Nafta

The North American Free Trade Agreement (NAFTA) is a three-country preferential trade agreement (PTA) in the form of an intergovernmental accord between Canada, Mexico, and the United States. Authorized in 1993 to commence in 1994, it was the first PTA to encompass one developing and two advanced economies. NAFTA built upon already substantial links between the three countries. Prior to NAFTA the United States was the major trading partner of both Canada and Mexico, and together these countries accounted for one-quarter of two-way U.S. merchandise trade.

Each country had its own specific reasons for entering into NAFTA. For the United States, a major objective was to help stabilize its border with Mexico by promoting increased economic development in its southern neighbor. Canada had a bilateral PTA with the United States (CUSTA) that took effect in 1989 and preferred a tripartite agreement to a separate Mexico-United States bilateral FTA. Mexico's government saw NAFTA as an instrument to increase foreign direct investment (FDI) flows, promote economic development, alleviate poverty, and cement the market-based economic reforms that occurred after 1985.

PROVISIONS

The more important provisions of NAFTA cover trade in goods, trade in services (including telecommunications and banking, with temporary immigration status for business and professional occupations), investment, and mechanisms for resolving trade and investment disputes. Other sections deal with government procurement and intellectual property. Essentially, NAFTA phased in zero tariffs on goods and provided national treatment (foreign and domestic owners being treated identically) for services and investment flows between the three countries. The agreement covered much more than trade in goods and therefore has elements of a regional integration agreement (RIA). To address opposition by numerous U.S. groups to NAFTA, there are side agreements that put in place commissions on environmental and labor cooperation. A further side agreement between the United States and Mexico established the North American Development Bank (NADB) and the Border Environment Cooperation Commission (BECC) to address socio-environmental problems within 100 kilometers (62 miles) on each side of the border. The full NAFTA accord can be found on the NAFTA Secretariat's Web page.

Under NAFTA, unlike the European Union, there is no delegation of authority to a supranational body. Each nation, for example, retains its own external tariff structure, its own laws on the environment and labor relations, its own trade-remedy laws, and its own enforcement procedures. NAFTA relationships are characterized by negotiation between sovereign states, not by action through a supranational authority. Tripartite institutional structures (apart from the side agreements on labor and the environment) to monitor the agreement are for all practical purposes nonexistent.

Because each participant retains its own external tariff structure, there are rules regarding the origin of goods moving between the three countries. These, which under NAFTA are very detailed, prevent external goods imported into a lower tariff member state from flowing to member countries with the higher external tariff. Rules of origin require some level of transformation of the goods—some value must be added—within the member country before they can be imported free of tariff by another party.

EXPERIENCE UNDER NAFTA: TRADE AND INVESTMENT

Further integration of the North American economies is most clear in intra-NAFTA merchandise trade. During its first decade, intra-NAFTA export trade in goods increased from some 45 percent to 56 percent of the three-country total. Much of this resulted from a 250 percent increase in Mexican exports to the United States. During the same period, the growth in intra-NAFTA imports of goods increased more modestly, from 37 percent to 39 percent. At the end of NAFTA's first decade, Mexico had an 11.7 percent market share of U.S. imports, up from 7.7 percent, while Canada's share remained approximately the same, at 18 percent. Just over 40 percent of Mexican exports originated in the border area maquiladoras in 1993, and this share ranged between 40 and 45 percent under NAFTA. Such great increases in the flow of goods puts a heavy burden on transportation infrastructure, and it is surprising that there has been no systematic coordination between the partners to address this problem. The change in two-way flows of services between the United States and its two partners has been less dramatic, increasing by three fifths compared with a two-thirds increase in the U.S. total.

FDI flows are very volatile from year to year, with a heavy dependence on general economic conditions in the partner country. During the NAFTA period, total twoway FDI flows between the United States and its partners amounted on average to 13.7 percent of the U.S. total. FDI flows from both the United States and Canada to Mexico exhibited a rising trend.

DISPUTE SETTLEMENT

There are a number of dispute settlement procedures under NAFTA. The principal ones concern trade (the application of national countervailing and anti-dumping legislation) and the treatment of foreign direct investment. In cases of trade disputes between NAFTA parties, presentations can be made by private parties, such as exporters, to a binational NAFTA panel, whose decision is binding. (Parties in certain circumstances have the right to file the complaint either solely under NAFTA or simultaneously at the WTO.) Since each country retains its own trade remedy laws, the NAFTA panel effectively determines if the findings of domestic trade agencies are justified. Panel determinations can be challenged by an "extraordinary" review, where panel misconduct, conflict of interest, or procedural irregularities are alleged.

NAFTA provides that foreign investors be treated legally and administratively the same as domestic investors. It also gives private investors of another NAFTA state the right to sue the host state, should a dispute arise. The exercise of this right in a number of high-profile cases affecting each of the three countries has become the most controversial aspect of NAFTA.

NAFTA'S IMPACT

Evaluating the impact of NAFTA is no easy task. One reason is the existence in the three countries of very polarized debate about NAFTA. A second is that many changes occurred during the decade, and it is simply improper to conclude that NAFTA caused these. In fact, the very strong expansion in the U.S. economy between 1994 and 2000 explains much of the increased two-way trade between the NAFTA parties. A third is that security issues now dominate discussions between the parties.

In Canada debates about CUSTA and then NAFTA focused very much on the potential impact on the manufacturing sector. This sector appears to have held its own, justifying neither the optimism nor the pessimism expressed in the domestic debate. Some restructuring occurred, frustrated initially by exchange-rate appreciation during the1989–1991 years but then facilitated by subsequent depreciation after 1992. At best, no acceleration in productivity is apparent, and at worst productivity improvement decelerated.

In Mexico, exports, though concentrated in a relatively few sectors, have become the primary engine of economic growth. Favorable developments in the expanded export sector have not, however, spilled over to other sectors of the economy. NAFTA doubtless reinforced the economic liberalization that commenced in the mid-eighties. Further, the agreement made Mexico more attractive as a destination for FDI in areas such as information technology, food processing and financial services. But it is clear that Mexico requires substantial, wide-ranging institutional reform to assure a fairer distribution of the gains from trade liberalization and to generate evidence of some convergence toward the per capita income levels of its NAFTA partners. This convergence will be necessary to reduce the amount of illegal immigration to the United States.

For the United States, the overwhelmingly dominant partner, NAFTA's impact was very small, far less signifi-cant than technological change, the sustained growth of the 1992–2000 period followed by the subsequent recession and slowdown, and international developments. For the strongest economic partner in NAFTA, the effects were weakest.

One criticism of a PTA is its potential for trade diversion—replacing low-cost suppliers from nonmember countries with higher-cost producers from parties to the agreement. Studies indicate little evidence at the national level of trade diversion under NAFTA.

Since 9/11, security has outranked trade and investment flows as the foremost intra-NAFTA concern. The result is a significant tightening up of border procedures—a "security tax" on NAFTA commerce. Mexican-U.S. border flows have been complicated by illegal immigration, drug trafficking, and trucking disputes. Despite the establishment of the NADB and BECC, social conditions on the border remain shameful. Given the magnitude of the problems, the NABD requires much more funding, with a larger share coming from the richer partner, the United States.

The burden of the terrorism response has fallen primarily on Canada-U.S. border trade flows, requiring substantial investment in surveillance and technology. A Smart Border Action Plan is now in place, providing for a range of joint actions, including incremental infrastructure funding.

The absence of provisions in NAFTA for substantial institutional evolution reinforces the impact of present security concerns. The result is that if there are changes in NAFTA, they will be limited. Chapter 11 (Investment) is one area needing clarification. Critics have requested both greater transparency in arbitration proceedings and the elimination of the present ambiguities around the phrasing of "expropriation." Generally, the trade dispute settlement provisions have worked quite well, but with the procedure of rotating panelists it will be important to build a body of jurisprudence that avoids the danger of obtaining different rulings in similar type cases.

SEE ALSO Canada;Mexico;Treaties;United States.

BIBLIOGRAPHY

Chambers, Edward J., and Smith, Peter H., eds. NAFTA in the New Millennium. La Jolla, CA: Center for U.S.-Mexican Studies, 2002.

Hufbauer, Gary C., and Schott, Jeffrey J. NAFTA: A Ten-Year Appraisal. Washington, DC: Institute for International Economics, 2003.

Lederman, Daniel; Maloney, William F.; and Serven, Luis. Lessons from NAFTA for Latin and Caribbean Countries: A Summary of Research Findings. Washington, DC: The World Bank, 2003.

INTERNET RESOURCES

Commission on Environmental Cooperation. Available from http://www.cec.org.

NAFTA Secretariat. Available from http://www.nafta-secalena.org.

North American Development Bank. Available from http://www.nadbank.org.

Vicario, Ma. Elena; Polaski, Sandra; and Maschino, Dalil. North American Labor Markets: Main Changes Since NAFTA. Washington, DC: Commission for Labor Cooperation, 2003. Available from http://www.naalc.org.

Edward J. Chambers

NAFTA (North American Free Trade Agreement)

On December 17, 1992, Canada, Mexico, and the United States entered into a historical trade pact called the North American Free Trade Agreement (NAFTA). It aims to increase trade by expanding market access and reducing investment barriers across North American borders. Of the many aspects of the debate in the United States over the ratification of NAFTA, none received as much attention as the potential impact of the agreement on the environment. A number of issues including labor market disruptions fueled intense debate over NAFTA, especially in the United States. But no issue received as much attention as the impact of NAFTA on the environment. Debate focused on (1) possible threats posed to previously signed U.S. domestic environmental laws and international environmental agreements; (2) concern that harmonization of environmental standards would result in acceptance of the least common denominator; and (3) fear that U.S. industries would establish pollution havens in Mexico, where labor is cheaper and enforcement of regulations is weaker than in the United States.

In order to allay such concerns, several provisions were added to the NAFTA text. For example, the preamble commits governments to undertake increased trade in "a manner consistent with environmental protection and conservation," and the agreement's dispute-settlement provisions can place the burden on the country challenging an environmental regulation. In addition, prior to NAFTA entering into force on January 1, 1994, the participating governments agreed to the North American Agreement on Environmental Cooperation (NAAEC), which obliges each country to "ensure that its laws and regulations provide for high levels of environmental protection and to strive to continue to improve those laws and regulations." It also ensures access by private persons to fair and equitable administrative and judicial proceedings on matters pertaining to the environment. The NAAEC established the Commission for Environmental Cooperation (CEC), which has three institutional components: a Council, a Secretariat, and a Joint Public Advisory Committee. The Council, assisted by the Secretariat, is charged with monitoring NAFTA's environmental impacts. When they uncover adverse environmental impacts, they publicize them in various ways, including posting notices on their web site. The aim of the council is that, by means of this public shaming, countries will take action to remedy these situations.

see also Economics; Laws and Regulations, International; Treaties and Conferences.

Bibliography

Audley, John N. (1997). Green Politics and Global Trade: NAFTA and the Future of Environmental Politics. Washington, D.C.: Georgetown University Press.

Magraw, Daniel. (1995). NAFTA and the Environment: Substance and Process. Washington, D.C.: American Bar Association.

internet resource

NAFTA Secretariat Web site. Available from http//:www.nafta-sec-alena.org.

Michael G. Schechter

NAFTA / ˈnaftə/ (also Nafta) • abbr. North American Free Trade Agreement.

NAFTA (ˈnæftə) New Zealand and Australia Free Trade Agreement
• North American Free Trade Agreement
• North Atlantic Free Trade Area

NAFTA

NAFTA. See North American Free Trade Agreement .