NAFTA vs. EU - Why is the EU more successful?

Both the NAFTA and the EU are perfect examples for prescriptive trade theories, which means that they are concerned with government interference in the free movement of goods and services.

The North American Agreement Free Trade Agreement, NAFTA, was created by the governments of the US, Canada and Mexico. Basically it is a trilateral trade bloc, which first came into effect on January 1, 1994.
Thanks to the NAFTA, all non-tariff barriers to agricultural trade between the US and Mexico were eliminated, and in addition to that many other tariffs were eliminated. Since than, even more have been phased out, which allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008.
Since entering into effect in 1989, the agricultural provisions of the US – Canada Free Trade Agreement, they simply got incorporated into the NAFTA in 1994.
Anyhow Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products, most of the tariffs have been eliminated but still a few remain.




The European Union, EU is an economic and political union, which was established by the Treaty of Maastricht in 1993. It counts twenty-seven member states, mainly located in Europe.
The main power of the EU is that its members have been able to create a single market through a standardized systems of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. Due to its common Trade policy and many other agreements the EU is nowadays the biggest free trade block in the world.

But was does the EU have, the NAFTA doesn’t?

Basically, in order to find an answer, we have to concentrate ourselves on the different theories of trade.

Obviously, in both the NAFTA and the EU, we live in the principle of comparative advantage, defined by David Ricardo, which believes that in order to promote productivity it is essential to specialize in what your best at. Even though richer countries are better at everything, by leaving some work to developing countries they become even more successful, and both countries are highly benefiting.
Basically a country is said to have comparative advantage in the production of a good if it’s able to produce that good with a lower opportunity cost than all the other countries.

Above we have an example of comparative advantage, based on Germany and Italy.

However, the theory of comparative advantage is not the reason why the EU is more successful than the NAFTA, in order to answer this we have to refer to a Swedish economist, Steffan Linder, who developed the Country Similarity Theory. It basically states that the more similar countries are (mostly measured per capita income), the greater is the chance of forming a strong trade connection.


And here we got the answer, the EU consists of twenty-seven different members, which are all more or less on the same economic basis or have at least some countries they’re equal to, which, when relating to the country similarity theory, makes it easy to build up a strong trade connection.
On the other hand, the NAFTA is compiled of Canada, the US and Mexico; while it is obvious that the US have the strongest economy, Canada also proves strong economic performances. However, Mexico is still developing and as such “drags” down the possible efficiency, the NAFTA could have if Mexico was as strong as the others.