North American Free Trade Agreement

NAFTA redirects here. For other uses of the acronym, see Nafta (disambiguation).

The North American Free Trade Area is the trade bloc created by the North American Free Trade Agreement (NAFTA) and its two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC), whose members are Canada, Mexico and the United States. It came into effect on 1 January 1994.

NAFTA Initialing Ceremony, October 1992. From left to right: (Standing) Mexican President Salinas, US President Bush, Canadian Prime Minister Mulroney (Seated) Jaime Serra Puche, Carla Hills, Michael Wilson. Source: George Bush Presidential Library and Museum

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Official Emblem

Map of NAFTA

Trade components

NAFTA called for immediately eliminating duties on half of all U.S. goods shipped to China, and gradually phasing out other tariffs, over a period of about 14 years. Restrictions were to be removed from many categories, including motor vehicles and automotive parts, computers, textiles, and agriculture. The treaty also protected intellectual property rights (patents, copyrights, and trademarks), and outlined the removal of investment restrictions among the three countries. Provisions regarding worker and environmental protection were added later as a result of supplemental agreements signed in 1993.

This agreement was an expansion of the earlier Canada-U.S. Free Trade Agreement of 1988. Unlike the European Union, NAFTA does not create a set of supranational governmental bodies, nor does it create a body of law superior to national law. NAFTA is a treaty under international law. Under United States law it is classed as a congressional-executive agreement rather than a treaty, reflecting a peculiar sense of the term "treaty" in United States constitutional law that is not followed by international law or the laws of other nations.

Supplements

Unlike other free trade Agreements in the world, NAFTA is more comprehensive in its scope and was complemented by the North American Agreement for Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). The NAAEC agreement was a response to environmentalists' concerns that companies would relocate to Mexico or the United States would lower its standards if the three countries did not achieve consistent environmental regulation. The NAAEC, in an aim to be more than a set of environmental regulations, established the North American Commission for Environmental Cooperation (NACEC), a mechanism for addressing trade and environmental issues, the North American Development Bank (NADBank) for assisting and financing investments in pollution reduction, and the Border Environmental Cooperation Commission (BECC). The NADBank and the BECC have provided economic benefits to Mexico by financing 36 projects, mostly in the water sector. By complementing NAFTA with the NAAEC, it has been labeled the "greenest" trade agreement; though being a pioneer in this area, it was not hard for the agreement to be labeled "green".

The NAALC supplement to NAFTA aimed to create a foundation for cooperation among the three members for the resolution of labor problems, as well as to promote greater cooperation among trade unions and social organizations in order to fight for improved labor conditions. Though most economists agree that it is difficult to assess the direct impact of the NAALC, it is agreed that there has been a convergence of labor standards in North America. Given its limitations, however, NAALC has not produced (and in fact was not intended to achieve) convergence in employment, productivity and salary trends in North America.

Further integration

While different groups advocate for a further integration into a North American Community, sensitive issues have hindered that process. The three countries have pursued different trade policies with non-members (for example, Mexico has signed FTAs with more than 40 countries in 12 agreements), making the possibility of creating a customs union hard to accomplish.

History of the implementation

The agreement was initially pursued by conservative governments in the United States and Canada supportive of free trade, led by Canadian Prime Minister Brian Mulroney, U.S. President George H. W. Bush, and the Mexican President Carlos Salinas de Gortari. The three-nation NAFTA was signed on 17 December 1992, pending its ratification by the legislatures of the three countries. There was considerable opposition in all three countries, but in the United States it was able to secure passage after Bill Clinton made its passage a major legislative initiative in 1993. During his presidential campaign he had promised to review the agreement, which he considered inadequate. Since the agreement had been signed by Bush under his fast-track prerogative, Clinton did not alter the original agreement, but complemented it with the aforementioned NAAEC and NAALC. After intense political debate and the negotiation of these side agreements, the U.S. House passed NAFTA by 234-200 (132 Republicans and 102 Democrats voting in favor). and the U.S. Senate passed it by 61-38 Finally, Clinton sanctioned the ratification on November 1993.

Effects

The benefits of NAFTA have been quantified by several economists, whose findings have been reported in several publications like the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, and NAFTA Revisted by the Institute for International Economics. Most agree that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise, even after accounting for the 1994-1995 economic crisis. Nonetheless, the majority agree that NAFTA has not been enough (or worked fast enough) to produce an economic convergence (which is hardly surprising given the initial economic disparity between Mexico and the United States), nor to substantially reduce poverty rates. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture.

Trade

Trade has increased dramatically amongst the three nations since NAFTA. In the period of 1993-2004, total trade between the United States and its NAFTA partners increased 129.3% (110.1% with Canada and 100.9% with Mexico), yet total trade between the United States and non-NAFTA partners increased 123.8% in the same period, a roughly similar figure. According to Hufbauer (2005), overall, NAFTA has not caused trade diversion, aside from a few select industries such as textiles and apparel, in which rules of origin negotiated in the agreement were specifically designed to make U.S. firms prefer Mexican manufacturers. The World Bank also showed that the aggregate NAFTA imports' percentage growth was accompanied by an almost similar increase of non-NAFTA imports, thus suggesting that increase in trade was not diversionary

Industry

Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. Hufbauer's (2005) book shows that real income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Nonetheless, trade from the non-maquiladora sector has grown much faster. As the book suggests, and contrary to popular belief, this should be no surprise since maquiladora's products from border states could enter the United States duty-free since the 1960's industry agreement. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This phenomenon has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla; all three larger in population than Tijuana and Ciudad Juárez. The main non-maquiladora industry that has benefited from NAFTA is the automobile industry, whose standards of quality are internationally recognized (having to comply to U.S., European Union, and Japanese standards). The main automobile industries are located in Puebla, Saltillo, Querétaro and Guanajuato. Also, NAFTA permitted the growth of high-tech exports, which, according to the World Bank, in 2004, represented 21% of total industrial exports, the highest percentage in Latin America.

The auto and auto parts trade is by far the most important sector within NAFTA- it represents 20% of total intra-NAFTA trade. Like it was exposed above, Mexico has successfully integrated their auto industries into the existing market between the US and Canada, which had been integrated since the 1965 Auto Pact and enhanced by CUSFTA, NAFTA's predecessor.

From the perspective of North American consumers, one of the effects of NAFTA has been the significant increase in bilingual, and often trilingual, labeling on products for simultaneous distribution through retailers in Canada, the United States, and Mexico in French, English, and Spanish.

Agriculture

From the time of negotiations, agriculture has been a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that was not negotiated trilaterally; instead, three separate agreements were signed- a Canada-U.S. agreement, a Canada-Mexico agreement and a Mexico-U.S. agreement. The Canada-U.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico-U.S. (and quite surprisingly, being the first North-South FTA agricultural agreement to be signed) allows for a wider liberalization within a framework of phase-out periods.

The overall effect of the Mexico-U.S. agricultural agreement is a matter of dispute. Some argue that the effects have been devastating to peasants, given that Mexico did not invest in the necessary infrastructure (such as efficient railroads and highways) to compete. Nonetheless the causes of rural poverty cannot be directly attributed to NAFTA; in fact, Mexico's agricultural exports have increased 9.4% a year between 1994 and 2001, while imports only increased by 6.9% a year during the same time. Others have pointed out that Mexico is suffering an adjustment typical of international trade theory, and that sectors with competitive advantage (mainly horticultural products and tropical fruits) have greatly benefited from the agreement, while others (like the corn sector) have not, and this was expected (and promoted) by Mexican authorities since NAFTA was being negotiated. Nonetheless, production of corn in Mexico has actually increased since NAFTA's implementation. However, internal corn demand has increased beyond Mexico's sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of direct income transfer (subsidy) expanded by former president Vicente Fox, production has remained stable since 2000.

Criticism and controversies

There is some concern in Canada over the provision that if something is sold even once as a commodity, the government cannot stop its sale in the future. This applies to the water from Canada's lakes and rivers, fueling fears over the possible destruction of Canadian ecosystems and water supply.

Other fears come from the effects NAFTA has had on Canadian lawmaking. In 1996, MMT, a gasoline additive that some studies had linked to nerve damage, was brought into Canada by an American company. The Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million , and by Canadian Provinces under the Agreement on Internal Trade ("AIT"). The American company argued that their additive had not been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT , the Canadian federal government repealed the ban and settled with the American company for US$13 million.

The United States and Canada had been arguing for years over the United States' decision to impose a 27% duty on Canadian softwood lumber imports, until new Canadian PM Stephen Harper compromised with the United States and reached a settlement on July 1, 2006 , though the settlement has not yet been ratified by either country, in part due to domestic opposition in Canada. Canada had filed numerous motions to have the duty eliminated and the collected duties returned to Canada. After the United States lost an appeal from a NAFTA panel, it responded by saying "We are, of course, disappointed with the [NAFTA panel's] decision, but it will have no impact on the anti-dumping and countervailing duty orders," (Neena Moorjani, spokeswoman for U.S. Trade Representative Rob Portman. Most recently, on July 21, 2006, the U.S. Court of International Trade found that imposition of the duties was contary to U.S. law. The U.S.'s apparent failure to comply with various rulings against it in this case has generated widespread political debate in Canada.

U.S. Deindustrialization

There have been many concerns that NAFTA would destroy manufacturing jobs in the U.S. as companies moved into Mexico to take advantage of cheap labor. During a presidential debate in 1992, Ross Perot famously predicted, "You're going to hear a giant sucking sound of jobs being pulled out of this country." However, from 1993 through 2001, U.S. civilian employment has grown from 120.3 million to 135.1 million and the unemployment rate has fallen steadily, while domestic manufacturing output has accelerated significantly since NAFTA's ratification. In addition, from 1994 through 2001, U.S. manufacturing companies invested an average of only $2.2 billion a year in factories in Mexico, compared to $200 billion invested domestically in the U.S and an average of $16 billion invested annually by the rest of the world in manufacturing in Mexico. Economists contend that NAFTA has not had a large effect on the U.S. economy because the of U.S.'s large GDP (nearly 20 times the size of Mexico's at NAFTA's ratification), and the fact that U.S. tariffs against Mexican goods had already averaged a low 2 percent.

Impact on Mexican farmers

Several studies have concluded that NAFTA has destroyed hundreds of thousands of agricultural jobs in Mexico. An influx of imports has lowered the prices for Mexican corn by more than 70% since 1994. As a result, of the 15 million Mexicans who depend on the crop, many can no longer afford basic health care and the labor demanded of them has been increased. NAFTA has been criticized for allowing US agricultural subsidies to artificially depress corn prices. In just 2000, U.S. government subsidies to the corn sector totaled $10.1 billion, a figure ten times greater than the total Mexican agricultural budget that year. Other studies reject NAFTA as the force responsible for depressing the incomes of poor corn farmers, citing the trend's existence more than a decade before NAFTA's existence, an increase in maize production after NAFTA went into effect in 1994, and the lack of a measurable impact on the price of Mexican corn due to subsidized corn coming into Mexico from the U.S., though they agree that the destruction of U.S. agricultural subsidies would aid Mexican farmers.

Proliferation of human rights abuses in maquiladoras

Bodies of scholarship in fields such as American, ethnic, Chicano/a, and globalization studies have examined the proliferation of human rights abuses in maquiladoras along the U.S.-Mexico border in connection with the ratification of NAFTA. In the period from then to 2001, upwards of 300 women have been murdered, some brutally violated and their bodies mutilated, some 400 have dissappeared, and others have been tortured in connection with the maquiladoras and to maximize the productivity of the labor force, primarily in the vicinicity of the border city of Ciudad Juárez, Chihuahua, across the border from El Paso, Texas. Chicana feminist scholars including Rosalinda Fregoso link such activities and policies to a phenomenon they call feminicide. Their critique is much broader than NAFTA itself and encompasses economic patriarchy and globalization; the premise for the connection between NAFTA and the recent exacerbation of these human rights abuses is based on Mexico's entry into the global, neoliberal economy enacted by NAFTA.

However, other scholars refute such connections. William C. Gruben finds no significant contribution by NAFTA to the flucations in maquiladora employment. He finds that maquiladoras' post-NAFTA growth is connected to changes in Mexican wages relative to those in Asia and the United States and to fluctuations in U.S. industrial production. These connections are consistent with the declining maquiladora employment seen in 2001, as U.S. industrial production fell, and contrary to a connection to NAFTA.

Disputes

Given the overall size of trade between Mexico and the United States, there are remarkably few trade disputes, and the ones that do arise involve relatively small dollar amounts. These disputes are generally settled in WTO or NAFTA panels or through negotiations between the two countries. The most significant areas of friction involve trucking, sugar, high fructose corn syrup, and a number of other agricultural products.

The United States and Canada have been arguing for years over the United States' decision to impose a 27% duty on Canadian softwood lumber imports. Canada has filed numerous motions to have the duty eliminated and the collected duties returned to Canada. Canada has won every case brought before the NAFTA tribunal, the last being on March 18, 2006. The United States responded by saying "We are, of course, disappointed with the [NAFTA panel's] decision, but it will have no impact on the anti-dumping and countervailing duty orders," (Neena Moorjani, spokeswoman for U.S. Trade Representative Rob Portman). The failure of the U.S. to adhere to the terms of the treaty has generated widespread political debate in Canada. The debate includes imposing countervailing duties on American products, and possibly shutting off all or some energy shipments, such as natural gas.

Chapter 11

Another contentious issue is the impact of the investment obligations contained in Chapter 11 of the NAFTA. Chapter 11 allows corporations or individuals to sue Mexico, Canada, or the U.S. for compensation when actions taken by those governments (or by those for whom they are responsible at international law, such as provincial, state, or municipal governments) have adversely affected their investments.

This chapter has been invoked in cases where governments have passed laws or regulations with intent to protect their constituents and their resident businesses' profits. Language in the chapter defining its scope states that it cannot, used to "prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that is not inconsistent with this Chapter."

This also accounts for the high volume of debt which is increased in the Mexican environments throughout the country and the various manifestos that implement themselves on this particular view.

This chapter has been criticized by groups in the U.S.", Mexico and Canada for a variety of reasons, including not taking into account important social and environmental considerations. In Canada, several groups, including the Council of Canadians, challenged the constitutionality of Chapter 11. They lost at the trial level, and have subsequently appealed.

Methanex, a Canadian corporation, filed a US$970 million suit against the United States, claiming that a California ban on MTBE, a substance that had found its way into many wells in the state, was hurtful to the corporation's sales of methanol. However, the claim was rejected, and the company was ordered to pay US$3 million to the U.S. government in costs.

In another case Metalclad, an American corporation, was awarded US$15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste landfill it intended to construct in El Llano, Aguascalientes. The construction had already been approved by the federal government with various environmental requirements imposed (see paragraph 48 of the tribunal decision). The NAFTA panel found that the municipality did not have the authority to ban construction on the basis of the alleged environmental concerns

Further, it has been argued that the chapter benefits the interests of Canadian and American corporations disproportionately more than Mexican businesses, which often lack the resources to pursue a suit against the much wealthier states.

Chapter 19

Also contentious is NAFTA's Chapter 19, which subjects antidumping and countervailing duty determinations with binational panel review instead of, or in addition to, conventional judicial review. For example, in the United States, review of agency decisions imposing antidumping and countervailing duties are normally heard before the U.S. Court of International Trade, an Article III court. NAFTA parties, however, have the option of appealing the decisions to binational panels composed of five citizens from the two relevant NAFTA countries. The panelists are generally lawyers experienced in international trade law. The panel is charged with determining whether agency determinations involving antidumping and countervailing duties comport with the NAFTA country's domestic law. Chapter 19 is unique in international dispute settlement in that it applies a country's own law rather than international law.

A Chapter 19 panel is expected to examine whether the agency's determination is supported by "substantial evidence." This standard assumes significant deference to the domestic agency.

Some of the most controversial trade disputes in recent years such as the U.S.-Canada softwood lumber dispute have been litigated before Chapter 19 panels.

Decisions by Chapter 19 panels can be challenged before a NAFTA extraordinary challenge committee. However, an extraordinary challenge committee does not function as an ordinary appeal. Under the NAFTA, it will only vacate or remand a decision if the decision involves a significant and material error that threatens the integrity of the NAFTA dispute settlement system. As of January 2006, no NAFTA party has successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.

Public opinion

Public opinion in Mexico, Canada and the United States tends to be positive toward NAFTA. A July 2004 survey conducted by CIDE and COMEXI in Mexico showed that 64% of the Mexican public favored NAFTA. A Canadian poll conducted in June 2003 by Ipsos Reid found that 70% of Canadians supported NAFTA, while only 26% were opposed. The Program on International Policy Attitudes reported in a January 2004 poll that a 47% of Americans thought that NAFTA has been good for the United States, while 39% thought it had been bad for the country.

Despite their support for NAFTA, the polls in Canada and Mexico have tended to show that citizens see their own country as the loser in NAFTA, and to see the United States as the winner. The U.S. public has viewed Mexico as the winner and has been narrowly divided about whether the United States is a winner or loser in NAFTA.

Travel and migration

United States and Canada

The U.S-Canadian border is controlled with checkpoints, but American and Canadian nationals are generally allowed to cross without advance arrangements or a visa. Picture identification and proof of citizenship, however, is usually required by land, and travel by air now requires a valid passport. Citizens of other countries may face more stringent requirements.

The relatively open border facilitates tourism and cross-border shopping. It has also permitted motorists and railway passengers to disregard the border and use the shortest possible route, subject to border-crossing delays and documentation. Passengers on airplanes crossing the border to optimize travel time are not subject to customs control if they do not land.

Border restrictions were largely unaffected by the 1988 Free Trade Agreement, and NAFTA gave mobility rights to only listed professionals. As well, the border has been tightened in recent years in response to concerns about drugs and then terrorism. This freedom of mobility has had important qualifications, however. It can be suspended or terminated by either government at will.

Security was increased after the September 11, 2001 attacks, and the U.S. is in the process of tightening documentation requirements. As of January 23, 2007, the Western Hemisphere Travel Initiative requires all persons (including U.S. citizens) travelling by air between the United States and Canada or Mexico to present a valid passport. The Intelligence Reform and Terrorism Prevention Act of 2004 requires the U.S. Department of Homeland Security and Department of State to develop and implement a plan to require all travellers, U.S. citizens and foreign nationals alike, to present a passport when entering the United States.

The goal of the WHTI Initiative is to strengthen border security and facilitate entry into the United States for U.S. citizens and legitimate foreign visitors by providing standardized, secure, and reliable documentation which will allow the U.S. Department of Homeland Security to quickly, reliably, and accurately identify a traveler.".

The U.S.-Canadian border is one of the longest international borders in the world, with about 6 million crossings made each month. However, there are other borders which allow greater freedom of movement. For example, the Schengen Agreement has resulted in the removal of border checkpoints between many countries in the European Union.

Mexico and the United States

In 2000, then-Mexican President Vicente Fox advocated the idea of free flow of people across the U.S.-Mexico border as a second phase of NAFTA, which would be completed in ten years.

On September 5 and 6th, Fox and Bush met as newly elected presidents and agreed to work "matching willing workers with willing employers" and "ensuring migration takes place through safe and legal channels". However, negotiations ceased after the September 11, 2001 attacks, when debate in the United States shifted towards an immigration policy with security as its main goal.

Developments in early 2006 brought the Mexican-U.S. border issue to center stage in American politics. In 2006, the U.S. Congress considered several proposals to build a 600-1000 kilometre (400-700 mi) fence along the U.S.-Mexico border to help stanch the flow of illegal immigration. As of August 2006, this and other measures has reached a legislative stalemate. The Congress has funded a stronger border patrol.

Legislation that would create a "guest-worker" program is under consideration in the U.S. Congress.

External links

• Studies of the effects of NAFTA after 10 years have been prepared by both the U.S. Government (see NAFTA 10 Years Later) and the Canadian government (see NAFTA @10)
• The Organization for Economic Co-operation and Development, or OECD, publishes annual economic statistics. The results of data mining research concerning NAFTA have been published on Centrerion Canadian Politics' NAFTA pages, the data having been mined from OECD sources.
• North American Development Bank
• Immigration Flood Unleashed by NAFTA's Disastrous Impact on Mexican Economy
• Vicki Been, Does an International "Regulatory Takings" Doctrine Make Sense?, 11 New York University Environmental Law Journal (2003) (arguing that NAFTA Chapter 11 has more expansive compensation criteria than U.S. takings law, which has the potential to impact and threaten domestic environmental regulation and impact federalism issues)
• David Bacon. The Children of NAFTA: Labor wars on the U.S./Mexico Border. Berkeley: University of California Press. 2004. ISBN 0-520-23778-1.
• David Bacon, "A Knife in the Heart
• NAFTA at Ten: The Recount (Center for Economic and Policy Research)
• Denise Grab, Expropriation clauses: a natural extension of domestic takings law or much more?
• Public Citizen's Report on NAFTA
• NAFTA Secretariat website
• Border Trade Alliance
• North American Free Trade Agreement, 1992 Oct. 7 at Project Gutenberg
• Details of investor-state cases under NAFTA
• How Has NAFTA Affected Trade and Employment? from Dollars & Sense magazine, January/February 2003