Overview

THIS VOLUME CONTAINS, in the form of a series of independently conducted analyses, a comprehensive overview of the North American Free Trade Agreement (NAFTA) [The discussion in this book is based on the August, 1992 version of the agreement. While no substantial changes have been made, a new, slightly reorganized version of NAFTA was released the week this volume was sent to the printer. The only paper which has been revised to take this change into account is that by Leonard Waverman.]. The agreement is a process by which Mexico, the United States and Canada have agreed to surrender their control or sovereignty over certain limited aspects of their trade policy. They have made this partial surrender of autonomy in order to achieve the benefits that are available from mutual relaxation of protectionism and the cementing of this resolve in the form of an international agreement.

Evaluation of the success of the trade negotiations which have produced this agreement should focus on the extent to which the countries have given up their ability to impede trade. That is to say, in a paradoxical way the country that "gave up the most" in terms of control over international trade is also the country that gained the most in terms of benefits. The apparently paradoxical nature of this statement is resolved with the recognition that protectionism does not benefit all of the citizens of a country but rather benefits one group-namely protected producers-at the expense of the consumers and other producers who must pay higher prices for the protected products. Protectionism is like a tax and expenditure program which taxes consumers and producers and conveys benefits to businesses and workers in the protected sector. Opening borders to foreign suppliers increases competition, removes the privilege enjoyed by protected producers and in consequence reduces prices.

Trade agreements like NAFTA also benefit competitive producers by giving them assured or improved access to the markets in the other countries which are part of the agreement.

There are of course "losers" in any liberalization. They are those who have been the beneficiaries of the protectionism. These losers can be expected to object to the signing of any such agreement and their opposition is quite understandable. The opposition of these losers to any trade liberalization usually takes the form of a claim that their interest is the same as the national interest. Therefore, what the U.S. textile producers and workers "lose" is portrayed as a loss for the U.S., or the "gain" of the Mexican auto industry is portrayed as a loss for Canada.

In evaluating NAFTA, the authors of this book have looked through the veil of apparent interest to the real motivations of the negotiating parties. They have revealed the strengths and weaknesses of the deal as it provides for the improvement of the standard of living for all three countries. The book is divided into three sections. The first provides an assessment, from the point of view of the three countries involved, of the overall impact of the agreement upon those countries. The second section deals with the impact on specific sectors that were of particular importance in the negotiations. It contains papers on automobiles, textiles, agriculture, financial services and energy. The third section provides a discussion of topics that were important in the negotiations and have an effect on many sectors. There are papers on the Rules of Origin and their importance, a review of the disputes settlement mechanisms agreed to, a treatment of the agreed regulations regarding Investment as well as a discussion of the environmental impact of the agreement.

Section One-The Country Assessments

The first section contains three papers which provide overviews from the point of view of the three countries as to the overall impact of the agreement. Since Professor Sidney Weintraub from the United States alone provides a comprehensive summary of the trade deal and since his paper therefore provides the best introduction to NAFTA, we made his the first chapter.

The Impact on the United States

In addition to an overview of the agreement, Weintraub provides an insight as to the U.S. objectives in approaching the negotiations and how the features of the deal meet these expectations. He also provides a very valuable survey of the economic impact analyses which have been conducted, concluding that the deal is likely to have modest short term consequence for the U.S. In assessing the evidence on the likely economic impact, Weintraub points out that, to the extent that the deal has negative consequences for employment and other aspects of labour markets, these effects would be forthcoming anyway. On the other hand, the deal will enable a restructuring of some industries, such as automobiles, that will make them more competitive and therefore more likely to survive global restructuring in the industry.

The economic evidence surveyed by Weintraub suggests that the pact will boost U.S. output by about 1 per cent and even more as time passes if the Mexican economy expands. According to Weintraub this positive assessment is the consensus of economists even though there are some dissenting views. Conclusions in one study that the deal will have strongly negative effects "are not well substantiated," according to Weintraub.

One development supporting the positive assessment of the deal is the recent expansion of U.S. exports to Mexico driven by the growth in the Mexican economy. This is likely to continue under the new arrangements and the U.S. is expected to enjoy a trade surplus with Mexico as that country's economy expands-a surplus lasting for several decades.

Weintraub brings to his paper much experience with the operation of the policy process in Washington and his insights about the micro politics of the deal are particularly interesting. The early opponents of the deal sided with trade-unionists and environmentalists concerned, respectively, about the lack of labour market provisions respecting worker safety and sanitation and about protection for the environment. Weintraub predicts that as the implementing legislation is submitted to the U.S. Congress, many of these Congressional opponents will be revealed as really opposing the deal because of anticipated impacts on industries in their districts.

Environmentalists have influenced the agreement in that it is the first such to include a comprehensive treatment of environmental issues. An additional measure in the form of a tri-national commission, proposed by President Clinton, is likely to be rejected by the other countries, in Weintraub's opinion. On the other hand, while labour conditions are not dealt with in the agreement, they are the subject of a consultative Commission established at the same time as the agreement was reached.

In some ways the most contentious issue of concern to opponents is the extent of support available to those who are displaced by the trade pact. President George Bush had already addressed this issue by proposing a worker adjustment initiative funded to the tune of $10 billion over five years but gave no indication of what should be dropped from the budget to accommodate this new program. Weintraub predicts that even though such an adjustment program is essential to get the support of organized labour, the pressure from other entitlement programs will make its realization difficult. In any event, as he notes, this is a matter for domestic U.S. policy and not for an international trade agreement.

The impact on Canada

The second paper, by Professor Leonard Waverman, Director of the University of Toronto's Centre for International Studies, discusses the impact of NAFTA for Canada.

In the course of his paper, Waverman provides a very valuable service for all who are interested in the issue of expanding trade in North America in that he faces directly an issue that has hung like a pall over the discussions, namely, the implication that the Canadian-U.S. Free Trade Agreement (FTA) has been a tremendous flop from Canada's point of view. As one wag put it, if the FTA has been a failure, why would we want to expand it to make it even more of a failure, and why would Mexico want to join in a practise that has been so bad for Canada.

Waverman surveys all of the studies that have been undertaken to assess the impact of the FTA. Some of the studies show a positive impact on employment and growth, some show a slight negative impact. The important thing is that none of the five studies show the sort of massive job loss that is sometimes claimed. Recession, global restructuring, adverse increases in the relative costs of manufacturing in Canada including higher rates of taxation and other factors seem to explain most of the job loss. At most, according to Waverman, 15 per cent of the job loss that has occurred since the FTA came into effect can be attributed to the agreement and these are related to the primary adjustment to the FTA. The longer term effects which will boost growth and employment have not had time to be fully felt.

One comprehensive study by Peter Pauly using the economic models in the United Nations Project Link shows that once all the other forces affecting the economy had been taken into account, even in the first two years of the agreement, the separate impact of the FTA was to boost Canadian output by nearly half of one per cent and to reduce the unemployment rate below what it would otherwise have been.

Waverman goes on to point out that the major future threat to Canadian employment is a general lack of competitiveness in a restructuring world. Canada cannot opt out of this process, and opening freer trade in North America is an essential response to what is happening. Moreover, as he notes, Mexico is going to open up to the U.S. and be admitted to the U.S. market with corresponding trade and investment diversion away from Canada, whether Canada is involved in NAFTA or not. By joining the agreement Canada stands to gain much better access to Mexico, and remains part of the emerging hemispheric trade area, thus enjoying, along with the other participants, the benefits of the largest marketplace in the world.

The impact on Mexico

The impact of NAFTA in Mexico is discussed in the third paper in the first section. Author Rogelio Ramirez De la O notes that Mexico's attempt to complete such a trade deal stems from a program of economic liberalization and stabilization which began in the mid 1980s. Currency stabilization, privatization of banks and other industries and a general climate which investors found reassuring led to a repatriation of capital by Mexicans and the beginning of economic restructuring. One result of this program was a dramatic increase in the amount of importation and a rapidly widening current account deficit corresponding to the capital inflow.

In the early stages of the restructuring, Mexico had little success in attracting the capital of non-residents. There was danger that the economic resurgence would come to a crashing halt owing to a capital shortage. Concern about this was heightened by the reunification of Germany and the impact this might have on the supply of capital in the western world. Finally, Mexico, like Canada before it, was impressed by the apparent world-wide trend toward regional trading blocks which might leave Mexico without an assured access to any market unless it could strike a deal with its closest and most important trading partner.

Ramirez De la O, president of the highly respected Mexico-based private consulting group Ecanal, expects that the NAFTA agreement will have exactly the effects that motivated the Mexican government to pursue it. He expects, even in the short run, a boost in Mexican incomes, wages and investment. He forecasts a significant further increase in imports and a swelling of the Mexican trade deficit as more capital floods into Mexico to take advantage of the opportunities available there. He has some claim to expertise in the area since he has more accurately forecasted the evolution of Mexican trade performance in the past few years than either the government or other private sector analysts.

Section II-Sectoral Impacts

The automotive sector

Arguably, the most important aspect of the North American Free Trade Agreement is its provisions regarding the automotive sector, which accounts for the largest share of continental trade flows. They are important because they make some changes to the Auto Pact between Canada and the United States, which was the kernel sectoral agreement that was the historical precedent for the comprehensive Free Trade Agreement signed in 1988. They are also important because of the fundamental changes they will bring to the Mexican auto sector, which will, via the Agreement, be brought fully into the North American automobile market by the end of the transition period allowed for in the Agreement.

The auto provisions of the agreement are not something that a free trader would find very attractive. As in the textile sector, there are a mind-numbing array of rules and regulations concerning the regional value content of automobiles produced under the Agreement, a trilogy of regulations respecting the basis on which the content regulations will be applied, and a complex process of tracing this value content (which was contained in the original U.S./Canada Auto Pact but was dropped in the FTA).

On the other hand, NAFTA has some distinct advantages over the FTA in that it greatly reduces the amount of flexibility provided to customs officials in the determination of the eligibility of a particular product to be transported duty free across the borders of the participating countries. This ambiguity in the FTA led to a corresponding uncertainty as to how regional value content should be calculated and, therefore, a lack of predictability and precision in the entire regime.

In his masterful chapter on the subject, Jon Johnson, who is a lawyer with the Toronto firm of Goodman and Goodman, provides a thorough description of the way in which NAFTA will affect the evolution of the automotive sectors in all three countries. He shows that under NAFTA, Mexico will be enabled to follow, at an accelerated pace, the path which Canada took (namely, from having an inefficient and uncompetitive automotive sector prior to 1965, to having in 1992 an automotive sector which is wholly competitive in the American market context and capable, in the view of some assessments summarized by Johnson, of competing effectively with Mexico for a share of the largest automobile market in the world-that of the U.S). While, as Johnson points out, the predictions about the future of the North American automobile industry can only be made on the basis of assumptions, there are good reasons to believe that, eventually, all three countries' automotive industries will be better off as a result of NAFTA.

If there are reservations, it is about the anticipated impact on Canada because of the potential for Mexican production to displace production currently occurring in Canada and because of the difficulties Canadian parts manufacturers might face in competing with their counterparts in Texas and southern California. However, as Johnson points out, all of the potential difficulties that might be faced by the Canadian automotive sector will ensue whether Canada is part of NAFTA or not, arising as they do primarily as a consequence of the arrangements made between the United States and Mexico. By being part of NAFTA, Canada acquires the greater certainty and specificity of the regulations respecting the rules of origin, and acquires access to the Mexican market for its output. That market access will be significant to the extent that the trade agreement, together with a thoroughgoing domestic liberalization program, succeeds in boosting the level of Mexican incomes.

Textiles and apparel

One of the sectors which historical experience predicted would be negatively affected by increased trade access was the textile and apparel sector. Long the focus of protectionism on both sides of the Canada/U.S. border, these industries were subject to special treatment in the FTA and, as pointed out by Eric Barry and Elizabeth Siwicki from the Canadian Textiles Institute in their fascinating paper, were the subject of a special negotiating group for NAFTA.

The objective of the negotiators in the FTA had been to liberalize some trade between the parties within the region while still greatly restricting trade in textiles and apparel from countries outside the region. Particular details of the implementation of this objective, both in the FTA and now in NAFTA, are of sufficient complexity that a very significant fraction of the article is taken up by a lucid description of the provisions of the Agreement. No useful purpose could be served by an attempt to summarize here for introductory purposes what is already a concise and heroic effort at summary by the authors.

Fortunately, the most interesting aspect of the article is not the description of the provisions of the Agreement and how it compares with the Canada/U.S. Free Trade Agreement. Most interesting are the comments made by the authors about the impact that the Free Trade Agreement has already had with respect to trade in textiles and apparel and their prediction, on the basis of this experience, of the consequences of NAFTA.

Say the authors, "The reality of the FTA and the need to adapt acted as a psychological trigger and firms began to look beyond the domestic market. In 1990, with a recession in Canada and the U.S.; with textile duties down by only two-tenths; and with a high Canadian dollar; textile exports to the U.S. increased by 28 percent. In 1991, exports held that gain and increased by another 15 percent. In 1992 they increased by another 30 percent." The authors point out that this spectacular performance in the textile area has been mirrored to some degree in the apparel side as well. "[I]t was widely assumed in 1987 that the Canadian market would be flooded with U.S. garments. This has not happened. Canada had a positive balance of clothing trade with the U.S. before the FTA. Since the FTA, instead of disappearing, this positive balance has continued to grow at an increasing rate."

There has also been a robust U.S. reciprocity in these trade arrangements. American readers may appreciate the fact that, notwithstanding these trade developments, the U.S. continues to enjoy a $1 billion trade surplus in its textile trade with Canada.

The authors conclude by noting that the prospect of the Free Trade Agreement caused a boost in the Canada/U.S. textile trade even before it was signed. They report that similar activity is happening between Canada and Mexico as exports of textiles from Canada to Mexico have grown by 85% in the first half of 1992, while imports of textiles and clothing from Mexico have also begun to increase.

The agriculture sector

Agriculture is proving to be one of the most difficult areas in which to accomplish trade liberalization. As Thomas Grennes points out in his comprehensive review of the agriculture provisions of the Agreement, some considerable ground has been gained in the form of trade creation, with only a modest amount of trade diversion. In the agriculture area, the Agreement consists of two separate bilateral arrangements between the United States and Mexico and between Canada and Mexico. The U.S./Canada Free Trade Agreement provisions for agriculture remain in effect for those two countries. In consequence, Grennes' article is largely an assessment of the impact of NAFTA on agriculture in the United States and in Mexico. His thorough assessment includes an indication of the trade effects, with its indication of a modest diversion of orange juice production from Brazil to Mexico, for example; a half billion dollar increase in food exports from the United States to Mexico and a $166 million increase in exports from Mexico to the United States. Concerns that lower Mexican standards will reduce the quality of food in the United States are dismissed, both by the Agreement and Grennes, in that the phyto sanitary standards currently in existence will be retained under the new agreement, with no reduction in U.S. standards.

Grennes expresses some concern about the fact that NAFTA does not explicitly provide for an accession clause; however, trade negotiators indicated during the course of negotiating the Agreement that their objective was to produce a general agreement that would set out the desirable principles of a liberalizing trade framework. Such a framework would be of such generality that any country which wished to do so would then be in a position to affirm the general principles while reserving on some particular points. The signatories of NAFTA have attached restrictions or exceptions to the general agreement for each of Canada, the United States, or Mexico, where that was felt to be necessary. The Agreement can, therefore, be expanded more easily than even an accession clause would have permitted, as it provides the opportunity for explicit, different timing, for example, of the decay of existing protection and other specifications in modification of the general principles that are contained in the NAFTA framework.

Grennes does lay to rest some concerns that have been expressed about the employment impact of the Agreement in Mexico. NAFTA opens up trade in corn, which is an essential Mexican product at the moment, employing large numbers of people. Grennes' observation is that the structure of employment in the ejidos will be affected by the fact that Mexican law regarding them has been modified, tending to lead to concentration of these lands back into economically and efficiently sized farms-a process that would have occurred with or without the North American Free Trade Agreement. There will be dislocation and rising unemployment due to the changes in domestic Mexican agriculture policy but these are not primarily related to NAFTA.

All in all, Grennes' assessment of the agricultural features of the Agreement are quite positive, although, he is sorry that the period of removal of trade barriers is going to be extended for fifteen years, thus reducing the present value of the changes which are being made, for all parties concerned. In his view, the liberalization could be done more rapidly to the benefit of all parties.

Financial Services

Somewhat greater enthusiasm is expressed by John Chant, in his assessment of the financial sector provisions of NAFTA. Chant notes first that the chapter respecting the financial sector could not simply be an extension of the FTA provisions because of the differences in the approach to financial regulation pursued in the three countries. Canada and Mexico pursue a system ruled by law, while the U.S. has a system ruled by specific and changeable regulations. Chant also points out that any such national agreement between the three countries would be only part of the story, in any event, because of the right of provincial and state governments to engage in their own regulation of financial institutions.

Respecting the diversity both of the signing parties and of any prospective future signatories, the Agreement is structured according to the most general principles, permitting a liberalized trade in financial services, with appropriate provisions for the right of establishment and national treatment. It also makes provisions for reservations to these principles by each of the signatories. The reservations consist both of those taken on behalf of the national government and those which may subsequently be registered by lower levels of government. Canada registered only one reservation, whereas the U.S. presented 18 and Mexico 26.

Chant concludes that all of the parties got some of what they wanted out of the negotiation but that Canada was, perhaps, the most successful, particularly in light of the fact that NAFTA extends to the financial sector the provisions for dispute settlement mechanisms which were not available under the FTA. In fact, financial sector disputes and issues have the benefit of a separate disputes resolution process with the ability to intercept difficulties before they become a significant trade irritant.

Perhaps the most encouraging aspect of the Agreement is the fact that it takes a liberalizing attitude toward the application of law with regard to the issue of national treatment. One of the things that investors most fear from expanding a service network into a foreign country is that they will be treated differently from resident nationals in the application of the law. It is typical in trade agreements that de jure national treatment is provided, ensuring that foreign institutions receive equal treatment under the law. However, Chant notes, "Nothing in de jure national treatment guarantees that foreign institutions will not be harmed by seemingly equal legal treatment that effectively limits them because of their different circumstances." NAFTA takes a more comprehensive attitude towards national treatment and requires competitive national treatment, i.e. "that the differential impact of the law on domestic and foreign institutions does not place foreign institutions at a disadvantage in their ability to compete."

In summary, Chant concludes that "The NAFTA financial sector provisions were much more than a reworking of the FTA provisions to include a third country . . . NAFTA was crafted around principles expressing the requirements for freedom of trade in financial services . . . permits countries to accept the agreement at different stages of financial development and work toward the eventual opening of their domestic financial markets to international competition. As a multilateral agreement, the NAFTA financial sector provisions offer potential benefits to countries other than Canada, Mexico and the U.S. by providing a framework in which a variety of financial sector needs can be met if these countries choose to join an expanded NAFTA."

Energy

The energy arrangements in the Agreement are analyzed by G.C. Watkins, immediate Past President of the International Association for Energy Economics and a person with a unique grasp of the complexities of North American energy trade. Watkins' assessment of the energy provisions of NAFTA is mixed. On the one hand, he regards it as an asymmetrical deal in which Canada and the United States have carried forward their commitment in the 1988 Free Trade Agreement and, indeed, embellished it to provide greater freedoms, while Mexico, reflecting the provisions of its Constitution, has declined to participate in this reciprocal liberalization process. On the other hand, Watkins does not regard this as an entirely bleak result since there is considerable liberalization as to sourcing of suppliers in the energy sector and some liberalization in the market for petro-chemicals, which liberalizations he believes will ultimately act as a lever to pry open the Mexican energy market.

One of the asymmetries in the Agreement relates to the so-called proportionality clause. This clause, a remnant of the Free Trade Agreement between Canada and the United States, provides that in the event that the Government of Canada should impose a restriction on the export of energy for reasons of conservation, supply shortages or price stabilization, the share of the total supply available for export purchase may not fall below the average level in the previous 36 months. This specific provision does not apply to Mexico, although a general prohibition of restrictions on trade in energy and in basic petro-chemicals which is contained in the General Agreement on Tariffs and Trade, of which all three countries are signatories, would presumably apply to Mexico.

On the other hand, Canada has been given the protection, denied to Mexico, of the right to export energy into the U.S. market, and is subject only to national security restrictions of a very tightly circumscribed nature. Canadians lost access to the U.S. energy market, in part, during the 1950s and 1960s under regulations passed in the guise of pursuing U.S. national security interests. This history is a matter of some future concern to the development of energy supplies in Canada, which are aimed at the U.S. market. Failing to agree to the proportionality clause meant that Mexico is not eligible for a tighter national security criterion, as specified in Article 607.

While Watkins believes there is considerable unfinished business in the energy sector in North America, he does conclude that the Agreement "confirms and modestly strengthens the energy provisions prevailing under the FTA between Canada and the U.S. This is not enough to generate euphoria, but a sense of quiet satisfaction would be justified."

Section III-Framework Issues

Rules of Origin

NAFTA is an arrangement whereby the participating countries agree to give preferential treatment to those inside the pact. The question naturally arises as to how countries can trade freely among themselves without, in the process, opening their borders to products from everywhere in the world at those same, preferential tariffs? Evidently, Mexico would be a very attractive venue through which to export the products of the Pacific Rim into North America if Mexico were a route around the tariffs imposed by Canada and the United States. Similarly, Canada, for example, would be an excellent way for British Commonwealth countries to seek access to the American market, bypassing American tariffs protecting the U.S. textile industry.

Of course, while consumers and, arguably, everybody in all three countries could be better off if a universal free trade regime could be adopted, the reality is that tariffs express the current state of political support for liberalizing trade arrangements, and it is not the intent of the original trade agreement to abolish all such trade barriers. Accordingly, there must be a way, within the Agreement, to ensure that products which pass duty free or without other difficulty between the consenting parties in the trade agreement are actually products of those countries and not interloping products from other areas. The rules of origin (where was the product produced) and regional value content (production value added in the North American region) requirements are the way in which this is achieved.

In his very complete discussion of this topic, Professor Peter Morici, of the Canada/U.S. Centre of the University of Maine, notes that, given the pressures under which they found themselves, the negotiators did very well to limit the extent to which these Rules of Origin and content requirements have been used to impose further protectionism. In particular, Morici notes that the Rules of Origin provided for in NAFTA are less onerous than had been sought by industrial pressure groups and represent a kind of compromise between Canadian (and Mexican) liberalizing interests and U.S. protectionists. The rules regarding regional value content are generally superior to those contained in the Canada-U.S. Free Trade Agreement and are less likely to promote the kinds of difficulties that resulted in, for example, the Honda Automobile case under the old rules.

One derogation from the provisions of the FTA has happened in the area of determining the value of parts in the automotive industry. Under the provisions of the FTA, negotiators had agreed to replace the 1965 Canada-U.S. Auto Pact rules of tracing with a roll-up rule (which basically provided that the value of a given part would be treated as having completely originated in North America, if it was at least 50% produced there), but tracing has once again reappeared in NAFTA. [So, for example, an engine having a value of $1,000-$501 of which had been spent in North America-would be a $1000 value contribution toward North American sourcing; whereas, a $1,000 engine of which $499 had been spent in North America, would not qualify at all. So the value was either rolled up to the total cost of the component, in this case $1000, or rolled down to zero, depending on whether the 50% requirement had been met or not. Under the new rules, as in the 1965 Autopact, tracing of all components will be utilized so that the same engine would qualify for $499 or $501 worth of the total, with no rolling up or rolling down.]

While Morici congratulates the negotiators for having avoided, in these protectionist times, a more draconian regime, he also makes a number of suggestions about how they may, over time, modify the rules to further increase their efficiency from the economic point of view.

Disputes settlement

Trade agreements represent a partial surrendering of the power to impede international trade. They do not eliminate such power, however, and protectionists still have access to a variety of means, both political and procedural, to harass foreign producers who are successful in penetrating domestic markets. As noted, it does not matter that these incursions are generally in the interest of consumers in the importing country. Local producers lose out when consumers chose the foreign-produced item, and the losers will use whatever laws there are to attempt to harass their competitor. The result is that a dispute will often arise as the foreign competitor rightly surmises that the domestic producer is misusing trade law to get the upper hand in what should be an economic contest for the sympathy of the domestic consumer.

In his concise yet comprehensive treatment, Gilbert Winham of Dalhousie University surveys the provisions that have been included in NAFTA for dealing with this sort of problem. As he notes, the FTA made explicit and, in some kinds of disputes, unique and innovative arrangements for the bi-national review of such actions. In the case of general disputes, the provisions followed the example set down in the GATT and were not particularly successful. NAFTA makes new and better arrangements for the resolution of these disputes, attempting to push the problems down to working groups and technical committees while they are still small and manageable.

In the case of anti-dumping and countervail actions, Winham notes that unprecedented arrangements were included in the FTA for the review, by bi-national, objective panels, of decisions taken by domestic agencies. Although under attack from U.S. sources from the beginning of the negotiations, these bi-national disputes panels are included as a permanent feature of NAFTA (they had been included in the FTA as a temporary expedient with a maximum life of seven years).

Winham, who has been selected as a member of three of the thirty disputes panels that have been struck under the FTA, also sees great benefit to all three parties from the extension of the disputes mechanism to include Mexico. Now a proven process of disputes resolution, the provisions of Chapter Nineteen of NAFTA will provide transparency and certainty where this has been lacking. It will also be an instrument for change in the Mexican legal framework regarding countervail and anti-dumping legislation and procedure since, as with Canada and the U.S., this aspect of Mexican law will now be subject to scrutiny by the international panels. Winham infers that the existence of the NAFTA disputes settlement provisions will aid domestic Mexican reformers to accomplish their goal of making the Mexican legal process more transparent and comparable in certainty to the Canadian and American systems.

Investment provisions

Arguably the most important aspects of any trade agreement are its provisions respecting investment. Foreign direct investment is an increasingly common route by which foreign competitors enter a domestic market. The security of their investment and the knowledge that they will be treated fairly or at least the same as domestic investors are key elements in the decision to flow capital into a particular country.

Alan Rugman and Michael Gestrin provide a thorough examination of the way in which NAFTA treats investment and insist that, in this respect, the agreement is much more than the FTA plus Mexico. The FTA is, however, the precursor and it contained four basic elements: national treatment (as noted above); reservation of certain sectors (culture in Canada, transportation in the U.S.); the retention of a review mechanism (the U.S. Exon-Florio measure and Investment Canada); and the prohibition of "performance requirements" such as export requirements.

According to the authors there are five areas where the investment chapter in NAFTA has been changed: the definition of investment (broadened); the security of investment (international arbitration and full and fair compensation in the event of expropriation); the application of the "most favoured nation" principle to investments (investors to be treated no less favourably than those of any other investor nation); the replacement of "grandfathering" with explicit lists of restrictions (makes NAFTA more transparent than the FTA) and changes to the rules regarding performance requirements (two more restrictions regarding technology and exclusive supplier arrangements have been added).

The authors judge that on the whole the new provisions in NAFTA will encourage intra-regional investment flows and indeed even improve flows from the rest of the world into the region. In that sense, NAFTA improves on the FTA. However, there are some remaining difficulties that require future attention and other provisions that contain a potential threat to investment liberalization. There are two areas of particular concern. The anti-trust exemption which U.S. high-tech firms have been given in order to form consortia has not been extended to Mexican and Canadian firms. The second area for concern is the U.S. Exon-Florio provision and the associated Committee on Foreign Investments in the United States. The newness of this provision means that there is little experience to guide investors on how it may be used. The Canadian experience with the Foreign Investment Review Agency in an earlier, more primitive era, suggests that such agencies can pose significant impediments to the free flow of investment.

Environmental considerations

The impact of trade liberalization on the environment has emerged as one of the major impacts in the debate surrounding NAFTA. Indeed, indications are that President Clinton will seek stronger environmental provisions in the Agreement as a condition of his support. Mexican reluctance to accept stronger environmental protection provisions, perhaps including mandatory harmonization of environmental legislation and enforcement within the free trade area, might well jeopardize NAFTA. Hence, the relationship between trade liberalization and the environment is of critical importance to any overall assessment of the Agreement.

In his chapter, Professor Steven Globerman sets out the major theoretical relationships between trade liberalization and the environment and reviews the available empirical evidence on these relationships. There are two relationships identified as being especially important. One is the link between economic growth and environmental pollution. A second is the link between differences in environmental standards and the relocation of businesses. Environmentalists argue that economic growth will lead to increased pollution and that countries with weaker environmental laws and enforcement will draw investment away from countries with stronger laws and enforcement.

With respect to the first relationship, the evidence is, at best, ambivalent. Specifically, it demonstrates that for particular forms of pollution, higher incomes associated with economic growth will lead to reductions in emissions. In other cases, it will lead to increased emissions. Certainly, there is no support for an unequivocal view that higher income levels result in environmental degradation. If anything, the reverse is true.

With respect to the second relationship, the available evidence is quite persuasive in demonstrating that differences in environmental laws and regulations (as actually enforced) have little impact on the location decisions of businesses. The apparent exceptions to this conclusion, a few resource based industries, have actually relocated from the U.S. and Canada for reasons other than environmental costs.

Implementation of the current NAFTA promises certain additional indirect environmental benefits. To the extent that the Agreement leads to some dispersion of economic activity away from the U.S.-Mexican border, it will alleviate congestion problems in that region. Moreover, the sense of cooperation engendered by the Agreement stands to promote cooperation on trans-border environmental problems.

Conclusion

The cumulative impression from this careful assessment of the North American Free Trade Agreement is that it is a worthwhile contribution to the liberalization of trading arrangements in North America. The gains from this particular extension of the previously negotiated arrangement between Canada and the United States are more immediately available to Mexico and the United States, but Canada will benefit as well. The technical aspects of the agreement are an improvement on the provisions of the Canada-U.S. deal and are innovative in many areas including the articles affecting environmental protection, financial services, investment, energy and the settlement of disputes. The formulation of the agreement as a statement of general principles from which the signatories dissent by appended restrictions means that it will be relatively easy to add other countries in the hemisphere-an objective that is increasingly widely shared.

The agreement offers economic development opportunities and immediate gains in welfare. It is most important, however, for the great hope it offers for the future social and economic well-being of the hemisphere.

Steven Globerman and Michael Walker

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.