\ ˈnaf-tə How to pronounce NAFTA (audio) \

Definition of NAFTA

North American Free Trade Agreement

Learn More about NAFTA

Statistics for NAFTA

Last Updated

18 Feb 2020

Cite this Entry

“NAFTA.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/NAFTA. Accessed 28 Feb. 2020.

Keep scrolling for more

More Definitions for NAFTA

Financial Definition of NAFTA

What It Is

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

How It Works

NAFTA was implemented on January 1, 1994, and supersedes the U.S.-Canada Free-Trade Agreement (CFTA) that took effect on January 1, 1989.

A tariff is a federal tax on imports or exports. NAFTA required the elimination of tariffs on half of U.S. goods shipped to Mexico and the gradual phase out of other tariffs among the U.S., Canada and Mexico over a 14-year period.

Because tariffs make it more expensive for consumers to purchase foreign goods, imports tend to decline when tariffs are high, which in turn causes a decline in the supply of the good and an increase in the price of the good. The price increase usually motivates domestic producers to increase their output of the product.

For example, let's assume Company XYZ produces cheese in Scotland and exports it to the U.S. The cheese costs $100 per pound but is subject to a 20% ad valorem tariff placed on the cheese by the U.S., which forces Company XYZ to pay the U.S. government an extra $20 to export it. Company XYZ would presumably mark the price of the cheese up to at least $120 in order to recover the cost of the tariff.

Under NAFTA, if the exporting and importing takes place within Canada, the United States and Mexico, the cheese would be subject to a much lower (or even no) tariff, presumably making the cheese cheaper than a Scottish import.

Why It Matters

NAFTA is essentially a tariff agreement designed to facilitate trade and ensure that North American producers receive preferences over goods not originating in the U.S., Canada or Mexico. According to the International Monetary Fund, trade among the three NAFTA countries more than tripled between 1993 and 2007.

But NAFTA is also highly controversial. Some economists and policy analysts argue that tariffs interfere with free market ideals by diverting resources to industries in which the U.S. is a less efficient, high-cost producer. Another common argument is that NAFTA encourages companies to outsource American jobs to lower-cost countries and the loss of tariffs reduces the money available for government programs.

Source: Investing Answers

More from Merriam-Webster on NAFTA

Spanish Central: Translation of NAFTA

Comments on NAFTA

What made you want to look up NAFTA? Please tell us where you read or heard it (including the quote, if possible).


See Definitions and Examples »

Get Word of the Day daily email!

Test Your Vocabulary

February 2020 Words of the Day Quiz

  • squirrel in winter
  • Which is a synonym of probity?
Spell It

Can you spell these 10 commonly misspelled words?

Syn City

Test Your Knowledge - and learn some interesting things along the way.

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!