The North American Free Trade Agreement (NAFTA; Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA) is an agreement signed by Canada, Mexico, and the United States, creating a trilateral rules-based trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canadaâ€"United States Free Trade Agreement between the U.S. and Canada.
NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).
Negotiation and U.S. ratification
Following diplomatic negotiations dating back to 1990 among the three nations, U.S. President George H. W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas, each responsible for spearheading and promoting the agreement, ceremonially signed the agreement in their respective capitals on December 17, 1992. The signed agreement then needed to be ratified by each nation's legislative or parliamentary branch.
The Canadaâ€"United States Free Trade Agreement had been very controversial and divisive in Canada, and the 1988 Canadian election was fought almost exclusively on that issue. In that election, more Canadians voted for anti-free trade parties (the Liberals and the New Democrats) but the split caused more seats in parliament to be won by the pro-free trade Progressive Conservatives (PCs). Mulroney and the PCs had a parliamentary majority and were easily able to pass the 1987 Canada-US FTA and NAFTA bills. However, he was replaced as Conservative leader and prime minister by Kim Campbell. Campbell led the PC party into the 1993 election where they were decimated by the Liberal Party under Jean Chrétien, who had campaigned on a promise to renegotiate or abrogate NAFTA; however, Chrétien subsequently negotiated two supplemental agreements with the new US president. In the US, Bush, who had worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing of the implementation law to incoming president Bill Clinton. Prior to sending it to the United States Senate Clinton added two side agreements, The North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC), to protect workers and the environment, plus allay the concerns of many House members. It also required US partners to adhere to environmental practices and regulations similar to its own.
After much consideration and emotional discussion, the House of Representatives passed the North American Free Trade Agreement Implementation Act on November 17, 1993, 234-200. The agreement's supporters included 132 Republicans and 102 Democrats. The bill passed the Senate on November 20, 1993, 61-38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; the agreement went into effect on January 1, 1994. Clinton, while signing the NAFTA bill, stated that "NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement."
Provisions
The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty-free. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.
Chapter 52 provides a procedure for the interstate resolution of disputes over the application and interpretation of NAFTA. It was modeled after Chapter 69 of the Canada-United States Free Trade Agreement. The roster of NAFTA adjudicators includes many retired judges, such as Alice Desjardins, John Maxwell Evans, Constance Hunt, John Richard, Arlin M. Adams, Susan Getzendanner, George C. Pratt, Charles B. Renfrew and Sandra Day O'Connor.
Intellectual Property
The North American Free Trade Agreement Implementation Act made some changes to the Copyright law of the United States, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within NAFTA) on certain motion pictures which had entered the public domain.
Environment
Securing U.S. congressional approval for NAFTA would have been impossible without addressing public concerns about NAFTA’s environmental impact. The Clinton administration negotiated a side agreement on the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the CEC was given a mandate to conduct ongoing ex post environmental assessment of NAFTA.
In response to this mandate, the CEC created a framework for conducting environmental analysis of NAFTA, one of the first ex post frameworks for the environmental assessment of trade liberalization. The framework was designed to produce a focused and systematic body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a "race to the bottom" in environmental regulation among the three countries, or the hope that NAFTA would pressure governments to increase their environmental protection mechanisms. The CEC has held four symposia using this framework to evaluate the environmental impacts of NAFTA and has commissioned 47 papers on this subject. In keeping with the CEC’s overall strategy of transparency and public involvement, the CEC commissioned these papers from leading independent experts.
Agriculture
From the earliest negotiation, agriculture was (and still remains) 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 between each pair of parties. The Canadaâ€"U.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexicoâ€"U.S. pact allows for a wider liberalization within a framework of phase-out periods (it was the first Northâ€"South FTA on agriculture to be signed).
Transportation infrastructure
NAFTA established the CANAMEX Corridor for road transport between Canada and Mexico, also proposed for use by rail, pipeline, and fiber optic telecommunications infrastructure. This became a High Priority Corridor under the U.S. Intermodal Surface Transportation Efficiency Act of 1991.
Impact
NAFTA's effects, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, and NAFTA Revisited by the Institute for International Economics.
Canada
Like Mexico and the U.S., Canada received a modest positive economic benefit as measured by GDP. Many feared declines failed to materialize, and some industries, like the furniture industry, were expected to suffer but grew instead. Canadian manufacturing employment held steady despite an international downward trend in developed countries. One of NAFTA's biggest economic effects on U.S.-Canada trade has been to boost bilateral agricultural flows. In the year 2008 alone, Canada exports to the United States and Mexico were at $381.3 billion, and imports from NAFTA were at $245.1 billion.
A book written by Mel Hurtig published in 2002 called The Vanishing Country charged that since NAFTA's ratification more than 10,000 Canadian companies had been taken over by foreigners, and that 98% of all foreign direct investments in Canada were for foreign takeovers.
Mexico
Maquiladoras (Mexican factories that take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. 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 has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla; all three larger in population than Tijuana, Ciudad Juárez, and Reynosa.
The overall effect of the Mexicoâ€"U.S. agricultural agreement is a matter of dispute. Mexico did not invest in the infrastructure necessary for competition, such as efficient railroads and highways, which resulted in more difficult living conditions for the country's poor. Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.
One of the most affected agricultural sectors is the meat industry. Mexico has gone from a small player in the pre-1994 U.S. export market to the 2nd largest importer of U.S. agricultural products in 2004, and NAFTA may be credited as a major catalyst for this change. The allowance of free trade removed the hurdles that impeded business between the two countries. As a result, Mexico has provided a growing market for meat for the U.S., leading to an increase in sales and profits for the U.S. meat industry. This coincides with a noticeable increase in Mexican per capita GDP that has created large changes in meat consumption patterns, implying that Mexicans can now afford to buy more meat and thus per capita meat consumption has grown.
Production of corn in Mexico has 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 subsidies expanded by former president Vicente Fox, production has remained stable since 2000.
United States
The U.S. Chamber of Commerce credits NAFTA with increasing US trade in goods and services with Canada and Mexico from $337 billion in 1993 to $1.2 trillion in 2011, while the AFL-CIO blames the agreement for sending 700,000 American manufacturing jobs to Mexico over that time.
Trade balances
The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4% increase ($25 billion) over 2009. The US goods trade deficit with NAFTA accounted for 26.8% of the overall U.S. goods trade deficit in 2010. The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).
In a study published in the August 2008 issue of the American Journal of Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification. The study focused on the effects that gradual "phase-in" periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increase in members’ agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.
Investment
The US foreign direct investment (FDI) in NAFTA countries (stock) was $327.5 billion in 2009 (latest data available), up 8.8% from 2008. The US direct investment in NAFTA countries is in nonbank holding companies, and in the manufacturing, finance/insurance, and mining sectors. The foreign direct investment of Canada and Mexico in the United States (stock) was $237.2 billion in 2009 (the latest data available), up 16.5% from 2008.[1]
Jobs
Many American small businesses depend on exporting their products to Canada or Mexico under NAFTA. According to the US Trade Representative, this trade supports over 140,000 small and medium-sized businesses in the US. [2]
According to the Economic Policy Institute, California, Texas, Michigan and other states with high concentrations of manufacturing jobs were most affected by job loss due to NAFTA.
Environment
Overall, none of the initial hypotheses were confirmed. NAFTA did not inherently present a systemic threat to the North American environment, as was originally feared. NAFTA-related environmental threats instead occurred in specific areas where government environmental policy, infrastructure, or mechanisms were unprepared for the increasing scale of production under trade liberalization. In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA's measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers threatened to discourage more vigorous environmental policy. The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada.
Mobility of persons
According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status. Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier).
Canadian authorities estimated that, as of December 1, 2006, a total of 24,830 U.S. citizens and 15,219 Mexican citizens were present in Canada as "foreign workers". These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law. New entries of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans).
Disputes and controversies
Legal disputes
In 1996, the gasoline additive MMT was brought into Canada by Ethyl Corporation, an American company. At the time, the Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US$201 million, from the Canadian government and the 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. Studies by Health and Welfare Canada (now Health Canada) on the health effects of MMT in fuel found no significant health effects associated with exposure to these exhaust emissions. Other Canadian researchers and the U.S. Environmental Protection Agency disagree with Health Canada, and cite studies that include possible nerve damage.
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." (Nick Lifton, spokesman for U.S. Trade Representative Rob Portman) On July 21, 2006, the United States Court of International Trade found that imposition of the duties was contrary to U.S. law.
Change in income trust taxation not expropriation
On October 30, 2007, American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under NAFTA, claiming thousands of U.S. investors lost a total of $5 billion in the fall-out from the Conservative Government's decision the previous year to change the tax rate on income trusts in the energy sector. On April 29, 2009, a determination was made that this change in tax law was not expropriation.
Impact on Mexican farmers
In 2000, U.S. government subsidies to the corn sector totalled $10.1 billion. These subsidies have led to charges of dumping, which jeopardizes Mexican farms and the country's food self-sufficiency.
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 United States, though they agree that the abolition of U.S. agricultural subsidies would benefit Mexican farmers. According to Graham Purchase in Anarchism and Environmental Survival, NAFTA could cause "the destruction of the ejidos (peasant cooperative village holdings) by corporate interests, and threatens to completely reverse the gains made by rural peoples in the Mexican Revolution."
Zapatista Uprising in response to NAFTA in Chiapas
The preparations for NAFTA included cancellation of Article 27 of Mexico's constitution, the cornerstone of Emiliano Zapata's revolution of 1910â€"1919. Under the historic Article 27, Indian communal landholdings were protected from sale or privatization. However, this barrier to investment was incompatible with NAFTA. With the removal of Article 27, Indian farmers feared the loss of their remaining lands, and also feared cheap imports (substitutes) from the US. Thus, the Zapatistas labeled NAFTA as a "death sentence" to Indian communities all over Mexico. Then EZLN declared war on the Mexican state on January 1, 1994, the day NAFTA came into force.
Chapter 11
Another contentious issue is the impact of the investor state dispute settlement obligations contained in Chapter 11 of the NAFTA. Chapter 11 allows corporations or individuals to sue Mexico, Canada or the United States 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) violate the international law.
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 Corporation, a Canadian corporation, filed a US$970 million suit against the United States, claiming that a California ban on Methyl tert-butyl ether (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. The tribunal based its decision namely on following reasoning: But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.
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 Guadalcázar, San Luis PotosÃ. 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 environmental concerns.
Eli Lilly and Company v. Government of Canada is a US$500mn claim for faulty drug patent legislation. Apotex is suing the US for US$520mn because of lost opportunity in a FDA generic drug decision.
Lone Pine Resources Inc. v. Government of Canada has filed a US$250mn claim against Canada, whom it accuses of "arbitrary, capricious and illegal" behaviour, because Quebec aims to prevent fracking exploration under the St. Lawrence Seaway. Milos Barutciski, the lawyer who represents Lone Pine, has decried attempts to portray his client as "another rapacious multinational challenging governments’ ability to regulate for health, safety and the environment". Lone Pine Resources is incorporated in Delaware but headquartered in Calgary, and had an initial public offering of stock on the NYSE on May 25, 2011, which offered 15M shares each for $13 and raised US$195mn. Barutciski acknowledged "that NAFTA and other investor-protection treaties create an anomaly in that Canadian companies that have also seen their permits rescinded by the very same Quebec legislation, which expressly forbids the paying of compensation, do not have the right pursue a NAFTA claim," and that winning "compensation in Canadian courts for domestic companies in this case would be more difficult since the Constitution puts property rights in provincial hands." A treaty with China would extend similar rights to Chinese investors, including SOEs.
Chapter 19
Also contentious is NAFTA's Chapter 19, which subjects antidumping and countervailing duty (AD/CVD) determinations to 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. Since the NAFTA does not include substantive provisions concerning AD/CVD, the panel is charged with determining whether final agency determinations involving AD/CVD conform with the country's domestic law. Chapter 19 can be considered as somewhat of an anomaly in international dispute settlement since it does not apply international law, but requires a panel composed of individuals from many countries to reexamine the application of one country's domestic 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. Since January 2006, no NAFTA party has successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.
See also
- Association of Southeast Asian Nations
- Canada's Global Markets Action Plan
- Comprehensive Economic and Trade Agreement (CETA)
- Economic Community of West African States
- European Economic Area
- European Free Trade Association
- European Union
- North American Transportation Statistics Interchange
- Pacific Alliance
References
Further reading
- Edward J. Chambers, Peter H. Smith (2002) NAFTA in the new millennium. University of California, San Diego. Center for U.S.-Mexican Studies ISBN 0-88864-386-1
- Maxwell A. Cameron, Brian W. Tomlin (2002) The making of NAFTA: how the deal was done. Cornell University Press. ISBN 0-8014-8781-1.
- Gary Clyde Hufbauer and Jeffrey J. Schott (2005) NAFTA Revisited: Achievements and Challenges Washington, D.C. : Institute for International Economics ISBN 0-88132-334-9
- M. Angeles Villarreal (2010)NAFTA and the Mexican Economy, Federation of American Scientists Congressional Research Service. RL34733
External links
- Official website
- Abbott, Frederick M. North American Free Trade Agreement, Case Law (Max Planck Encyclopedia of Public International Law).
- NaftaNow.org, jointly developed by the Governments of Canada, Mexico and the United States of America.
- Office of the U.S. Trade Representative â€" NAFTA statistics page
- U.S. Department of Agriculture NAFTA links page
- North American Free Trade Agreement, 1992 Oct. 7 at Project Gutenberg
- NAFTA document in World Bank's World Integrated Trade Solution *GPTAD database library