|
THE NORTH AMERICAN FREE TRADE
AGREEMENT (NAFTA) AT FIVE YEARS: WHAT IT
MEANS FOR THE U.S. AND MEXICO
INTRODUCTION
The NAFTA Forum is a series of papers
and conferences, organized by the U.S.-Mexico
Chamber of Commerce, that aims to
clarify key aspects of U.S.-Mexico
economic relations framed by the North
American Free Trade Agreement (NAFTA).
This paper provides an overview of NAFTA
after five years, and examines what
NAFTA has accomplished and where actions
by the Mexican and U.S. governments
could improve NAFTA's implementation.
THE NORTH
AMERICAN FREE TRADE AGREEMENT
NAFTA is a comprehensive
rules-based agreement among the United
States, Canada, and Mexico that took
effect January 1, 1994. It was signed by
the governments of the United States,
Mexico, and Canada in December 1992 and
ratified by the U.S. Congress in
November 1993. The Agreement eliminated
many tariffs immediately while other
tariffs will fall to zero over a 5 to 15
year period. This Agreement broadened
and superseded the 1989 free trade
agreement between the United States and
Canada.
But NAFTA goes well beyond tariff
reduction.
It opened previously protected sectors
in agriculture, energy, textiles, and
automotive trade.
It opened up the U.S.-Mexico border to
trade in services with specific rules in
finance, transportation, and
telecommunications.
It set rules on government procurement
and intellectual property rights.
It set specific safeguards, including
how to deal with subsidies and unfair
practices; it set up procedures for
dealing with private commercial or
agricultural disputes; and it set up a
process for dealing with NAFTA
implementation concerns.
MEXICO continues to make far more
significant changes to its economy
because of NAFTA than the United States.
Mexican tariffs on U.S. goods averaged
10 percent in 1993 while U.S. tariffs on
Mexican products averaged 4 percent.
Mexico is moving its rules on investment
closer to those in the United States.
NAFTA has continued to open the U.S.-Mexico
border to increased commerce. Two way
trade between the United States and
Mexico has risen 113 percent from the
year before NAFTA was implemented (1993)
to its fifth year (1998).
The NAFTA was negotiated and approved
with bipartisan support in the U.S.
During his campaign in 1980, President
Reagan proposed a "North American Accord."
In the mid-1980s, President de la Madrid
began a dramatic opening of the Mexican
economy leading to Mexico's accession to
the General Agreement on Tariffs and
Trade (GATT) in 1987. Negotiations to
lock in and deepen this trade and
investment liberalization took place
under President Bush with the oversight
of a Democratic-led Congress. This
agreement was passed with the strong
support of President Clinton and the
Republican leadership in the Congress.
NAFTA has broad support in Mexico. NAFTA
is publicly supported by the ruling
party in Mexico (PRI) and has the
support of most members of the center-right
political party (PAN) which now holds 6
of the 31 governorships.
The U.S. economy is about 20 times the
size of the Mexican economy. In 1998 the
U.S. GDP was $8,511 billion compared
with the Mexican GDP of about $415
billion. Put another way, the Mexican
economy is about the size of the economy
of the state of Illinois’ economy.
U.S. employment has risen, and the level
of unemployment has decreased during the
first five years of NAFTA. The U.S.
government estimates that over this five
year period, 18 million new jobs were
created in the United States and 7
million jobs were lost due to ongoing
changes in the dynamic U.S. economy. The
11.1 million net new jobs created over
NAFTA’s first five years has led to a
decrease in the number of unemployed
from 8.5 million to 6.0 million.
This positive labor picture in the
United States is due only in a marginal
way to NAFTA. The continued expansion of
the U.S. economy has been the driving
force in this excellent employment news.
While NAFTA has had little impact on the
level of employment in the United States
over its first five years, the U.S.
government estimates that the
approximately 350,000 jobs created in
the U.S. due to exports to Mexico under
NAFTA pay wages 13 to 16 percent higher
than the somewhat smaller number of jobs
that may have been lost due to imports
from Mexico. Therefore, the shifting of
the U.S. and Mexican trade balance have
had little impact on employment in the
United States.
MEXICO’S
ECONOMY
In early 1995, Mexico was forced to
dramatically devalue its peso by 50
percent, making its exports far more
competitive, and reducing its imports
both because they were relatively more
expensive and because Mexico experienced
a severe recession in 1995. From 1995 to
1998, the peso has appreciated in real
terms against the dollar by about 25
percent.
The Mexican overall trade balance went
from a $18.5 billion deficit in 1994 to
a $7.1 billion surplus in 1995 after the
peso devaluation in December 1994. The
impact of this change on the U.S.
exports to Mexico was significantly less
than the impact on Asian or European
exports to Mexico. This was due in part
to NAFTA commitments made by Mexico and
due in part to co-production agreements
between Mexico and the United States.
U.S. exports to Mexico slipped only $4
billion in 1995 while Mexican exports to
the U.S. rose about $12 billion that
same year. Mexico’s trade surplus with
the U.S. has stayed relatively steady
since 1995 at about $10 billion per year.
The fall in the Mexican economy was
muted and its recovery much faster
because of NAFTA. The number of workers
in Mexico’s formal economy (permanent
workers affiliated with the Mexican
Social Security Institute) fell to 9.9
million at the peak of the 1995
recession and has risen to 12.2 million
at the end of 1998. NAFTA provides
investors with an additional level of
confidence and its existence undoubtedly
helped the political case for the major
rescue package put together at the
outset of the peso crisis.
Mexico’s economy is recovering well from
this recession, growing 4.5 percent in
1996, 7 percent in 1997, and 4.6 percent
in 1998. Due to this growth, U.S.
exports to Mexico have recovered well
and are now 55 percent higher than
before the peso crisis. However, even
with this process of recovery in Mexico,
some of Mexico’s workers are still
feeling the effects of the devaluation
and the resultant recession.
The economic policies of the Zedillo
Administration in Mexico are leading to
dynamic export-led growth in Mexico with
a stable, consumer driven economy which
will continue to buy greater and greater
quantities of sophisticated products
made in capital-intensive and high-wage
U.S. industries.
Mexico remains exceptionally important
to the U.S. Mexico’s population of about
96 million is about one-third the size
of the U.S. As the second-largest market
for U.S. goods and services (surpassing
Japan in 1997), a growing, prosperous
Mexico is in the interest of every
citizen in the U.S. This trade lowers
poverty in Mexico with a resulting
reduction in illegal immigration. A
vibrant Mexico will be better able to
deal with corruption and illegal drug
activities as well as provide resources
for a healthier environment.
MAINTAINING
CONFIDENCE IN NAFTA
Trade frictions under a large complex
agreement such as NAFTA are inevitable
but both the United States and Mexico
need to act quickly on the very few
which do exist, to find solutions so
that confidence in the overall agreement
can be maintained. Indeed, a number of
trade disputes have already been solved,
including, avocados, pork, wheat, corn
brooms and petroleum.
Trucking Into Border States. The United
States should fulfill the transportation
agreement negotiated under NAFTA but not
yet implemented. The NAFTA agreement
calls for trucks from both the U.S. and
Mexico to be able to deliver goods
across the border, to border states in
Mexico and the U.S., starting in
December 1995. The U.S. government has
delayed the certification process for
Mexican trucks citing safety concerns.
All parties agree that it is important
that foreign trucks meet domestic safety
rules. It is important for the future of
NAFTA that this breach of the NAFTA
implementation schedule is fixed as soon
as possible so that it does not set a
precedent for partner countries to
ignore selected NAFTA rules under strong
political pressure.
Express Package Delivery. One of the key
principles of NAFTA is national
treatment. Countries must treat firms of
partner counties in the same way they
treat their own firms. One area where
Mexico has reneged on national treatment
is in small package express delivery.
While Mexico agreed to national
treatment of this service in NAFTA, it
has yet to implement the rules to make
this happen.
Sugar and Corn Sweeteners. Mexico has
liberalized the pricing and production
of sugar since 1995 and simultaneously
increased the protection to its sugar
industry. Tariffs on standard sugar were
increased in late 1995 from 65 percent
to 136 percent and on refined sugar from
73 percent to 127 percent. This has led
to a 60 percent increase in domestic
sugar prices in Mexico and a boom in
sugar production leading to a domestic
surplus of close to one million tons. As
in the U.S., high domestic sugar prices
have made it cost effective to use high
fructose corn sweeteners in Mexico, and
as a result U.S. exports to Mexico of
these sweeteners has increased.
Early in 1998 Mexico accused the U.S.
high fructose industry of dumping its
sweetener in Mexico and initiated anti-dumping
duties. The U.S. has begun a WTO
complaint on these duties. NAFTA permits
Mexican exports of sugar to the U.S.
duty free up to 25,000 tons for the
first seven years with high (currently
13.6 cents per pound) tariff beyond that
amount. While the NAFTA agreement gives
Mexico full access to the U.S. market
after seven years (2001), there was an
exchange of side letters limiting
Mexican duty free access to 250,000 tons
from 2001 until 2009. These were
exchanged to provide the votes in the
U.S. congress to pass the NAFTA. Mexico
claims that the side letters are not
valid because there are major
inconsistencies between the two letters,
and has begun formal Chapter 20
consultations with the U.S. Meanwhile,
the U.S. corn sweetener industry has
filed a formal complaint under U.S. law
alleging collusion between the Mexican
sugar industry and the Mexican soft
drink industry. Both governments should
seek equitable solutions to these
disputes.
ENVIRONMENT AND
LABOR
The 2,000 mile U.S.-Mexico border
separates two countries with
significantly different income levels.
The development of appropriate
infrastructure to deal with increased
commerce, continuing the process of
reducing environmental degradation, and
improving working conditions on both
sides of the border will be essential to
maintain confidence in NAFTA.
Considerable progress has been made over
the past five years to address three
decades of deteriorating environmental
conditions along the U.S.-Mexico border
as well as in the interior of Mexico.
Only in the last decade has Mexico had
environmental laws which were adequate,
and only since 1993 have these laws been
supported by appropriate implementing
regulations, standards, and
institutional infrastructure to make
them effective.
At the outset of his administration in
1994, President Zedillo reorganized
Mexico’s disparate environmental
agencies into a single, cabinet-level
secretariat (SEMARNAP) and released a
six-year plan to achieve sustainable use
of natural resources. This plan calls
for decentralization of environmental
authority from federal to state
agencies, increased social participation
in decision making and, most importantly,
a greater use of economic incentives.
In 1994 Mexico began a serious effort to
enforce its environmental laws,
particularly for new companies, thereby
diminishing any incentive for firms to
relocate to Mexico to avoid
environmental enforcement. NAFTA has
contributed to Mexico’s importing
environmentally friendly technology and
has provided Mexico with the necessary
resources to invest in environmental
protection. Mexico is now a major export
market for U.S. environmental technology.
The North American Agreement on
Environmental Cooperation (NAAEC) was
approved as a side agreement to NAFTA.
The Commission for Environmental
Cooperation (CEC) was established under
this agreement to address regional
environmental concerns, help prevent
potential trade and environmental
conflicts, and to promote the effective
enforcement of environmental laws.
The Border Environment Cooperation
Commission (BECC) and the North American
Development Bank (NADBank) were
established in 1993 under an agreement
between the U.S. and Mexico to help deal
with the extensive environmental
problems on the U.S.-Mexico border. They
have developed mechanisms for community
participation and have approved and
allocated loan funds for infrastructure
projects. In April 1997, the NADBank and
the U.S. Environmental Protection Agency
(EPA) established a $170 million Border
Environment Infrastructure Fund (BEIF)
to provide affordable financing packages
for poor border communities. In addition,
the Border XXI Program is an innovative
binational effort which brings together
the diverse U.S. and Mexican federal
entities responsible for the border
environment to work cooperatively toward
sustainable development through
protection of human health and the
environment and proper management of
natural resources in both countries.
A non-tariff barrier to trade and
investment with Mexico is the lack of an
up-to-date reliable source in English of
Mexican federal, state, and local
environmental laws and regulations. The
U.S.-Mexico Chamber of Commerce, under a
grant from the U.S. Department of
Commerce and with the cooperation of
SEMARNAP, is developing an affordable
internet-based system to remedy this
problem under a project called ACCESS-MEXICO.
The North American Agreement on Labor
Cooperation (NAALC) rests on sound labor
laws of the United States, Mexico, and
Canada. This pact was also approved as a
side agreement of NAFTA and permits
citizens of any NAFTA country to request
that their government examine how the
labor laws in a partner country are
being enforced. This agreement does not
rewrite any country's labor laws, but
puts public pressure on enforcement and,
in the case of lack of enforcement of
health and safety as well as child labor
laws, can lead to trade sanctions.
In a case which involved the right of
union registration at a Mexican
electronics plant, not only did the
Mexican government meet separately with
the workers and the plant managers, but
commissioned a study by independent
experts to examine the issue of union
registration in Mexico and prepare a
public report. In addition, the Mexican
government held a series of public
seminars in Mexico City, San Antonio,
and Monterrey attended by government
officials, academics, management, and
labor representatives to discuss the
issue of union registration and other
labor law issues.
Twenty submissions have been filed under
the NAALC. Thirteen have been filed with
the U.S. authorities, eleven against
Mexico and two against Canada. Five were
filed with the Mexican authorities
involving labor issues in the U.S. Two
submissions have been filed in Canada,
one against the U.S. and one against
Mexico.
MAQUILADORAS
The Maquiladora program has been
flourishing under NAFTA although it will
be modified by 2001. This program began
in 1965 and set up a special customs
regime in Mexico which permitted certain
corporations temporary duty-free imports
into Mexico for raw materials, equipment,
machinery, replacement parts, and other
items needed for the assembly or
manufacture of finished goods for
subsequent export.
The U.S. tariff schedule provision known
as "9802" (formerly known as 806/807)
greatly assisted the development of the
maquiladora industry, as this provision
permitted U.S. goods to be exported to
Mexico and other countries and face a
duty only on the value added when the
finished product is imported back into
the United States.
In 1998, the maquiladora industry
exports were $53.1 billion, comprising
45 percent of Mexico’s exports. By mid-1999
there were about 3,300 maquiladora
plants in Mexico with about 1.14 million
employees, roughly 40 percent of
Mexico’s manufacturing employment.
Employment in the maquiladora sector
grew 10.9 percent in 1998 and has
doubled since the beginning of NAFTA.
About one-third of these plants are
located in the interior of Mexico. Under
NAFTA, an increasing proportion of
maquiladora output can be sold in Mexico
(currently 80 percent of a firm's prior
year output) reaching 100 percent in
2001
Maquiladoras and Mexico’s national
industries are increasingly converging
in their operations that are leading to
one export-oriented Mexican industry. As
of November 1, 2000, Mexico will collect
duties on intermediate goods and
machinery used in products exported into
the NAFTA market that do not meet NAFTA
rules of origin. Mexico will continue to
waive the duties for products sold
outside the NAFTA market.
Audits and inspections from Mexico’s
Labor Ministry show that exporting
plants and maquiladoras have better
labor law compliance than non-exporting
companies. These inspections also
revealed that maquiladoras pay wages
that are 16 percent higher than wages in
non-exporting firms.
NAFTA AND THE
FREE TRADE AREA OF THE AMERICAS
The NAFTA contains a very simple clause
that states that if agreed to by the
United States, Mexico, and Canada, other
countries may accede to this agreement.
Chile began such negotiations in 1995
but withdrew in 1996 when the U.S.
president was unable to obtain "fast
track" negotiating authority. Chile
subsequently negotiated separate
bilateral arrangements with Mexico and
Canada, leaving U.S. firms at a relative
disadvantage.. Under fast track
negotiating authority, the Congress
delegates to the President the authority
to negotiate a trade agreement involving
tariff reductions, and agrees to either
vote for or against the agreement and
not to amend it. This authority is
important as countries fear they will be
forced to renegotiate with Congress in
the absence of fast track.
At the first Summit of the Americas in
December 1994, the 34 democratically
elected leaders in this Hemisphere
agreed to forge a Free Trade Area of the
Americas (FTAA) by 2005. The
negotiations for the FTAA were launched
at the second Summit of the Americas in
April 1998 in Santiago, Chile.
If the strong rules-based disciplines
contained in the NAFTA are to become the
norm in the hemisphere, it is imperative
that the Congress gives the President
fast track authority. The good news is
that Mexico and Canada are forging their
own bilateral or multilateral agreements
based on the NAFTA model. While this is
good for hemispheric trade discipline,
it is hurting U.S. firms who are finding
that Canadian and Mexican firms have a
tariff advantage in trade within this
hemisphere.
As this paper has described, NAFTA works
and therefore is an excellent model for
the FTAA.
TRADE FACILITATION VS. ENFORCEMENT ALONG
THE BORDER
There is a natural tension between the
goal of facilitating the movement of
goods, services, and people across the
U.S. Mexico border and the need to stop
the flow of illegal drugs and
undocumented immigration. The U.S.-Mexico
Chamber of Commerce believes there needs
to be a balance struck between these two
objectives to minimize the impact on
cross border trade.
Both technology and good business
practices can work to dramatically
reduce the flow of illegal drugs across
the border. Already, seven mobile search
x-ray systems are working along the
border. These systems can examine an
entire truck in 5 minutes for hidden
contraband. More of this technology is
on order by the U.S. government, and the
Mexican government completed the
purchase of five systems in June 1998.
Minimizing the flow of drugs in
legitimate business shipments can be
accomplished by increased security and
good business practices, starting with
manufacturing and extending to shipping
and distribution. The U.S.-Mexico
Chamber of Commerce has initiated the
Business Anti-Smuggling Interdiction
Coalition (BASIC), a business-led, U.S.
Customs-supported alliance created to
disseminate information on appropriate
security and good business practices.
The Chamber is working closely with the
Border Trade Alliance (BTA) on this
project.
Section 110 of the 1996 Illegal
Immigration Reform and Immigrant
Responsibility Act will be a disaster
for cross border trade. This law
requires the Immigration and
Naturalization Service (INS) to match
the record for every departing alien
with the record of that person entering
the United States. Scheduled
implementation in 1998 was postponed to
March 2001. INS was given this task with
no new resources. In 1997 there were
over 280 million legal crossings from
the United States into Mexico,
frequently with long lines. Section 110
will create long lines of pedestrians,
trucks, and automobiles, which will
impact U.S. citizens as well as non-U.S.
citizens and dramatically impede cross
border commerce. Implementation of this
provision along the U.S. northern border
with Canada will cause equally severe
problems. Bills have been introduced in
both the House and Senate to repeal
Section 110.
CONCLUSION
NAFTA has locked in fundamental economic
reforms in Mexico and, under President
Zedillo, these reforms are being widened
and deepened. With the increase in
commerce between the United States and
Mexico, which began in the late 1980s
and accelerated with NAFTA, the lives of
the citizens of the United States and
Mexico are being improved. The few trade
irritants that exist today can and
should be dealt with promptly by both
governments.
September 1999
The preceding paper is part of the
United State-Mexico Chamber of
Commerce's NAFTA Forum series, which
considers general trade issues and
sector-specific concerns between the two
nations. The information contained
herein is for informational and
educational purposes only.
CONTACT INFORMATION:
Albert C. Zapanta, President
John Harrington, Senior Economist and
author of NAFTA Forum series
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite 270
Washington, DC 20004-3021
Tel: 202-371-8680 Fax: 202-371-8686
[
Back to top ] |
