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North American Free Trade Agreement: everybody wins.

Despite critics' dire warnings, the U. S., Canada, and Mexico all should benefit from the pact.

On Dec. 17, 1992, the U.S., Canada, and Mexico signed the North American Free Trade Agreement (NAFTA), an accord with far-reaching implications for the economies of North America. The legislatures in all three countries must ratify the historic accord before it can take effect on Jan. 1, 1994. Pres. Clinton has called for the negotiation of supplementary agreements on labor, the environment, and safeguards in parallel with Congressional consideration of NAFTA.

NAFTA will create about 171,000 net new U.S. jobs by 1995, compared with 1990. With surging American exports to Mexico ($43,000,000,000 in 1992, compared with $28,000,000,000 in 1990), many already have resulted.

If rejected, the U.S. is likely to experience job losses in comparison with the situation in 1992. It also probably would cause capital to leave Mexico. The resulting slowed growth south of the border and potential devaluation of its currency would contract that nation's imports and expand its exports, thereby slashing the U.S. trade surplus with Mexico.

An estimated gross total of 316,000 Americans jobs will be created by NAFTA, while 145,000 will be dislocated. As part of the NAFTA package, the U.S. therefore will need better training programs for dislocated workers. However, this retraining should be seen in a larger context, since job dislocations will be less than two percent of total displacements in the American labor market over five years. It is recommended that the U.S. earmark up to $335,000,000 of existing tariff revenues for worker adjustment to help American employees identifiably dislocated by NAFTA. This would serve as an interim measure until an economy-wide retraining program - the ultimate answer to all such labor adjustment problems - is enacted.

Based on the 1990 composition of trade, the median weekly wages associated with U.S. jobs supported by exports to Mexico and those dislocated by imports from Mexico were practically the same (about $425 per week). There is no over-all tendency for exports to Mexico to support high-skilled American jobs or for imports from Mexico to displace low-skilled positions.

The efficiency benefits and growth stimulus of NAFTA could exceed 15,000,000,000 annually. Over the long term, this figure, rather than jobs gained or lost, is the true measure of the economic gain from the NAFTA accord. Annual gains of $15,000,000,000 are equivalent to making an addition to the combined capital stock of the three nations of about $75,000,000,000. As the heretofore most protected and regulated of the three economies, Mexico will accrue the largest share of these gains.

NAFTA likely will lead to long-term growth in Mexican per capita income. Over a period of three or four decades, it might reach half the U.S. level, a gain that substantially would ease illegal immigration to the U.S. Nevertheless, Mexican immigration may increase in the next five to 10 years for demographic reasons having nothing to do with NAFTA.


For the U.S., NAFTA reforms will enhance an already important export market. Exports to Mexico have expanded rapidly since 1986, reaching an annual rate of about $43,000,000,000 in 1992. Suppliers of capital goods and high-technology products should continue to reap large benefits as prime suppliers of the burgeoning Mexican market.

For Mexico, NAFTA reinforces the extensive market-oriented policy reforms implemented since 1985. These have promoted real annual growth of three-four percent in recent years and a falling rate of inflation, now approaching single digits. The pact should reinforce the fast pace of change in the Mexican economy by locking in the Salinas reforms and buying insurance against future U.S. protectionism. It also should extend the reform process to sectors such as autos, textiles and apparel, finance, telecommunications, and land transportation. The prospect of NAFTA implementation already has generated strong expectational effects, with capital inflows to Mexico estimated at approximately $18,000,000,000 in 1992, of which about $5,000,000,000 was foreign direct investment.

For Canada, NAFTA reinforces, and in some cases strengthens, its foreign trade agreement preferences in the U.S. market. Canada achieved many of its specific objectives in the negotiations, such as clarifying the method used to calculate the regional content for autos. In addition, the pact will expand export opportunities for Canadian firms in Mexico in several key sectors, such as financial services, automobiles, and government procurement.

NAFTA complements ongoing efforts to conclude the Uruguay Round of multilateral trade negotiations. In many areas, it incorporates provisions already developed in the Uruguay Round; in some cases, it improves upon the draft General Agreement on Tariffs and Trade (GATT) accords. A successful Uruguay Round will open a wide range of new trade opportunities. By promoting greater efficiency and productivity, NAFTA will enhance the competitiveness of North American firms and allow them to take better advantage of the opportunities created by GATT reforms.

Energy. NAFTA fails to break the Pemex monopoly on Mexico's energy sector. It does not ensure foreign investment in oil exploration, production, or refining; provide for risk-sharing contracts; or permit U.S. and Canadian firms to enter Mexico's retail gasoline market. Nevertheless, NAFTA does make modest progress in opening Mexico's energy market. Most notably, the agreement gradually opens Pemex and CFE (the State Electricity Commission) contracts to foreign participation; these are worth about $8,500,000,000 a year. NAFTA also increases U.S. and Canadian access to Mexican electricity, petrochemical, gas, and energy services.

The pact would permit the U.S. to impose an import fee on exports from Mexico if such a measure were introduced as a national security issue, though the U.S. is prohibited by the Canada-U.S. Free Trade Agreement from imposing a similar fee on Canadian exports. Despite this difference, past U.S. policy of treating exports from Canada and Mexico equally creates a precedent for any future action.

Automobiles. The US. and Canada succeeded in gaining access to Mexico's highly protected automotive market, the fastest-growing in the world. NAFTA will eliminate all of Mexico's automotive tariffs and most of its non-tariff barriers over a transition period lasting five to 10 years. The agreement also embraces a restrictive rule of origin for autos - the ultimate figure will be 62.5%, compared with the current 50%.

U.S.-Mexico two-way trade in automotive goods might triple under NAFTA auspices, growing from $8,300,000,000 in 1990 to $20-25,000,000,000 by 1995. As a consequence, an integrated auto market will exist in North America within 10 years. North America could become the world's low-cost producer of autos and trucks and a major net exporter of these products.

Textiles and apparel. For the first time, the U.S. and Canada have opened their heavily protected textile and apparel sectors to significant trade competition with a large developing country. This is notable for NAFTA's speedy elimination of virtually all quotas on North American trade in textiles and apparel and its fast phase-out of tariffs. However, the benefits of liberalization will be limited by ultra-strict rule of origin that determines which textiles and apparel will be eligible for tariff and quota elimination. The NAFTA rule of origin is likely to divert textile and apparel trade from other suppliers.

Agriculture. Barriers on bilateral U.S.-Mexico farm trade will be eliminated within 15 years - a notable achievement compared with the limited liberalization envisaged in the GATT negotiations. For U.S.-Mexico trade, NAFTA largely incorporates a grand bargain on agriculture - linking Mexican liberalization of field crops to U.S. horticultural reforms. Tariffs will be eliminated immediately on $3,100,000,000 of U.S.-Mexico agricultural trade, though U.S.-Canada farm trade will continue to face important constraints.

Financial services. In time, NAFTA dramatically will improve investment access for U.S. and Canadian financial firms doing business in the Mexican market. The right to establish a business presence in Mexico is phased at a measured pace, with interim caps placed on the market share that can be controlled by foreign financial firms. Nonetheless, by Jan. 1, 2000, all Mexican restrictions on entry into the financial services market and individual firm size will be eliminated.

Transportation. Within a few years, the U.S. and Mexico will be connected by a common network of trucking, rail, and other transportation services. NAFTA permits American, Mexican, and Canadian trucking companies to carry international cargo to and from the contiguous US. and Mexican states by the end of 1995 and to have cross-border access to all of the U.S. and Mexico by the end of 1999. In addition, it allows American and Canadian investment in Mexico's bus and trucking firms and harmonizes many of the technical and safety standards for truck and rail operations.

Telecommunications. NAFTA makes rapid progress in gaining access for North American businesses to Mexico's telecommunications market for enhanced or value-added services, and should accelerate both cross-border trade and investment in telecommunications goods and enhanced services. Mexico immediately will eliminate the majority of tariffs and nontariff barriers to its telecommunications equipment market - estimated to have exceeded $1,000,000,000 in 1992.

Investment. The pact commits all three countries to provide national treatment to investors from NAFTA partners and contains a most-favored-nation obligation ensuring that NAFTA investors are treated as well as any other foreign investor. In addition, private investors may seek binding arbitral rulings, in an international forum, directly against the host government. In parallel negotiations, the U.S. and Mexico agreed to a tax treaty that reduces the high statutory withholding rates charged on interest, dividends, and royalties flowing in both directions.

Intellectual property rights. NAFTA stands as a model for resolving outstanding disputes over intellectual property and for locking in reforms Mexico has enacted already. The accomplishments relating to intellectual property are so striking that it quickly became the preferred benchmark for evaluating the accomplishments of GATT and other trade agreements. The two major shortcomings are the cultural exemption maintained by Canada and the exclusion from patentability for biotechnology inventions in Mexico.

Dispute settlement. In return for significant reform of its judicial and administrative practices in the application of its trade laws, Mexico gains full rights under the innovative dispute mechanism for reviewing anti-dumping and countervailing duty cases. In addition, NAFTA fine tunes the U.S.-Canada FTA by adopting compliance provisions to ensure that the panel procedures are not impeded and by strengthening the extraordinary-challenge process.

Border reforms

The NAFTA Fund. To finance the environmental cleanup of the U.S.-Mexican border area and improve transportation infrastructure at the border, it is recommended that those two nations create a NAFTA Fund of $3,000,000,000, to be administered by a joint U.S.-Mexican Commission. The NAFTA Fund would be financed equally by the two countries from earmarked tariff revenues in annual installments of $300,000,000 from each, starting in 1994.

Pres. Clinton has called for three supplementary agreements as part of NAFTA: an improved environmental package, a stronger accord on labor, and beefed-up safeguards.

Environment. While NAFTA attempts to ensure that existing standards are maintained, it does not contain provisions to upgrade the enforcement of existing standards or to adopt tougher ones, nor does it provide a mechanism to prevent countries from relaxing such measures to attract investment. The U.S.-Mexico Border Plan, under which the two nations will cooperate in addresing the serious pollution and other environmental conditions along their 2,000-mile border, is an important first step, but fails to commit the parties to specific projects and lacks a long-term funding strategy.

Clinton has said he will negotiate a supplementary agreement to NAFTA and create a trilateral Environmental Protection Commission headed by Vice Pres. Gore. It is recommended that the new commission emphasize the joint design of product and process standards. Toward this end, it should sponsor broad assessments of environmental conditions in each country and publish the results; perform a detailed and open evaluation of the means by which citizens and public interest groups can use legal and administrative processes to compel state and Federal governments to enforce legally established standards; establish a procedure to encourage the upward harmonization of ecological standards and enforcement, especially in the area of process standards; and seek wider implementation of the "polluter pays" principle.

In addition, NAFTA members should be allowed to reinforce environmental provisions with trade penalties in carefully controlled circumstances. If a NAFTA panel finds that the ecological criteria or enforcement rigor of a member country distorts intraregional trade flows, the other nations could impose "green fees" on all regional exports from the offending country (not to exceed a stipulated maximum). In the case of U.S.-Mexico trade, such fees would not be held by the implementing country, but, rather, would be paid into the NAFTA Fund.

Labor adjustment. In the U.S., opposition to NAFTA has focused on potential job losses and downward pressure on American wages. Several explicit NAFTA provisions will smooth the transition for U.S. workers, including 15-year transition periods for the most sensitive sectors and improved safeguard mechanisms to protect sensitive industries against a flood of imports. In addition, the US. and Mexico have signed a series of bilateral agreements to promote closer cooperation and joint action on a variety of labor issues.

The most important measure put forth by the Bush Administration to address labor concerns was a worker adjustment program - Advancing Skills through Education and Training. It would have spent $10,000,000,000 in fresh funding over five years on training and adjustment assistance for displaced workers, of which $335,000,000 annually would have been earmarked (if needed) for those displaced by NAFTA. Clinton has promised to take a bigger and better approach to labor adjustment, starting with a supplemental agreement to reinforce standards and safety. Specific objectives for the pact have not yet been spelled out.

Supplemental negotiations should seek to establish commitments to the aggressive enforcement of national labor laws and regulations. Creation of a trinational commission to monitor the labor markets is recommended. The commission would issue biennial reports on labor market conditions, including immigration, in each nation (unions and industry associations should be able to file reports on the labor practices in any member country), and would focus public attention on inadequate enforcement and labor standards that do not meet international norms. The commission also could be used to enforce labor standards by exposing offenders and, ultimately, authorizing trade counter-measures if governments do not succeed in halting the abuses. It should not have the power to levy fines or award damages against particular firms or industries. Such remedies should remain the responsibility of national agencies and courts.

Safeguards. The NAFTA text does not represent a "dash for free trade" accompanied by liberal safeguards. Instead, the negotiations followed a different strategy. By designing long transition periods and special safeguard mechanisms, the negotiators tried to address the adjustment consequences of free trade within North America. During the transition period, a tariff "snapback" to the pre-NAFTA level is allowed for up to three years for many goods, and up to four years for the most sensitive ones, in cases where imports from a NAFTA partner are a substantial cause of, or threaten, serious injury. Two special safeguards are established: for sensitive agricultural products, tariff rate quotas are used; for textile and apparel products, a different causation test is applied ("serious damage").

In addition, the global safeguard allows for the imposition of tariffs or quotas on imports from NAFTA partners as part of a multilateral safeguard action brought by any one of them. Action can be taken against a partner only if it is among the top five suppliers of the good subject to the proceeding or its imports "contribute importantly to the serious injury."

The Clinton supplementary agreement on safeguards seems designed to address cases in which trade injury is severe or the snapback provisions for bilateral action are inadequate to stem the import surge from NAFTA partners.
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Author:Hufbauer, Gary Clyde; Schott, Jeffrey J.
Publication:USA Today (Magazine)
Date:Sep 1, 1993
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