North American Free Trade Agreement Totally Explained

Everything about Nafta totally explained

The North American Free Trade Agreement ((TLCAN)) ((ALENA)) is the trade bloc in North America created by the North American Free Trade Agreement (NAFTA) and its two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and The North American Agreement on Labor Cooperation (NAALC), whose members are Canada, Mexico, and the United States. It came into effect on January 1, 1994 and (as of 2007) it's the largest trade bloc in the world in terms of combined purchasing power parity GDP of its members.

Supplemental Agreements

North American Agreement on Environmental Cooperation

The North American Agreement on Environmental Cooperation (NAAEC) was a response to environmentalists' concerns that the United States would lower its standards if the three countries didn't achieve consistent environmental regulation. The NAAEC only obligates parties to enforce their own environmental laws. The NAAEC, in an endeavour to be more than a set of environmental regulations, established the North American Commission for Environmental Cooperation, a mechanism for addressing trade and environmental issues, the North American Development Bank (NADBank) for assisting and financing investments in pollution reduction, and the Border Environmental Cooperation Commission (BECC). The NADBank and the BECC have provided economic benefits to Mexico by financing 36 projects, mostly in the water sector.

North American Agreement on Labor Cooperation

The North American Agreement on Labor Cooperation (NAALC) supplements NAFTA and endeavors to create a foundation for cooperation among the three countries for the resolution of labor problems, as well as to promote greater cooperation among trade unions and social organizations in order to fight for improved labor conditions. Though most economists agree that it's difficult to assess the direct impact of the NAALC, it's agreed that there has been a convergence of labor standards in North America. Given its limitations, however, NAALC hasn't produced (and in fact wasn't intended to achieve) convergence in employment, praductivity and salary trends in North America.

Further integration

While different groups advocate for a further integration into a North American Community, sensitive issues have hindered that process. The three countries have pursued different trade policies with non-members (for example, Mexico has signed FTAs with more than 40 countries in 12 agreements), making the possibility of creating a customs union difficult to accomplish. Former President Vicente Fox of Mexico had promoted the idea of enhancing NAFTA (into what he labeled "NAFTA-Plus", or possibly a North American Community), but after the September 11, 2001 attacks, priorities in the United States changed. The Security and Prosperity Partnership of North America was signed, instead, as a separate and unrelated agreement.
Given the scope of the agreement, which includes very sensitive issues in trade talks such as agriculture liberalization and environment regulation, few countries have shown interest in joining NAFTA. Instead, some countries, like Chile, preferred to negotiate three separate bilateral agreements with the three current NAFTA members, with different restrictions to liberalization of their industries and the regulation of environment protection. Jamaica and Trinidad and Tobago also showed a similar interest.
In an interview with Larry King on October 8, 2007, Fox described any plans for a North American single currency as a "Long term, very long term" proposal. He also spoke of his and U.S. President George W. Bush's support for the Free Trade Area of the Americas as a "first step" toward "a new vision" for the Americas, "like we're trying to do with NAFTA," but then said that Venezuelan President Hugo Chávez had decided to "destroy the idea".

History of the implementation

NAFTA was initially pursued by politicians in the United States and Canada supportive of free trade, led by Canadian Prime Minister Brian Mulroney, U.S. President George H. W. Bush, and the Mexican President Carlos Salinas de Gortari. The three countries signed NAFTA in December 1992, subject to ratification by the legislatures of the three countries. There was considerable opposition in all three countries. In the United States, NAFTA was able to secure passage after Bill Clinton made its passage a major legislative priority in 1993. Since the agreement had been signed by Bush under his fast-track prerogative, Clinton didn't alter the original agreement, but complemented it with the aforementioned NAAEC and NAALC. After intense political debate and the negotiation of these side agreements, the U.S. House of Representatives passed NAFTA on November 17, 1993, by 234-200 vote (132 Republicans and 102 Democrats voting in favor; 43 Republicans, 156 Democrats, and 1 independent against), and the U.S. Senate passed it on the last day of its 1993 session, November 20, 1993, by 61-38 vote (34 Republicans and 27 Democrats voting in favor; 10 Republicans and 28 Democrats against, with 1 Democrat opponent not voting -- Sen. Byron Dorgan (D-ND), an ardent foe of NAFTA, missed the vote because of an illness in his family).

Effects

The effects of NAFTA, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, and NAFTA Revisited by the Institute for International Economics. Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise, even after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on US workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U.S. and Mexico. Some economists believe that NAFTA hasn't been enough (or worked fast enough) to produce an economic convergence, nor to substantially reduce poverty rates. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture.

Trade

According to Hufbauer (2005), overall, NAFTA hasn't caused trade diversion, aside from a few select industries such as textiles and apparel, in which rules of origin negotiated in the agreement were specifically designed to make U.S. firms prefer Mexican manufacturers. The World Bank also showed that the collected NAFTA imports' percentage growth was accompanied by an almost similar increase of non-NAFTA exports.

Industry

Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This phenomenon has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, León and Puebla; all three larger in population than Tijuana, Ciudad Juárez, and Reynosa. The main non-maquiladora industry that has benefited from NAFTA is the automobile industry.

Agriculture

From the earliest negotiation, agriculture was (and still remains) a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that wasn't negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The Canada-U.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the Mexico-U.S. pact allows for a wider liberalization within a framework of phase-out periods (ironically, it was the first North-South FTA on agriculture to be signed).
   The overall effect of the Mexico-U.S. agricultural agreement is a matter of dispute. Mexico didn't invest in the infrastructure necessary for competition, such as efficient railroads and highways, creating more difficult living conditions for the country's poor. Still, the causes of rural poverty can't be directly attributed to NAFTA; in fact, Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period.
   Production of corn in Mexico has increased since NAFTA's implementation. However, internal corn demand has increased beyond Mexico's sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of direct income transfer (a subsidy) expanded by former president Vicente Fox, production has remained stable since 2000.
   The logical result of a lower commodity price is that more use of it's made downstream. Unfortunately, many of the same rural people who would have been likely to produce higher-margin value-added products in Mexico have instead emigrated. The rise in corn prices due to increased ethanol demand may improve the situation of corn farmers in Mexico.

Mobility of persons

According to the Department of Homeland Security Yearbook, during fiscal year 2006 (for example October 2005 through September 2006), 74,098 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (for example in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status. Since what the DHS actually counts is the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for one year, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their one-year admission period expired, while other aliens admitted earlier may change their status to TN or TD, or extend earlier granted TN status).
Canadian authorities estimated that as of December 1, 2006, the total of 24,830 US citizens and 15,219 Mexican citizens were present in Canada as "foreign workers". These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law. New entries of foreign workers in 2006 were 16,841 (US citizens) and 13,933 (Mexicans).

Criticism and controversies

Canadian disputes

There is some concern in Canada over the provision that if something is sold even once as a commodity, the government can't stop its sale in the future. This applies to the water from Canada's lakes and rivers, fueling fears over the possible destruction of Canadian ecosystems and water supply.
   Other fears come from the effects NAFTA has had on Canadian lawmaking. In 1996, MMT, a gasoline additive that some studies had linked to nerve damage, was brought into Canada by an American company. The Canadian federal government banned the importation of the additive. The American company brought a claim under NAFTA Chapter 11 seeking US $201 million, and by Canadian Provinces under the Agreement on Internal Trade ("AIT"). The American company argued that their additive hadn't been conclusively linked to any health dangers, and that the prohibition was damaging to their company. Following a finding that the ban was a violation of the AIT, the Canadian federal government repealed the ban and settled with the American company for US $13 million.
   The United States and Canada had been arguing for years over the United States' decision to impose a 27 percent duty on Canadian softwood lumber imports, until new Canadian Prime Minister Stephen Harper compromised with the United States and reached a settlement on July 1, 2006, though the settlement hasn't yet been ratified by either country, in part due to domestic opposition in Canada.
   Canada had filed numerous motions to have the duty eliminated and the collected duties returned to Canada. After the United States lost an appeal from a NAFTA panel, it responded by saying "We are, of course, disappointed with the [NAFTApanel's] decision, but it'll have no impact on the anti-dumping and countervailing duty orders", (Neena Moorjani, spokeswoman for U.S. Trade Representative Rob Portman). On July 21, 2006, the U.S. Court of International Trade found that imposition of the duties was contrary to U.S. law.

Canadian government challenged on change in Income trust taxation

On October 30, 2007 American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under NAFTA. The couple claims thousands of US investors lost a total of $5 billion dollars in the fall-out from the Conservative Government's decision last year to effectively tax income trusts in the energy sector out of existence.
Under the NAFTA, Canada isn't allowed to target other NAFTA citizens when they impose new measures. Canadian Federal Finance Minister Jim Flaherty is on record that energy trusts were included because of their high U.S. ownership, while Real Estate Investment Trusts, owned mostly by Canadians, were excluded. NAFTA also stipulates that Canada must pay compensation for destroying investment by U.S. investors. The Government of Canada's 2006 Halloween tax changes for income trusts were designed to eliminate the income trust model for investment by U.S. citizens. The NAFTA says that U.S. investors are entitled to rely upon Canadian government promises. Harper repeatedly made a public promise that his Government wouldn't tax trusts, as had the previous Liberal Government. Canada's tax treaty with the United States also says that trust income won't be taxed at more than 15 percent.
The Gottliebs maintain a website for American and Mexican citizens interested in filing a NAFTA claim against the Government of Canada.

U.S. deindustrialization

An increase in domestic manufacturing output and a proportionally greater domestic investment in manufacturing doesn't necessarily mean an increase in domestic manufacturing jobs; it may simply reflect greater automation and higher productivity. Although the U.S. total civilian employment rate may have grown by almost 15 million in between 1993 and 2001, manufacturing jobs only increased by 476,000 in the same time period. Furthermore from 1994 to 2007, net manufacturing employment has declined by 3,654,000, and during this period several other free trade agreements have been concluded or expanded.

Impact on Mexican farmers

In 2000, U.S. government subsidies to the corn sector totaled $10.1 billion, a figure ten times greater than the total Mexican agricultural budget that year. Other studies reject NAFTA as the force responsible for depressing the incomes of poor corn farmers, citing the trend's existence more than a decade before NAFTA's existence, an increase in maize production after NAFTA went into effect in 1994, and the lack of a measurable impact on the price of Mexican corn due to subsidized corn coming into Mexico from the United States, though they agree that the abolition of U.S. agricultural subsidies would benefit Mexican farmers.

Chapter 11

Another contentious issue is the impact of the investment obligations contained in Chapter 11 of the NAFTA. Chapter 11 allows corporations or individuals to sue Mexico, Canada or the United States for compensation when actions taken by those governments (or by those for whom they're responsible at international law, such as provincial, state, or municipal governments) have adversely affected their investments.
   This chapter has been invoked in cases where governments have passed laws or regulations with intent to protect their constituents and their resident businesses' profits. Language in the chapter defining its scope states that it can't be used to "prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that isn't inconsistent with this Chapter."
   This chapter has been criticized by groups in the U.S.", Mexico and Canada for a variety of reasons, including not taking into account important social and environmental considerations. In Canada, several groups, including the Council of Canadians, challenged the constitutionality of Chapter 11. They lost at the trial level, and have subsequently appealed. Methanex, a Canadian corporation, filed a US$970 million suit against the United States, claiming that a California ban on MTBE, a substance that had found its way into many wells in the state, was hurtful to the corporation's sales of methanol. However, the claim was rejected, and the company was ordered to pay US$3 million to the U.S. government in costs.
   In another case, Metalclad, an American corporation, was awarded US$15.6 million from Mexico after a Mexican municipality refused a construction permit for the hazardous waste landfill it intended to construct in Guadalcazar, San Luis Potosi. The construction had already been approved by the federal government with various environmental requirements imposed (see paragraph 48 of the tribunal decision). The NAFTA panel found that the municipality didn't have the authority to ban construction on the basis of the alleged environmental concerns

Chapter 19

Also contentious is NAFTA's Chapter 19, which subjects antidumping and countervailing duty (AD/CVD) determinations with binational panel review instead of, or in addition to, conventional judicial review. For example, in the United States, review of agency decisions imposing antidumping and countervailing duties are normally heard before the U.S. Court of International Trade, an Article III court. NAFTA parties, however, have the option of appealing the decisions to binational panels composed of five citizens from the two relevant NAFTA countries. The panelists are generally lawyers experienced in international trade law. Since the NAFTA doesn't include substantive provisions concerning AD/CVD, the panel is charged with determining whether final agency determinations involving AD/CVD conform with the country's domestic law. Chapter 19 can be considered as somewhat of an anomaly in international dispute settlement since it doesn't apply international law, but requires a panel composed of individuals from many countries to reexamine the application of one country's domestic law.
   A Chapter 19 panel is expected to examine whether the agency's determination is supported by "substantial evidence." This standard assumes significant deference to the domestic agency.
   Some of the most controversial trade disputes in recent years, such as the U.S.-Canada softwood lumber dispute, have been litigated before Chapter 19 panels.
   Decisions by Chapter 19 panels can be challenged before a NAFTA extraordinary challenge committee. However, an extraordinary challenge committee doesn't function as an ordinary appeal. Under the NAFTA, it'll only vacate or remand a decision if the decision involves a significant and material error that threatens the integrity of the NAFTA dispute settlement system. As of January 2006, no NAFTA party has successfully challenged a Chapter 19 panel's decision before an extraordinary challenge committee.

Chapter 20

Chapter 20 provides a procedure for the interstate resolution of disputes over the application and interpretation of the NAFTA. It was modeled after Chapter 18 of the Canada-United States Free Trade Agreement.

Chapter 14

"This chapter dealing with Financial Services provides for the same procedure as Chapter 20, except that the members of the panel shall be selected from a roster of fifteen persons who “have expertise in financial services law or practice...” The roster has never been made public and no dispute has yet occurred under this chapter."

Public opinion

Public opinion toward NAFTA in Mexico, Canada and the United States is mixed. A July 2004 survey conducted by CIDE and COMEXI in Mexico showed that 64 percent of the Mexican public favored NAFTA. The Program on International Policy Attitudes reported in a January 2004 poll that 47 percent of Americans thought that NAFTA has been good for the United States, while 39 percent thought it had been bad for the country. A recent Rasmussen report, however, shows that only 16% of likely Democratic voters in the 2008 presidential election support NAFTA, while 53% disapprove of the trade agreement.
A Canadian poll conducted in June 2003 by Ipsos Reid found that 70 percent of Canadians supported NAFTA, while only 26 percent were opposed. However, a May 2004 Ipsos poll found that "Six in ten Canadians (62 percent) disagree that Canada should sign a trade agreement that would open Canada’s public services to competition from foreign companies" and "A further six in ten (60 percent) disagree that government should sign deals that would allow corporations to directly sue the Government of Canada if our public policies impair their ability to make profits".
Despite their support for NAFTA, the polls in Canada and Mexico have tended to show that citizens see their own country as the loser in NAFTA, and to see the United States as the winner. The U.S. public has viewed Mexico as the winner and has been narrowly divided about whether the United States is a winner or loser in NAFTA.

Travel and migration

United States and Canada

Border restrictions were largely unaffected by the 1988 Free Trade Agreement, and NAFTA gave mobility rights to only listed professionals (admittable to the USA under the TN status, or to Canada as "business people covered by NAFTA"). Also, the border has been tightened in response to concerns about drugs and then terrorism. This freedom of mobility has had important qualifications. It can be suspended or terminated by either government at will.

Mexico and the United States

In 2000, then-Mexican President Vicente Fox advocated the idea of free flow of people across the U.S.-Mexico border as a second phase of NAFTA, which would be completed in ten years. However, negotiations ceased after the 9/11 attacks, when debate in the United States shifted towards an immigration policy with security as its main goal.
Developments in early 2006 brought the Mexican-U.S. border and United States immigration debate to the center stage in American politics. The Secure Fence Act of 2006 provided for 700 miles of high security fence, to be built in regions of the border subject to high rates of illegal crossings. To this date only seven miles of fence have been built, with the U.S. Congress wavering on its decision. The Comprehensive Immigration Reform Act of 2007 would have granted illegal immigrants already in the country a way forward to stay and gain citizenship. It would also have provided up to 200,000 placements per year for guest workers. On June 28, 2007, the bill failed cloture in the Senate, largely due to public outcry, and no further action was taken.
The Open Skies Policy is intended to be applied by both of the governments once the Mexican air-transportation industry has been stabilized and Mexico's largest airlines AeroMexico and Mexicana consider themselves able to compete with airlines the size of American Airlines, Continental Airlines and United Airlines.

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