North American Free Trade Agreement
North American Free Trade Agreement (Encyclopedia of Environmental Issues, Revised Edition)
The North American Free Trade Agreement (NAFTA), an unparalleled trade accord among the United States, Canada, and Mexico, was signed on December 17, 1992. Once ratified by the legislative bodies of the three nations, the agreement went into effect on January 1, 1994. Although the United States and Canada had established open bilateral trading terms in 1988 (the Canada-United States Free Trade Agreement), NAFTA not only aimed at expanding the earlier agreement, particularly in terms of liberalization of conditions for cross-border private investment, but it also sought to integrate terms of trade and investment between two highly developed national economies and a third emerging, or developing, country. An important aspect of Mexico’s role in NAFTA was an expectation that the steps toward liberalization of the Mexican economy begun in 1985 (that is, privatization of traditionally state-run companies and increased emphasis on market-oriented economic activity) would continue at a regular pace.
A first and major aim of NAFTA was to eliminate tariff-based trade “barriers” that historically had shielded domestically produced goods, whether agricultural or industrial, from competition from lower-priced foreign imported goods. High tariffs automatically raise prices for imports. An equally important goal was to eliminate, as much as possible, individual national laws hampering the free flow of labor and capital across the signatories’...
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Further Reading (Encyclopedia of Environmental Issues, Revised Edition)
Cameron, Maxwell A., and Brian W. Tomlin. The Making of NAFTA: How the Deal Was Done. Ithaca, N.Y.: Cornell University Press, 2000.
Gallagher, Kevin. Free Trade and the Environment: Mexico, NAFTA, and Beyond. Stanford, Calif.: Stanford University Press, 2004.
Grinspun, Ricardo, and Yasmine Shamsie, eds. Whose Canada? Continental Integration, Fortress North America, and the Corporate Agenda. Montreal: McGill-Queens University Press, 2007.
Hansen, Patricia Isela. “The Interplay Between Trade and the Environment Within the NAFTA Framework.” In Environment, Human Rights, and International Trade, edited by Francesco Francioni. Portland, Oreg.: Hart, 2001.
Hufbauer, Gary Clyde, and Jeffrey J. Schott. NAFTA Revisited: Achievements and Challenges. Washington, D.C.: Institute for International Economics, 2005.
McPhail, Brenda M., ed. NAFTA Now! The Changing Political Economy of North America. Lanham, Md.: University Press of America, 1995.
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North American Free Trade Agreement (Great Events from History: North American Series)
Article abstract: Reducing barriers to the flow of goods, services, and investment among Canada, Mexico, and the United States, the North American Free Trade Agreement (NAFTA) and its effects are hotly debated.
Summary of Event
Approval of the North American Free Trade Agreement (NAFTA) in 1993 was one in a long series of policy actions reflecting a commitment by the United States government to relatively unrestricted international trade and finance. This commitment began in 1934, when, in the depths of a deep depression, the United States adopted a policy of reciprocal trade agreements. Agreements were negotiated by which the United States reduced tariffs on the products of other countries that agreed to the do the same for U.S. products. This helped trade to expand and gave each country an opportunity both to sell more exports and to buy more imports. At the end of World War II, this policy was extended by the formation of the General Agreement on Tariffs and Trade (GATT), which involved many countries negotiating at once. GATT negotiations involved a series of “rounds,” with the Uruguay round ending in new agreements in 1994.
Policy toward international trade has always been controversial. Most economists argue that relatively free international trade encourages each country to specialize in the products it can produce most efficiently—that competition is intensified and innovation encouraged,...
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North American Free Trade Agreement (West's Encyclopedia of American Law)
The North American Free Trade Agreement (NAFTA) was made between the United States, Canada, and Mexico, and took effect January 1, 1994. Its purpose is to increase the efficiency and fairness of trade among the three nations.
At the heart of NAFTA is a simple goal: the elimination of tariffshe taxes each nation imposes on the others' importsnd other bureaucratic and legal barriers to trade. In addition to its central terms, the massive, highly detailed agreement also includes so-called side agreements intended to ensure that each nation enforces its own labor and environmental laws. The bulk of its regulations are to be phased in over the course of 15 years.
The impetus for NAFTA developed in the 1980s. Its roots lie in the United States-Canada Free Trade Agreement of 1988mplemented by the United States-Canada Free Trade Agreement Implementation Act (19 U.S.C.A. § 2112 note [Supp. 1993])hich, by the mid-1990s, had already eliminated most trade barriers between the United States and Canada. With the world gradually becoming divided into large regional trading blocs where goods and services move freely, as in the European Union, NAFTA's supporters saw the inclusion of Mexico as necessary for North America to compete internationally.
In the United States, debate over NAFTA threatened to derail it. Proponents saw economic benefits for all three nations...
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North American Free Trade Agreement (NAFTA) (Encyclopedia of Small Business)
The North American Free Trade Agreement (NAFTA) is a treaty that was signed on August 12, 1991 by the United States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed between the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day, the three countries became the largest free market in the worldhe economies of the three nations at that time was more than $6 trillion and directly affected more than 365 million people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and services trade, remove investment restrictions, and protect intellectual property rights, all while addressing environmental and labor concerns (although many observers charge that the three governments have been lax in ensuring environmental and labor safeguards since the agreement went into effect). Small businesses were among those that were expected to benefit the most from the lowering of trade barriers since it would make doing business in Mexico and Canada less expensive and would reduce the red tape needed to import or export goods.
Highlights of NAFTA included:
- Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took affect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism.
- Elimination of nontariff barriers by 2008. This includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced.
- Establishment of standards. The three NAFTA countries agreed to toughen health, safety, and industrial standards to the highest existing standards among the three countries (which were always U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The speed of export-product inspections and certifications was also improved.
- Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution, special side agreements were included in NAFTA. Under those agreements, the three countries agreed to establish commissions to handle labor and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently. Environmental and labor groups from both the United States and Canada, however, have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced.
- Tariff reduction for motor vehicles and auto parts and automobile rules of origin.
- Expanded telecommunications trade.
- Reduced textile and apparel barriers.
- More free trade in agriculture. Mexican import licenses were immediately abolished, with most additional tariffs phased out over a 10-year period.
- Expanded trade in financial services.
- Opening of insurance markets.
- Increased investment opportunities.
- Liberalized regulation of land transportation.
- Increased protection of intellectual property rights. NAFTA stipulated that, for the first time, Mexico had to provide a very high level of protection for intellectual property rights. This is especially helpful in fields such as computer software and chemical production. Mexican firms will no longer be able to steal intellectual property from companies and create a "Mexican" version of a product.
- Expanded the rights of American firms to make bids on Mexican and Canadian government procurement contracts.
One of the key provisions of NAFTA provided "national goods" status to products imported from other NAFTA countries. No state, provincial, or local governments could impose taxes or tariffs on those goods. In addition, customs duties were either eliminated at the time of the agreement or scheduled to be phased out in five or 10 equal stages. The one exception to the phase out was specified sensitive items, for which the phase-out period would be 15 years.
Supporters championed NAFTA because it opened up Mexican markets to U.S. companies like never before. The Mexican market is growing rapidly, which promises more export opportunities, which in turn means more jobs. Supporters, though, had a difficult time convincing the American public that NAFTA would do more good than harm. Their main effort centered on convincing people that all consumers benefit from the widest possible choice of products at the lowest possible pricehich means that consumers would be the biggest beneficiaries of lowered trade barriers. The U.S. Chamber of Commerce, which represents the interests of small businesses, was one of the most active supporters of NAFTA, organizing the owners and employees of small and mid-size businesses to support the agreement. This support was key in countering the efforts of organized labor to stop the agreement.
NAFTA AND SMALL BUSINESS
Analysts agree that NAFTA has opened up new opportunities for small and mid-size businesses. Mexican consumers spend more each year on U.S. products than their counterparts in Japan and Europe, so the stakes for business owners are high. (Most of the studies of NAFTA concentrate on the effects of U.S. business with Mexico. Trade with Canada has also been enhanced, but the passage of the trade agreement did not have as great an impact on the already liberal trade practices that America and its northern neighbor abided by.)
Some small businesses were affected directly by NAFTA. In the past, larger firms always had an advantage over small ones because the large companies could afford to build and maintain offices and/or manufacturing plants in Mexico, thereby avoiding many of the old trade restrictions on exports. In addition, pre-NAFTA laws stipulated that U.S. service providers that wanted to do business in Mexico had to establish a physical presence there, which was simply too expensive for small firms to do. Small firms were stuckhey could not afford to build, nor could they afford the export tariffs. NAFTA leveled the playing field by letting small firms export to Mexico at the same cost as the large firms and by eliminating the requirement that a business establish a physical presence in Mexico in order to do business there. The lifting of these restrictions meant that vast new markets were suddenly open to small businesses that had previously done business only in the United States. This was regarded as especially important for small businesses that produced goods or services that had matured in U.S. markets.
Still, small firms interested in conducting business in Mexico have to recognize that Mexican business regulations, hiring practices, employee benefit requirements, taxation schedules, and accounting principles all include features that are unique to that country. Small businesses, then, should familiarize themselves with Mexico's foundation of business rules and traditionsot to mention the demographics culture of the marketplaceefore committing resources to this region.
OPPOSITION TO NAFTA
Much organized opposition to NAFTA centered on the fear that the abolishment of trade barriers would spur U.S. firms to pack up and move to Mexico to take advantage of cheap labor. This concern remains strong among labor unions and other worker organizations. Opposition to NAFTA was also strong among environmental groups, who contended that the treaty's anti-pollution elements were woefully inadequate. This criticism has not abated since NAFTA's implementation. Indeed, both Mexico and Canada have been repeatedly cited for environmental malfeasance.
Controversy over the treaty's environmental enforcement provisions remained strong in the late 1990s. In fact, North American business interests have sought to weaken a key NAFTA side accord on environmental protections and enforcement. This accordne of the few provisions welcomed by environmental groupsllows groups and ordinary citizens to accuse member nations of failing to enforce their own environmental laws. A trinational Commission for Environmental Cooperation is charged with investigating these allegations and issuing public reports. "That process is slow, but the embarassment factor has proven surprisingly high," noted Business Week. As of mid-2000, the U.S. government has expressed opposition to revisions in the NAFTA agreement. But the Canadian government and many businesses in all three countries continue to work to change this accord.
THE EFFECTS OF NAFTA
Since NAFTA's passage, American business interests have expressed general satisfaction with the agreement. Employment, productivity, and trade have all surged in the 1990s, although analysts point out that these increases can be attributed to myriad factors, of which NAFTA is only one. Moreover, job losses in the U.S. that can be attributed to NAFTA have been minimal. As of 1997, only 117,000 Americans had signed up for the benefits offered to workers displaced by NAFTA.
Change has been most dramatic in Mexico. U.S. firms are setting up joint ventures in Mexico that, for the first time, use local firms for materials and parts. The quality of goods produced in Mexico has gone up, and the biggest beneficiaries are Mexican consumers. Wages and working conditions have also improved in many areas.
Allen, Mike. "NAFTA Is a Good Treaty, But Could Be Better." San Diego Business Journal. July 21, 1997.
Edmond Jr., Alfred. "Making the Most of NAFTA: Here's What to Do when the Barriers to Mexico's Markets Come Down." Black Enterprise. February 1994.
"A Green Thumb in NAFTA's Eye?" Business Week. June 12, 2000.
Holzinger, Albert G. "Why Small Firms Back NAFTA." Nation's Business. November 1993.
Krueger, Anne O. "NAFTA's Effects: A Preliminary Assessment." World Economy. June 2000.
Ostroff, Jim. "Report: NAFTA Helped Both U.S. and Mexico." WWD. July 14, 1997.
"Taking the Green Out of NAFTA." Business Week. May 29, 2000.
"What NAFTA Means to Small Businesses: Mexico Is an Important Market for Small and Medium Sized U.S. Businesses." Arkansas Business. November 15, 1993.
"When Neighbours Embrace: the NAFTA Effect." The Economist. July 5, 1997.
North American Free Trade Agreement (NAFTA) (Encyclopedia of Business)
- ENVIRONMENTAL PROVISIONS AND SIDE AGREEMENT
- TRADE AND ECONOMIC CONSEQUENCES
- ENVIRONMENTAL CONSEQUENCES
- FURTHER READING:
The North American Free Trade Agreement (NAFTA) is an international agreement among the United States, Canada, and Mexico. Much has changed in the years since NAFTA took effect on January 1, 1994. The biggest effect of NAFTA has been on trade volumes. From 1993 to 1997, US.-Canadian trade increased more than 80 percent and U.S.-Mexican trade increased more than 90 percent. Mexico is now the second-largest trading partner of the United States, being second only to Canada.
NAFTA phases out tariffs among the three countries over a period ending in 2009, and it liberalizes rules related to investment in Mexico. NAFTA's adoption was supported strongly by most businesses and investors in the United States. Many other citizens, however, opposed its adoption and continue to be wary of its consequences. Debate continues as to whether NAFTA's effects have been negative or positive. Labor representatives say that NAFTA has encouraged more U.S. companies to move their operations to Mexico, where wages are lower than in the United States, workers receive fewer protections in terms of occupational safety and health, and enforcement of environmental laws is less stringent in many, but not all, cases.
Many, but not all, environmental groups opposed NAFTA prior to its adoption, and such opposition continues. As a result of opposition prior to Congress's approval of NAFTA, side agreements on labor, the environment, and import surges were negotiated. Following heated debate and serious concern about whether NAFTA would be approved, NAFTA and the side agreements were approved by the U.S. Congress in November 1993. As we enter the 21st century, environmentalists allege that increased trade resulting from NAFTA has led to further degradation of the environment in Mexico and the Southwest United States.
NAFTA liberalizes rules for investment by businesses from one NAFrA country in another NAFTA country. It also eliminates tariffs and other barriers to trade among the United States, Canada, and Mexico over a 15-year period that began January 1, 1994. Thus, it creates what some commentators are calling "the world's largest trading bloc." As of December 31, 1993, there were tariffs on approximately 9,000 products being traded between the United States and Mexico. Approximately 4,500 tariffs were eliminated on January 1, 1994, and by 1999 tariffs remained in effect on only about 3,000. The remaining tariffs will be gradually phased out, with the last of them being terminated by the year 2009. NAFTA is a two-volume document covering more than 1,200 pages with extremely detailed, complex provisions specifying how tariffs and other barriers for a multitude of different industries will be altered. The following description of NAFrA summarizes some of its salient provisions with respect to selected sectors of the economy.
REMOVAL OF BARRIERS TO INVESTMENT.
NAFTA removes certain investment barriers, protects NAFTA investors, and provides process for settlement of disputes between investors and a NAFTA country. Coverage includes anticompetitive practices, financial services, intellectual property, temporary entry for businesspersons, and dispute settlement procedures. One of the most significant aspects of NAFTA is that it minimizes or eliminates many requirements of foreign government approval, which formerly posed significant barriers to investment.
NAFTA includes provisions on anticompetitive practices by monopolies and state enterprises as well as on such practices by privately owned businesses. It also sets out principles to guide regulation of financial services. Under NAFTA, financial service providers from one NAFTA country may establish banking, insurance, securities operations, and other types of financial services in another NAFTA country. The advantage of this for investors is that they are able to use the same financial service providers for both domestic and international transactions.
NAFTA provides U.S. and Canadian firms with greater access to Mexico's energy markets and energy-related services. Pursuant to NAFTA, U.S. and Canadian energy firms are now allowed to sell their products to PEMEX, Mexico's state-owned petroleum company, through open, competitive bidding. Under NAFTA, for the first time Mexico is allowing foreign ownership and operation of self-generation, cogeneration, and independent power plants.
Transportation among the three countries is becoming more efficient and less costly due to changes in investment restrictions. Pursuant to NAFTA, Mexico is removing its restrictions on foreign investment for trucking firms. Since 1995, U.S., Mexican, and Canadian trucking companies have been allowed to establish cross-border routes. Bans on such routes prior to NAFTA made shipping across the U.S.-Mexican border costly and inefficient; goods had to be unloaded from one truck and put onto another truck as they were moved from Mexico to the United States, or vice versa. As we enter the 21st century, trade is flowing more freely between the United States and Canada for a variety of reasons. For example, as of January 1999, a driver-record database is available for use by law enforcement officers in each of the three NAFTA countries. But crossing procedures at the U.S.-Mexican border continue to be inefficient. In January 1996, an agreement was to take effect that would allow U.S. and Mexican carriers to pick up and deliver international shipments in states adjacent to the U.S.-Mexican border, but the agreement was blocked by the United States. Commentators believe that the decision was based on organized labor's opposition to NAFTA. In addition, the United States and Mexico are still working to harmonize safety standards for motor carriers.
Under NAFTA, Mexico's pharmaceutical market is being opened to U.S. investors. Mexico has removed its import restrictions on pharmaceutical products, and it will phase out tariffs on such products by 2004. Mexico has opened its government procurement contracts for pharmaceuticals to bids from U.S. and Canadian companies.
NAFTA builds on the work of the General Agreement on Tariffs and Trade (GATT), providing substantial protection for intellectual property. Covered are copyrights, including sound recordings; patents and trademarks; plant breeders' rights; industrial designs and trade secrets; and integrated circuits (semiconductor chips). NAFTA includes details regarding procedures for enforcement of intellectual property rights and for damages in the event of violations of such rights. Mexico divides its intellectual property laws into two areas: intellectual property and industrial property. Mexico adopted its new Industrial Property Law as of 1994 and its new Federal Copyright Law took effect in 1997. Mexico has a history, however, of weak enforcement of intellectual property rights, and this area of law is developing slowly.
NAFTA does not create a common market for movement of labor. Thus, provisions in NAFTA deal with temporary entry of businesspeople from one NAFTA country into another. On a reciprocal basis, each of the three countries admits four categories of businesspersons: (1) business visitors dealing with research and design, growth, marketing and sales, and related activities; (2) traders and investors; (3) intracompany transfereesrovided that such transferees are employed in a managerial or executive capacity or possess specialized knowledge; and (4) specified categories of professionals who meet minimum educational requirements or possess specialized knowledge.
ELIMINATION OF TARIFFS.
NAFTA's provisions on farm products were of great concern to agriculture businesspeople in the United States. Pursuant to NAFTA, tariffs on all farm products will be phased out, but producers of certain "sensitive" products will be allotted extra time to adjust gradually to competition from products of other NAFTA countries. Tariffs for those sensitive products will be phased out over a period of 15 years ending in 2009. "Sensitive products" receiving such treatment include corn and dry beans for Mexico, and sugar, melons, asparagus, and orange juice concentrate for the United States.
Provisions related to the automobile industry were also of special concern in the United States. Pursuant to formnulas set out in NAFTA, as of 1995, cars must contain 50 percent North American content to qualify for duty-free treatment. By 2002, they will be required to contain 62.5 percent North American content to receive such treatment. Also, U.S. automobile manufacturers have gained greater access to Mexican markets. During a transition period, limits on numbers of vehicles imported to Mexico are being phased out, as are duties on automobiles, light trucks, and automobile parts. As of 1999, according to Brenda M. Case," The auto industry is already one of the great success stories of the Mexican economy, and most of the world's auto makers have plans to make it bigger and better. Auto plants, suppliers, and dealers make up 20 percent of Mexico's exports and 2.5 percent of its gross domestic product (GDP)."
Mexico's telephone system was severely underdeveloped prior to NAFTA. Prices were high, service was irregular, and private customers often waited for years to get telephones installed. As of NAFTA's effective date, Mexico abolished tariffs on all telecommunications equipment except telephone sets and centralswitching equipment, and tariffs on even those products were phased out by 1998. Now, U.S. companies compete for certain contracts for Mexico's telephone system. In addition, foreign investors are allowed to form joint ventures with Mexican companies in the area of telecommunications, although foreign participation in telecommunications is limited to 49 percent in most cases. As a result of the new joint ventures and lowered tariffs, the quality of telephone service in Mexico has improved tremendously.
Administration of NAFTA is handled by a commission composed of ministers (cabinet-level officers) designated by each NAFTA country. A secretariat serves the commission and assists with the administration of dispute resolution panels.
Whenever a dispute arises with respect to a NAFTA country's rights under the agreement, a consultation can be requested at which all three NAFTA countries can participate. If consultation does not resolve the dispute, the commission will seek to settle the dispute through mediation or similar means of alternative dispute resolution procedures. If those measures are unsuccessful, a complaining country can request that an arbitration panel be established. The panel is composed of five members selected from a trilaterally agreed upon list of trade, legal, and other experts. After study, the panel issues a confidential initial report. After receiving comments from the parties, a final report will be prepared and conveyed to the commission. If the panel finds that a NAFTA country violated its NAFTA obligations, the disputing parties have 30 days to reach an agreement. If none is reached, NAFTA benefits may be suspended against the violating country in an amount equivalent to the panel's recommended penalty until the dispute is resolved.
ENVIRONMENTAL PROVISIONS AND SIDE AGREEMENT
NAFTA has more provisions relating to the environment and, at least on paper, is more protective of the environment than any other international agreement or treaty ever before entered into by the United States. Former U.S. Environmental Protection Agency (EPA) Administrator William K. Reilly observed that it is "the most environmentally sensitive free trade agreement ever negotiated anywhere." Yet consideration and adoption of NAFTA led to a painful division within the environmental community. A coalition of eight major environmental organizations supported it, yet other major environmental groups opposed its approval.
NAFTA's environmental provisions are complex, lengthy, and yet-to-be interpreted as they are implemented. Questions arise in two directions. First, does NAFTA do enough to safeguard existing environmental laws and standards? Second, does NAFTA require or at least promote upward harmonization of the environmental laws of the three NAFTA countries?
ENVIRONMENTAL PROVISIONS IN THE PREAMBLE.
The environment and the pursuit of what is called "sustainable development" are mentioned three times in NAFTA's preamble. Nevertheless, in NAFTA's Statement of Objectives, which is part of the agreement itself, they are not mentioned at all. Thus, sustainable development is a goal of NAFTA, but there are no substantive provisions in NAFTA to require its pursuit or achievement. "Sustainable development" is a term used often in environmental discussions today. It refers to measures designed to ensure that the needs of the present are met without compromising the ability of future generations to meet their own needs.
ENVIRONMENTAL PROVISIONS WITHIN NAFTA.
In terms of our ability to safeguard the "status quo" in environmental regulation in the United States, there are two key articles in NAFTA: Articles 7 and 9. Article 7 covers sanitary and "phytosanitary" measures. ("Phytosanitary" refers to measures related to plant and food safety.) Article 7 reserves to each party (the United States, Mexico, and Canada) the "right" to set its "appropriate level of protection" for human, animal, or plant life or health. It confirms that a party may adopt a measure more stringent than an "international standard, guideline or recommendation." Further, adoption of these "more stringent" measures may be by federal, state, or local governments.
A major concern of U.S. environmental groups is the ability of the United States to maintain its own health and environmental standards. For example, Article 7 says that any trade measure used to achieve a party's level of protection must be "necessary" for the protection of human, animal, or plant life. Some environmentalists are concerned that the term "necessary" might be interpreted very narrowly, as has been the case recently under interpretation of GATT.
Article 9 of NAFTA gives each party the right to establish the levels of protection that it considers to be appropriate so long as the choice is made based on a "legitimate" objective. Environmental measures cannot be used to promote unfair discrimination or to serve as a disguised barrier to trade. NAFTA allows only those trade regulations involving "product characteristics or their related processes and production methods." Thus, a process standard must be related to the characteristics of a product, and a party can't prohibit trade in products grown or manufactured using "unsustainable" methods. Analyzing such provisions of NAFTA, environmentalists fear that specific, individual U.S. environmental laws or regulations might be challenged under NAFTA as being a nontariff barrier to trade without a legitimate objective.
PROVISIONS OF THE ENVIRONMENTAL SIDE AGREEMENT.
The North American Agreement on Environmental Cooperation, also known as the "Environmental Side Agreement," was adopted as a part of NAFTA along with two other side agreements, covering labor and import surges.
Part one of the Environmental Side Agreement lists two objectives: (1) to promote environmental concerns without harming the economy, and (2) to open discussion of environmental issues to the public.
Part two outlines the obligations of the three countries. It confirms that each party has the right to set its own standards and states that the governments of each country are responsible for monitoring and enforcing their environmental laws. It also states that private parties can request government intervention and can seek remedies through the courts of their respective countries.
Part three establishes a Commission for Environmental Cooperation (Environmental Commission) that is based in Montreal, Canada. The Environmental Commission consists of a council, a secretariat, and a Joint Public Advisory Committee. The council consists of cabinet-level representatives who will meet at least once a year. Its function is to implement the environmental side agreement. The secretariat provides a support system for the Council.
Nongovernment organizations or private citizens may assert that a country "has shown a persistent pattern of failure to effectively enforce its environmental laws" by filing a complaint with the commission. Thus, private citizens can serve as watchdogs for the commission. This is important to U.S. environmental groups because such groups have played an active role in overseeing enforcement of U.S. environmental laws and regulations.
The Joint Public Advisory Committee may advise the council on any relevant matter and may provide relevant technical information. The committee consists of 15 members, 5 of whom are appointed by each of the NAFTA countries.
Pursuant to part four of the Environmental Side Agreement, each party agrees to cooperate and to provide information to the secretariat upon request.
Part five allows a party to request consultation with a second party concerning the party's failure to enforce its environmental laws if such a failure is shown to be part of a persistent pattern. If a mutually satisfactory resolution is not reached within 60 days, a party can request a special session of the council, which must meet within 20 days. If the council is unable to resolve the dispute, it can convene a panel for arbitration of the dispute. The panel will issue an initial report within 180 days, and the parties are allowed to submit comments within 60 days. Next, the panel will submit a final report, which will be made public within 5 days after it is received by the council. The parties are given an opportunity to reach their own settlement based on the report, and if they cannot reach an "action plan" within 60 days, the panel can be reconvened to establish one. If the offending country does not follow the plan, a fine can be imposed. If the fine is not paid, NAFTA benefits can be suspended.
Thus, the Environmental Side Agreement allows citizeiis and their organizations to serve as "watchdogs" by bringing complaints to the attention of the Environmental Commission. Nevertheless, citizens do not have standing to take action on their own. A NAFTA party, however, can file a complaint with the council in cases in which another party has shown a persistent pattern of failure to enforce its environmental laws and regulations. Ultimate sanctions against an offending party may include suspension of trade benefits; such sanctions, however, have not been used during the first six years of NAFTA, and it is unlikely that they will be invoked in the near future.
At the time NAFTA and the Environmental Side Agreement were adopted, commentators predicted that suspension of trade benefits would seldom be invoked as a sanction. That prediction "come true" over NAFTA's first six years. As of mid-1995 the Environmental Commission had not issued even a draft of its procedures for handling complaints from citizens. As of 1999 it is clear that the Environmental Commission is poorly funded (with a budget of under $10 million for all three countries), its complaints process makes it difficult for private citizens to file and pursue complaints, and it lacks authority to force member countries to participate in many of its activities. For example, in 1998, the Environmental Commission issued a detailed pollution report detailing types and quantities of hazardous substances emitted into the air in the United States and Canada. Mexico, however, was not included in the report, because data on emissions from that country were not available.
The Environmental Commission's accomplishments have been limited to date. Its greatest accomplishment so far has probably been that it has promoted communication about environmental problems among governments, citizens, and environmental groups from the three NAFTA countries.
SIDE AGREEMENT ON LABOR
The North American Agreement on Labor Cooperation, commonly known as the "Labor Side Agreement," was negotiated in response to concerns that NAFTA itself did little or nothing to protect workers in Mexico, the United States, or Canada. U.S. labor groups have maintained their opposition to NAFTA even with the addition of the Labor Side Agreement. Representatives of labor groups assert that the Labor Side Agreement does little to protect workers in the United States, Canada, or Mexico. The structure and provisions of the Labor Side Agreement parallel those of the Environmental Side Agreement. Included are a preamble, objectives of the agreement, and obligations of the parties. There are also provisions for a Commission for Labor Cooperation, dispute resolution mechanisms, and sanctions against a NAFTA country found to be in violation of the agreement's provisions.
The preamble affirms the three parties' desire to create new employment opportunities and to protect, enhance, and enforce basic workers' rights while, at the same time, affirming their respect for each party's constitution and laws.
Part one lists the objectives of the agreement. Its basic goals include the desire to improve labor conditions and encourage compliance with labor laws. Another goal is to encourage open sharing of information (transparency) among the three countries regarding their respective labor laws and their enforcement of those laws.
Part two of the Labor Side Agreement discusses the obligations of the parties. Each party is responsible for enforcement of its own labor laws, but the parties agree that proceedings dealing with enforcement of labor laws will be "fair" and tribunals will be "impartial." Labor laws and information about their enforcement are to be made public, and public education will be promoted.
Part three establishes a Commission for Labor Cooperation. It will consist of a council and a secretariat. The council meets at least once a year or upon the request of one of the parties. Its primary tasks are to oversee implementation of the Labor Side Agreement and to promote cooperation among the parties on various labor issues.
The secretariat is headed by an executive director, and that position is rotated among the three countries. The secretariat's tasks are to assist the council, make public the labor policies of each country, and prepare studies requested by the council.
The United States, Mexico, and Canada have each established a National Administrative Office (NAO) led by a secretary. NAOs are responsible for gathering information within their respective countries and conveying it to the secretariat and the other two NAFTA parties. In addition, the Labor Side Agreement allows the NAOs in each country to review each other's labor laws (and enforcement) in response to complaints from workers.
In the event of a dispute related to the Labor Side Agreement, the leader of one of the NAFTA parties may request a meeting with another leader to attempt to resolve the dispute. The allegation cannot be based on a single failure to enforce its own laws. Instead, any complaint must be based on a "persistent pattern of failure by the Party complained against to effectively enforce its occupational safety and health, child labor, or minimum wage technical labor standards." All three NAFTA parties are allowed to participate in such a meeting. If the matter is not resolved by those leaders, a party-country may request that an Evaluation Committee of Experts (ECE) be established. The ECE will study the matter and submit a report to the council. The purpose of this report is to allow a party to obtain information about the practices and enforcement of labor laws by another NAFTA party.
After the ECE's report is presented, the parties will try to resolve any dispute between themselves. If this fails, the council may attempt to assist the parties in resolving the dispute. Finally, if the matter is not resolved, the council may convene an arbitration panel, chosen from a roster of 45 people chosen pursuant to qualifications outlined in the Labor Side Agreement. The panel convenes, receives input from each of the disputing party-countries, and prepares an initial report. After reviewing comments from each of the parties, a final report is prepared. If it is found that a party "persistently failed" to enforce its laws, the disputing parties will prepare an action plan. If the parties do not agree or if the plan is not fully implemented, the panel can be reconvened. If the panel finds that the plan was not implemented, the offending party can be fined. If the fine is not paid, NAFTA trade benefits can be suspended to pay the fine. As of 1999, however, such a sanction has not been ordered.
Thus, the Labor Side Agreement provides a mechanism for dealing with a party-country that shows a "pattern of practice" of failing to enforce its occupational safety and health, child labor, or minimum wage technical labor standards. The Labor Commission is supposed to pressure NAFTA countries into enforcing their own labor laws, but it lacks a meaningful method for punishing them. For example, managers at the ITAPSA brake parts factory in the State of Mexico, Mexico, fired assembly-line workers in retaliation for voting for an independent union. The U.S. and Canadian NAOs issued reports recommending that the former workers be restored to their jobs, but, according to Robert Donnelly, that has not happened.
As we enter the 21st century, organized labor in the United States continues to oppose NAFTA; labor representatives view the Labor Side Agreement as an ineffective mechanism that is unenforceable. The most significant achievement of the Labor Side Agreement to date is similar to that of the Environmental Side Agreement: complaints before the Labor Commission and the NAOs of the three countries have attracted media attention. And that media attention, in turn, may be compelling countries to enforce their own labor laws to a greater extent than might otherwise occur.
TRADE AND ECONOMIC CONSEQUENCES
NAFTA is facilitating an unprecedented level of economic integration in North America. It is creating opportunities for investment and growth by private business, and it is promoting more stable relations between and among the United States, Mexico, and Canada. Nevertheless, NAFTA is not welcomed by all people in the three countries. Overall, NAFTA is neither a complete success nor a complete failure. Its benefits vary for each of the three countries.
The effects of NAFTA on trade between the United States and Canada have not been as dramatic. The U.S.-Canada Free Trade Agreement was enacted in 1989, and tariffs between the United States and Canada were completely eliminated (with a few minor exceptions) as of 1998. Therefore, under NAFTA, trade observers have focused on effects on Mexico.
Mexico has benefited from NAFTA in substantial ways including, but not limited to, the following: First, as of 1998 Mexico passed Japan to become the second-largest trading partner of the United States. Second, exports from maquiladoras (in Mexico) to the United States are up about 135 percent comparing 1994 to 1999. (The maquiladora program was established pursuant to an agreement between the United States and Mexico. The agreement allows U.S. businesses to operate manufacturing facilities in northern Mexico, with restrictions, including the condition that all products produced be returned to the United States.) Third, direct foreign investment in Mexico has grown tremendously. It was at about $4 billion before NAFTA and reached over $10 billion in 1998. Fourth, Mexico is beginning to enjoy a more diversified economy. Before NAFTA, oil production was its primary source of revenue; now the manufacturing sector is becoming its primary source.
NAFTA's effect on the United States has not been as dramatic. In 1993, in his book Save Your Job, Save Our Country, former U.S. presidential candidate and businessperson H. Ross Perot (1930-) warned workers of a "giant sucking sound" that would be the flow of American jobs to Mexico. In reality, NAFTA's effect on jobs in the United States has varied. The jobs that have been most vulnerable are those that require unskilled labor and those that were, in the past, protected by high U.S. tariffs. Such industries include the clothing industry, glassware, and manufacture of ceramic tiles. The American Textile Manufacturers Association strongly opposed and continues to oppose NAFTA because lower labor costs in Mexico make it hard for U.S.-manufactured clothing to compete with low-priced garments made in Mexico. On the other hand, it is reported that NAFTA led to the creation of 100,000 jobs in the United States during the first half of 1994, and that as of January 1995 there were at least 700,000 U.S. jobs that depended on exports to Mexico. Trade officials say that 2.6 million U.S. jobs were supported by exports to Mexico and Canada in 1998.
Economic consequences of NAFTA for Mexico are more significant than those for the United States because Mexico has a much smaller economy. As of 1993, the $6 trillion American economy was 20 times the size of Mexico's. As of 1998, U.S.-Mexico trade totaled $173.3 billion in a U.S. economy with a GDP of $8.5 trillion. In contrast, Mexico had a GDP of about $381 billion in 1998.
FACTORS AFFECTING CONTINUING DEVELOPMENT OF TRADE WITH AND WITHIN MEXICO
NAFTA does not represent a blessing for Mexico's unskilled workers and their families. Workers are obtaining employment at low wages in new manufacturing facilities. Their wages, however, are not sufficient to enable them to purchase decent housing, clothing, and good food for their families. Due to a lack of potable water, inadequate sewage facilities, inadequate or unavailable electricity, and other inadequate or unavailable services in the areas around new industrial facilities, life for workers and their families is often a miserable existence. Diseases and illness due to a lack of sanitary facilities and due to industrial pollution are prevalent and are increasing.
There have been scandals within Mexico's government. On March 23, 1994, Luis Donaldo Colosio, the leading candidate for election to Mexico's presidency, was assassinated during a political rally. In August 1994, Ernesto Zedillo was elected to the presidency. His election was reassuring to investors who were awaiting the results of the election, because he advocated economic and political policies similar to those of former President Carlos Salinas, who led Mexico in approving NAFTA. During 1995, however, there were additional scandals within Mexico's government. The brother of former President Salinas was arrested in March 1995 and convicted in 1998 of planning the murder of Jose Francisco Ruiz, who had been governor of the Mexican state of Guerrero from 1987 to 1993. In the aftermath of his brother's arrest, and accusations Salinas himself embezzled millions of dollars, he left Mexico and went into exile in Europe.
In addition, on January 1,1994, the effective date of NAFTA, there was an uprising in Chiapas, Mexico, led by Zapatista rebels. (The rebels take their name from the early 20th-century Mexican revolutionary leader Emiliano Zapata [1879-1919].) After the initial fighting, which resulted in at least 145 deaths, the rebellion has continued to simmer, with occasional armed conflicts, for over six years. The Zapatistas are protesting political injustices, extreme poverty, and ethnic oppression of the indigenous people of Chiapas. They are also protesting NAFTA and the environmental degradation resulting from increased industrialization of Mexico.
Foreign investments in Mexico have been stemmed by Mexico's financial crisis of 1995-96 and its continuing financial problems since then. In November 1994, the Mexican peso was trading for slightly over three pesos per U.S. dollar. But the exchange rate had dropped to a low of 7.7 pesos per dollar as of March 9, 1995. Further, inflation in Mexico reached an annualized rate of 64 percent as of February 1995. In March 1995, the United States extended $20 million in loans and loan guarantees to Mexico. In return, Mexico instituted an economic plan that included sweeping budget cuts, increased taxes, and approved provisions allowing the United States to oversee Mexico's handling of its economy. The loans have been repaid, but the agreement caused Mexican citizens accuse President Zedillo of" trading his nation's sovereignty" for American dollars.
Meanwhile, Mexico's response to the debt crisis included creation of an official bank bailout program called Bank Fund for Savings Protection (Fondo Bancario para Proteccin de Ahorrolso known as Profoba or Fobaproa). But, according to Angelo Young, the program has been plagued by scandal and allegations of illegal practices. In early 1999, the Mexican Congress passed a set of reforms to replace Profoba with a new Bank Savings Protection Institute (IPAB) that is modeled after the Federal Deposit Insurance Corporation in the United States. IPAB is charged with administering a debt-relief package that will discount amounts owed on loans from 16 percent to 60 percent, depending on the type of loan. It is expected that business, agricultural, and small domestic debtors will benefit from the plan.
Environmentalists, business representatives, and the governments of the three NAFTA countries agree that environmental contamination has reached serious proportions in northern Mexico, where U.S. businesses have been operating for nearly three decades under the maquiladora program and where industrial development has continued to grow under NAFTA.
The hazardous waste treatment industry was expected to be a major area for U.S. investors under NAFTA. The United States could offer experience and expertise that Mexicans lacked. Sadly, however, "five years into NAFTA, Mexico's hazardous waste industry is in total disarray," as reported by Sam Quínones. Of seven major waste-treatment projects in which tens of millions have been invested, all are "stalled." "As it stands, Mexico has less landfill infrastructure than it had before NAFTA," Quínones related.
A few observers are guardedly optimistic that, in the long term, NAFTA may result in better environmental conditions in Mexico and in the U.S.-Mexican border area. Such optimism rests on the belief that the success of NAFTA itself will help the environment. If jobs are created in Mexico, and wages increase, and Mexico's economy improves, there should be more money available for what is needed environmentally. Money is needed for personnel to enforce Mexico's environmental laws; money is needed for infrastructure, including waste disposal facilities, water treatment and sewage facilities; and technology and equipment are needed to create safer working conditions inside and outside the walls of industrial facilities.
What happened during the first six years of NAFTA? The effects of NAFTA on trade between Canada and the United States were visible but not unexpected, because the United States and Canada already had a free trade agreement that eliminated nearly all tariffs as of 1998. Meanwhile, Mexico has seen significant increases in trade with the United States and Canada since 1994.
On the other hand, NAFTA has not been a success for labor interests and the environment. The Labor Commission created under the Labor Side Agreement has had little success in improving the status of workers. And the Environmental Commission has had similar limited results. Further, the environmental contamination in Mexico is escalating.
Meanwhile, NAFTA is being watched closely by observers throughout the world, because it is being used as a model for other agreements. For example, in December 1994, the United States and 33 other Western Hemisphere countries met in Miami, Florida, for a "Summit of the Americas." At the summit, the 34 countries agreed to create a Free Trade Area of the Americas (FTAA) by the year 2005. The FTAA will be modeled after NAFTA. As an immediate step, at the close of the 1994 Summit of the Americas, the United States, Canada, and Mexico announced their plans to admit Chile to NAFTA by 1996, but that did not happen for a variety of political and economic reasons.
Therefore, NAFTA's provisions and its implementation will continue to be watched closely. NAFTA must be monitored to determine whether its provisions need modification and to determine whether its provisions provide a suitable model for additional trade agreements, such as the FTAA.
[Paulette L. Stenzel]
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