3.5 International Economic Communities

North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) created the world’s largest free-trade zone. The agreement was ratified by the U.S. Congress in 1993. It includes Canada, the United States, and Mexico, with a combined population of 510 million and an economy of over $30.9 trillion.²⁴ NAFTA has since been replaced by the U.S.-Mexico-Canada Agreement (USMCA), which went into effect on July 1, 2020.

Canada, one of the largest U.S. trading partners, entered a free-trade agreement with the United States in 1988. Thus, most of the new long-run opportunities opened for U.S. business under NAFTA are in Mexico, America’s third-largest trading partner. Before NAFTA, tariffs on Mexican exports to the United States averaged just 4 percent, and most goods entered the United States duty-free, so NAFTA’s primary impact was to open the Mexican market to U.S. companies. When the treaty went into effect, tariffs on about half the items traded across the Rio Grande disappeared. Since NAFTA (now USMCA) came into effect, U.S.-Mexican trade has increased from $80 billion to over $750 billion annually. The agreement removed several barriers to trade including licensing requirements, quotas, and tariffs that limited transactions in the countries for goods and services. For example, the agreement allows U.S. and Canadian financial services companies to own subsidiaries in Mexico, which had long been previously prohibited.

The real test of USMCA will be whether it can deliver rising prosperity on both sides of the Rio Grande. To be effective, the agreement needs to provide rising wages and benefits and increased purchasing power to Mexico so it will continue to buy goods from the U.S. and Canada. At the Delphi Corp. auto parts plant in Ciudad Juárez, just across the border from El Paso, Texas, the assembly line is a cross section of working-class Mexico. In the years since NAFTA lowered trade and investment barriers, Delphi has significantly expanded its presence in the country and has restructured into multiple entities that employ thousands and receive millions of U.S.-made components to assemble into parts. The wages are modest by U.S. standards—an assembly-line worker with two years' experience earns about $4 to $6 per hour—but that's much higher than Mexico's minimum wage of around $2.50 per hour, making these positions highly coveted.²⁵

One of the largest new trade agreement is Mercosur, which includes Argentina, Bolivia, Brazil, Paraguay, and Uruguay as full members. The elimination of most tariffs among the trading partners has resulted in trade revenues that exceed $80 billion annually. Economic conditions have impacted some growth, but trade among Mercosur countries has continued to grow. Another relatively recent trade agreement is the Regional Comprehensive Economic Partnership (RCEP). This trade agreement includes fifteen (15) Asian States and signals to investors that the region is still committed to multilateral trade integration. One item that is most notable about this trade agreement is that the U.S. is not a member.

Central America Free Trade Agreement

Another key free trade agreement is the Central America Free Trade Agreement (CAFTA) passed in 2005. Besides the United States, the agreement includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. As the United States was already a principal exporter to these nations, there has not been a major increase in U.S. exports. However, the agreement did reduce tariffs on exports to CAFTA countries. Nearly all of the goods imported into the United States from CAFTA nations are tariff free. Additional benefits can be realized as U.S. multinational firms deepen investment in the region.

The European Union

In 1993, the member countries of the European Community (EC) ratified the Maastricht Treaty, which proposed to take the EC further toward economic, monetary, and political union. Although the heart of the treaty deals with developing a unified European Market, Maastricht was also intended to increase integration among European Union (EU) members.

The EU has helped increase this integration by creating a borderless economy for the 27 European nations, shown on the map in Exhibit 3.6.²⁶

European Union member states have set up common institutions to which they delegate some of their sovereignty so that decisions on specific matters of joint interest can be made democratically at the European level. This pooling of sovereignty is also called European integration. On January 31, 2020, the United Kingdom formally withdrew from the European Union, more commonly known as Brexit.²⁷

One of the principal objectives of the European Union is to promote economic progress of all member countries. The EU has stimulated economic progress by eliminating trade barriers, differences in tax laws, and differences in product standards, and by establishing a common currency. A new European Community Bank was created, along with a common currency called the euro. The European Union’s single market has prompted a growth in the labor force to over 221 million and more than an 85 percent increase in GDP per capita just since 2024.²⁸ Under pressure of competition, the prices of airfares in Europe have fallen and passengers from the EU are entitled to compensation when flights are significantly delayed. The removal of national restrictions has enabled millions of Europeans to go to other EU countries to work or spend their retirement.

The EU utilizes a tough two-tier antitrust enforcement system. In 2026, the EU fined X (formerly Twitter) $140 million for deceptive practices. They have also opened investigations against Alphabet and Meta.²⁹ Unlike in the United States, the EU can seal off corporate offices for unspecified periods to prevent destruction of evidence and enter the homes, cars, yachts, and other personal property of executives suspected of abusing their companies’ market power or conspiring to fix prices.

Microsoft has been at odds with the EU since 2020 regarding the bundling of their product Teams with Office 365 licenses. The complaint was brought by a competitor, Slack, who asserted that the act forced customers to use the product and hid the true cost. The dispute was settled in late 2025 when Microsoft agreed to unbundle Teams from the Office Suite, and it now is purchased as a separate product. Another big U.S. company, Coca-Cola, agreed to revise its packaging regarding recycling content in response to a complaint filed by a consumer that the company's statements were misleading. Previously, the company agreed to limits on its sales tactics by not signing exclusive agreements with retailers to ban competing brands or give retailers rebates based on the sales volume of their products. They also agreed to give competitors space in their branded coolers. Violations of these agreements will result in fines that could be in the billions.³⁰

Another key issue facing global businesses is the industry protectionist measures enacted by the EU against imports. For example, anti-dumping tariffs, quotas, and technical barriers to trade have all been enacted not only to regulate trade from outside the EU, but also to create a more equitable trade environment within EU countries. The member countries do not always agree on the tactics used as each considers its own economy and the impact such measures like quotas and tariffs will have on producers and consumers.

Interestingly, a number of large U.S. companies have a stronger foothold in Europe than some European companies. Coke and Kellogg’s are considered classic European brand names. Apple, Microsoft, and Alphabet dominate in their markets, while General Electric and AT&T are strong brands all over Europe.