North American Free Trade Agreement

NAFTA AS A POLITICAL AND ECONOMIC PROCESS

THE IMPACT OF NAFTA

BIBLIOGRAPHY

On January 1, 1994, the North American Free Trade Agreement (NAFTA) went into effect, creating the largest free-trade area in the world. Many view NAFTA as a major policy victory for the architects of a new era of trade liberalization and economic globalization. Yet proponents of this view did not go unchallenged. NAFTA’s departure from several traditional trade concerns opened political opportunities for challengers to ally across borders and overcome longstanding political divisions, making it the most contentious trade policy initiative to date (Dreiling 2001).

NAFTA AS A POLITICAL AND ECONOMIC PROCESS

At the most explicit level, NAFTA is a treaty designed to liberalize trade and investment activity in North America. The trade agreement sets timetables for significant reductions in duties and a steady elimination of tariffs between the three trading partners (Canada, the United States, and Mexico). Partly as a result of these reduced transaction costs, trade between the three countries has increased significantly. According to International Monetary Fund (IMF) data, the three NAFTA countries traded over $620 billion in goods and services in 2004, nearly doubling total trade volume in the ten years since NAFTA was implemented. Combined, the three countries produced over $12 trillion in goods and services in 2004 and, with more than 425 million people, constitute a major economic bloc in the world economy.

Literature on globalization portrays NAFTA as one of three distinct trading blocs in the world economy (Dicken 2003). The concentration of trade flows studied by sociologists, geographers, and economists reveals a growing tripolar configuration of world trade relations and policy agendas of leading states. This research suggests that NAFTA and the Maastricht Treaty on European Union (1992) were driven by global economic forces as well as strategic political responses to globalization. NAFTA, seen from this perspective, reflects a trade-policy response to the regionalization of capitalist competition at a global level. Content rule, tariff reduction schedules, and other NAFTA provisions are designed to favor North American capital. Premised on an improved capacity to export commodities produced under low-cost conditions in Mexico into the high-price consumer markets of North America, western Europe, and Japan, NAFTA is an attempt to reclaim economic power in a capitalist world system. James Petras and Morris Morley argue that “NAFTA is the centerpiece of a new economic strategy … which Washington hopes to use as a springboard for its reemergence as a more competitive player in the world market” (1995, pp. 128–129).

During the debate over NAFTA, considerable attention was addressed to the question of “jobs.” Ross Perot’s presidential bid and famous claim of an impending “giant sucking sound” helped frame the political debate, but also alluded to important economic trends in all three countries. Prior to the conclusion of NAFTA, a steady erosion in manufacturing employment in the United States, coupled with a rapid increase of manufacturing employment by U.S. multinational corporations operating in Mexico, aroused fears of a decline of American industrial supremacy. Economists, such as Robert Blecker and William Spriggs (1992), showed how these patterns would likely continue with NAFTA, particularly in the maquila sector. The maquiladoras—literally meaning “twin plants”—generally refer to export industries along the U.S.-Mexico border, though the term is also used in reference to export processing industries in El Salvador, Guatemala, and elsewhere in Central America. After NAFTA’s ratification, the increase in manufacturing employment in Mexico by U.S. multinationals certainly did not create a “giant sucking sound,” but the movement of industrial-sector jobs has continued.

In a policy context, NAFTA represents an economic integration plan that extended the deregulation and free-market agendas of governments in the United States, Canada, and Mexico. Administrations under presidents Ronald Reagan and George H. W. Bush in the United States, Prime Minister Brian Mulroney in Canada, and President Carlos Salinas in Mexico initiated national reform agendas where market principles supplanted other institutional goals and organization. Known as neoliberalism —where market forces are believed to be the most efficient and least costly mechanism for allocating all societal goods—this ideological context all but guaranteed a free-market approach to North American integration. In this way, NAFTA emerged as a neoliberal counterpart to Europe’s more social democratic Maastricht Treaty.

NAFTA extends and accelerates market deregulation and trade liberalization efforts across the continent by creating supranational institutions and binding agreements between signatory governments. For example, one feature of NAFTA contained in Chapter Eleven prevents governments from discriminating against cross-border investors—all North American capital is to be treated as domestic capital, eventually. These provisions also establish an investor-state arbitration system that permits companies from one NAFTA country to seek monetary damages for actions or policies of another NAFTA government (national, state/provincial, or local). One often-cited case began in 1997 when the Ethyl Corporation, a U.S. company, challenged Canada’s environmental ban of a known carcinogenic gasoline additive, methylcyclopentadienyl manganese tricarbonyl (MMT)—a chemical made by Ethyl. In July 1998 the arbitration panel ruled against Canada, forcing Canada to reverse its environmental ban on MMT and pay $13 million in damages and legal fees to Ethyl. As of 2005, five Chapter Eleven cases have settled in favor of investors, leaving critics wary of NAFTA’s bias in favor of capital at the expense of national sovereignty and environmental protection. From an analytical standpoint, the neoliberal framework of NAFTA helps investor rights trump environmental or national rights.

Neoliberal defenders of NAFTA, and free markets more generally, praise this “deepening and widening” of markets in the hemisphere, calling for an extension of NAFTA to Central America and throughout the Western Hemisphere as envisioned in the Free Trade Area of the Americas. Elaborate hemispheric plans for subregional and continental integration are discussed among elite policy organizations, from the Council on Foreign Relations to the highly influential Business Roundtable (Dreiling 2001). May 2005 discussions by elite supporters of NAFTA alluded to a new “security perimeter” around North America, known as the North American Initiative.

THE IMPACT OF NAFTA

Migration from Mexico to the United States has risen significantly under NAFTA. Growing rural unemployment in Mexico and the instability of small farming in Mexico stem in part from NAFTA’s liberalization of trade in agricultural goods. With cheaper corn and grains imported from Canada and the United States into Mexico, small, often indigenous farmers are hurt economically. Worries persist that these pressures will also hurt peasant communities throughout Central America with the adoption of the Dominican Republic-Central America Free Trade Agreement in 2005. While pressure to migrate has increased, anti-immigrant politics persist in the United States, and the number of people found dead along the U.S.-Mexico border rose to a peak in 2003. Other U.S.-Mexico border problems were compounded by NAFTA. Mexico’s environment and urban infrastructure remain inadequate to support the growing population and heavy concentrations of export-oriented industry. The number of labor-intensive, export-processing factories along the border in Mexico increased by about 73 percent between 1993 and 2000, putting strain on both the environment and the mostly female workforce in those factories.

The expectation that greater wealth and income growth in Mexico would increase political pressures to limit environmental pollution remains unrealized. Arguments that refer to the environmental Kuznets curve—that pollution increases with per capita gross domestic product (GDP) at lower levels of national income while pollution decreases with per capita GDP at higher levels of national income—suggest that increased trade, and hence increased wealth pollution, will decrease in Mexico (Grossman and Krueger 1993). More research is needed to address this important question about the relationship between trade, economic growth, and political pressure to improve and enforce environmental regulations in Mexico and elsewhere.

Perhaps the most significant impact of NAFTA flowed not from the agreement itself, but the conflicts that arose in NAFTA’s wake. NAFTA, like its close relative and successor, the World Trade Organization (WTO), significantly departed from the direction of previous multilateral trade initiatives and inadvertently opened political opportunities for challengers to question neoliberal trade policy. Advancing new language on investment protections, institutionalizing language and protocols for protecting trade related intellectual property rights (TRIPs), and promoting a series of policy shocks to liberalize trade in agriculture, NAFTA drew a line that subsequent conflicts over trade policy would brave. These three concerns remain pivotal dividing lines within the WTO and in the ongoing discussions for a Free Trade Area of the Americas. Confrontations over patents on seeds and other “intellectual property,” nontariff agricultural subsidies in richer countries, and investment rules have, for example, stalled agendas at the WTO ministerial meetings in Seattle in 1999 and in Cancun, Mexico, in 2003. NAFTA anticipated and presaged these same divisions, prompting conflict both prior to and following its implementation.

The conflict over NAFTA catalyzed a mobilization of forces for and against the agreement. For over two years, the NAFTA negotiations faced challenges and changes, from a legal decision at a U.S. district court that required an environmental impact statement on NAFTA (which was subsequently appealed and overruled) to negotiations for two-side agreements on labor and the environment. Critics nearly stopped the passage of NAFTA. By the time that NAFTA went public in 1991, a broad spectrum of groups—from farmers to human rights organizations—began meeting to develop both national and international strategies to stop NAFTA in its tracks. Three years later, voices against NAFTA had developed a transnational movement, providing a supportive, if not encouraging, backdrop for the armed insurgency in Chiapas, Mexico, that initiated its mobilization with deliberate intent on January 1, 1994, NAFTA’s birthday.

Beyond the contentious interests mobilized for and against NAFTA, the agreement and the historical stage it set caught the eye of scholars. NAFTA, at a social scientific level, came to represent a triumph of markets, a continentalization of economies, and a window into the political struggles over globalization. As Jeremy Brecher and Tim Costello argued (1998), this neoliberal “globalization from above”—via free trade and corporate-sponsored multilateral institutions—is being resisted not only by “older” nationalist and protectionist foes of free trade, but also by a “globalization from below.” NAFTA helped set this stage.

SEE ALSO Barriers to Trade; Liberalization, Trade; Quotas, Trade; Tariffs; World Trade Organization

BIBLIOGRAPHY

Blecker, Robert A., and William E. Spriggs. 1992. Manufacturing Employment in North America: Where the Jobs Have Gone. Briefing paper. Washington, DC: Economic Policy Institute. http://www.epinet.org/briefingpapers/1992_bp_manufacturing.pdf.

Brecher, Jeremy, and Tim Costello. 1998. Global Village or Global Pillage: Economic Reconstruction from the Bottom Up. 2nd ed. Boston: South End.

Dicken, Peter. 2003. Global Shift: Reshaping the Global Economic Map in the 21st Century. 4th ed. New York: Guilford.

Dreiling, Michael. 2001. Solidarity and Contention: The Politics of Security and Sustainability in the NAFTA Conflict. New York: Garland.

Grossman, Gene M., and Alan B. Krueger. 1993. Environmental Impacts of a North American Free Trade Agreement. In The Mexico-U.S. Free Trade Agreement, ed. Peter M. Garber, 13–56. Cambridge, MA: MIT Press.

NAFTA Secretariat. http://www.nafta-sec-alena.org/DefaultSite/index.html.

Office of the United States Trade Representative. North American Free Trade Agreement. http://www.ustr.gov/Trade_Agreements/Regional/NAFTA/Section_Index.html.

Petras, James, and Morris Morley. 1995. Empire or Republic: American Global Power and Domestic Decay. New York: Routledge.

Michael Dreiling

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

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: nafta@tamiu.edu, <www.tamiu.edu/coba/usmtr/>

NORTH AMERICAN FREE TRADE AGREEMENT (ISSUE)

Formal negotiations for the North American Free Trade Agreement (NAFTA) began in 1991. Within three years the United States, Canada, and Mexico signed the trilateral free trade agreement and it went into effect in 1994. Pushed through by both the administrations of Presidents George Bush (1989–1993) and Bill Clinton (1993–) amidst much domestic controversy, this historic agreement established a formal trading bloc with 364 million consumers and a combined economic output of six trillion dollars in North America.

The agreement established what was called the world's largest free trade zone, and included a 15-year gradual phase-in of the elimination of tariffs and traditional non-tariff barriers on trade for all goods and services among the three countries. The accord is a 2,000-page text that contains detailed rules for hemispheric trade liberalization and two side agreements. The rules cover such areas as rules of origin (the country where the product was produced) to qualify for free trade, protection of intellectual property rights, and dispute settlement procedures.

NAFTA originated in negotiations begun in the mid-1980s between Canada and the United States to establish a bilateral agreement to guarantee market access between the two countries. The subsequent U.S.-Canada Free Trade Agreement was implemented in 1989. Canada then wanted to expand the agreement into a trilateral arrangement when the United States and Mexico initiated negotiations on a bilateral agreement of their own in 1990.

In the 1980s Mexican President Carlos Salinas de Gortari (1988–1994) decided to expand economic reforms through international agreements when the protectionist, state-dominated economy was in crisis and unable to pay off its debts to commercial banks. Moving to a market-based economy, the Salinas administration implemented accelerated trade-barrier reductions to encourage foreign investment. Having removed or reduced most of the tariffs between the United States and Mexico since Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, the hope for Mexico was that a free trade agreement between the two countries would continue to stimulate foreign investment and economic growth.

The Bush administration had support from most large U.S. industrial corporations that would be able to take advantage of lower Mexican wages. Thus the administration requested "fast-track" negotiating status for NAFTA, which permits a president to negotiate international trade treaties and submit them to Congress for approval without amendments. In 1991 Congress gave NAFTA fast-track status.

NAFTA became a hotly debated issue in the 1992 U.S. presidential elections. Differentiating himself from the incumbent, presidential candidate Ross Perot opposed NAFTA, calling for the public to hear the "giant sucking sound" of jobs being pulled from this country and going South to Mexico. Meanwhile as a compromise in support of NAFTA, candidate Bill Clinton promised that NAFTA would include guarantees for the trading countries to abide by environmental and labor standards. Clinton was the target of mounting pressure from environmental groups and organized labor that NAFTA would amount to a "green light" for environmental "dumping" and human rights abuses in Mexico. After Clinton was elected as president and NAFTA was ratified in 1993 along with the two labor and environmental side agreements, the same groups criticized NAFTA for not having any effective enforcement mechanisms.

Opponents of NAFTA, such as labor leaders, were especially concerned that the agreement would result in massive losses in U.S. manufacturing jobs after Mexico began to attract foreign investment. Critics and supporters drew contradictory conclusions about the long-term consequences of NAFTA after the agreement was implemented in 1994. On one hand, opponents conducted studies such as the one by the Economic Policy Institute (EPI). The EPI authors, Jesse Rothstein and Robert E. Scott, concluded in their report, NAFTA and the States, that "an exploding deficit in net exports with Mexico and Canada has eliminated 394,835 U.S. jobs since NAFTA took effect in 1994." On the other hand, supporters such as Nora Claudia Lustig, a senior fellow at the Brookings Institute, claimed that "there is evidence that NAFTA has created more jobs than it destroyed."

Critical studies such as the EPI report contended that NAFTA resulted in the net export deficit growing from $16.1 billion in 1993 to $48.3 billion in 1996. Consequently jobs created with increased exports were offset by jobs lost with increased imports. The EPI argued that the implementation of NAFTA had affected all 50 states, with job losses ranging from 621 in Vermont to 38,406 in California. The states hardest hit were those with the greatest production facility relocation, industries such as automotive manufacturing, textiles, apparel, computers, and electrical appliances. In addition, wages fell four percent between 1993 and 1996 and real median wages fell in at least 25 states.

Meanwhile NAFTA proponents at the Brookings Institute, such as Lustig, claimed that the agreement "has resulted in an increase in U.S.-Mexican trade, business partnerships, specialization in production processes and direct investment flows into Mexico. At the same time, the agreement has protected U.S. exporters from the brunt of the Mexican crisis [peso crisis of 1994], especially in comparison to exporters from Japan and the European Union." The report's author claimed that "there is even some evidence that NAFTA has created more jobs than it destroyed." Lustig contended that a net job gain may be the end result because a strong Mexican economy makes a strong market for U.S. exports.

Despite the absence of follow-up initiative on Capitol Hill to push for fast-track negotiations that would include other countries such as Chile and Brazil in the free trade bloc, President Clinton remained sanguine concerning the outcome of NAFTA in its early years. In a letter to Congress, Clinton noted that "NAFTA is an integral part of a broader growth strategy that has produced the strongest U.S. economy in a generation."

Thus the history of the negotiations over and implementation of the landmark agreement further complicated a centuries-old debate over the economic impact of free trade policies. Departing from traditional trade liberalization agreements, NAFTA became part of a public controversy that resulted in the unique inclusion of labor and environmental standards as an element in a trilateral free-trade bloc in North America.

See also: Free Trade

FURTHER READING

Baer, M. Delal, and Sidney Weintraub, eds. The NAFTA Debate: Grappling with Unconventional Trade Issues. Boulder, CO: Lynne Rienner Publishers, 1994.

Bognanno, Mario F., and Kathryn J. Ready, eds. The North American Free Trade Agreement: Labor, Industry, and Government Perspectives. Westport, CT: Quorum Books, 1993.

Cohen, Stephen D., Joel R. Paul, and Robert A. Blecker. Fundamentals of U.S. Foreign Trade Policy: Economics, Politics, Laws, and Issues. Boulder, CO: Westview Press, 1996.

Ensign, David. "NAFTA: Two Sides of the Coin." Spectrum, Fall 1997.

Lustig, Nora C. "NAFTA: Setting the Record Straight." The World Economy, August 1997.

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

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.