The future of Nafta: compelling reasons in both experience and law suggest Mexican courts will declare the deal unconstitutional.

During negotiations from 1991-93, the North American Free Trade Agreement (Nafta) seemed like a magical mirror in which each of the contracting parties saw its own commercial and policy agenda fulfilled.

How these differing viewpoints shaped the years to follow was reviewed at a conference at the University of Houston Law Center in late April. Talk of continued limitations in the energy sector, fundamental differences in the trade partners' legal systems and the uneven playing field suggested that the treaty would be abolished by the time it turns 15 years old.

DIFFERING PERCEPTIONS

For Canada and Mexico, the trade agreement's Article 19, which concerned subsidies and countervailing duties, offered a mechanism to limit the arbitrary and unpredictable behavior of the U.S. government in commercial disputes.

For the United States, the success of the bilateral treaty with Canada in 1988 showed that such regional arrangements could strengthen national energy security. Hence, a comparable treaty with Mexico (originally conceived as a bilateral one) would guarantee continued crude oil and gas supplies under emergency market conditions.

There were expectations that a comprehensive commercial treaty with the United States would be sufficiently attractive to entice Mexico to relax its harsh restrictions on private investment in energy markets. At the very least, such a treaty would open the government procurement process to competition by American (and Canadian) companies.

For the first Bush administration, a Nafta market was a commercial and geopolitical counterweight to the European Community, which came into legal existence in 1992. For Canada, its inclusion in the treaty would allow Canada to leverage its special relationship with the United States to gain commercial advantage in Mexico.

In addition to these expectations, it was assumed that trade and investment would increase under Nafta. The La Paz side agreement on environmental issues was expected to institutionalize ways to improve air and water quality. The new North American Development Bank based in San Antonio would at least offer some preferential funding for environmental and community projects.

LACKLUSTER RESULTS

The dispute-resolution mechanisms of Nafta look ineffective, if only judged by the lingering softwood lumber dispute between Canada and the United States and the trucking row between Mexico and the U.S. The latter was finally settled last month by a U.S. Supreme Court ruling allowing Mexican trucks unfettered access to U.S. highways, 4-and-a-half years after the date set in Nafta.

In energy, key segments of the motor fuel (lubricants) and liquefied petroleum gas (LPG) markets remain closed. As important as Pemex's Multiple Service Contracts (MSCs) may be in theory, commercially they are restrictive to the point that in 2003 two of seven blocks tendered in the Burgos Basin received no bidders at all. The blocks that received no bidders were the large ones unofficially reserved for major oil companies--precisely those with the best technology and management practices. The MSCs succeeded in everything except for bringing the most qualified companies to the table.

PEROT WAS RIGHT

As for trade and investment, statistical comparisons of 1994 and 2004 are deceptive and inconclusive. As Ross Perot correctly intuited during the 1992 U.S. presidential election campaign, trade with Mexico is largely an optical illusion, since 70% of it concerns the "revolving door" of intra-firm transactions, that is, with subsidiaries of a firm "selling" to its corporate parent. The terms "investment" and "trade," therefore, are relative to their intended final markets, not to the geographical location of the manufacturing plant.

Most of the increase in trade with Mexico have to do with U.S. components assembled in Mexico for the U.S. market. Most of Nafta trade and investment statistics do not refer to Mexico as an Original Equipment Manufacturer (OEM) or as the final, consumer market. Mexico is an intermediary, an outside agent, in U.S. commerce.

Another optical illusion is the "trade gain" made by the states on the U.S.-Mexico border.

Texas far surpasses California as an exporter to Mexico. However, the statistics measure transactions at ports of entry, not the economic activity of manufacturers and service companies in the state where the customs point of entry is found.

It may be that there are no data that are systematically collected by federal or state authorities to measure gains or losses in the exports and employment of an individual state's commerce with Mexico or Canada.

COLLISION OF LEGAL SYSTEMS

Nafta is a characteristically American work-around of an awkward constitutional problem: the procedural and philosophical incompatibility of the legal system of Canada and Mexico with that of the United States. Canada and Mexico have civil code systems, the U.S. has a common law system. Together, they mix like oil and water.

At the Nafta seminar in Houston, Manuel Gonzalez Oropeza, a legal scholar from the National Autonomous University of Mexico (UNAM) made a series of observations and arguments that led to an unexpected conclusion: sooner or later the Mexican Supreme Court would rule that Nafta was unconstitutional.

He strongly doubted that the 10 years of so-called "Nafta jurisprudence" has any weight in Mexico's legal system. "It is to suggest that Mexico would be legally bound by jurisprudence that is independent of Mexico's laws. In Mexico, a law can only be modified by another law, but not by analogy or inference from a treaty."

His example is expropriation, which, in Mexican law, is the taking by the state of the property belonging to private parties for the public good.

"There is no such thing as 'regulatory expropriation,' as was alleged in the Metalclad dispute in the late 1990s." (Metalclad, an American company, was awarded US$16 million by a Chapter 11 Nafta arbitration panel as compensation for construction costs on a toxic waste plant, the site of which was declared an ecological reserve by a Mexican a governor).

"What is happening is that American common law is being smuggled into Mexico's legal system through Nafta's procedures for dispute resolution," said Gonzalez.

Gonzalez also points out that the so-called Calvo Clause in Mexican diplomacy and laws precludes the possibility that foreign citizens in Mexico could appeal to their home countries for intervention. "It is just this possibility," he said, "that Nafta opens, albeit in the form of arbitration panels and not as direct intervention as was the case in the 19th and first half of the 20th centuries."

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If he is right, should any provision of Nafta be sent to the Mexican Supreme Court for review, it is likely that the treaty itself would be found unconstitutional.

Suppose that there is no way a civil code system can incorporate a common-law legal philosophy based on the notion of incremental jurisprudence based on case law. If so, then the only long-term solution would be to construct a species of North American Constitution analogous to the European Constitution of the EU that is still in gestation.

But trade and investment obviously will go on with or without Nafta. And the areas controlled by Pemex and the Federal Electricity Commission (CFE) will stay closed to private investment with or without Nafta. Meanwhile, Canadian firms operating in Mexico, who have gained the most from Nafta, will consolidate their positions in Pemex and CFE procurement.

Left out of this picture are two issues: the environment and transparency. How can there be fair and open procedures where by the interests of investors and the environmental and community interests of local authorities are reconciled? The American authors of the phrase in the treaty "tantamount to expropriation" certainly pinpointed a growing issue, as an expropriation in Baja California last February dramatized.

Both the Metalclad and Marathon (in Baja California) cases lacked transparency. In each instance a state governor opposed federal permitting. In Metalclad's case, there was a strong suspicion that the odd behavior of the governor and his staff had been influenced by Metalclad's competitor, the only alternative industrial waste facility located in Monterrey. In Marathon's case, a common suspicion is that the state government in Mexicali favors another LNG project.

There are two alternatives to the idea of "tantamount" or "virtural" expropriation: A North American meta-constitution for all three countries, or the abrogation of NAFTA.

Commentary by George Baker

George Baker, a historian and former Fulbright visiting professor at the National Autonomous University of Mexico, is the editor and publisher of Mexico Energy Intelligence, based in Houston. He can be reached at [e-mail].