Is NAFTA?
NAFTA is a comprehensive rules-based agreement between the United States, Canada, and Mexico. It took effect January 1, 1994, after having been ratified by the U.S. Congress in November 1993. NAFTA eliminated many tariffs immediately; other tariffs will fall to zero over a 5- to 15-year period. NAFTA goes well beyond tariff reduction.
- It opened previously protected sectors in agriculture, energy, textiles, and automotive trade.
- It opened up the U.S.-Mexico border to trade in services with specific rules in finance, transportation and telecommunications.
- It set rules on government procurement and intellectual property rights.
- It set specific safeguards, including how to deal with subsidies and unfair practices; it set up procedures for dealing with private commercial or agricultural disputes; and it set up a process for dealing with NAFTA implementation concerns.
Remind the students that Adam Smith pointed out in 1776 that if countries specialize and trade all parties benefit.
Ask: How do you think NAFTA has affected trade between the United States and Mexico? What effect do you think NAFTA has had on the economic welfare of both nations? Explain.
[Once barriers interfering with trade were lifted, the United States could export more goods and services to Mexico, and the United States could import more goods and services from Mexico. The citizens of both countries would benefit through increased trade.]
Have the students look at this website on NAFTA and answer the questions.
- GDP between 1991 and 1998 for the United States and Mexico
- Amount of Mexican exports to the U.S. in dollars
- Amount of U.S. exports to Mexico in dollars
- Exports from one US state to Mexico in dollars between 1993-1998 (the state will be assigned by the teacher)
Also, have students locate data on the impact of NAFTA on individual states. Assign each student a different state for which he or she should locate the changes in U.S. export totals to Mexico in U.S. dollars between 1993 and 1998. For example:
Exports to Mexico
The students will see that some states such as North Dakota have experienced significant growth in exports since 1993, whereas others such as Michigan have basically seen little change in their exports.
Tell the students that once they have gathered this data, they will work alone or in groups to answer the following discussion questions.
Answer the questions below:
- What is the annual trade surplus for Mexico in trading with the US since 1995? [Mexico's trade surplus has been in the $15 to $18 billion range.]
- What are the implications for Mexico? [Mexico's positive trade balance has had a positive impact on the Mexican economy – generating more jobs and increasing GDP.]
- Given the two way trade between the US and Mexico, what has been the percentage growth in trade between the two countries since the implementation of NAFTA?[Trade has increased by approximately 110 percent.]
- How would this increase in trade affect job creation in Mexico?[This increase in trade has led to more jobs.]
- In time, how might an increase in jobs affect wages and worker skills?[Wages will increase as will new jobs more technical skills required and better educated labor force .]
- How would the reestablishment of trade barriers between Mexico and the United States affect the following: Mexico's economy, the U.S. economy, the U.S. consumer? [The impact would be much greater on the Mexican economy since a much larger percentage of the Mexican GDP is accounted for by correlated to the exports to the United States. U.S. citizens would probably pay higher prices for some products if Mexican imports were reduced, since there would be a reduction in competition.]
Ask the students to make a generalization about the impact of NAFTA on the United States and Mexico.
[Students should be able to generalize that NAFTA has positive implications for Mexico and the United States.]
United States: Since the United States is a developed economy the impact on the US would be less. However, some regions within the United States may be affected to a greater degree. The data suggest that these states would most likely be in the Southwest United States and in industrial states in the Midwest. As in the colonies (less developed) and Europe (more developed), both countries will gain. Although both countries gain, there will be some businesses that may be hurt by increased competition in both countries.
Mexico: Because the Mexican economy is smaller and less developed, the impact on Mexico would be greater. Some Mexican industries will expand while others may have to change or close down. Through trade, more products will be available and consumers and some producers will benefit in both countries.]
Display Screen 1. Reread Adam Smith’s quote. Ask:
Does Adam Smith’s philosophy on free trade hold true today for NAFTA? Explain.
[Adam Smith’s philosophy regarding benefits of trade rings true today. Companies in Mexico and the United States specialize with each producing the goods it can produce best, given its individual resources. These goods can be traded to earn income. In turn, people in each country can purchase products they want and don’t produce. Through trade both groups are better off. Restrictions on trade generally come at the expense of the consumers who pay higher prices because of the reduction in competition.]
Ask the students how NAFTA might affect them and their future.
[The Mexican economy should continue to grow, with trade expanding between the United States and Mexico. This trade extension could create increased opportunities for young people entering the labor force.]
Collect Activity 2 results for assessment.