North American Free Trade Agreement

North America 1992

Synopsis

After two years of negotiations, the North American Free Trade Agreement (NAFTA) was signed on 17 December 1992 by President Bush of the United States, President Salinas of Mexico, and Prime Minister Mulroney of Canada. NAFTA took effect on 1 January 1994. The act immediately lifted the majority of tariffs on goods exported among the three countries, with the remaining barriers to free trade of goods and services to be phased out over a period of 15 years. Additional provisions included in NAFTA cover environmental and labor concerns. The agreement also provides for future regional and multilateral cooperation to expand free-trade areas in the Americas.

Timeline

• 1973: Signing of peace accords in Paris in January ends the Vietnam War.
• 1978: U.S. Senate approves a measure presented by President Carter the year before, to turn the Panama Canal over to Panama by 2000.
• 1982: Argentina invades the Falkland Islands, a British possession, and Great Britain strikes back in a ten-week war from which Britain emerges victorious.
• 1986: In November, the scandal variously known as Iran Contra, Irangate, and Contragate breaks, when it is revealed that the Reagan administration agreed to sell arms to Iran in exchange for hostages, and to divert the funds from the arms sales to support the anti-Sandinista Contras in Nicaragua.
• 1991: The United States and other allies in the UN force commence the war against Iraq on 15 January. By 3 April the war is over, a resounding victory for the Allied force.
• 1992: Trouble begins after the Yugoslav Federation breaks up in January. Soon Yugoslavia, now dominated by Serbia, is at war in several former Yugoslav republics, and in September, the United Nations expels Yugoslavia.
• 1992: Former Panamanian leader General Manuel Noriega is convicted on drug charges in a U.S. court and is sentenced to forty years in prison.
• 1992: Four Los Angeles police officers are acquitted in April on federal civil rights charges stemming from the 1991 beating of motorist Rodney King, an incident captured on videotape. Following the announcement of the verdict, Los Angeles erupts with rioting and looting.
• 1992: U.S. military forces depart the Philippines, ending nearly a century of American presence in that country.
• 1992: Despite a campaign fraught with controversy involving the candidate's evasion of the draft, his extramarital affairs, and allegations of shady financial dealings, Bill Clinton wins election as President of the United States. The election marks a changing of the guard in several respects: not only does it end twelve years of Republicans in the White House, but Clinton is the first baby boomer elected president.
• 1998: Scandal engulfs the White House amid allegations that President Clinton instructed former White House intern Monica Lewinsky to lie about their sexual affair. Clinton's fortunes begin to improve, however, late in the summer, after rumors circulate that his filmed deposition, scheduled to be televised, reveals damning evidence. In fact the deposition presents him in a positive light, and he appears as the victim of unfair scrutiny. Thenceforth, Clinton and his damage-control team have the upper hand, and in the end, it will be House Speaker Newt Gingrich, not Clinton, who is forced to step down.

Event and Its Context

NAFTA's Beginning

The negotiations that ultimately led to the North American Free Trade Agreement, NAFTA, began in August 1990 when the U.S. trade representative, Carla A. Hills, and the Mexican secretary for commerce and industrial development, Jamie Serra Puche, recommended to their respective presidents that formal negotiations should begin on a comprehensive free trade agreement. Shortly after that recommendation, President Salinas of Mexico sent a formal proposal to President Bush suggesting the negotiations should begin as soon as possible for a free trade agreement between the U.S. and Mexico in accordance with each country's official legal procedures.

The Canada-United States Free Trade Agreement, FTA, had been in place between the United States and Canada since 1 January 1989. The FTA had the general provisions for the gradual elimination of tariffs and the reduction of nontariff trade barriers on goods that were later incorporated into NAFTA in 1992. There were some improvements to FTA, however, when it was replaced by NAFTA. The main change was that NAFTA included Mexico and expanded free trade into such areas as investment, services, intellectual property, competition, the cross-border movement of business persons, and government procurement.

In September 1990 President Bush sent a formal notification to the chairman of the Committee on Ways and Means in accordance with the existing Omnibus Trade and Competitiveness Act of 1988 that negotiations were to begin with Mexico. He also noted that the Canadian government asked to participate in the negotiations with the intentions of getting an agreement among the three countries.

In March 1991 President Bush asked Congress to apply fast-track legislation to the proposed North American Free Trade Agreement and Congress agreed. Fast track is an expeditious procedure to get important legislation processed. The fast track procedure was included in the Trade Act of 1974. It provides for a strict timetable, a limit to the time spent on debate, and prohibition on adding amendments to the bill or resolution. Fast track provides for a 90-day window between the time the president notifies Congress and the date he actually signs the agreement.

On 12 August 1992 President Bush announced that the negotiations were completed for the North American Free Trade Agreement between Mexico, Canada, and the United States. On 7 October 1992 President Bush, President Salinas, and Prime Minister Mulroney met in San Antonio, Texas, where they made a commitment to adopt NAFTA in 1993 with an effective date of 1 January 1994. The actual signing of the Agreement was on 17 December 1992 when Bush, Salinas, and Mulroney each signed it in their respective capitals. The date was the last date President Bush could sign the agreement under the fast track provision.

By the time NAFTA was actually signed, President Bush had lost his bid for reelection to President-elect Clinton, but Clinton declared his support for NAFTA, with some reservations regarding issues he considered still needed to be addressed. These included the environment, workers, and special safeguards for unexpected surges in imports. NAFTA had become a hotly debated issue during the presidential campaign, particularly by a third-party candidate, Ross Perot, who declared in a heated presidential debate that the real effect of NAFTA would be a "giant sucking sound" caused by millions of jobs moving across the U.S. border to Mexico.

The Benefits of NAFTA

The 500-plus page NAFTA document is a complex legal agreement that spells out in great detail all aspects related to a free trade zone that represented a combined economy of $6.5 trillion and 370 million people in 1992. The North American Free Trade Agreement created the world's largest integrated market for goods and services. NAFTA also was designed to serve as a guide for the liberalization of trade throughout the Western Hemisphere.

Foremost in the agreement is the gradual elimination of all tariffs on North American-made goods. Because the United States and Canada already had a free-trade pact, the principal benefit of NAFTA was the increased trade opportunities with Mexico, which at the time was the second largest importer of U.S.-manufactured goods and the third largest importer of U.S. agricultural products.

Before NAFTA, Mexican tariffs were about two and a half times comparable to U.S. duties. NAFTA eliminated tariffs on more than half of the 9,000 goods traded between Mexico and the U.S., with about 15 percent more to be eliminated in the next five years. The tariffs on the rest were scheduled to be removed at intervals of between two and 15 years after the start of NAFTA. Product sensitivity determines the tariff removal schedule. Each country has some products that it feels need a longer period of protection to adjust to a free market. Sensitive products for Mexico include agricultural products such as orange juice, sugar, and corn. Textiles are another example. Approximately 65 percent of U.S. industrial and agricultural exports were either tariff free at the start of NAFTA or would be free within five years. The existing schedule for tariff reductions between the U.S. and Canada remained the same as it was in the 1989 Free Trade Agreement.

The principal benefits of NAFTA are outlined at the start of the agreement. They are then elaborated more specifically through sections on principles and rules that include national treatment and Most-Favored-Nation treatment. The United States changed the name "Most-Favored Nation" in 1998 to "Normal Trade Relations." Nearly all U.S. trading partners have Normal Trade Relations, which does not mean that they are free of tariffs.

As presented in the agreement under Article 102, NAFTA's objectives are to eliminate barriers to trade and facilitate the cross-border movement of goods and services, promote fair competition, increase investment opportunities in the countries governed by the agreement, protect and enforce intellectual property rights, create procedures for the implementation and administration of the agreement and for the resolution of disputes; and to establish a framework for cooperation in the expansion and enhancement of the benefits of the agreement.

The terms of the agreement dictate that NAFTA will prevail in the case of any conflict between it and other agreements that are in place. The exceptions to this are specific trade obligations that are set out in the Convention on International Trade in Endangered Species of Wild Fauna and Flora, the Montreal Protocol on Substances that Deplete the Ozone Layer, and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal.

NAFTA also provides for continuing adherence to two preexisting agreements: an agreement signed in 1983 between the United States and Mexico related to environmental concerns for the protection and improvement in the border area, and one signed in 1986 between the United States and Canada that governs the transboundary movement of hazardous waste.

Rules of Origin

NAFTA covers North American-made goods. This sounds straightforward, but it is not. A great many goods, particularly autos and automotive goods, are made in part or whole from materials of foreign origin. Textiles, another sensitive area, required incorporation of special Rules-of-Origin in the Agreement because they may be manufactured with foreign materials. Among the many regulations in NAFTA is one that stipulates that manufacturers of finished goods that are exported from a maquiladora (manufacturing plant) in Mexico to the U.S or Canada have 60 days from the date of export to pay Mexico import duties on non-NAFTA parts contained in the goods.

The FTA with Canada already covered automobiles and automotive parts, and U.S. automotive parts manufacturers were already in Mexico for a number of years before NAFTA. With NAFTA, the Mexican-U.S. tariffs were being phased out to the advantage of all three countries. This raised concern for the possibility that European and Japanese automobile and automotive parts manufacturers would establish businesses in Mexico to get their products into the United States using the tariff advantages of NAFTA.

Rules-of-Origin is such a complex issue that the U.S. Department of Commerce (DOC) lists it as one of the most commonly misunderstood issues. DOC therefore suggests that exporters should seek legal assistance or an advanced ruling from the Customs Administration in the country to which they are exporting if they are unsure of the answers in filling out a NAFTA Certificate of Origin. When foreign components or raw materials are used in the manufactured products, it may be necessary to get a customs ruling on each item in them to get a NAFTA tariff benefit on the finished product.

Maquiladoras

A maquiladora is a Mexican manufacturing plant that operates with foreign capital and management to produce goods for export. The program is a "value added" operation named after the payment given to millers by farmers for the service of grinding corn into meal. The foreign assembly operations are sometimes simply called maquilas. Mexico started permitting foreign assembly plants in 1965 to get some of the off-shore business that was going to Taiwan and Singapore and other foreign countries as U.S. companies were using lower cost labor to remain competitive in world markets. Maquiladoras may be simple assembly plants that use foreign parts or they may be in the business to manufacture products from raw materials through to finished products. They have also expanded into nonindustrial operations such as data-processing and packaging.

In 1989 the Mexican government published a Decree for Development and Operation of the Maquiladora Industry that outlines maquila program application procedures and requirements and the special provisions that apply to running one. The provisions of the Decree are incorporated in the text of NAFTA with timetables for bringing in line any inconsistencies. For example, NAFTA includes a provision that gives Mexico until 1 January 2004 to maintain the decree as it applies to the development and modernization of the automotive industry; at that point Mexico must bring any inconsistent provisions into conformity with other provisions in NAFTA.

The maquiladora program started slowly in the 1960s but grew rapidly once the Mexican government made the first revisions to regulations early in the 1980s. Those regulations were replaced by the 1989 decree. The maquiladora movement has created a population migration to the border region, particularly in the Matamoros, Mexico/Brownsville, Texas, region and the Tijuana, Mexico/San Diego, California, region. The maquiladoras may be located anywhere in Mexico, but congestion and existing industrial development prompted a mandate that the maquiladoras must be located away from major urban areas such as Mexico City, Guadalajara, and Monterrey. The border region is favored because it is closest to the point of export.

NAFTA: More Than a Trade Agreement

NAFTA covers more than trade in goods. It also covers services such as engineering, construction, accounting, tourism, land transportation, architecture, education, health care, management, and environmental services. In 1992 the Mexican combined services market was estimated to be worth $146 billion. At the time, the U.S. share was about 5 percent of that.

NAFTA requires each country to treat foreign service providers no less favorably than it treats its own service providers. Also, no country may require a foreign service provider to maintain a local office or enterprise as a condition of cross-border provision of a service. The agreement spells out a timetable for the negotiation or liberalization of local laws that do not comply.

NAFTA covers banking, insurance, investment, and intellectual property issues as well as services and trade in goods. The agreement specifically addresses financial services by financial institutions in the banking, insurance, and securities sectors and spells out the requirements in detail. As a result of the agreement, U.S. banks and securities firms were able to establish wholly owned subsidiaries in Mexico for the first time in 50 years. Although there are limits on the market share, the opening of the Mexican banking and financial market is significant part of the agreement. There are similar agreements in place with Canada from the Canada-U.S. Free Trade Agreement, and under NAFTA, Canada-Mexico financial services and institutions will be similarly structured.

NAFTA's intellectual property stipulations require each country to provide the same effective enforcement of the rights to the protection of copyright, patent, trademark, plant breeders' rights, industrial designs, trade secrets, integrated circuits, and geographical indications to foreign intellectual property that it provides to its own citizens. The copyright protection extends to all types of computer programs as literary works. Throughout NAFTA there are provisions to handle dispute resolution.

NAFTA Add-ons: Environment and Labor

Chapters 27 and 28 were added to NAFTA after President Clinton came to office in 1993, but they were part of the agreement when it came into effect on 1 January 1994. Chapter 27, the North American Agreement on Environmental Cooperation (NAAEC), is designed to promote sustainable development based on supportive environmental and economic policies.

Among the issues that prompted the addition of environmental cooperation to NAFTA was a growing recognition of the long-range air transport of persistent pollutants that cross borders on what are described as continental pollutant pathways. Other concerns included the deterioration of the environment in border areas where expanding maquiladoras meant burgeoning populations. One of the objectives of NAAEC is to promote pollution prevention policies and practices without creating trade distortions or new trade barriers.

As with all of NAFTA, each country's laws govern actions within its own borders. The levels of domestic environmental protection and environmental development policies and priorities are a local prerogative, but the parties have agreed to ensure high levels of environmental protection and to improve laws and regulations. The local laws and regulations must be published. When a country bans a pesticide or toxic substance, the export into that country of the banned substance is prohibited.

NAFTA created the Commission for Environmental Cooperation (CEC) to establish programs that foster the development of regionql information and the sharing of technical expertise. CEC also addresses issues related to the conservation of wild-life and natural ecosystems in North America, such as that of the monarch butterfly.

Chapter 28, the North American Agreement on Labor Cooperation (NAALC), recognizes that NAFTA was created to expand and secure markets for goods and services and to enhance the competitiveness of each country's businesses in global markets. It also was intended to create new employment opportunities while improving working conditions and living standards in each country's respective environment. Basic worker rights were to be protected and enhanced.

The labor component of NAFTA added a resolution to invest in continuous human resource development, promote employment security, and strengthen labor-management cooperation. NAALC prompted the creation of cooperative programs and technical exchanges between the countries on industrial relations, health and safety, child labor, gender, and migrant worker issues.

Unfortunately, as the respect for basic labor standards increases in Mexico, the cost of labor is making the maquiladoras less competitive on the global level. The Ross Perot complaint that there would be a "giant sucking sound" as U.S. companies went south for cheaper labor is now a concern in Mexico, as U.S. companies are looking to countries such as China for cheap labor.

Free Trade Area of the Americas (FTAA)

In 1994 conferees at a Summit of the Americas initiated a process designed to integrate the economies of all of the democratic countries of the Western Hemisphere into a single free trade agreement. In accordance with one of the objectives of NAFTA, Canada, the United States, and Mexico have been active in negotiations that may open the world's largest market to free trade.

Key Players

Mulroney, Martin Brian (1939-): Mulroney was prime minister of Canada between 1984 and 1993. He was a strong promoter of the North American Free Trade Agreement and signed NAFTA for Canada in 1992.

Perot, H. Ross (1930-): Perot was a candidate for the office of president of the United States in 1992 when NAFTA was being negotiated. He was not in favor of the agreement and in a public debate among the candidates declared that there would be a "giant sucking sound" as jobs moved to Mexico if NAFTA were approved. Perot, a Texan, was the founder of Electronic Data Systems.

Salinas de Gortari, Carlos (1948-): Salinas was president of Mexico between 1988 and 1994. He was a major promoter of NAFTA and signed the North American Free Trade Agreement for Mexico in 1992.

See also: Maquiladoras Established.

Bibliography

Books

Glick, Leslie Alan. Understanding the North American Free Trade Agreement. Boston: Kluwer Law & Taxation Publishers, 1993.

Periodicals

Greider, William. "A New Giant Sucking Sound." The Nation (31 December 2001): 22-24.

"NAFTA'S Scorecard: So Far, So Good." Business Week (9July 2001): 54-56.

Other

Foreign Trade Information System (SICE). "Free Trade Areas of the Americas—FTAA" [cited 1 August 2002]. <http://www.sice.oas.org/ftaa_e.asp>.

Issues 2000. "Ross Perot on Free Trade." 2000 [cited 1August 2002]. http://www.issues2000.org/Ross_Perot_Free_Trade.htm .

North American Free Trade Agreement. NAFTA Trilateral Customs Web Site. "Chapter 4: Rules of Origin" [cited 1 August 2002]. <http://www.customs.gov/nafta/docs/us/chap04.html>.

North American Free Trade Agreement. NAFTA Trilateral Customs Web Site. "Public Law 103-182" [cited 1 August 2002].<http://www.customs.gov/nafta/agreement.htm>.

U.S. Department of Commerce. Trade Information Center. "NAFTA Update." Created 20 December 1999; last modified 17 January 2002 [cited 1 August 2002]. http:// tradeinfo.doc.gov .

United States Trade Representative. "NAFTA: The Agreement" [cited 1 August 2002]. <http://www.ustr.gov/regions/whemisphere/nafta.shtml>.

Additional Resources

Books

Folsom, Ralph H. NAFTA in a Nutshell. Eagan, MN: West Group, 1999.

Mayer, Frederick. Interpreting NAFTA: The Science and Art of Political Analysis. New York: Columbia University Press, 1998.

Orme, William. Understanding NAFTA: Mexico, Free Trade, and the New North America. Austin, TX: University of Texas Press, 1996.

Other

"Research Guide on the North American Free Trade Agreement (NAFTA)" Vanderbilt University Alyne Queener Massey Law Library [cited 1 August 2002]. <http://law.vanderbilt.edu/library/research/nafta.html>.

—M. C. Nagel