NORTH AMERICAN FREE TRADE AGREEMENT

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 tariffs—the taxes each nation imposes on the others' imports—and 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 1988—implemented by the United States-Canada Free Trade Agreement Implementation Act (19 U.S.C.A. § 2112 note [Supp. 1993])—which, 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 in the agreement. But opponents concentrated their attack on the implications for the relationship between the United States and Mexico. They feared several potential outcomes if NAFTA were signed: the loss of U.S. jobs, damage to the environment as a result of economic growth in Mexico, and the likelihood that U.S. safety regulations would be challenged as barriers to free trade.

In 1993, a coalition of consumer and environmental groups brought suit in an attempt to block congressional consideration of the agreement. In Public Citizen v. United States Trade Representative, 5 F.3d 549 (D.C. Cir. 1993), the coalition argued that the administration of President bill clinton had failed to comply with the national environmental policy act (42 U.S.C.A. §§ 4321 et seq. [1977]), which requires all federal agencies to submit environmental impact statements for all legislation or actions that affect the environment. The suit failed when a federal appellate court ruled that it had no authority to review the president's actions.

In response to anti-NAFTA criticisms, the White House negotiated three side agreements that were signed on September 14, 1993. The side agreements attempted to ensure that the three countries comply with their own labor and

environmental laws; established fines and limited trade sanctions for violations; and called for consultations by the members if increases in imports from one country appeared to be having a devastating effect on an industry in one of the other countries. Two months later NAFTA won congressional approval. The House of Representatives narrowly passed the implementing legislation (North American Free Trade Implementation Act [19 U.S.C.A. §§ 3314 et seq., Pub. L. No. 103-182, 107 Stat. 2057]), and the Senate also passed it.

NAFTA specifies a timetable for its changes. When the agreement went into effect on January 1, 1994, the United States eliminated all tariffs on 60 percent of imports from Mexico that previously were subject to tariffs. On January 1, 2003, more U.S. tariffs on Mexico's imports were removed, and 92 percent of previously taxed Mexican goods were able to enter the United States without tariffs. Finally, on January 1, 2008, all remaining tariffs on the three countries' goods will be eliminated. Other barriers were removed beginning January 1, 2000. For instance, U.S. banks, which had traditionally been shut out of Mexico, became free to take over as much as 15 percent of the Mexican financial market.

Investor Protection Provisions Under NAFTA

One of the more controversial provisions in NAFTA (Chapter 11) involves the "investor-to-state" dispute resolution process. This provision provides a vehicle and a forum for corporations and other companies to sue governments directly for what is called "regulatory expropriation", which is similar to eminent domain under domestic law. A company may allege regulatory expropriation in such instances as the actual taking of property by a country through condemnation, or constructive taking by way of laws or regulations that negatively affect the commercial value of a property. In order for a company to bring suit under this provision, it need only show that it is an "investor party."

In Metalclad Corp. v. Mexico, a special NAFTA dispute resolutions panel awarded U.S. corporation Metalclad $16.7 million in damages under this provision. In response, Mexico filed an appeal. The decision was then reviewed by a neutral Canadian court, the Supreme Court of the Province of British Columbia, which upheld the decision, but slightly reduced the damages to $15 million. Both parties withdrew their appeals in 2001.

Metalclad, a U.S. waste-disposal company, requested the creation of the special NAFTA tribunal in 1997, after a local Mexican government condemned property that Metalclad owned. The property in question was a closed toxic-waste dumping site, which Metalclad had purchased, and which the company intended to clean up and reopen. After it purchased the site, Metalclad successfully secured permits for the $20 million project from Mexican federal authorities, including federal environmental agencies, but it had not coordinated with local authorities. Local and state authorities refused to issue permits to Metalclad, claiming that the site was part of a 600,000-acre protected environmental reserve.

Metalclad complained to NAFTA officials, charging that the Mexican government's actions constituted expropriation. Mexico countered that Metalclad had started construction without waiting for all levels of approval. In particular, what angered Mexican authorities was that Metalclad had bypassed local jurisdictional forums and gone directly to NAFTA, claiming $90 million in damages and lost profits. The Canadian court that reviewed the appeal found that the original NAFTA panel, meeting behind closed doors in Washington, had interpreted the NAFTA Chapter 11 investor protection clause too broadly. It disagreed with the panel's decision that federal, state, and local governments in Mexico had issued a series of contradictory declarations to Metalclad, which violated NAFTA's guarantee of clear and transparent rules to protect investors.

By 2001, at least nine companies had invoked NAFTA's investor protection clause to file multimillion-dollar damage claims against the three member countries of NAFTA. Many of them alleged trade-restrictive practices involving environmental regulations. Canada's Methanex Corporation filed a claim against the state of California, charging that the state's ban on the gasoline additive MTBE resulted in company losses of more than $1 billion. Conversely, the U.S.-based Ethyl Corporation was reimbursed $13 million in damages for Canada's restrictions on the importation of the gasoline additive MMT. Another U.S. company, S. D. Myers, sought $20 million in damages against Canada for its ban on importing PCB chemicals.

further readings

Hufbauer, Gary Clyde, et al. 2000. NAFTA and the Environment: Seven Years Later. Washington, D.C.: Institute for International Economics.

NAFTA Handbook. 2002. Buffalo, N.Y.: W. S. Hein.

cross-references

Canada and the United States; Mexico and the United States.

NORTH AMERICAN FREE TRADE AGREEMENT

NORTH AMERICAN FREE TRADE AGREEMENT. The General Agreement on Tariffs and Trade (GATT), which went into effect in 1948 in the wake of World War II, sought to expand free trade by reducing tariffs between the twenty-three signatory nations. A strong supporter of GATT throughout its history, the United States in 1986 began to urge that GATT move beyond the reduction of trade barriers and that its agenda include foreign investment, services, agriculture, and intellectual property rights.

Increasing competition from Pacific and European countries caused the United States to begin trying to assemble a dollar-dominated block in the American hemisphere. This desire led first to the Free Trade Agreement (FTA) with Canada, effective January 1989, and then to an expanded trilateral agreement with Canada and Mexico, the North American Free Trade Agreement (NAFTA), effective January 1994. Given the earlier agreement between the United States and Canada, NAFTA dealt primarily with restructuring trade between the United States and Mexico and between Mexico and Canada. All tariffs between the United States and Canada would end by the year 1998; those between the United States and Mexico would be eliminated by 2008.

The agreements, however, much like the expanded agenda for GATT, covered more than the elimination of trade barriers and led to divisive debate in all three countries. Concerns among Canadians in 1988 and Mexicans in 1992 reflected a lingering view of the United States as a powerful nation that might yet seek to swallow up or strangle its neighbors. While some critics employed a powerful emotional rhetoric reminiscent of the days when the United States was roundly condemned as the Colossus of the North, others focused on the perceived need to protect Canadian and Mexican sovereignty, which they saw as threatened by expanded U.S. investment in such crucial national resources as oil and in institutions such as banking. Given the unequal status between them and their powerful neighbor, these opponents argued, both Canada and Mexico risked becoming in effect economic colonies of the United States.

In 1988 Canadians voiced many of the same concerns expressed by labor leaders and environmentalists in the United States in the early 1990s. Because Canada was already part of GATT, Canadians questioned the necessity of the FTA and the benefit to Canada of tying itself more closely to the largest debtor nation in the world. They argued that the movement of jobs from Canada to the United States, already a problem because of lower U.S. labor costs, would accelerate and that Canada's higher standards of environmental regulation and social programs would be threatened by U.S. investment and business practices. By far the most emotional issue in all three countries was the effect of NAFTA on employment. While proponents of NAFTA stressed that implementation would create jobs, opponents argued that the accord would lead to job loss. The negotiations commenced and continued during a period of global recession and high unemployment. While the movement of jobs from Canada to the United States and from the United States to Mexico had preceded the FTA and NAFTA negotiations, labor groups in both the United States and Canada were unshakable in their opposition.

As the leaders of both Mexico and the United States sought to assuage the fears of those at home who opposed NAFTA, the fate of the pact had implications beyond the borders of North America in the early 1990s. When President George Bush and Mexican President Carlos Salinas de Gortari announced in June 1990 the possibility of a free trade agreement between Mexico and the United States, Bush also announced the Enterprise for the Americas Initiative, which envisioned a free-trade block stretching from Alaska to Tierra del Fuego. This announcement preceded a dizzying number of new trading alignments within Latin America, including the agreement among Argentina, Brazil, Paraguay, and Uruguay in March 1991 to establish MERCOSUR, which pledged to integrate their economies by 1995, and numerous framework trade agreements between the United States and its southern neighbors.

The creation of a multinational trading bloc was a political and economic project. By the early 1990s, Latin American leaders had come to see the opportunity to move closer to the United States economically as a way to move their countries politically along a modern path of reform. At stake, then, was more than an economic reordering of the relationship among the three North American countries; there was also a foreign policy objective: strengthening political ties throughout the hemisphere. The U.S. Congress approved NAFTA in November 1993. A complicated and cumbersome document largely unread by proponents and opponents alike, it included concessions from all the parties because the United States, Mexico, and Canada saw in it an opportunity to promote their own economies, and protect the frailest components of those economies.

BIBLIOGRAPHY

Bowker, Marjorie Montgomery. On Guard for Thee: An Independent Analysis, Based on the Actual Test of the Canada-U.S. Free Trade Agreement. Hull, Quebec: Voyageur, 1988.

Bulmer-Thomas, Victor, Nikki Craske, and Monica Serrano, eds. Mexico and the North American Free Trade Agreement: Who Will Benefit? New York: St. Martin's Press, 1994.

Cavanagh, John, et al., eds. Trading Freedom: How Free Trade Affects Our Lives, Work, and Environment. San Francisco: Institute for Food and Development Policy, 1992.

MaryCommager/a. g.

See alsoCanada, Relations with ; Foreign Investment in the United States ; Mexico, Relations with ; Tariff ; Trade, Foreign .