AbstractAlthough most analysis of the North American Free Trade Agreement (NAFTA) has focused on the bilateral relationship between Mexico and the United States this article concentrates on the larger trading and investment linkages of Canada and the United States. From a Canadian perspective the NAFTA is an extension of (and improvement upon) the Canada–U.S. Free Trade Agreement (FTA) of 1989. The FTA introduced new dispute settlement mechanisms that Canada views as essential to partially offset U.S. administered protection. The new rules‐based system of the FTA is also the basis for the NAFTA, and it has been extended from the trade law regime to cover foreign investment disputes. All three parties in NAFTA will benefit from a rules‐based system rather than the power‐based system that permits U.S. producer interests to exploit the size asymmetries between the large triad market of the United States and the smaller open trading economies of Mexico and Canada. © 1995 John Wiley&S