INTER-AMERICAN DEFENSE COLLEGE

DEPARTMENT OF STUDIES

CLASS XXXVIII

MONOGRAPH

AN EVALUATION OF NAFTA AFTER 5 YEARS

AND A LOOK AT ITS FUTURE

BY

LIEUTENANT-COLONEL PATRICK D. NICHOLSON, CAF

WASHINGTON, D.C. MAY 1999

Executive Summary

NAFTA just celebrated five years of existence at the end of 1998. Some claim that it has been a failure and some claim that it has been a resounding success. As usual, the truth is somewhere in the middle.

NAFTA is nothing new, it is the extension of the World Trade Organization and the natural development of the US-Canada Free Trade Agreement which now has ten years. We will look at the reasons behind this extension to Mexico and what prompted the three member countries to agree to sign the agreement.

NAFTA is a very complex agreement. It contains many chapters and covers a wide range of topics essential in the make up of the agreement. There is much more to free trade than just the abolishment of tariffs. This may appear tedious but without such coverage it makes it very difficult to discuss the pros and the cons.

The next step is to spend some time discussing the advantages and the disadvantages of the agreement. There are a great deal of testimonies arguing both sides and, as usual, the negative arguments are often more vocal. We will see that, in the end, NAFTA appears to be working and that most of the arguments against it can be refuted with relative ease.

We will discuss briefly what impact NAFTA and any future developments may have on the security of the Hemisphere.

We will look briefly at the other major trade agreements currently in place in the Hemisphere. This is a necessary background before discussing the future of NAFTA. Should NAFTA be expanded at all and, if so, how? Should NAFTA be replaced, as appears to be the wish of the Organization of the American States (OAS), by a new trade agreement to be named Free Trade Area of the Americas (FTAA)?

NAFTA works and the future of free trade, while somewhat ambiguous, appears promising. Whether NAFTA is to expand gradually or to be replaced by a new Hemisphere-wide trade agreement, the process of expansion and abolishment of trade barriers seems inevitable in the near future. Free trade is here to stay.

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.[37]

Year	Exports	Imports	Total	Increase
1992	114.3	111.1	225.4	Prev Yr
1993	117.8	121.5	239.3	+6.2%
1994	131.7	139.6	271.3	+13.4%
1995	145.5	157.9	303.4	+11.8%
1996	154.2	169.7	323.9	+6.8%
1997	172.3	182.3	354.6	+9.5%
Increase between 1993-97				+48.1%

USA - Canada (in billions of $US)

Year	Exports	Imports	Total	Increase
1992	0.60	2.02	2.62	Prev Yr
1993	0.60	2.72	3.32	+26.9%
1994	0.80	3.30	4.10	+23.3%
1995	0.84	3.91	4.75	+15.9%
1996	0.91	4.40 .	5.31	+12.1%
1997	0.93	5.09	6.02	+13.1%
Increase between 1993-97				+81.2%

Canada - Mexico (in billions of $US)

Year	Exports	Imports	Total	Increase
1992	44.7	45.4	90.1	Prev Yr
1993	50.9	49.5	100.4	+11.5%
1994	60.7	60.0	120.7	+20.2%
1995	53.6	72.4	126.0	+4.4%
1996	64.7	85.9	150.6	+19.5%
1997	80.7	99.1	179.8	+19.4%
Increase between 1993-97				+79.0%

USA - Mexico (in billions of $US)

Year	Exports	Imports	Total	Increase
1992	159.6	158.5	318.1	Prev Yr
1993	169.3	173.7	343.1	+7.8%
1994	193.2	202.9	396.0	+15.4%
1995	199.9	234.2	434.1	+9.6%
1996	219.8	260.0	479.8	+10.5%
1997	253.9	286.4	540.3	+12.6%
Increase between 1993-97				+57.5%

Total NAFTA (in billions of $US)

Figure 2. NAFTA Trade 1992-97

Figure 3 provides a good reflection of the steady increase in trade between NAFTA members since the inception.[38]

Figure 3. NAFTA Overall Trade 1992-97

The increase in overall trade numbers compares more than favorably with what was happening in the rest of the world, as demonstrated in Figure 4 below. This graph shows that in 1996, NAFTA trade grew 2½ times faster than world trade, and this increased to 4 times faster in 1997.

Figure 4. World & NAFTA Trade 1996-97[39]

In Favor of NAFTA

A report published in September 1997 by the Progressive Policy Institute, a Washington based organization, claimed that NAFTA was indeed working as advertised after three years. They based their conclusions on the following observations:

a) trade and investment throughout North America increased between 1994 and 1997;

b) North America's economic growth was 3.5% in 1997, compared to 2.7% for the rest of the industrialized nations;

c) US exports to Mexico and Canada were at record levels;

d) trade and investment disputes were being handled with relative transparency and according to established procedures agreed to in NAFTA;

e) small businesses as well as large firms have secured market access and the tools for resolving commercial disputes under NAFTA; and

f) despite predictions of giant sucking sounds form south of the Mexican-American border, NAFTA, at the end of 1997, had not produced any serious flight of investments or jobs in that direction.[40]

There was a great deal of fear in Canada that many businesses would be moving to the US or to Mexico. This did not materialize. What happened was a move by the Canadian manufacturing sector to restructure to protect their markets. There was a great deal of pain at the beginning when some 10,000 Canadian manufacturers went out of business between 1989 and 1991, at the beginning of the FTA. However, today, this sector is the fastest growing and the value of manufacturing exports has increased from $US 280 billion to $US 430 billion. One example of redirecting is the furniture sector where small town plants have given way to higher value goods and niche markets. This sector is now thriving.[41]

Again, in Canada, some small manufactures did disappear as a direct result of free trade. This is the case of the 100 year old Kroehler Furniture in Stratford, Ontario, Canada. It had to shut down in the early 1990s, facing cheaper production from the US. Since then, 175 of the 220 workers found other work opportunities rather quickly. Many are now saying it is the best thing that could happen to them as they retrained and many now hold better positions. This is in short what many claim happened to Canada. The country had to restructure its industrial sector in order to compete. The Canadian trade is now much more North-South oriented. Companies were forced to become more competitive and specialized. The result is an 80% overall increase in trade since the signing of NAFTA five years ago.[42]

The so-called flight of companies from Canada or the US to Mexico is often used as a negative factor resulting form NAFTA. What is ignored is the fact that such companies were likely leaving those countries regardless of NAFTA and could have gone to any number of other countries around the world in order to produce more cheaply and compete. The fact that they went to Mexico at all is mainly the result of NAFTA measures making it easier to move there.[43]

Another case contradicting the flight of companies to Mexico as an example of failure of NAFTA and as a consequence a loss of jobs is that during the first three years of NAFTA at least $US 26 billion in direct American investment found its way to Mexico. This has the effect to provide employment for many Mexicans who produce goods often resold to American and Canadian consumers for a better price than before and in the end the American and Canadian owned companies can repatriate their revenues to their countries for spending or reinvestment. The point must be made again that this flight of companies or investment dollars would have happened regardless, but that NAFTA allowed it to remain close instead of ending up in Asia, for example.[44]

Mexico is a big winner with regard to trade balance with both Canada and the US. Their trade surplus with Canada increased threefold from $US 1.4 billion to $US 4.2 billion. With the US, their trade surplus increased twenty-five times from $US 0.7 billion to $US 18.4 billion.[45] Some of the benefiting sectors in Mexico are:

a) the garment industry which has boosted its exports to the US from $US 1.4 billion in 1994 to $US 4.4 billion in 1997 (a 314% increase), and estimates for 1998 are for a 15% increase:

b) jewelry makers have also seen exports from their sector increase by 50% since 1993; and

c) exports of ceramic and handicraft products have risen by 60% since 1993.[46]

A survey conducted in the US in the fall of 1997 showed that 91% of business leaders favored NAFTA. In fact, 76% of the following groups approved of NAFTA:

a) foreign affairs specialists;

b) national security experts;

c) state and local officials;

d) academics and think tank members;

e) religious leaders;

f) scientists and engineers; and

g) Capitol Hill staff.

Only labor leaders disproved by a 71 to 29% margin, while the rank and file unionists were in favor by a 51 to 49% margin.[47]

The automobile trade appears to have benefited from NAFTA. The rules between Canada and the US were already set by the FTA since 1989, but NAFTA liberalized trade with Mexico. Mexican import tariffs, previously set at 20%, were immediately reduced by half and local content requirements are to be eliminated by 2001. US vehicle exports to Mexico exceeded initial predictions during the first three years and American imports doubled in three years. Another plus, as a direct result of the strong rules of origin, is the elimination of the possible use by foreign car producers of Mexico as an export platform.[48]

One crucial point in any discussion about benefits or losses with regard to NAFTA is that it is essentially impossible to measure what the impact on jobs has been, no matter which country. NAFTA is only part of the overall trade in any member country. Some are arguing that the increased trade deficit the US is running against Canada and Mexico (or Canada against Mexico) can be translated into a net loss. In reality, it is an indication of a consumer decision to buy the best possible product at the best possible price. If this happens to be a trading partner, the better for it. The argument could easily be turned around and one could argue that, were it not for NAFTA, the US trade deficit with the rest of the world would be higher.[49]

By agreeing to reduce tariffs on imports, Mexico made it possible for US and Canadian products to become cheaper and more affordable to its citizens. The result is Canada and the US are selling more now than they did before NAFTA. It must be pointed out that, since the peso crisis hit Mexico in 1995, the country fell into a near depression. This was not caused by NAFTA but it certainly affected trade between Mexico and its NAFTA partners.[50]

The area of harshest criticism is no doubt that of American loss of jobs to Mexico. This is an area of controversial data. Statistics are difficult to analyze and most tend to refute that theory. Many groups have claimed a loss of more than 400,000 jobs since 1993. The American Labor Department certifies that, since January 1994, about 120,000 American workers have been displaced through NAFTA. Of that number, only 6,000 actually used the benefits the government offers. This number may appear impressive but one must remember that the US is creating more than 2,5 million jobs every year. In essence, it takes the economy about two weeks to compensate for the so-called NAFTA losses.[51]

A July 1997 US report argues that the big job winner in NAFTA is Canada. According to them, only 8,000 additional new direct jobs were created in the US as a result of Canada-US trade while 47,000 were created in Canada. At the same time, they claim that the US is the big winner with Mexico. They estimate a gain of 43,000 by the US, while losing 34,000. The report co-authored by Raul Hinojosas and Sherman Robinson claims that it is difficult to determine how much impact NAFTA had on the increased trade between the three members of the agreement.[52]

Another argument against the theory of exodus of jobs is in great part refuted by statistics in that the latest unemployment rate in the US has dropped from 6.9% in 1993 to 4,.3% at the end of 1998.[53]

There is no doubt that reducing trade barriers has some advantages:

a) studies have demonstrated that increased foreign trade means better paying jobs. On the average, jobs in the export industry pay 15% more than the average;

b) lower trade barriers promote a better standard of living. Competitiveness encourages innovation and better products;

c) with the barriers (taxes and tariffs) removed, products are cheaper. It is estimated that in 1997 alone between $US 100 and 200 billion was saved around the world; thus leaving more resources to the consumer for more purchases; and

d) freer trade offers the consumer a greater variety of choices.[54]

Against NAFTA

However, there are some negative charges against NAFTA. While all reflect genuine concerns, most are essentially regional and do not reflect national criticism against the agreement. With an agreement as comprehensive as NAFTA, it is inevitable that some sectors of industry in each country will suffer as a result of realignments.

All sides have been accused of violating the agreement on several occasions. Here are a few examples cited recently:

a) the US has been accused of refusing to allow Mexican trucks on US highways. They may have genuine reasons but the result is restriction of free trade;

b) Mexico has been accused of violating Mexican workers' freedom of association;[55] and

c) Canada has been accused of taking unilateral measures to prevent American advertising in publications printed and distributed in Canada so as to protect its culture.[56]

Labor unions in Canada and in the US claim that the agreement has failed to protect worker safety and to guarantee the rights of Mexican workers to organize unions. Eight of the nine complaints filed against Mexican employers under NAFTA have alleged violations of the rights to organize unions.[57] What these reports fail to consider is that while there remain problems with labor rights in Mexico, conditions have improved since the inception of NAFTA. The approach of labor groups is more often to attack everything in sight in order attract attention and putting emphasis on persisting problems rather than on progress. On the other hand, wages have not increased significantly in any of the three member countries. NAFTA is not the cause. The globalization of trade has increased pressure to lower production costs in order to maintain global competitiveness. Wages in some sectors have increased while others have remained relatively stable. This phenomenon precedes NAFTA.

The latest dispute comes in the field of the protection of culture. Canada has threatened to ban Canadian advertising in some American magazines printed in Canada to protect Canadian publications. High level Canadian officials understand the principle that it is difficult to maintain separate social, cultural, environmental and foreign policy decisions while becoming on supra-regional economic entity. However, they are unlikely to stop fighting for national integrity as it is a very popular political tool. American authorities have threatened to target Canada's steel, textile, wood and plastics exporters if the planned magazine policy goes through. In addition, friction remains strong in other areas like steel, softwood lumber, textiles, wheat, and fisheries.[58]

On the same front of culture, the argument was made in 1997 in a Fraser Institute (a Canadian think-tank) review that it is indeed very difficult to define what is meant by Canada's unique national identity. This makes it hard to rationalize what amounts to very subjective political decisions "for the good of the country". The cultural card may very well be more for internal consumption than international, in order to appease Québec separatist tendencies.[59] There will be pressures against the sovereignty of all three member countries and this is not only the impact of NAFTA but the result of the globalization of trade. To the credit of NAFTA, it is not an agreement designed to be intrusive but rather respective of the sovereignty of its members.

Mexico, Canada and the US agreed in 1997 to speed up the elimination of tariffs on 38 products, representing far less than 1% of NAFTA trade. This apparent good will gesture cannot hide the fact that some products have as much as 15 years of protection under NAFTA. This will de facto ensure that NAFTA will not meet its target of complete free trade by 2005, as originally agreed.[60] There are some signs that complete free trade may not be feasible. There will always be some areas of disagreement and some areas where any one of the three member countries may elect unilaterally to impose restrictions because of national priorities. The issues of culture and fresh water may well remain thorny issues for Canadians, while Mexicans and Americans will have some areas of protectionism as well.

The push against NAFTA remains more political than economic, especially in the US. As discussed earlier, numbers alone cannot support or reject NAFTA. What continues is the political posturing which for Democratic candidates often means supporting US worker unions and their causes, as well as groups supporting the protection of the environment. In both cases, these groups are staunchly anti-NAFTA. This is mostly based on what they perceive as a bad deal not affording sufficient protection for American workers and not enough safeguards for the environment.[61] In the end, the political opposition is in order to either secure or maintain the votes of a group of the population such as the labor unions or a particular industrial lobby group. All in all, opposition constitutes a minority group, but a vary vocal one.

One must not forget the argument about American loss of jobs to Mexico and Canada because of NAFTA. The American public has turned against trade in general and, by extension against NAFTA, mostly on the basis that the agreement weakens wages and employment. A December 1998 poll shows 58% agreeing that free trade is detrimental and only 32% disagreeing. The same poll indicated that 48% were opposed to NAFTA expansion while 36% were in favor. Critics partially explain those numbers by the lack of marketing of NAFTA by business leaders. It appears that the minority negative voices are overheard above the non-existent or quiet interventions of those supporting the agreement. In addition, NAFTA, if it has an overall negative impact, is only a small part of the problem. The US has large trade deficits with China and Japan, among others.[62]

In the middle of 1996, after a White House report praised NAFTA's positive results, several anti-NAFTA groups were quick with a rebuttal. The Economic Policy Institute, the Public Citizen's Global Trade Watch and the Sierra Club said that the US were big losers. They pointed out that, while exports to Mexico increased by 36.3% between 1993 and 1996, during the same period imports grew by 82%. At the same time, they estimated the flight of jobs, directly related to NAFTA, at 420,000. Such large numbers have never been substantiated.[63] Another 1997 University of California at Los Angeles (UCLA) report claimed that Canada, not Mexico, claimed more jobs from the US. According to them, the first three years of NAFTA produced a net gain of approximately 8,500 jobs in favor of the US in their trade with Mexico while, at the same time, there was a net loss of 39,000 jobs to Canada..[64] Truth be known, it is practically impossible to determine exactly how many American jobs were lost to Mexico or Canada as a direct result of NAFTA. As argued before, to use an average claim of 250,000 jobs lost, how can that be such a negative result when the overall gain of jobs in the US during the same period increased by over 2,5 million per year?[65] Some claim that trade between Canada and Mexico supports 2,6 million US jobs, an increase of 655,000 between 1993 and 1999.[66]

The relative reduction of real wages throughout NAFTA member countries is often used as a negative result of NAFTA. A tri-national labor commission established by NAFTA published a study in 1996 concluding that 1995 real wages in all three countries were below 1984 levels. What the survey failed to do is link those results in any way with the advent of NAFTA. On the other hand, the same study highlighted a rapid increase in all three countries of service sector jobs and the growth of small businesses. This is not a negative effect but a desirable effect, especially for Mexico where this reflects a movement away from the agricultural sector.[67] One must also realize that there are world pressures on wages, not just from NAFTA. For instance, a company moving to Mexico for lower wages might have gone to another part of the world had trade conditions with Mexico not been favored by a free trade agreement. The result would still have been lower wages in order to compete globally, not just within NAFTA.

The flood of immigrants from Mexico to the US was a problem before the birth of NAFTA and it persists today. The Asian crisis has hit Mexico quite hard in the last few years. It would be fair to say that NAFTA has been an attenuating factor during the world crisis. Mexico has continued to increase its overall trade and trade surplus with both Canada and the US.

The problems encountered in the areas of safeguarding of the environment and labor issues are often being brought up as failures of NAFTA. The expected results of the agreement may not have been reached as everyone expected but one must wonder what would have happened if there had been no NAFTA. In all likelihood, problems in those fields are closer to a solution now because of NAFTA and its forum for referring problems and violations.

The Verdict Is…

The facts indicate that NAFTA is a success. Overall trade between partners has increased significantly since the signature of the agreement. From the beginnings of the agreement there have been some losers and this has been inevitable. However, the impact appears relatively local and the number of people affected minimal, in proportion to all the jobs involved. Some industries have been hit by a relocalization of companies where conditions are more favorable and this has caused job losses, personal hardships and negative economic impact on some towns. On the other hand, many additional jobs have been created to more than absorb any NAFTA generated losses. The perceived reduction in real wages cannot be blamed solely on NAFTA. This is more of a global phenomenon. North America has to contend more and more with global cost reductions and either compete or give up its place in the market. NAFTA is a measure of the ability of its member countries to adapt to global pressures and succeed quite effectively in the end.

There remains many fights to be fought in order to enforce all that is contained in the agreement and reach complete free trade within the deadline of 2005. Every country has claimed exceptions to the treaty by acting unilaterally or not acting fast enough:

a) US stopping Mexican trucks or Canadian soft lumber products;

b) Canada acting to protect its culture by regulating the content of Canadian originated publications and refusing to allow the export of fresh water; and

c) Mexico's inability to guarantee labor rights as stipulated in the agreement.

In the end, however, everybody wins. The US and Canada increased trade with Mexico while gaining investment incentives. The need to compete globally would have forced many Canadian and American companies to move to areas where production costs are lower. The fact that they moved to Mexico is a bonus in the short run as it keeps shipping costs much lower and a plus in the long run as it will strengthen Mexico and make it a choice export market in the future. Canadian and American consumers get cheaper products.

The challenge will be to see if NAFTA can be expanded successfully and if that expansion will be a plus or a minus.

IV. NAFTA and the Hemispheric Security

On the surface, NAFTA or the FTAA, or any other multinational economic agreement, would appear to be a very positive factor toward enhancing security between neighbors. After all, the member countries are engaged together not only economically, but also diplomatically, in daily discussions with issues related to the agreement. The continued dialogue alone is a very positive factor.

However, there remain constant irritants. The NAFTA member countries are periodically at odds over various aspects of the agreement and at times with other issues which have the potential to jeopardize the agreement. Canada and the US have disagreements over the cultural content of trade, subsidies of soft lumber products, fishing quotas, farm subsidies and more. Thankfully, Canada and the US have enjoyed a long standing relationship and have managed to resolve their differences peacefully for almost two hundred years. The relationship between the US and Mexico is much more fragile. The two countries did fight a war during the last century and Mexico has always remained driven by trying to counterbalance the might of its northern neighbor. After losing a war and part of its territory, such an attitude is understandable. To this day, many Mexicans remain very much preoccupied by American interference in their affairs. Only a few weeks ago, the US was threatening to decertification to Mexico over its alleged lack of progress in the fight against drug trafficking, corruption and money laundering.[68] This is perceived an intrusion in sovereign matters.

The FTAA would make almost every country in the Hemisphere an overnight economic friend and partner. Many of those sudden friends were fighting wars against each other not too long ago. It is conceivable that old rivalries will not go away as quickly as would be desired.

The conditions for membership in the FTAA remain to be determined, but it would be fair to say that they will be somewhat similar to those adopted in the agreements and treaties already in place in the Hemisphere. One would have to assume that several countries will find it politically difficult to join the FTAA and many will find the prerequisites difficult if not impossible to satisfy. They might feel forced into this agreement, resent the process and end up looking elsewhere for help. This is not to say that such an eventuality is likely, but we do not have to look very far for an example during the last half century. Cuba, notwithstanding its political orientation, looked for solace with the USSR when it could not get the recognition or assistance it sought within the Hemisphere. The effects of this are still felt as Cuba remains somewhat of a pariah and a destabilizing factor in the Hemisphere. One or more countries may find themselves excluded from the FTAA for their refusal or inability to meet all the entry criteria, and find themselves forced to the brink of economic collapse unless they can ally themselves elsewhere.

It would also be fair to say that several countries might very well prefer to continue on their own with whatever arrangements they already have in place.

While it is essential to consider the negative aspects, the expansion of NAFTA or the take-over by the FTAA should have a very positive overall impact over the hemispheric security. At present the OAS is one of the few fora where the majority of the countries of the Hemisphere have delegates and meet on a regular basis. However, at times, the subjects discussed may not be equally important for everyone. With an economic agreement, there can be no doubt that everyone will be extremely interested and participate actively to all negotiations that can affect them.

The main dangers of trade agreements expansion in the Hemisphere remain exclusion or undue pression to join. That one or more countries find themselves left out of any "all hemispheric" free trade agreement, for whatever reason, may be the most damaging result, if it is allowed to happen. At the same time, bullying any country to become a member may very well become a liability at a later date.

V. The Other Hemispheric Trade Agreements

Before discussing the future of NAFTA, it is necessary to discuss introduce some of the other main trade agreements currently in place within the Hemisphere.

ALALC - Latin-American Free Trade Association

The presence of economic trade agreements in Latin-America goes back almost forty years. A short while after the creation of the European Coal and Steel Community (1954) and the European Economic Community (1957), Latin-America was already beginning to take its first steps towards regional integration. The treaty that created the Latin-American Free Trade Association (ALALC), signed in 1960, provided for the creation of a free trade zone, by means of periodical and selective negotiations between its member states. The choice of negotiation at the discretion of the member states rather than automatic reduction of import duties made the ALALC trade opening program develop reasonably well in its first years, lose impetus as of 1965 and almost come to a complete standstill in the 70's.

This initial agreement was only partially successful but served as the initial step toward several other bilateral and multilateral arrangements. ALALC includes Argentina, the Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Columbia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay and Venezuela.[69]

ALADI - Latin-American Integration Association

The Latin-American Integration Association (ALADI) is the oldest and widest integration forum in Latin-America. It dates back to1960 with the creation of the Latin-American Free Trade Association (ALALC), which was modified by the 1980 Montevideo Treaty (TM80), which provided for the creation of the ALADI during that year.

ALADI is the "Integration House" of the countries belonging to the Andean Community: Bolivia, Colombia, Ecuador, Peru, and Venezuela; to those belonging to the MERCOSUR: Argentina, Brazil, Paraguay and Uruguay; and of Chile and Mexico. Those countries represent 95% of the gross domestic product, 87% of the territory and 86% of the population of Latin-America and the Caribbean Sea.

Within the framework of the TM80, its eleven member countries have concluded more than 80 bilateral and subregional agreements which refer to trade and other areas, such as tourism and transport. However, after 1990, integration has been boosted with a growing process of signature of new generation agreements. A network of 11 economic complementation agreements leading to create a free trade area among ALADI's member countries by 2005 has been completed to date (August 1998). [70]

Also, a new political approach of the integration has been defined. The third generation agreements have been complemented by other integrating facts which strengthened the economic, political and cultural scopes arisen in the region, and the process acquired a new dynamic. The institutional organization of the ALADI is basically composed of two political fora: the Council of Ministers and the Committee of Representatives; and a technical body: the General Secretariat.

The Latin-American Integration Association, created in 1980 to replace ALALC, used other means to attempt member state integration. In place of the free trade zone established by ALALC, an economic preference zone was established creating conditions favorable to the growth of bilateral initiatives, as a prelude to the institution of multilateral relationships in Latin-America. As a result, ALADI made possible agreements and joint actions between countries in the region which, until then, had only limited previous ties.[71] The establishment of a common market, however, was still the long term objective. ALADI includes Bolivia, Colombia, Ecuador, Peru and Venezuela.

Mercosur - Southern Market

Under the ALADI system, Brazil and Argentina signed in 1986 twelve commercial protocols. This constituted their first concrete step towards bringing the two countries closer together. This had officially been initiated in 1985 under the Declaration of Iguaçu. To supplement and improve on their former agreements, Brazil and Argentina signed in 1988 a Treaty for Integration, Cooperation and Development that set the stage for a common market between the two countries within ten years, with the gradual elimination of all tariff barriers and harmonization of the macroeconomic policies of both nations. It was further established that this agreement would be opened to all other Latin-American countries. After the adhesion of Paraguay and Uruguay a new treaty was signed by all four countries on March 26, 1991, in Asuncion, Paraguay, providing for the creation of a common market among the four participants, to be known as the Southern Common Market (Mercosur).

Chile joined on 1 October 1997 and Bolivia followed on 1 January 1997. Venezuela Colombia and Peru have already shown interest in joining Mercosur. Other Latin-American countries, members of ALADI, can initially also join through association agreements with member nations. These association agreements can then be extended until full participation in formation and conduct of a common market has been achieved.

Mercosur has approached other countries in South America. Negotiations are under way to reinforce links between Mercosur and other nations in South America and in North America as well with Canada and Mexico. This is leading to what is referred to now as the South American Free Trade Area (SAFTA).[72]

Mercosur is more than a free trade agreement. The aim is to link up to NAFTA by 2005 and to have a South American regional common market by 2006.[73]

SIECA - General Treaty of the Integration of the Central American Economy

SIECA was created on 13 December 1960 by the General Treaty for the Integration of the Central-American Economy, signed in Managua, Nicaragua. In conformity with this instrument, the SIECA is a judicial entity with its headquarters in the city of Guatemala. The SIECA reached its actual format on 1 February 1993, following the signature of the Tegucigalpa Protocol by Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama. It operates within the System for the Integration of Central-America (SICA).

In conformity with the Tegucigalpa Protocol, SIECA will handle all economic affairs of SICA generated through this instrument. In particular, SIECA has the following responsibilities:

a) oversee, on a regional level, the proper application of the Tegucigalpa Protocol and its other judicial instruments for the integration of the economy;

b) execute the decisions of the various organs of SICA and the Council of Ministers of SICA and its Executive Committee;

c) implement the tasks and studies commissioned by SICA; and

d) exercise its capacity to forward proposals in matters pertaining to the integration of the economy.

In essence, SIECA is the economic arm of SIECA.[74]

CARICOM - Caribbean Community and Common Market

CARICOM was formed in 1973 and includes the following members: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago.[75]

The Caribbean Community holds as its objectives the economic integration of member states by the establishment of an economic common market, the coordination of foreign policies, and functional cooperation in the field of common services. The objectives of the agreement are as follows:

a) economic cooperation through the Caribbean Common Market;

b) coordination of foreign policy among the independent Member States; and

c) common services and cooperation in functional matters such as health, education and culture, communications, and industrial relations.

The Caribbean Community includes a Common Market which makes special provisions for:

a) a Preferential Trading Area;

b) a Free Trade Area;

c) a Customs Union;

d) a Common Market;

e) an Economic Community; and

f) an Economic Union.[76]

G-3 - Group of Three

Within the framework of the World Trade Organization (WTO), Mexico, Colombia and Venezuela signed an agreement toward the pursuit of the following objectives:

a) reinforce the special friendship ties, solidarity and cooperation between their people;

b) contribute toward harmonious development, expansion of the world commerce and the spread of international cooperation;

c) create wide and secure markets for goods and services produced within its territories;

d) reduce commercial fluctuations;

e) establish clear and mutually beneficial rules for its commercial exchanges;

f) ensure predictable commercial markets through planning of production activities and investments;

g) reinforce the competitiveness of its enterprises on the world market;

h) encourage innovation and creativity, supporting the protection of rights and intellectual property;

i) create new opportunities for employment, improve working and life conditions within its territories;

j) preserve its capacity to maintain the public wellbeing;

k) promote sustained development;

l) facilitate the coordinate action of the member countries in the international economic forum, in particular with regard to the process of Latin-American integration; and

m) encourage the dynamic participation of the various economic agents, particularly in the private sector, in all efforts oriented toward the reinforcement of economic relations within the member countries, and in developing and reinforce as much as possible their joint presence in international markets.[77]

Andean Group - Cartagena Agreement

Created by the Cartagena Agreement in 1969, and consisting of Bolivia, Colombia, Ecuador, and Venezuela, the Andean Group aims to accelerate the harmonious development of the member states through economic and social integration.

The agreement covers about 100 million inhabitants. Since its inception, trade between the member countries has increased significantly in response to substantial tariff reductions, although the ultimate goal of a full customs union including common external tariff remains in the distant future.[78]

VI. The Future of NAFTA

NAFTA Expansion

In 1992, at the time Mexico was admitted into what has become NAFTA, the signing members specifically avoided making NAFTA a "closed" agreement. Article 2205 is very vague about the criteria for accession: "Any country or group of countries may accede to this Agreement subject to such terms and conditions as may be agreed between such country or countries and the Commission and following approval in accordance with the applicable approval procedures of each country."[79]

However, it is generally accepted that some basic criteria must be met before accession to NAFTA. Among others are the following:

a) economic stability;

b) political stability:

c) respect for intellectual rights;

d) similarity of approaches to taxation;

e) transparency of business laws and regulations;

f) outward economic orientation demonstrated by the falling of trade barriers;

g) respect of human rights;

h) recognition of labor unions; and

i) respect for the environment.[80]

The most obvious candidate at this time appears to be Chile. Chile's acceptance to NAFTA appears to be only a matter of time. Chile could be in NAFTA now if the American Congress had accepted to renew the "fast-track authority" which was granted to the President Clinton's administration until it expired in 1994. Fast-track authority grants to the American president the power to negotiate trade agreements with other countries. Following those negotiations the American Congress must approve or reject such treaties without amendments. This was designed to expedite the legislative process and in particular to avoid intense lobbying.[81] As NAFTA was never a unanimous choice for the Americans and certain sectors of the economy were particularly affected, it is not surprising that the lobbying was effective at preventing the renewal of fast-track authority. Even NAFTA expansion is questioned as popular opinion appears swayed by the impact of the effective negative lobby concerning NAFTA. Those benefiting from NAFTA are not as loudly heard.

What happens now? With the US government preoccupied during the last few months by the impeachment process of President Clinton and now with the Kosovo, the resolution of many national and international pressing issues have to be delayed until such time as the legislative body can again concentrate on the affairs of the nation. This is not to say that the accession of Chile would be one of the priority issues. Meanwhile, Chile has had a separate trade agreement with Mexico since 1991[82] and one with Canada since November 1996.[83]

Mexico is not waiting for anybody else's lead before negotiating separate trade agreements. The Mexicans have signed trade treaties with Costa Rica, the Group of Three (G-3) and Bolivia in 1995, and with Nicaragua in 1998.[84] In addition, they are in discussions with El Salvador, Mercosur and the European Union. Finally, negotiations with Israel entered their third round in November 1998.[85]

Perhaps more farfetched are the suggestions made a month apart in 1998 by Newt Ginrich, then Majority Leader of the American Congress[86] and Preston Manning, the Canadian leader of the opposition[87] that Britain be approached as a new member of NAFTA. Their logic was based of Britain's relative resistance at joining the European Union's new monetary union. Whether or not they were really serious about approaching Britain, no discussions were ever started by either the Americans or the Canadians.

In Canada, Latin-America appears not to be a high priority. The country is looking primarily at the US and beyond that focuses on the European Union (EU) and Asia. What will push Canada to take a more active role in NAFTA's expansion or the FTAA is that it wants to maintain a prominent role in the US and, since free trade agreements may be inevitable, by projection south of the US. Canadians do not wish to sit back and let the negotiations on economic integration be dictated by somebody else.[88]

The Free Trade Area of the Americas (FTAA)

The next evolution of free trade is very likely to be the FTAA, a treaty which would extend free trade to the entire Hemisphere. The Organization of American States (OAS) began to officially promote a FTAA at the Miami Summit of the Americas in 1994. A process was set in motion to reach an agreement by which barriers to trade and investment will be progressively eliminated. The members of the summit "… resolved to conclude the negotiations of the "Free Trade Area of the Americas" no later than 2005, and agreed that concrete progress toward attainment of this objective will be made by the end of the century".[89]

If the FTAA existed today, it would represent the largest free trade area in the world with 34 countries, over 750 million people and economies with a gross domestic product (GDP) of $US 9 trillion.[90] It is important to note that, from the beginning, the OAS encouraged direct discussions with the existing subregional and bilateral agreements in order to build on the successes already achieved and learn from the obstacles encountered.[91]

In the final declaration which followed the Second Summit of the Americas in Santiago, Chile, the Heads of State directed their respective ministers for trade to begin negotiations for the FTAA. This culminated three years of preparatory work and formalized the process. The tripartite committee, formed of the Inter-American Development Bank (IADB), the OAS and the Economic Commission for Latin-America and the Caribbean (ECALC) was a major player in this process since the beginning in 1994; and it continues, to this date, to play a very large role toward the success of the FTAA.[92]

There is no doubt that the FTAA holds promises of benefits and reassurances for all. There is a perception that most Latin-American countries would rather deal with hemispheric neighbors rather than with Europe or Asia. Many US and Canadian business people believe that such a trade agreement would offer better market access and liberalize trade and investment. In addition, a hemispheric wide trade agreement would reassure investors against political instability and a belief that the threat of expropriation would be considerably reduced.[93]

The FTAA is facing some real challenges. In the US, uncertainty about the benefits of free trade have prevented the adoption of "fast track" authority. In Latin-America, there is a perception that many are suffering of reform fatigue and therefore may be unable to generate a great deal of enthusiasm in pursuing the FTAA.

On the side of trade policy, the FTAA should bring the economies of the Americas together under a single agreement, while preserving, in some form, existing alliances such as Mercosur and the Andean Community, whose objectives reach beyond only free trade. The FTAA will join some of the smallest economies of the world with some of the largest. There must be reassurances for those smaller economies that the FTAA will not threaten their economic well-being. The FTAA should be perceived instead as an opportunity for growth. The FTAA should not adopt any measures which would conflict with obligations already existing with the World Trade Organization, in that no market barriers should be erected against other countries or trade organization.[94] The essence of the FTAA is that it will be a single undertaking, meaning that every participant must accept all the obligations (no free riders). The FTAA will be compatible with the WTO and member countries must agree not to raise barriers against non-member countries.

Will the FTAA be in effect in 2005? This is a difficult question to answer. What is certain is that the amount of work ahead is enormous. This is about a trade agreement which must consider the interests of economic partners which range from some of the most developed countries in the world (US) to some of the least developed (Haiti).[95]

A series of steps have been taken in order to support these principles:

a) member nations have formed working groups of senior officials from all governments to prepare for the negotiations in each of the substantive areas to be covered by the FTAA;

b) the structure and management of how the FTAA is to work will be addressed early by studying how other hemispheric regional agreements (NAFTA, Mercosur, the Andean Group, etc.) function;

c) participating countries have identified several areas for immediate action such as existing arbitral conventions and developing proposals to promote accreditation and testing facilities;

d) consider how best to promote worker rights and environmental protection; and

e) several private sector groups have been participating in the FTAA process by giving input, identifying priority areas and finding opportunities where immediate action is possible, in order to facilitate business on an Hemisphere wide basis. These initiatives are to be implemented expeditiously.[96]

With the arrival on 1 January 1999 of the Euro, the new European Union currency, the idea of a single currency, presumably the US dollar, in North America and potentially all the Hemisphere has surfaced. It was inevitable that the advent of the Euro would be linked to the talks about the FTAA. This is the type of decision which is much more political than economical. The result is a variety of diametrically opposed views on the subject. Businessmen say that a common currency within NAFTA would bring stability and greatly benefit Canada and Mexico. Others argue that both Canada and Mexico would have to surrender some control over budget policies and again the argument about loss of social and cultural identity comes up. What everyone seems to agree upon is that any plan for a common currency has to be long term.[97] Some have already suggested the creation of a world currency and the name "phoenix" has been proposed.[98] As usual, reality is somewhat simpler. It is unlikely that a single currency will be adopted for the entire Hemisphere in the foreseeable future. There is simply a lack of interest at this time.

The success of efforts toward trade integration, especially the FTAA, depends on its capacity to move forward, not in a vacuum, but in concert with other activities addressing a range of social and economic issues.[99] The argument has been made that the US economy is large enough that it does not require closer economic ties further south in the Hemisphere. However, one must realize that they can ill afford not to be present. The economies in Latin-America are moving toward free trade and, if they cannot get on board with NAFTA or the US, they will look toward Europe or Asia. As a matter of fact, many have already started. It may very well be that the US becomes more interested in the southern part of the Hemisphere for negative reasons, such as keeping the others out. In the end, it will no doubt appear to be good politics to do so.[100]

What will be the final essential criteria for adhesion? Once those criteria are known, how long have the potential members to comply? Six years appears to be a very short period of time to accomplish all this. One must also remember that many hemispheric countries may have other more pressing preoccupations of internal or external nature.

Observations on NAFTA / FTAA

The NAFTA / FTAA process is almost entirely supportive of a strengthening and broadening of the WTO multilateral system. Broader market access commitments by Western Hemisphere developing countries for trade in services and government procurement and new commitments in the areas of investment policy and reduced agricultural subsidies should all be supportive of moving the WTO in those liberal trade directions as well. More far reaching challenges within the FTAA negotiations include developing additional rational policy frameworks for rules of origin and the anti-dumping / competition policy relationship, although at this point the likelihood of this happening is very low.

The NAFTA / FTAA process is out in front of the APEC (Asia-Pacific Economic Cooperation) free trade objectives in terms of target dates and pre-negotiation preparations within the FTAA working groups. The important overlap in membership on the US, Canada, Mexico and possibly Chile provides the opportunity for stimulating a transfer of progress from the Western Hemisphere across the Pacific and into the APEC framework. A more serious effort on the part of APEC to negotiate an investment agreement is one potential target, as well as broader market access commitments for financial, telecommunications and transportation services.[101]

There is also the possibility that new realities may influence whether or not some countries may be more or less inclined to support free trade expansion. One area of fear in Canada is fresh water exports. Canadian companies are now planning to export huge quantities of fresh water. Under NAFTA rules, Canada would have to give American and Mexican companies national treatment rights which is to mean the same access to Canadian fresh water supplies as any Canadian company. This is likely to be something very difficult to accept for the Canadian public and government. In the event that foreign companies are not granted equal rights of access, it is quite possible that they will seek high monetary compensations from Canada. One company in the US is already seeking $US 200 million in compensation for Canada's refusal to export fresh water to the US.[102]

The future appears quite challenging for NAFTA and the FTAA, which may very well be its successor. Everyone seems to agree that free trade, or at least "freer" trade, is the answer. The realities of implementing such a concept are somewhat more complex. All the countries already involved in an existing free trade agreement or treaty will not likely settle for anything less than what they have already agreed to when considering expansion or a brand new agreement. The rules of adherence will no doubt be a very thorny issue. The poorer countries may not be in position to join the FTAA because of how it could damage their already shaky economy or simply because they just cannot meet the entry requirements. The count down is on and only six short years remain before the 2005 objective. This is a very short period of time to agree upon the rules of the game, sell the end product to 34 countries and effect the required legislative and economic modifications.

VII. Conclusion

The birth of NAFTA was not without its difficulties, as was the case for the FTA before. There were many skeptics at the beginning and many lobby groups prepared to do everything in their power to prevent the signature of the agreement. Compromises were necessary on certain issues, some exceptions were introduced to cater to national interests and additions were included to the initial text to pacify the most vocal opponents in the US. In the end the agreement came into being in 1993.

NAFTA is much more than just the abolishment of tariffs between member countries. It is comprised of complex rules and regulations set to protect the interests of each member country. NAFTA is not yet a completely free trade agreement as exceptions are scheduled to persist until up to ten years from now. There will always remain a few areas where each nation will insist in having an exception and complete free trade may very well never be achieved. This should not be considered a failure of the agreement, on the contrary, the amount of progress achieved during the first five years of the agreement is enormous.

There are those who claim that NAFTA has been a failure. However, their case is often based on a limited area of the agreement and rarely supported by verifiable facts. The greatest fear in the US was a massive flight of American jobs to Mexico. This did not materialize. There is no question that some jobs were lost to Mexico and Canada, but the number is relatively small compared to the number of overall jobs created during the same period. During the first five years of NAFTA, two-way trade between the member countries has increased by almost 60%. Canada and Mexico saw the level of their exports increase tremendously. The US now faces a larger trade deficit with its two neighbors but benefits from significantly lower prices on imported goods and duty free repatriation of the dividends from the companies which moved from the US to Canada and Mexico. The data supports the argument that NAFTA is a success. Besides, if it were not so, why are all three countries prepared to continue with the agreement and are entertaining the possibility of expanding to other countries in the Hemisphere?

NAFTA is a two-edged sword when it comes to the security of the Hemisphere. The commercial union forces closer ties in all other areas. There remains however the danger of exclusion for certain countries or the impossibility of joining a trade agreement because of the inability to meet the prerequisites for adhesion.

There are already a large number of trade agreements in the Hemisphere. The question is whether to expand and, if so, how to go about such an expansion? Each trade agreement is essentially based on regional realities and necessities which may not lend themselves to the different realities facing adjacent regions. Additionally, the agreements vary significantly in their nature and objectives; from the free trade agreement to the more comprehensive European Union-type agreement pursued by the member countries of MERCOSUR.

The prospects for free trade appear promising, both in the Hemisphere and worldwide. In the immediate future, Chile is at the door ready to enter as soon as the American government gets around to approving it.

The dilemma is whether to continue with regional free trade agreement or to go along with the OAS sponsored Hemisphere-wide Free Trade Area of the Americas (FTAA). The timetable of having one FTAA by 2005 is very optimistic, given the obstacles such a project will no doubt face. At the same time, every free trade group in the Hemisphere appears to be competing for expansion. More often than not, rapid expansion results in a weaker product. The likelihood is that more and more compromises will be necessary in order to reach an accord. The end product may very well be too watered down to be effective.

A gradual expansion of regional trade agreements would seem a more logical and easier to achieve course of action. In time, these regional trade groups could join up to form an Hemisphere-wide free trade agreement.

TABLE OF CONTENT

Chapter

I. Introduction...................................................................................................................... 1

The Predecessors........................................................................................................... 1

Political Orientation........................................................................................................ 1 Bridging the North-South Divide.............................................................................................................. 1 Why did Canada join NAFTA?.......................................................................................................... 2 Why did Mexico join NAFTA?.......................................................................................................... 2

Why did the US join NAFTA?....................................................................................... 3

II. Description of NAFTA?.................................................................................................. 5

Main Objectives............................................................................................................. 5 National Treatment and Market Access for Goods............................................................................. 7

Rules of Origin............................................................................................................... 8 Customs Administration...................................................................................................................... 9

Agriculture................................................................................................................... 10

Emergency Action........................................................................................................ 10

Standards-Related Measures........................................................................................ 11

Government Procurement............................................................................................. 12 Investment ............................................................................................................................ 13

Cross-Border Trade in Services................................................................................... 14

Temporary Entry for Business Persons.......................................................................... 15

Intellectual Property..................................................................................................... 16

Dispute Settlement Procedures..................................................................................... 16

Supplemental Agreement on the Environment................................................................ 17

Supplemental Agreement on Labor Cooperation........................................................... 18

III. Evaluating NAFTA........................................................................................................ 19

Some Statistics About NAFTA.................................................................................... 19

In Favor of NAFTA..................................................................................................... 20

Against NAFTA.......................................................................................................... 24

The Verdict Is….......................................................................................................... 27

IV. NAFTA and the Hemispheric Security......................................................................... 29

V. The Other Hemispheric Trade Agreements................................................................. 31

ALALC - Latin-American Free Trade Association....................................................... 31

ALADI - Latin-American Integration Association......................................................... 31

Mercosur - Southern Market........................................................................................ 32

SIECA - General Treaty of the Integration of the Central American Economy................ 33

CARICOM - Caribbean Community and Common Market.......................................... 33

G-3 - Group of Three.................................................................................................. 34

Andean Group - Cartagena Agreement......................................................................... 35

VI. The Future of NAFTA................................................................................................... 36

NAFTA Expansion...................................................................................................... 36

The Free Trade Area of the Americas (FTAA)............................................................. 37

Observations on NAFTA / FTAA................................................................................ 40

VII. Conclusion...................................................................................................................... 42

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[1] Barry Appleton, "Navigating NAFTA - A Concise User's Guide to the North American Free Trade Agreement," Carswell Thompson Professional Publishing, 1994, pp. 3-4

[2] Ernest H. Preeg, "From Here to Free Trade - Essays in Post-Uruguay Round Trade Strategy", The University of Chicago Press, 1998.

[3] Michael A. Walker, "Free Trade and the Future of North America - Beyond NAFTA: An Economic, Political and Sociological Perspective", The Fraser Institute, 1993, pp.13-21

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[6] Paul Wonnacott, "Beyond NAFTA," The Economics of Preferential Trade Agreements. The American Enterprise Institute, 1996, pp. 85.

[7] Ernest H. Preeg, "From Here to Free Trade - Essays in Post-Uruguay Round Trade Strategy", The University of Chicago Press, 1998.

[8] Rebecca Reynolds Bannister, "The NAFTA Success Story - More than Just Trade", Progressive Policy Institute, Washington, September 1997, pp. 3-4.

[9] A.R. Riggs and Tom Velk, "The Economic Future of North America - Beyond NAFTA: An economic, political and sociological perspective", The Fraser Institute, 1993, p. 81.

[10] William A. Orme, Jr., "Continental Shift - Free Trade & The Hew North America," Briefing Book. The Washington Post, 1993, pp. 55-71.

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[20] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 45-47.

[21] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 57-59.

[22] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[23] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 67.

[24] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[25] Barry Appleton, "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 79.

[26] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[27] NAFTA Article 1201(1).

[28] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[29] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 117-118.

[30] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[31] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 145-155.

[32] "NAFTA Facts", Department of Foreign Affairs and International Trade - DFAIT, (http://www.cbsc.org/nb/bis/1294.html).

[33] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 173-180 and 201-205.

[34] NAFTA Labor Supplemental Agreement, Annex 1.

[35] Barry Appleton , "Navigating NAFTA" - A Concise User's Guide to the North American Free Trade Agreement", Carswell Thompson Professional Publishing, pp. 186-187.

[36] Canadian Trade with Mexico 1990-1998, Canadian Embassy in Mexico. (Conversion rate: One $Cdn = 0.73 $US), US Census Bureau and Bureau of Economic Analysis of the US Department of Commerce.

[37] Kevin Carmichael, "Free trade debate cooled but not quelled - Free Trade: Ten Years After", The Canadian Press, 5 January 1999.

[38] Canadian Trade with Mexico 1990-1998, Canadian Embassy in Mexico, US Census Bureau and Bureau of Economic Analysis of the US Department of Commerce.

[39] Trade figures for the world, World Trade Organization.

[40] Rebecca Reynolds Bannister, "The NAFTA Success Story - More than Just Trade", Progressive Policy Institute, Washington, September 1997, p 2.

[41] Allan Swift, "Canada-US trade doubles, but how much did free trade deal help? - Free Trade: Ten Years After", The Canadian Press, 30 December 1998.

[42] Heather Scofield, "Canada Adjusts to Free Trade Realities - 10 Years After", The Globe and Mail, 31 December 1998.

[43] Sidney Weintraub, "Three Years Later, NAFTA Proves the Naysayers Wrong", The Los Angeles Times, 21 March 1997.

[44] Loraine Woellert, "NAFTA Blamed for lost jobs", The Washington Times, 29 June 1997.

[45] Kevin Carmichael, "Free trade debate cooled but not quelled - Free Trade: Ten Years After", The Canadian Press, 5 January 1999.

[46] Isabel Becerril, "Small Companies are Unhappy With NAFTA", El Financiero Internacional, 2 January 1999.

[47] Douglas Harbrecht, "A New Survey's Surprising Findings About NAFTA", Business Week Online News Flash, (http://www.businessweek.com/bwdaily/dnflash/oct1997/nf71010c.htm), 10 October 1997.

[48] Rebecca Reynolds Bannister, "The NAFTA Success Story - More than Just Trade", Progressive Policy Institute, Washington, September 1997, pp. 7-8.

[49] Brian Doherty, "Friends and Critics Miss the Point on NAFTA", Reason Online - Swap Meat, (http://www.reasonmag.com/9710/ed.doherty.html), October 1997.

[50] James K. Glassman, "NAFTA - Good or Bad?", The Washington Post, 28 March 1996.

[51] Leo Abruzzese, "Bearing False Witness Against NAFTA", The Journal of Commerce.

[52] Julian Beltrane, "Canada Big NAFTA Winner", The Ottawa Citizen, 11 July 1997.

[53] "U.S. jobless claims fall in latest week", Reuters, 14 January 1999.

[54] Robert Z. Laurence and Robert E. Litan, "Globaphobia: The Wrong Debate Over Trade Policy", The Brookings Institute, Brookings Policy Brief No. 24, September 1997.

[55] Nora Claudia Lustig, "NAFTA: Setting the Record Straight", The Brookings Institute, Brookings Policy Brief No. 20, June 1997.

[56] Andrea Hopkins, "Canada-US trade row over magazines resurfaces", Reuters, 12 January 1999.

[57] Adolfo Garza, "5 Years Into NAFTA, Strong Survive", Associated Press, 31 December 1998.

[58] Sarah Edmonds, "Storm Clouds Darken Canada-US Free Trade Anniversary", Reuters, 14 January 1999.

[59] Lynda Newhnham, "NAFTA Passes Ten-Year Review, The Ottawa Times, June/July 1998.

[60] John Maggs, "NAFTA speeds up tariff elimination on 38 products", The Journal of Commerce, 24 March 1997.

[61] William J. Holstein and Linda Robinson, "Economic NAFTA Thoughts", U.S. News, Business & Technology, 7 July 1997.

[62] Alan Tonelson, "Weighing the NAFTA tide's losses… and gains", The Washington Times, 14 January 1999.

[63] Paul Blustein, White House Subdued On NAFTA's Impact, The Washington Post, 11 July 1997.

[64] Martin Crustinger, "Study finds Canada luring U.S. jobs", The Toronto Star, 18 July 1997.

[65] Loraine Woellert, "NAFTA Blamed for lost jobs", The Washington Times, 29 June 1997.

[66] Michelle Mittelstadt, "Impact of NAFTA Eyed After 5 Years", Washington Post - Associated Press, 28 January 1999.

[67] Tim Shorrock, "Drop seen in real wages in all three NAFTA countries", The Journal of Commerce, 29 May 1996.

[68] John Ward Anderson and Douglas Farah, "Mexico Risks Losing Anti-Drug Certification", Washington Post, 10 February 1999.

[69] America's Net, (http://www.americasnet.com/mauritz/mercosur/english/page02.html).

[70] Latin-American Free Trade Association (ALALC), (http://www.aladi.org/que_eng.htm).

[71] "Historical Background", America's Net, (http://www.americasnet.com/mauritz/mercosur/english/page02.html).

[72] Miguel Rodriguez, "Trade Liberalization in the Americas: Challenges and Opportunities", United States Information Agency, February 1998.

[73] Masaaki Kotabe, "MERCOSUR and Beyond: The Imminent Emergence of the South American Markets", Center for the Study of Western Hemispheric Trade, (http://lanic.utexas.edu/cswht/kotabe.html).

[74] "Qué es el SICA", Sistema de la Integración Centroamericana, (http://www.sicanet.org.sv/sica/index.html).

[75] Caribbean Community, (http://caricom.org/expframes.htm).

[76] "The CARICOM Trade Agreement", Caribbean Community (CARICOM), (http://www.tradetnt.com/miniti/tragtscaricomtrade.htm).

[77] "Tratado de Libre Comercio entre México, Colombia y Venezuela", SCHP - Aduana de Nuevo Laredo, (http://www.aduananlmx.org.mx/g3.htm).

[78] "Andean Group - International Trade", Wells Fargo, (http://wellsfargo.com/inatl/wrldalmn/intro/andean).

[79] NAFTA Treaty, Chapter 22, article 2205.

[80] Stellios Loizides and Michael Grant, "NAFTA Extension in the Americas - The Business Case", The Canadian Conference Board of Canada, Report 131-94, 1994.

[81] "NAFTA Expansion and Fast-Track Authority, A Twentieth Century Fund
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[82] "Network of Trade Agreements Makes Mexico Cornerstone for Hemispheric Trade", SECOFI - NAFTA Works, (http://www.naftaworks.org).

[83] "Canada-Chile Relations", The Business Pages, The Canadian Embassy in Chile Homepage (http://www.dfait-maeci.gc.ca/santiago/stago-06f-e.htm).

[84] "Network of Trade Agreements Makes Mexico Cornerstone for Hemispheric Trade", SECOFI - NAFTA Works, (http://www.naftaworks.org).

[85] "Network of Trade Agreements Makes Mexico Cornerstone for Hemispheric Trade", Mexico is Leading Participant in International Trade, (http://www.naftaworks.org), 1997.

[86] Hugo Gurdon, "Gingrich wants Britain in NAFTA", The Daily Telegraph, 20 April 1998.

[87] Mike Trickey, "Manning wants Britain in NAFTA", The Ottawa Citizen, 26 February 1998.

[88] Mike Trickey, "How Axworthy stopped worrying and learned to love free trade", The Ottawa Citizen, 13 September 1998.

[89] "Declaration Principles", Miami Summit of the Americas, (http://www.sice.oas.org/ftaa/miami/sadope.stm).

[90] Miguel Rodriguez, "Trade Liberalization in the Americas: Challenges and Opportunities", United States Information Agency, February 1998.

[91] "Plan of Action", Summit of the Americas - December 1994, (http://www.sice.oas.org/ftaa/miami/sapoae.stm).

[92] "Santiago Declaration", Second Summit of the Americas, (http://www.sice.oas.org/ftaa/santiago/sadop_e.stm).

[93] Stelios Loizides and Michael Grant, "NAFTA Extension in the Americas - The Business Case", The Conference Board of Canada, Report 131-94.

[94] Miguel Rodriguez, "Trade Liberalization in the Americas: Challenges and Opportunities", United States Information Agency, February 1998.

[95] "Human Development Report 1998", United Nations Development Programme, (http://www.undp.org/hdro/98.htm).

[96] Charlene Barshefsky, "Integrating the Economies of the Americas", Economic Perspectives, USIA Electronic Journals, 16 Nov 1996.

[97] David Crary, "NAFTA Common Currency Unlikely", Associated Press, 18 January 1999.

[98] Duncan Graham, "The Fathers of the Euro", The Globe & Mail, 9 January 1999.

[99] Miguel Rodriguez, "Trade Liberalization in the Americas: Challenges and Opportunities", United States Information Agency, February 1998.

[100] Nora Claudia Lustig, "NAFTA: Setting the Record Straight", The Brookings Institute, Brookings Policy Brief No. 20, June 1997, pp. 7-8.

[101] Ernest H. Preeg, "From Here to Free Trade - Essays in Post-Uruguay Round Trade Strategy", The University of Chicago Press, 1998.

[102] Michael MacDonald, "Free Trade Battles Expected to Rage in 1999 - Free Trade: Ten Years After", The Canadian Free Press, 30 December 1998.