Mexico: Trade and the Environment

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History and Background

What is NAFTA?

The North American Free Trade Agreement (NAFTA) was put into practice on January 1, 1994 and eliminated most barriers to trade between the U.S., Canada and Mexico(Topulos 2007). Some barriers were removed right away while others were eliminated over longer periods of time, ranging from five to fifteen years(USDA 2008). The agreement addresses energy, textiles and apparel, agricultural products, transportation, investment, and intellectual property, among other things(TCC 2008). Two related agreements were created after NAFTA to address environmental and labor issues.

Negotiations before the Treaty

The agreement itself was signed on December 17, 1992, by Mexican President Salinas de Gortari, U.S. President George Bush and Canadian Prime Minister Brian Mulroney(Cameron 2000). Incoming President Bill Clinton asserted the need for side agreements to go along with NAFTA, and a number of talks and meetings were held in Washington, Mexico City and Ottawa to negotiate the terms of the two side agreements. The side agreements were signed by all three countries on September 14, 1993 and NAFTA was passed by the United States Senate and Congress on November 20, 1993(Cameron 2000).

The North American Agreement on Environmental Cooperation (NAAEC)

The North American Agreement on Environmental Cooperation (NAAEC) calls for environmental impact analyses by each nation that is a member of NAFTA. The agreement encourages the respective states to consider the interconnectedness of their environments, to promote sustainable development, enforce and comply with environmental regulations, and use pollution prevention practices(SICE 2007).

The North American Agreement on Labor Cooperation (NAALC)

The North American Agreement on Labor Cooperation was established to foster the creation of new jobs, improvements in wages and living conditions, and the protection of the rights of workers(SICE 2007). More secure markets were intended to result in a rise in productivity of firms and the quality of goods. The agreement calls for each country to develop their own laws and regulations concerning labor standards, while also establishing cooperative standards(SICE 2007). A secretariat performs publicly accessible studies of labor conditions in each country in order to promote transparency(SICE 2007).

Controversial Legislation

Chapter 11

Chapter 11 of NAFTA concerns issues of investment, and the conflict between economic life standards of parties to the agreement and trade or business standards. Disagreement over chapter 11 concerns whether or not NAFTA should follow a system of neutral laws, or one that helps developing countries(Afilalo 2004). Under the chapter, the governments of the U.S., Canada, and Mexico can be liable for the losses of companies or individuals. Chapter 11 allows international panels to examine the domestic policies of those governments, which is also a disputed issue(Afilalo 2004).

Chapter 19

Chapter 19 of NAFTA concerns antidumping and countervailing measures, “Review and Dispute Settlement in Antidumping and Countervailing Matters.” Parties to the agreement can use their own antidumping and countervailing laws with goods produced in that country(Nafta Secretariat 2003). There is controversy over judicial review of the law(Magnus 2007). Issues pertaining to Chapter 19 can be reviewed by a panel made up of representatives from the two concerned parties, instead of being reviewed by an Article III court from the Court of International Trade in the U.S., and similar courts in Canada and Mexico(Magnus 2007). Decisions made by the panels are final(Nafta Secretariat 2004).

Chapter 20

Chapter 20 concerns the settlement of disputes about NAFTA policies and their implementation. First, there is discussion between the two concerned parties, then a meeting between the trade ministers of the two parties, then a meeting of a five member panel. There are also scientific and review boards to gather and analyze relevant information(Nafta Secretariat 2004).

Economic Impacts

Overview

Since the inception of NAFTA in 1994, the volume of trade between the three countries has more than tripled going up from $297 billion to $930 billion (Office of the United States Trade Representative). NAFTA has led to the elimination of trade barriers between the three members, thus facilitating the free exchange of goods. Because of the trade liberalization and the increased competition, firms from the three countries have been stimulated to become more efficient in order to maintain their competitive edge (U.S. Department of Commerce, International Trade Administration). Currently all the countries are each other’s top three importers or exporters. However, many analysts point out that the trade between the members has been growing even before the agreement and would have still grown at a significant pace without it (Congressional Budget Office). Although difficult to create, a precise assessment of the impact of NAFTA is important because this would determine the future development of the agreement. In the light of the upcoming elections in the U.S., politicians and businesspeople on both sides of the country are wondering what will the new government politics toward the agreement be and what implications will stem from it.

Impacts in the United States

Positive Effects

One of the strongest proponents of NAFTA and most vocal promoter of the benefits it has brought is the Office of the United States Trade Representative (USTR). According to its statistics US manufacturing output has increased with 58% over the period 1996-2003, which is 11 percentage points increase compared to the rate of growth for the previous seven-year period (Office of the United States Trade Representative).

In the area of agriculture, the U.S. has benefited tremendously from the freer trade with Canada and Mexico. The two countries are the top two largest markets for US agricultural products, representing together 30% of the exports. While the U.S. food and farm exports to the world have grown with about 65% over a 15 year-period, those to the two other NAFTA members have increased 156% (United States Department of Agriculture). The trade in the area of agriculture has always been strong between the U.S. and Canada. The U.S.-Canada Free Trade Agreement (CFTA), later incorporated in NAFTA has additionally boosted that trend (find graphs). In terms of its agriculture-trade relationship with Mexico, in the years prior to the agreement, U.S. exports to its southern neighbor were in a downslide (find graphs). However, after the introduction of NAFTA the trend was reversed and in 2007 72% of Mexico’s agricultural imports came from the USA.

In terms of employment levels in the U.S., USTR states that the rates in the country have risen with 24% between 1993 and 2007 and unemployment has decreased with 2 percentage points over the same period. Despite the fear that after the introduction of NAFTA cheaper competition from Mexico would trigger a race to the bottom for wages in the U.S., this has not happened. According to official statistics real hourly wages have gone up with over 19% between 1993 and 2007 (Office of the United States Trade Representative).

The trade liberalization has increased competition and particularly in the heavy manufacturing sector many firms have been forced to become more cost-efficient. Often time, this has resulted in outsourcing to developing countries in Asia. The loss of jobs in the heavy manufacturing sector in the US has inflicted the criticism of many who blame NAFTA for the process. In defense of the agreement, many analysts say that certain jobs in manufacturing would have been outsourced to Asia anyway because of competitive pressures triggered by globalization. In addition, according to Daniel Griswold from the Cato Institute, there has been a switch to more light manufacturing and high-end service-oriented jobs, which usually are paid higher wages (Cato Institute). For many economists this is a natural trend that cannot be blamed on NAFTA.

Environmental Impacts

The introduction of NAFTA carries a continuous impact the environment in Mexico; it is difficult to say definitively whether this is for better or for worse as there is a balance between the inadvertent effects and the institutions introduced as a part of the agreement.

Positive Impact

NAFTA introduced legislation meant to integrate environmental policies and enforcement in North America. This is particularly significant for Mexico, which has very progressive environmental laws on the books but lacks the means to enforce them effectively.

NAFTA also created cooperative improvement projects across the Mexican-American border. These projects were created with the goal of equalizing the distribution of resources across the border as well as assisting the Maquiladoras with environmental concerns. These projects also focus on trans-national provision of technical assistance that will help with sewage treatment and sanitation of drinking water among other things.

NAFTA has also had positive effects on environmental spending in Mexico. Since 1994 the Mexican government spends more on environmental policy and enforcement, which can arguably be attributed to the increase in trade that the agreement encouraged.

Since 1994 Mexico has seen environmental improvements in the industrial sector. Waste produced by American owned Maquiladoras, for instance, is now shipped to the US for treatment in greater quantities. Also, the Mexican government is far more likely to respond to environmental emergencies now than it was prior to NAFTA. There have also been improvements in emissions standards, however as the vast majority of air pollution in Mexico stems from automobiles, this effect is marginal in the grand scheme of things.

Negative Impact

One of the major weaknesses of NAFTA’s environmental policies is that the organizations in charge of enforcing them are institutionally weak. The lack the means to actually ensure adherence to the policies they are tasked with upholding. This creates obvious problems, as there is legislation on the books without an appropriate means of enforcement.

There is also debate as to whether or not the legislation provides enough protection to counter balance the increased stress of higher levels of trade. As production and transport increases, more waste will be produced. It is not entirely clear whether the new legislation is enough to deal with the increase in pollution.

Abuse of the nature of the free trade agreement is also an issue. Because firms have the right to challenge environmental policies if they can be construed as barriers to trade as defined by the legalese of NAFTA, it has in some ways become easier to dodge environmental legislation.

There are also certain specific examples of negative effects associated with NAFTA. For instance, since the agreement entered into effect, the amount of American corn sold in Mexico has increased. While this is not a problem in and of itself, the prevalence of gene-modified corn entering Mexico has caused problems for Mexican corn farmers. The modified corn tends to intersperse with regular corn making it very hard to separate the two. When modified corn breeds with natural corn it may have unforeseen effects, but more importantly it tends to drive out native species of corn, creating problems with bio-diversity as the modified corn breeds and pushed out the native species.

Opposing Views

It is hard to determine whether NAFTA is a success or a failure because of the great number of parties involved. What is thought to be an improvement for one party may be degradation for another party. In this section we present some of the opposing views that exist.

Mexican Farmers

On January 1st 2008 the import tariffs on corn were eliminated as part of the North American free trade agreement. In practice little has changed because the tariffs on corn have gradually been dropping since 1994, but this elimination deepens the problems that the small-scale Mexican farmers have to deal with. Mexican farmers cannot compete with the huge corn subsidies that the U.S. and Canada receive. The American corn farmers receive more than $10 billion in agricultural subsidies which allows them to sell their grains at a price lower than the production cost (Becker 2003). At the same time the “entire Mexican agricultural budget is only one-tenth the size of the subsidies given to American corn farmers alone.” This results in undermining Mexican farmers because the cheap American corn is flooding the Mexican markets. It is estimated that the price of corn has fallen more than 70 percent since the signing of the free trade agreement and this has reduced the income of more than 15 million Mexicans who earn a good living by producing corn. Also according to the Institute for Policy Studies (IPS), 1.3 million farm jobs have been lost since 1993. The suggestion of the experts from the World Bank is to reduce the agricultural subsidies and tariffs of wealthy nations so that the developing nations could compete (Becker 2003).

Corporations

The biggest winners from the North American free trade agreement seem to be the corporations. First of all under NAFTA’s Chapter 11 the corporations have the right to sue governments if they feel that the profit-making potential of their ventures has been threatened by governmental decisions. One of the most well known examples that resulted from this privilege is the case of the U.S. Ethyl Corporation against government of Canada in 1997. Ethyl Corporation sued the government for $250 million because “the Canadian parliament banned the import and interprovincial transport of and Ethyl product – the gasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT) – which Canada considers to be a dangerous toxin.” (Sforza 1997). The argument that the corporation presented was that the ban would reduce “the value of Ethyl’s MMT manufacturing plant, hurt its future sales and harm its corporate reputation.” (Sforza 1997). Eventually, the Canadian government agreed to lift its prohibition against importing MMT, paid the Ethyl Corporation $10 million and issued a public statement that the formula posed no risk.

Another benefit for the corporation is the flexibility to relocate their production to Mexico where the living standards are lower and the environmental requirements are not so strict. This weakens the position of the labor unions that are now afraid of raising their voice. (Cheney 2001).

Former trade representatives

In 2004 the Council on Foreign Relations held a panel discussion about the accomplishments and failures of NAFTA. The guest speakers were Carla Hills who was a former U.S. trade representative, Roy MacLaren, former Canadian trade minister and Jaime Serra Puche, former Mexican trade minister. The three of them presented their points of view on how NAFTA had affected each country and what direction the treaty should take.

Carla Hills based her speech on economic data that documented that NAFTA has served very well the national interests of all three of the participants. According to her a further step in the integration has to include persuading the US citizens that economic interdependence is one of the best tools “generate economic growth, alleviate poverty, and encourage stability”, although the trade does not make every citizen a winner. (Bhagwati 2004). She rejects the proposal of the Mexican president to have a common market which would eventually lead to common external tariff in which labor can move freely. Instead, what should be done is to have “a serious and intense trilateral dialogue on a wide range of issues that will create a context within which they can try to develop the means that will both deal with key challenges and take account of their divergent interests.” (Bhagwati 2004).

Roy Maclaren was more skeptical about the benefits that came along with the signing of the treaty. He made a point that the same benefits might have flowed from the unparallel growth and economic dynamic that was enjoyed by the US during the 1990s. According to him Canada is not ready for further integration because the people are afraid that the country may lose its sovereignty. (Bhagwati 2004).

While Maclaren was dubious about the benefits from NAFTA, the former Mexican trade minister Jaime Puche presented data that clearly showed the positive outcomes from the treaty. According to a study done by the World Bank Mexico’s global exports would have been about 25 percent lower and the foreign direct investment would have been 40 percent less without NAFTA. An interesting observation that he makes is that Mexico has a trade surplus with countries with which the country has free trade agreements and a trade deficit with those with which it does not have free trade agreements. Pulche also touches on the topic of agriculture. He notes that people concentrate mainly on the impacts of NAFTA only on corn, but there are other agricultural products that Mexico exports to the US. According to him the agricultural exports has gone up by 100 percent since the treaty was implemented. Mexico is the number one supplier to the U.S. market in products such as sunflower seeds, chili, lemon pulp, jojoba, tamarind, etc. As for production of corn he says that it has gone up from 18 million tons to 20 million tons during NAFTA years and that rise would not have been possible, if Mexico had had troubles exporting their corn. (Bhagwati 2004).

US Politicians

As the presidential elections are approaching, the question about NAFTA is largely discussed during the presidential debates. It is important to examine the view points of different presidential candidates because they are going to determine the future of NAFTA. The current position of the White House defends NAFTA and George Bush is even suggesting to expand NAFTA by including the countries from Mercosur. He is warning that a withdrawing from the pact “would hurt U.S. farmers and businesses, which export around $380 billion worth of goods to Canada and Mexico each year.” (Palmer 2008). At the same time Hillary Clinton and Barack Obama clearly state that they would opt out of the North American Trade Agreement unless the labor and environmental policies are renegotiated with Mexico and Canada. Largely discussed is the position of Clinton who said that she always opposed the free trade agreement which was signed under her husband’s administration. However, not only she did not have the role of a mere bystander, but also she was a strong supporter of NAFTA. Clinton spoke at meetings to promote NAFTA and believed that “NAFTA was giving Americans a chance to compete.” (McGann 2008). On the other hand, it is not clear whether Obama is not bluffing as well. Early in March Associated Press obtained a memo from a Canadian diplomat, Joseph DeMora, saying that Obama’s advisor Austan Goolsbee told Canadian Consulate officials that Obama’s intentions to renegotiate NAFTA are just about “political positioning rather than a clear articulation of policy plans.” (CNN 2008). As of now it seems that the candidate amongst the top three who has a clear position on NAFTA is John McCain. McCain’s supports NAFTA because he fears that an attempt to restructure the free trade agreement would be seen by the Canadians “as a betrayal of the long years of negotiation and agreement” and the US may lose the military support that is offered by Canada in the war in Afghanistan. (Reston 2008).

References

Afilalo, Ari .Towards a Common Law of International Investment: How NAFTA Chapter 11 Panels Should Solve Their Legitimacy Crisis. Georgetown International Environmental Law Review. Washington: Fall 2004. Volume 17, Issue 1, pages 51-96 (46 pp.)

Cameron, Maxwell A. The Making of NAFTA. Ithaca: Cornell University Press, 2000. Page xiii.

Magnus, John R. Lumber and the NAFTA Chapter 19 Mess. 26 February 2007. 25 April 2008. <http://www.worldtradelaw.net/articles/magnuschapter19.pdf>.

Nafta Secretariat. North American Free Trade Agreement. 31 March 2003. 25 April 2008. <http://www.nafta-sec-alena.org/DefaultSite/index_e.aspx?DetailID=173#A1911>.

Nafta Secretariat. Overview of the Dispute Settlement Provisions of the North American Free Trade Agreement (NAFTA). 10 May 2004. 25 April 2008. <http://www.nafta-sec-alena.org/DefaultSite/index_e.aspx?DetailID=8>.

SICE: Foreign Trade Information System. North American Agreement on Environmental Cooperation between the Government of Canada, the Government of the United Mexican States, and the Government of the United States of America. 2007. 25 April 2008. <http://www.sice.oas.org/Trade/NAFTA/Env-9141.asp#ONE>.

SICE: Foreign Trade Information System. North American Agreement on Labor Cooperation between the Government of Canada, the Government of the United Mexican States, and the Government of the United States of America. 2007. 25 April 2008. <http://www.sice.oas.org/Trade/NAFTA/Labor-c1.asp#P.I>.

Trade Compliance Center. North American Free Trade Agreement. April 2008. 25 April 2008. <http://tcc.export.gov/News/index.asp>.

Topulos, Katherine. NAFTA. November 2007. 25 April 2008. <http://www.law.duke.edu/lib/researchguides/nafta.html>.

United States Department of Agriculture. North American Free Trade Agreement (NAFTA). April 2008. 25 April 2008. <http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp.