THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) AT FIVE YEARS: WHAT IT MEANS FOR THE U.S. AND MEXICO
The North American Free Trade Agreement:
Five Years Linking U.S. & Mexican Markets
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 This Agreement broadened and superseded the 1989 free trade agreement between the United States and Canada.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 ] |
