Background to NAFTA

I. INTRODUCTION

The Predecessors

The way NAFTA looks now has been greatly influenced by the General Agreement on Tariffs and Trade (GATT), by the first and second bilateral trade and services agreements between the United States and Israel, and the Canada-USA Free Trade Agreement (FTA) which provided the basic framework for many of NAFTA's 22 chapters.[1] The US-Canada FTA, signed in 1989, had for main objective to achieve total free trade between the United States and Canada by 1998. For the most part these objectives were reached but we are now at the beginning of 1999 and there remain many obstacles to overcome before a complete absence of tariffs and restrictions is achieved.

Political Orientation

NAFTA and, as we will see later, the yet to be agreed upon Free Trade Area of the America (FTAA) agreement, have a political objective of supporting democratic governments in the Hemisphere through higher economic growth and more decentralized, private sector oriented societies inherent to free trade relationships. This goal is only an indirect one and does not involve the aim of political integration beyond the separate, largely consultative framework of the OAS. This would be more in line with what the European Union and Mercosur have in mind. The motivation of Canada and Mexico for supporting NAFTA was in fact to secure enhanced access to the US, their dominant export market. They wanted to achieve this without unduly sacrificing national sovereignty. A similar commercial motivation exists in the Hemisphere with respect to an FTAA. In this context, World Trade Organization (WTO) commitments are viewed as mutually reinforcing to those obtained within NAFTA / FTAA, such as dispute settlement and safeguards, as a means of resisting protectionist actions in the US and assuring free market access. The US viewed NAFTA as benefiting both commercially and from a foreign policy point of view. But only as one part of a global trade strategy including Asia and Europe on the same footing and with the WTO as the vital multilateral foundation.

Bridging the North-South Divide

The most important characteristic as to how free trade within the Western Hemisphere is influencing the overall trading system is what can be called the bridging of the North-South Divide. NAFTA involves a comprehensive free trade agreement between two major industrialized countries and on major developing country, based almost entirely on fully reciprocal commitments. Mexico, in its own self-interest, opened its market to a far greater degree than did the US and Canada because its tariffs and other border restrictions were much higher to begin with and new commitments in such areas as investment, intellectual property rights, transportation and public procurement were far more consequential to Mexico. The sharp distinction between industrialized and developing countries which permeated the GATT and now the WTO, with a contentious history over preferential treatment, simply does not exist within NAFTA. In addition, the outlook for a FTAA is essentially to continue this non-special, non-differential relationship. Even the small countries of the Caribbean basin region are likely to receive special treatment, for the most part, in terms of a longer timeframe for implementing free trade commitments. This regional integration on a non-preferential basis will have a substantial impact on the future course of NAFTA.

In fact, the process of moving toward comprehensive free trade within the Western Hemisphere by bridging the gap between industrialized and developing countries is very much compatible with the continued evolution of the multilateral WTO.[2]

Why did Canada join NAFTA?

Canada was initially cold to the idea of expanding the FTA to a third country. The politicians in Ottawa were always reticent toward the FTA and were questioning the wisdom of adding more problems. However, through sheer pragmatism, they came to realize that the US and Mexico would sign an agreement with or without Canada participating. They then assumed that such an agreement would draw investment capital away from Canada and, in all likelihood, require some kind of separate Canada-Mexico agreement. Another initial misconception was that many Canadians assumed Mexico to be just another "poor country". To their dismay, when the numbers were added up, they discovered that the average Mexican consumer was buying more Canadian products annually ($US 325) than a Japanese ($US 300) or a European ($US 200).[3] Another case where old prejudices had to be overcome by economic facts.

There was also fear that a soaring US dollar and an ever increasing US trade deficit would potentially lead to protectionist measures on the part of the Americans. Canada had four principal objectives in negotiating:

a) to isolate itself from a possible swing toward protection in the US;

b) to negotiate the phasing out of tariffs to gain even greater access to US markets;

c) to maintain a degree of protection for Canadian cultural industries; and

d) negotiate a dispute settlements agreement that would give Canada some insulation from what it considered an arbitrary application of US trade remedy laws.

Why did Mexico join NAFTA?

It was important for Mexico's entry that they were perceived as the initiators of the process. In their case, history played an important role with regard to how they view their northern neighbor. The Mexicans had long felt that they were already too close to the US. They were far more inclined toward European ties in order to counterbalance the overwhelming presence of their American neighbors. What interested them first and foremost was the desire to attract much needed American investment capital. They hoped to have an influx of around $US 15 billion during the first year of the agreement.[4]

Another motivation for joining a free trade agreement with the US and Canada may have been the fear of exclusion from the FTA, an already existing and rapidly expanding free trade deal, which was showing signs of expanding south. Mexico long maintained a relationship with the US aimed, before everything else, at maintaining its autonomy. There was also no doubt a realization that any future relationship with the US would require more economic integration with its stronger neighbor. This is something Canada came to realize five years before when it signed the FTA with the US.[5]

Why did the US join NAFTA?

The coming of FTA awoke the interest of several politicians in US southern states toward the possibility of a similar type of agreement with Mexico.[6] For them, the main driving forces were the prospect of more liberal access to economic opportunities within Mexico. There was also a realization that such an agreement would be beneficial from a foreign policy point of view as it would hopefully open the door to warmer relationships between the two countries.[7] The relaxation of investment barriers, the promise of the protection of their markets by better rules of origin guarantees and the potential for a much larger market as the Mexican economy grew were all factors which contributed toward making the agreement a reality.

However, the Americans fully realized a very practical concept which remains true today: all three countries would gain by joining a free trade agreement, but not all sectors of the economy in each country would gain. The realization of this possibility was very evident during the negotiating process when concerted efforts by several American lobby groups almost succeeded in preventing the birth of NAFTA.

Here are some of the more economically oriented reasons why the Americans were interested in expanding NAFTA south:

a) secure and augment U.S. market access to Mexico's newly open and growing economy;

b) push for new opportunities in the services sector and for contracts with government projects, both in Mexico and in Canada;

c) ensure that American companies would be treated fairly, that the rules of trade would be transparent and that their companies would be treated as well as national firms both in Canada and in Mexico; and

d) make North America more powerful when competing against regional economies in Europe and Asia. [8]

The passage of the agreement was certainly not without its opposition in the US. The main critics were labor unions and environmentalists. The labor unions were afraid of a large job exodus south and wanted better guarantees in the area of worker rights. The environmentalists were also seeking guarantees but in the area of pollution control. The NAFTA talks were initiated while President Bush, a Republican, was in the White House.

One of the most prominent anti-NAFTA proponents was no doubt the very influential and controversial American industrialist Ross Perot. During a live television interview, he predicted: "… You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement, no pollution controls, et cetera, et cetera, and you're going to hear a giant sucking sound of jobs being pulled out of this country…"[9]

When Bill Clinton, the Democrat presidential candidate in the 1992 election, promised three supplementary agreements with Canada and Mexico on labor, the environment and about "unforeseen" problems, a North-American free trade agreement became a non partisan issue and was approved more easily.[10]

NAFTA was clearly designed to make North America an even stronger economic powerhouse toward competing regional economies in Asia and Europe. The fact that the North American economy is growing faster than any other region with strong growth in all three countries indicates that this is happening.

There was another important motive for the United States to negotiate with Mexico. NAFTA was a vote of confidence in Mexico and its possibilities. It was an expression of optimism about US relations with Mexico after a long history of troubled interaction. Through NAFTA, democratic principles such as transparency, open records, public notice and recourse for disputes would be introduced throughout Mexico. While there were no illusions that corruption, narcotics and immigration difficulties would disappear overnight, there was hope that conditions would improve with the advent of NAFTA.[11]

II. DESCRIPTION OF NAFTA

Main Objectives

NAFTA is not a simple agreement to complete free trade between three countries, however desirable such an idea might have been at the time. The treaty is a complex series of documents contained in more than one thousand pages and covering a wide variety of trade areas, conditions and deadlines. This chapter is an attempt to give the reader an overview of NAFTA including the initial resolutions, the principal objectives and the main areas discussed in some of its twenty-two chapters, seven annexes and supplemental agreements.

In the preamble to the treaty, the three governments put down a series of resolutions from which to build further:

a) strengthen the special bonds of friendship and cooperation among their nations;

b) contribute to the harmonious development and expansion of world trade and provide a catalyst to broader international cooperation;

c) create an expanded and secure market for the goods and services produced in their territories;

d) reduce distortions to trade;

e) establish clear and mutually advantageous rules governing their trade;

f) ensure a predictable commercial framework for business planning and investment;

g) build on their respective rights and obligations under the General Agreement on Tariffs and Trade, and other multilateral and bilateral instruments of cooperation;

h) enhance the competitiveness of their firms in global markets;

i) foster creativity and innovation, and promote trade in goods and services that are the subject of intellectual property rights;

j) create new employment opportunities and improve working conditions and living standards in their respective territories;

k) undertake each of the preceding in a manner consistent with environmental protection and conservation;

l) preserve their flexibility to safeguard the public welfare;

m) maintain sustainable development;

n) strengthen the development and enforcement of environmental laws and regulations; and

o) protect, enhance and enforce basic workers' rights.[12]

They later refined those resolutions into six specific objectives:

a) eliminate barriers to trade in goods and services, and facilitate their cross-border movements between the territories of the member countries;

b) promote conditions of fair competition in the free trade area;

c) increase substantially investment opportunities in the territories of the member countries;

d) provide adequate and effective protection, and enforcement of intellectual property rights in each member country's territory;

e) create effective procedures for the implementation and application of the agreement, for its joint administration and for the resolution of disputes; and

f) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the agreement.[13]

As if things were not complicated enough, NAFTA is supported by a series of national legislation to allow internal modifications, letters, statements and regulations such as:

a) domestic legislation used to implement NAFTA obligations into domestic laws in Canada and the USA;

b) supplemental agreements to NAFTA on the environment and labor, and the trilateral understanding on emergency actions, signed on 14 September 1993;

c) letters by NAFTA member countries clarifying or modifying some provisions in the initial agreement;

d) a Statement of Administrative Action produced by the American Administration which sets out its position regarding the implementation of the agreement;

e) a Statement of Government Action issued by the Canadian government which sets out its position on key NAFTA implementation and interpretative questions;

f) several internal regulations by NAFTA member countries dealing with the agreement; and

g) rulings of panels on the provisions of the General Agreement on Tariffs and Trade GATT and the Canada-USA Free Trade Agreement (FTA) which were then incorporated into NAFTA.[14]

The Treaty proper contains 22 Chapters, 7 Annexes and 2 supplementary clauses as listed in Table 1 below.

Chapter	Title
1	Objectives
2	General Definitions
3	National Treatment and Market Access for Goods
4	Rules of Origin
5	Customs Procedures
6	Energy and Basic Petrochemicals
7	Agriculture and Sanitary and Phytosanitary Measures
8	Emergency Action
9	Standards-Related Measures
10	Government Procurement
11	Investment
12	Cross-Border Trade in Services
13	Telecommunications
14	Financial Services
15	Competition Policy, Monopolies and State Enterprises
16	Temporary Entry for Business Persons
17	Intellectual Property
18	Publication, Notification and Administration of Laws
19	Review and Dispute Settlement in Antidumping and Countervailing Duty Matters
20	Institutional Arrangements and Dispute Settlement Procedures
21	Exceptions
22	Final Provisions
Annexes I through VII	Reservations and Exceptions to Investment, Cross-Border Trade in Services and Financial Services Chapters
	North American Agreement on Environmental Cooperation
	North American Agreement on Labor Cooperation

Table 1- NAFTA's Main Sections.[15]

Now, in order to better emphasize the fact that NAFTA is indeed a complicated agreement and also to facilitate the analysis of its effectiveness which will follow, the main themes of the agreement will be covered in some details.

National Treatment and Market Access for Goods

Within 10 years of the implementation of NAFTA, all tariffs were to be eliminated on North American industrial products traded between the member countries. A few tariffs on US exports of agricultural products to Mexico were to be phased out over 15 years. As provided in the US-Canada Free Trade Agreement (FTA), all trade between the US and Canada was to be duty free by 1998. As a matter of fact, most US-Canada trade was duty free already.

Prior to NAFTA, Mexican tariffs, which ranged from 0 to 25 %, were 2½ times US tariff rates and about the same as pre-FTA Canadian rates. Without NAFTA, international trade rules would have permitted Mexico to raise its tariffs to as much as 50 % without paying compensation. Under NAFTA, tariffs on all goods entering Mexico from the United States were to be eliminated.

On 1 January 1994, Mexico eliminated tariffs on nearly 50% of all industrial goods imported from the US, including some of the US' most competitive products such as machine tools, medical devices, semiconductors and computer equipment, and telecommunications and electronic equipment. Within five years, 65% of all U.S. exports of industrial products to Mexico were to enter Mexico tariff free, including light trucks, most auto parts and paper products.

In addition to the elimination of tariffs, Mexico was to eliminate non-tariff barriers and other trade distorting restrictions. Upon implementation, American and Canadian exporters started to reap the benefits from the removal of most import licenses, which had acted as quotas, essentially limiting the importation of products into the Mexican market. The benefits were two-fold: exporters were able to ship more of their products into Mexico and exporting was more cost effective since exporters no longer needed to deal with the uncertainty and administrative burden associated with obtaining an import permit.

NAFTA also eliminated a host of other Mexican barriers such as local content, local production and export performance requirements, which had acted to limit US and Canadian exports. Local content requirements made the permission to sell a product conditional on the incorporation of a mandatory percentage of local parts or labor. In other cases, companies were required to produce locally if they wanted to sell to the domestic market; or they were required to export a certain percentage of production. NAFTA eliminated all these requirements.[16]

Rules of Origin

NAFTA reduced tariffs only for goods made in North America. Tough rules of origin determine whether a particular good qualifies for preferential tariff treatment under NAFTA. Goods traded duty free under NAFTA must contain substantial North American content. Rules of origin reward companies using North American parts and labor. As duties are phased out, the incentive to use North American goods increases. Rules of origin prevent "free riders" from benefiting through minor processing or trans-shipment of non-NAFTA goods. A NAFTA country cannot be utilized as an export platform into another NAFTA country by a non-NAFTA country.

NAFTA rules strengthened, clarified and simplified rules contained in the US-Canada Free Trade Agreement (FTA) and NAFTA rules superseded the FTA rules. The improvements are summed up below:

a) few NAFTA rules require cost accounting; those that do are based on simple formulas; and

b) most NAFTA rules are based on simple, predictable tariff classification principles.

Each product has a rule of origin that applies to it. The rules are organized according to the Harmonized System classification of the product. There are two types of rules, both requiring substantial North American processing, but they are measured differently.

a) Tariff-Shift Rule - All non-NAFTA inputs must be in a different tariff classification than the final product. The rules state the level of tariff classification shift required and may necessitate that the non-NAFTA input be in a different harmonized system chapter, heading or tariff item number. Most goods are subject to a tariff classification shift requirement. For example: paper (Harmonized System, Chapter 48) made from wood pulp (Harmonized System, Chapter 47) imported from outside North America would qualify for NAFTA tariffs because the manufacturing process results in the required shift in Harmonized System chapter. This is not simple.

b) Value-Content Rule - A set percentage of the value of the good must be North American, usually coupled with a tariff classification shift requirement. Some goods are subject to the value-content rule only when they fail to pass tariff classification shift test because of non-NAFTA inputs. For instance, perfume (Harmonized System, Article 3303), must contain 50 to 60%, depending on the valuation method, of North American content in order to get preferential treatment.[17]

Customs Administration

With the FTA customs administration rules were a serious headache and this was not surprising given that trade between the two countries was around US $200 billion. NAFTA negotiators set out to improve on that.[18] Under NAFTA, Mexico, Canada and the US have agreed to implement many uniform customs procedures and regulations. These provisions benefit everyone by ensuring predictability and transparency in the exporting process. Small to medium-sized companies especially benefit since they often have limited resources to devote to dealing with complex customs procedures. Uniform procedures ensure that exporters who market their product in more than one NAFTA country do not have to adapt to multiple customs regimes. Many procedures governing rules of origin documentation, record keeping and verification of origin are the same for all three NAFTA countries. The same NAFTA certificate of origin form can be utilized by the Customs administrations in all three countries. In addition, Mexican, US and Canadian customs administrations are to issue advance rulings, upon request, on whether or not a product qualifies for tariff preference under the NAFTA rules of origin. This removes a great deal of uncertainty from the exporting process.[19]

Agriculture

This is the only area of the agreement where two different agreements were necessary for dealings between US and Mexico on the one hand and Mexico and Canada on the other. Bilateral agricultural issues between Canada and the US are not addressed in the agreement. However, some common agreements were reached in the area of agriculture, more specifically:

a) Agricultural Safeguards - Special safeguards are set during the first ten years whereby an importing country may revert to pre-NAFTA tariffs if the level of import reaches pre-agreed levels;

b) Domestic Support - Each member country is to move toward domestic support policies that have minimal trade distorting effects and are consistent with the GATT;

c) Export Subsidies - The member countries have agreed to refrain from providing export subsidies on goods sold in another NAFTA country, unless that country also subsidizes the same good. This remains a contentious area to this day; and

d) Committee on Agricultural Trade - This committee, along with several working groups, was set up in order to monitor the implementation of the various multilateral and bilateral agricultural agreements.[20]

Emergency Action

This Section allows for an opt-out clause in cases where a member country feels injured by modifications to the agreement such as tariff modifications. This is referred to in the agreement as a safeguard or escape clause.

NAFTA provides timely, effective relief to workers and firms needing time to adjust to injurious imports from another country. The provisions of the FTA continue to apply to bilateral safeguard actions between Canada and the US.

A bilateral safeguard permitted a return to pre-NAFTA tariff rates for up to 3 years (or 4 years for extremely sensitive products) if increases in imports of Mexican goods caused or threatened to cause serious injury to Canadian or American firms or workers. This meant resetting a tariff at its original level. A global safeguard retains the right for any NAFTA country to impose quotas or tariffs as part of a multilateral safeguard action, when imports from that country account for a substantial share of total imports and contribute importantly to the serious injury or threat as a consequence. Specific safeguards were also provided for certain agricultural products and textiles.

NAFTA protects jobs and firms in a member country against unjustified safeguard actions by another member country by establishing clear procedures for taking safeguard actions. Any NAFTA partner taking a safeguard action must compensate the country whose imports are affected.[21]

Standards-Related Measures

Standards related measures cover both voluntary and mandatory technical specifications that lay out the characteristics of a product such as quality, performance, labeling, etc. NAFTA prohibits the use of standards and technical regulations as obstacles to trade. NAFTA enhances the ability of firms to effectively develop and market new products in another NAFTA member country and ensures that the implementation of new regulations does not adversely affect the sale of existing products.

NAFTA requires that standards related measures be applied in a non-discriminatory manner to both domestically produced and imported products. It ensures that the standards development process in all three countries is open and transparent. NAFTA goes further than any existing trade agreement by allowing companies and other interested parties to participate directly in the development of new standards in another NAFTA member country on the same basis as domestic firms. It also requires that adequate notice be given before new domestic regulations go into effect. Ample time is provided for affected industries to make comments. This ensures that an industry in a member country is not surprised by any new requirements in another and that standards are not tailored to domestic products, effectively shutting imports out of the market.

NAFTA continues its efforts to make standards more compatible. It established various working groups, including private sector representatives, to facilitate work in specific product areas. Compatible standards, accreditation of laboratories in other NAFTA countries and access to the standards development process enabled NAFTA exporters to compete more effectively in each other's markets by lowering costs. As a result:

a) compatible standards mean that companies are not faced with the burden of adapting a product to comply with three different standards in three different countries;

b) companies might only have to pay one accredited laboratory to certify the safety and health standards of a product, rather than a laboratory in each country;

c) companies face less paperwork and red tape when attempting to export a product. For instance: NAFTA does not require the United States to change any of its existing standards, nor does it prohibit states from setting standards that are more stringent than federal law; and

d) products that fail to meet the standards of a member country including health and safety standards, may be denied entry into their market.[22]

Government Procurement

This is normally a sensitive area for any government and, with government procurement of the three member countries in goods and services now exceeding $US 1 billion each year, the agreement saw fit to include a complete chapter on the issue. This chapter builds on the GATT code and the Canada-US FTA.[23]

American and Canadian suppliers of oil and gas field equipment and services, heavy electrical equipment, communications and computer systems, electronic, steel and pharmaceutical products and medical equipment and construction services, particularly benefit from the NAFTA's government procurement provisions. NAFTA gives US and Canadian suppliers immediate and growing access to the Mexican government procurement market, including government controlled enterprises (parastatals) such as PEMEX (national oil company) and CFE (national electric company). Coverage of the parastatals is extremely valuable since they purchase more than do the federal departments in Mexico.

The government procurement provisions of NAFTA apply not only to goods, but to contracts for services and construction as well. NAFTA substantially increases opportunities for exports within NAFTA in such services as construction, environmental and computer software, and design services. This is a definite advantage for Canada and the US since continued growth in Mexico will result in infrastructure upgrading and many new opportunities for Canadian and American companies to participate in modernization efforts.

NAFTA guarantees member countries fair and open competition for procurement in North America through transparent and predictable procurement procedures. A mechanism to challenge bids guarantees suppliers the right to an independent review of the bidding process and contract award. Suppliers gain access to information and training programs provided by another NAFTA member on the operation of its procurement system to improve their prospects in securing contracts. For covered procurement, NAFTA prohibits the use of offsets in contracts. Suppliers are able to bid on other member countries' government contracts without discriminatory provisions requiring the use of local purchases or suppliers.[24]

Investment

This portion of the agreement again builds on the Canada-US FTA and does the following:

a) it establishes common rules for the treatment of investment from investors of other NAFTA countries;

b) it liberalizes existing investment restrictions; and

c) it provides a mechanism to resolve investment disputes between investors and other NAFTA governments.[25]

NAFTA eliminated most investment conditions which restricted the trade of goods and services to Mexico. Among the conditions eliminated are the requirement by foreign investors:

a) to export a given level or percentage of goods or services;

b) to use domestic goods or services;

c) to transfer technology to competitors; or

d) to limit imports to a certain percentage of exports.

The result is that companies in Mexico now have more freedom to buy American or Canadian parts and less incentive to export to them. NAFTA ensures that foreign investors from NAFTA countries are treated the same as domestic firms. It provides key rights that facilitate business, such as:

a) the right to repatriate profits and capital;

b) the right to fair compensation in the event of expropriation; and

c) the right to international arbitration in disputes between investors and governments that involve monetary damages.

Another example of improved investment climate is that prior to NAFTA implementatio Mexico could review all investment proposals to determine if they were in the national interest. Under NAFTA, Mexico may review acquisitions above an initial threshold of $US 25 million, phased-up to $US 150 million over nine years (adjusted for inflation and economic growth). Mexico will continue to prohibit foreign investment in certain "constitutional" activities (e.g., energy, railroads). NAFTA gives companies from a NAFTA country the right to establish firms in another NAFTA country or acquire existing firms, but it does not encourage these firms to go abroad.

NAFTA provides, at the option of the investor, for binding international arbitration of disputes between host governments and foreign investors that involve monetary damages or restitution of property which could arise if NAFTA rights are denied. This is an important development in trade relations with Latin America, as certain countries in that region have denied foreign investors such protection. NAFTA builds upon the earlier US-Canada FTA as it improves on FTA definition of investor to cover firms established in a partner country; and NAFTA broadens FTA coverage to include real estate, stocks, bonds, certain contracts and intangible property. Also, NAFTA, unlike the FTA, has an investor versus state dispute settlement provision.

NAFTA investment provisions do not cover maritime, basic telecommunications, government sponsored technology consortia and Research and Development (R&D) programs, and exiting state and local measures. NAFTA does not prohibit a government from taking investment related measures necessary to protect its national security.[26]

Cross-Border Trade in Services

This chapter applies in particular to:

a) the production, distribution, marketing, sale and delivery of a service;

b) the purchase, use of, or payment for a service;

c) the access to, and use of distribution and transportation systems in connection with the provision of a service;

d) the presence in its territory of a service provider of another member country; and

e) the provision of a bond or other form of financial security as a condition for the provision of a service.[27]

The FTA established the first comprehensive set of principles governing services trade. NAFTA broadens these protections and extends them to Mexico. Virtually all services are covered by NAFTA with the exception of aviation transport, maritime and basic telecommunications. The key covered sectors include: accounting, architecture, land transport, publishing, consulting, commercial education, environmental services, enhanced telecommunications, advertising, broadcasting, construction, tourism, engineering, health care management, and legal services. The US has not lived up to their end of the bargain in the area of ground transport by not allowing Mexican trucks on their territory.

Separate chapters cover specific rights and obligations for financial services and telecommunications. Each country also excluded certain sensitive sectors from coverage. For example, Mexico did liberalize services, such as public notaries, which were specifically reserved to Mexicans by the Mexican Constitution. Canada has retained its cultural exclusion from the FTA, which affects the entertainment and publishing industries, among others. NAFTA does not apply to domestic shipping.

NAFTA does not remove or weaken US or Canadian licensing and certification requirements, but consistent with the NAFTA principle of non-discrimination, licensing of professionals, such as lawyers, doctors and accountants should be based on objective criteria aimed at ensuring competence, not on nationality. Citizenship requirements for licensing of professionals were eliminated within two years. NAFTA does not permit professionals from one member country to practice in the another member's country unless they have undergone the same licensing and certification procedures as a professional from the latter country . A Canadian architect, for example, may be eligible to enter Mexico under NAFTA provisions for temporary entry of business persons, but may not practice in Mexico unless licensed in Mexico.[28]

Temporary Entry for Business Persons

The governments have developed uniform and transparent procedures to facilitate temporary entry of business persons who conduct trade in goods and services as well as investment activities. U.S.- Canada provisions are essentially unchanged from FTA.

Expanded trade and the economic alliances developed as a result of the NAFTA will result in more business persons traveling between member countries. The agreement defines business persons as:

a) business visitors engaged in international activities for the purpose of:

- research and design;

- growth, manufacturing and production;

- marketing;

- sales;

- distribution;

- after-sales service; and

- general services.

b) traders who carry on substantial trade in goods or services between their own country and the country they wish to enter;

c) investors who seek to commit a substantial amount of capital in that country;

d) intra-company transferees; and

e) specified categories of professionals (including lawyers, architects, economists and accountants).[29]

The US would later decide to take exception to that rule with the adoption of the Helms-Burton law which severely restricted access to the US for Canadian business people whose parent company openly did business with Cuba.

Intellectual Property

NAFTA promotes export driven growth in some of America's most competitive sectors, such as high technology and entertainment products, by providing the highest standards of protection for intellectual property available in any bilateral or international agreement. However, as we will discuss later, this sector remains a very litigious issue. NAFTA covers patents, trademarks, copyrights and related rights, trade secrets, semiconductor integrated circuits, plant breeder rights, geographical indications and industrial designs. NAFTA reaffirms and extends the protection contained in the world class intellectual property rights (IPR) laws adopted by Mexico in June and July 1991.

NAFTA protects the industry of a member country by reducing the risk that products created or innovated in that country could be unfairly exploited by another member country. More to the point, NAFTA:

a) requires each country to provide for the enforcement of the rights of authors, artists and inventors against infringement and piracy;

b) ensures protection for North American producers of computer programs, sound recordings, motion pictures, encrypted satellite signals and other creations, including rental rights for computer programs and sound recordings;

c) locks in the availability of patent protection for most technologies in a member country, allowing firms from other member countries to patent a broad range of inventions in that country; and

d) resolves longstanding trade irritants for U.S. and Canadian pharmaceutical and agricultural chemical companies by expanding the coverage of product and process patents and limiting compulsory licensing of patents.[30]

Dispute Settlement Procedures

NAFTA has several procedures to settle disputes involving the application or interpretation of the NAFTA. The agreement created a trilateral free trade commission (FTC) which regularly reviews trade relations among the three countries and discusses specific problems. The FTC may create bilateral or trilateral panels of private sector experts to hear disputes involving interpretations or application of NAFTA. Dispute resolution should normally be completed in less than one year.

The panels rule on whether or not an action taken by a NAFTA country is consistent with its NAFTA obligations. The panels must issue their initial report to the parties within 90 days of the panel being formed and issue their final report 30 days hence. If the panel finds an action inconsistent, the panel will make a recommendation. If a country decides not to comply with a panel's recommendations, it must offer acceptable compensation. If not, the affected country can retaliate by withdrawing equivalent trade concessions.

NAFTA contains special provisions for dispute resolutions:

a) environmental and health issues: In disputes regarding environmental, safety, health-related or other scientific matters, panels may call upon experts for advice. Scientific review boards may be convened to provide written reports on factual issues to assist panels;

b) investment: NAFTA permits investors to take the host government directly to international arbitration or settlement of disputes involving monetary damages arising from violations of the NAFTA's investment provisions;

c) anti-dumping and countervailing duty investigations: Disputes involving antidumping or countervailing duty investigations cases will generally be addressed by binational panels. The panel's mandate is limited to whether decisions rendered by Mexico, the U.S. or Canada are consistent with their domestic law; and

d) commercial disputes: NAFTA encourages and facilitates the use of alternative dispute settlement, including arbitration, for commercial disputes between private parties. Each country must have in place legal mechanisms to enforce arbitration contracts and awards.[31]

Supplemental Agreement on the Environment

NAFTA allows the imposition of strict environmental standards on investments and discourages the lowering of environmental standards to induce investment. NAFTA also permits governments to require environmental impact statements on new investments. Under Mexican law, these are currently required for new investments.[32]

NAFTA parties have recognized the right for each member country to establish its own levels of domestic environmental protection and to modify them as it wishes. There are no provisions requiring the member countries to harmonize their environmental standards upward. As the question comes up more and more often, fresh water is covered by the GATT, in this supplemental agreement and in several other NAFTA chapters.[33]

Supplemental Agreement on Labor Cooperation

This is an important part of NAFTA as it is one of the most often contested, especially by the US. The agreement sought to require each member country to provide guarantees that their administrative, quasi-judicial, judicial and labor proceedings would be fair, equitable and transparent. The agreement goes on to specify that each member state must promote, to the maximum extent possible, the following principles:

a) freedom of association and the right to organize;

b) right to collective bargaining;

c) right to strike;

d) prohibition of forced labor;

e) labor protection for children and young persons;

f) minimum employment standards;

g) elimination of employment discrimination;

h) equal pay for men and women;

i) prevention of occupational accidents and diseases;

j) compensation for occupational injuries and illnesses; and

k) protection of migrant workers.[34]

This Supplemental Agreement contains an added twist as the federal government of Canada does not have jurisdiction over what is happening within its provinces in the area of labor and must depend on each province. As it is now, all provinces have agreed to join the agreement, but the issue of dual levels of governments remains a problem in new negotiations. There is another problem in that none of member countries adhere to all the principles listed in the Supplemental Agreement just listed above. The best example would be equal pay for men and women.[35]

III. Evaluating NAFTA

In this Chapter, we will try, with the use of specific cases, to determine if NAFTA is to be considered a success or a failure after five years of existence.

Some Statistics About NAFTA

The first positive sign is the overall increase in trade among the NAFTA signing members. Since the year preceding the birth of NAFTA and the end of 1997, trade of goods and services between Mexico and the US has increased by 79%. During the same period, trade between Mexico and Canada increased by 81% and trade between the US and Canada increased by 48%. Figure 2 provides a breakdown of those numbers.[36] It must be said at this point that NAFTA cannot and should not take all the credit for such an increase across the board. All three NAFTA member countries have seen their trade with the rest of the world during the same time increase substantially. What NAFTA has done is polarize a great deal of that trade among neighbors. This is considered a great achievement for Canada as it not only maintained its share of the largest market in the world but increased it significantly.