North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) is an international trade agreement among the United States, Canada, and Mexico that became effective on January 1, 1994. Pursuant to NAFTA most tariffs among the three countries are being phased out over a period of fifteen years. In addition, the agreement liberalizes rules regulating investment by United States and Canadian firms in Mexico. NAFTA includes side agreements on environment , labor, and dealing with import surges. Controversy surrounding the adoption of NAFTA by the United States in 1993 included issues related to trade, employment, immigration, labor law, and environmental protection. And, several years after its effective date, observers continue to debate the wisdom of the agreement. The economic slowdown in the United States that began in 2001 has intensified public debate over NAFTA's provisions.

While NAFTA's adoption was being debated, environmentalists were divided in response to whether or not we are environmentally better off with NAFTA. Thus, its adoption was opposed by some environmental groups and supported by others. Major groups opposing it included the Sierra Club , Greenpeace , the United States Public Interest Research Group (U.S. PIRG), Citizen's Action, Public Citizen: the Clean Water Fund, and the Student Environmental Action Coalition . NAFTA was supported, however, by a coalition of major environmental organizations including the National Wildlife Federation , the World Wildlife Fund , the National Audubon Society , the Environmental Defense Council, the Natural Resources Defense Council , Conservation International , and Defenders of Wildlife , and the Nature Conservancy . Such division among environmentalists with respect to NAFTA and its consequences for the environment continues through the present day.

NAFTA's provisions

NAFTA is first and overall a trade agreement. Thus, the majority of the provisions within its over 1,200 pages focus on elimination of barriers to trade. Over a period of fifteen years, beginning on January 1, 1994, tariffs on over 9,000 products traded among the United States, Mexico, and Canada are being phased out. In addition, other "non-tariff" barriers to trade are being eased or eliminated.

Elimination of tariffs

Tariffs on approximately 4,500 products traded among the NAFTA parties were eliminated on January 1, 1994, and by 1999 tariffs will remain on only about 3,000 products. The remainder will be phased out by the year 2009. The period during which tariffs are phased out gives producers time to adjust gradually to competition from products of other NAFTA countries. Those products for which tariffs are being phased out gradually are labeled "sensitive products" and include many farm commodities. For example, to protect Mexican producers, corn and dry beans are being protected through a "phase-out" period for tariffs. Producers in the United States are being protected with respect to sugar, asparagus, orange juice concentrate, and melons.

The automobile industry is another area for which NAFTA includes special provisions. NAFTA sets out formulas requiring a certain minimum percentage of content from North America (the three NAFTA parties) for an automobile to qualify for duty-free treatment. By 2002, automobiles must contain 62.5% North American content to qualify for such treatment.

The fact that Mexico agreed to abolish tariffs in certain sectors of the economy is important to U.S. investors. For example, telecommunications in Mexico are underdeveloped, and that country has a poor quality telephone system. By 1998, Mexico phased out all tariffs on telecommunications service and equipment.

Removal of non-tariff barriers to trade

NAFTA removes certain barriers to trade that are not in the form of tariffs. For example, NAFTA allows financial service providers of a NAFTA country to establish banking, insurance, securities operations, and other types of financial services in another NAFTA country. NAFTA also provides U.S. and Canadian firms with greater access to Mexico's energy markets. Under NAFTA, U.S. and Canadian firms can sell products to PEMEX, Mexico's federally owned petroleum company. In addition, Mexico has opened operation of self-generation, cogeneration , and independent power plants in Mexico to investment by U.S. or Canadian firms.

Transportation has also been facilitated by NAFTA. Since 1995, U.S., Mexican, and Canadian firms have been allowed to establish cross-border routes. In the early summer of 2002, the United States signed an agreement allowing Mexican trucks to travel throughout the United States. The long-term effects of transportation agreements are difficult to evaluate, however. Statistics for 2001 indicate that truck crossings into the United States from Canada and Mexico fell by 4.2% from their level in 2000. This decrease represents the first annual decline since the agreement among the three countries took effect in 1994. On the other hand, this decrease may be only temporary, as it reflects the impact of tightened border security measures following the terrorist attacks of September 11, 2001.

NAFTA does not create a common market for movement of labor, but it does provide for temporary entry of business people from one NAFTA country into another. The four different categories for such movement of workers include business visitors in marketing, sales and related activities, traders and investors, specified kinds of intracompany transfers, and specified professionals meeting educational or special knowledge requirements.

Dispute resolution

Administration of NAFTA is handled by a Commission of cabinet-level officers each of whom has been appointed by one of the NAFTA countries. The Commission includes a Secretary, who is the chief administrator.

The process for resolution of disputes under NAFTA is cumbersome and time-consuming. When a dispute arises with respect to a NAFTA country's rights under the agreement, a consultation can be requested. If the consultation does not resolve the dispute, the Commission will seek to resolve the dispute through alternative dispute resolution procedures. If those are unsuccessful, the complaining country can request the establishment of a five member arbitration panel which will recommend solutions, monitor results, and, if necessary, impose sanctions.

NAFTA's side agreements

In areas involving labor law and environmental protection, NAFTA's provisions are limited.

Labor side agreement

The North American Agreement on Labor Cooperation, also known as the "Side Agreement on Labor" or "Labor Side Agreement," was negotiated in response to concerns that NAFTA itself did little to protect workers in Mexico, the United States, and Canada. In the Labor Side Agreement, the three countries articulate their desire to improve labor conditions and encourage compliance with labor laws. Each party agrees to enforce its own labor laws, but new laws protecting workers are not established. The Agreement establishes a multiple-step process for dealing with instances in which a NAFTA country has exhibited a "consistent pattern of ... failure to effectively enforce its own occupational safety and health, child labor, or minimum wage labor standards." If the three NAFTA parties cannot agree to a resolution, then a committee of experts can be convened to assist in resolving the dispute.

Seven years after NAFTA was enacted, a number of observers consider its side agreement on labor a conspicuous failure that protected international investors at the expense of ordinary workers in all three countries. In the United States, NAFTA led to the elimination of 800,000 manufacturing jobs. Contrary to predictions in 1995, the agreement did not result in an increased trade surplus with Mexico, but the reverse. As manufacturing jobs disappeared, workers in the United States were downscaled to lower-paying, less-secure services jobs. Employers' threats to move production to Mexico became a powerful weapon for undercutting workers' bargaining power. In Canada, a similar process has brought about a decline in stable full-time employment as well as damaging Canada's social safety net.

Mexican workers have not benefited from this redistribution of jobs. While some manufacturing jobs did move to Mexico, they are largely confined to maquiladoras just across the border. Maquiladoras are factories that assemble electronics equipment and small appliances for export. Workers are typically paid low wages and have few rights. The maquiladoras are isolated from the rest of the Mexican economy and contribute very little to its development. In addition, the expiration of the duty-free status of maquiladora products in 2001 means that these factories are less competitive in the global market. As a result, many foreign companies began to shut down their plants in Mexico in 2002.

Environmental side agreement

The North American Agreement on Environmental Cooperation, also known as the "Environmental Side Agreement," was adopted along with the Labor Side Agreement and was negotiated in response to concerns that the body of NAFTA did little to protect the environment. In the Environmental Side Agreement, the three parties articulate their desire to promote environmental concerns without harming the economy, and promote open public discussion of environmental issues. As in the Labor Side Agreement with respect to labor laws, each party agrees to enforce its own environmental laws, but no new environmental laws are made. The agreement establishes a Commission for Environmental Cooperation (CEC) that includes a Secretariat and a Council, which is charged with implementing the side agreement.

The Environmental Side Agreement allows a nongovernmental organization (such as an environmental group) or a private citizen to file a complaint with the Commission asserting that a NAFTA country "has shown a persistent pattern of failure to effectively enforce its environmental laws." Thus, such groups and individuals can serve as watchdogs for the Commission.

The Environmental Side Agreement allows a NAFTA country to request a consultation with a second NAFTA country regarding that second country's persistent pattern of failure to enforce its environmental laws. If a resolution is not reached as a result of the consultation, a party can request that the Council meet. If the Council is unable to resolve the dispute, it can convene an arbitration panel, which will study the dispute and issue a report. After the parties submit comments, the report is made final. The parties are given an opportunity to reach their own action plan, but, if there is no such agreement, the panel can be reconvened to establish a plan. If an imposed fine is not paid, as under the Labor Side Agreement, NAFTA benefits can be suspended.

Environmental consequences of NAFTA

Environmentalists share many concerns with respect to NAFTA, three of which will be introduced here. First, environmentalists are concerned that NAFTA represents a threat to the sovereignty of the United States because U.S. environmental laws may be challenged under NAFTA. For example, it is feared that the U.S. will not be allowed to refuse entry of goods produced in Mexico even if those goods are produced using production methods that do not meet U.S. environmental, health, or food safety standards. This is based on U.S. experience under the General Agreement on Tariffs and Trade (GATT) when a GATT panel declared that a U.S. embargo on Mexican tuna caught using methods violating the U.S. Marine Mammal Protection Act was illegal. The GATT panel held that products must be treated equally regardless of how they are produced.

Ironically, the first major challenge to national sovereignty came from Canadian corporations. A Canadian conglomerate known as Methanex made use of a little-known section of NAFTA known as Chapter 11 to sue the state of California, demanding financial compensation for loss of market share. Methanex is the world's largest producer of the key ingredient in a gasoline additive known as MBTE, a substance that California ordered to be phased out after it began to contaminate public water systems in 1995. A phrase in Chapter 11 written to protect investors from having their property seized by foreign governments has been invoked to justify corporate lawsuits against state and federal environmental regulations. Other examples of cross-border lawsuits include another Canadian company's suit against the state of Mississippi, and a United States corporation's suit against the government of Canada for banning another gasoline additive.

Second, environmentalists label Mexico as a "pollution haven" for U.S. businesses seeking less-stringent enforcement of environmental laws than that which occurs in the United States. Concerns about environmental degradation in Mexico due to increased industrialization do seem to be valid. Environmentalists, business leaders, and government officials from the three NAFTA countries agree that environmental contamination had reached serious proportions in northern Mexico in the decades preceding the 1994 effective date of NAFTA. Such contamination continues to spread as Mexico becomes more heavily industrialized under NAFTA. A report published by the CEC in 2002 indicates that chemical producers accounted for the largest amount of pollutants.

On paper, Mexico has environmental laws that parallel many, but not all, of the federal environmental laws of the United States. Mexico's 1988 Código Ecológico, known in English as the "General Ecology Law," is a comprehensive statute addressing pollution , resource conservation , and environmental enforcement . Often, however, Mexico's environmental laws are not enforced. This lack of enforcement can be attributed to a variety of reasons. For one thing, the statutes are relatively new, dating only from 1988, and regulations have not been made to supplement the laws. Also, Mexico is a country in which people distrust the legal system and where there are widespread violations of law in various areas (not limited to environmental laws.) Noncompliance with law is accepted and expected in many areas in Mexico. Since Mexico is a developing country striving to implement open, democratic systems of government, this casual attitude toward legislation is a significant hurdle to be overcome throughout Mexican society.

Third, Mexico is a debt-ridden country that continues to struggle with periodic financial crises. Thus, even if Mexi co's leaders were convinced that there should be vigorous enforcement of environmental laws and regulations, Mexico lacks money for such enforcement. In connection with its lack of capital, Mexico lacks technology and it lacks infrastructure such as water treatment plants, sewage systems, and waste disposal facilities. For example, as of mid-1997, in the entire country of Mexico, there was only one facility licensed for disposal of hazardous wastes. Lacking a place to dispose of toxics and knowing the low probability of being cited by government officials for violations, most companies and individuals continue to dump hazardous wastes into Mexico's waters and air and onto its land. Mexico's citizens do not want to live with the contamination any more than we do in the United States. They feel, however, that they are less empowered to "do something about it" than we are as U.S. citizens.

Looking ahead

NAFTA represents a significant turning point in international law, because it recognizes explicitly that trade policy and environmental policy are inextricably linked. Through its Environmental Side Agreement, it establishes mechanisms for dealing with citizens' concerns and for dealing with that party or country that systematically fails to enforce its own environmental laws. However, NAFTA's environmental provisions provide only a foundation upon which citizens and governments of the U.S., Mexico, and Canada must build if the environment of North America is to be protected from the often detrimental effects of expanded trade. As of 2002, those detrimental effects have been sufficiently obvious to produce a growing chorus of criticisms of NAFTA. Proposals to create a Free Trade Area of the Americas (FTAA), which would represent an extension of NAFTA's provisions to every country in Central America, South America, and the Caribbean except Cuba, have provoked widespread protest from a variety of environmental and social justice organizations.

[Rebecca J. Frey, Ph.D. ]

RESOURCES

BOOKS

Bello, J. H., A. F. Holmer, and J. J. Norton, eds. NAFTA: a New Frontier in International Trade and Investment in the Americas. American Bar Association Section of International Law & Practice, 1994.

Hufbauer, G. C., and J. J. Schott, NAFTA: An Assessment. The Institute for International Economics, 1993.

MacArthur, John R. The Selling of Free Trade: NAFTA, Washington, and the Subversion of American Democracy. New York: Farrar, Straus and Giroux, 2000.

Moran, R. T., and J. Abbott, NAFTA: Managing the Cultural Differences. Gulf Publishing Company, 1994.

PERIODICALS

Franz, Neil. "Report Tracks NAFTA Region Emissions." Chemical Week 164 (June 5, 2002): 39.

Knight, Danielle. "Environment Groups Organise Against NAFTA Rules." International Third World Press Service (IPS), September 8, 2000.

Smith, Geri. "The Decline of the Maquiladora." Business Week. April 29, 2002.

Stenzel, P.L. "Can NAFTA's Environmental Provisions Promote Sustainable Development?" 59 Albany Law Review 59 (1995): 423–480.

OTHER

Economic Policy Institute. NAFTA at Seven. Washington, DC: Economic Policy Institute, 2001.

Global Exchange. Documentary Exposing How NAFTA's Chapter 11 Has Become Private Justice for Foreign Companies. January 7, 2002.

Williams, Edward J. The Maquiladora Industry and Environmental Degradation in the United States–Mexican Borderlands. Paper presented at the annual meeting of the Latin American Studies Association, Washington, DC, September 1995.

ORGANIZATIONS

NAFTA Information Center, Texas A&M International University, College of Business Administration, 5201 University Blvd., Laredo, TX USA 78041-1900 (956)326-2550, Fax: (956)326-2544, Email: [email protected], <www.tamiu.edu/coba/usmtr/>