North American Free Trade Agreement (NAFTA)

CHAPTER: 1.1 INTRODUCTION

The North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada United States Free Trade Agreement between the U.S. and Canada. In terms of combined GDP of its members, as of 2010 the trade bloc is the largest in the world. Established: Percentage of World Population: G.D.P:22nd December 1995 6.57% $17271000Billion

Administrative centre: - Mexico City, Ottawa, Washington D.C The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than onethird of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all USMexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.

CHAPTER:1. 2 Environment
Securing U.S. congressional approval for NAFTA would have been impossible without addressing public concerns about NAFTAs environmental impact. The Clinton administration negotiated a side agreement On the environment with Canada and Mexico, the North American Agreement on Environmental Cooperation (NAAEC), which led to the creation of the Commission for Environmental Cooperation (CEC) in 1994. To alleviate concerns that NAFTA, the first regional trade agreement between a developing country and two developed countries, would have negative environmental impacts, the CEC was given a mandate to conduct ongoing ex post environmental assessment of NAFTA.[12] In response to this mandate, the CEC created a framework for conducting environmental analysis of NAFTA, one of the first ex post frameworks for the environmental assessment of trade liberalization. The framework was designed to produce a focused and systematic body of evidence with respect to the initial hypotheses about NAFTA and the environment, such as the concern that NAFTA would create a "race to the bottom" in environmental regulation among the three countries, or the hope that NAFTA would pressure governments to increase their environmental protection mechanisms. The CEC has held four symposia using this framework to evaluate the environmental impacts of NAFTA and has commissioned 47 papers on this subject. In keeping with the CECs overall strategy of transparency and public involvement, the CEC commissioned these papers from leading independent experts.[14] Overall, none of the initial hypotheses were confirmed. NAFTA did not inherently present a systemic threat to the North American environment, as was originally feared, apart from potentially theISDS provisions of Ch 11. NAFTA-related environmental threats instead occurred in specific areas where government environmental policy, infrastructure, or mechanisms, were unprepared for the increasing scale of production under trade liberalization. In some cases, environmental policy was neglected in the wake of trade liberalization; in other cases, NAFTA's measures for investment protection, such as Chapter 11, and measures against non-tariff trade barriers, threatened to discourage more vigorous environmental policy. The most serious overall increases in pollution due to NAFTA were found in the base metals sector, the Mexican

petroleum sector, and the transportation equipment sector in the United States and Mexico, but not in Canada

CHAPTER 1.3: Trade

The agreement opened the door for open trade, ending tariffs on various goods and services, and implementing equality between Canada, USA, and Mexico. NAFTA has allowed agricultural goods such as eggs, corn, and meats to be tariff-free. This allowed corporations to trade freely and import and export various goods on a North American scale.

Exports At $248.2 billion for Canada and $163.3 billion for Mexico, they were the top two purchasers of US exports in 2010. US goods exports to NAFTA in 2010 were $411.5 billion, US exports to NAFTA accounted for 32.2% of overall US exports in 2010. The top export categories (2-digit HS) in 2010 were machinery ($63.3 billion), vehicles (parts) ($56.7 billion), electrical machinery ($56.2 billion), mineral fuel and oil ($26.7 billion), and plastic ($22.6 billion). The top export categories (2-digit HS) in 2010 were machinery ($63.3 billion), vehicles (parts) ($56.7 billion), electrical machinery ($56.2 billion), mineral fuel and oil ($26.7 billion), and plastic ($22.6 billion). Imports At $276.4 billion for Canada and $229.7 billion for Mexico, they were the second and third largest suppliers of goods imports to the United States in 2010. US goods imports from NAFTA totaled $506.1 billion in 2010, up 25.6% ($103 billion), from 2009, up 184% from 1994, and up 235% from 1993. US imports from NAFTA accounted for 26.5% of overall U.S. imports in 2010. The five largest categories in 2010 were mineral fuel and oil (crude oil) ($116.2 billion), vehicles ($86.3 billion), electrical machinery ($61.8 billion), machinery ($51.2 billion), and precious stones (gold) ($13.9 billion). US imports of agricultural products from NAFTA countries totaled $29.8 billion in 2010. Leading categories include fresh vegetables ($4.6 billion); snack foods including chocolate ($4.0

billion); fresh fruit (excluding bananas) ($2.4 billion); live animals ($2.0 billion); and red meats, fresh/chilled/frozen ($2.0 billion). US imports of private commercial services excluding military and government were $35.5 billion in 2009 (latest data available), down 11.2% ($4.5 billion) from 2008 but up 100% since 1994.

Trade balances The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4% increase ($25 billion) over 2009. The US goods trade deficit with NAFTA accounted for 26.8% of the overall U.S. goods trade deficit in 2010. The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).

Investment The US foreign direct investment (FDI) in NAFTA Countries (stock) was $357.7 billion in 2009 (latest data available), up 8.8% from 2008. The US direct investment in NAFTA countries is in nonbank holding companies, and in the manufacturing, finance/insurance, and mining sectors. The foreign direct investment, of Canada and Mexico in the United States (stock) was $237.2 billion in 2009 (the latest data available), up 16.5% from 2008.

CHAPTER 1.4: Industry

Maquiladoras (Mexican factories that take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. These are plants that moved to this region from the United States, hence the debate over the loss of American jobs. Hufbauer's (2005) book shows that income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last five years while the share of exports from maquiladora-border states has decreased. This has allowed for the rapid growth of nonborder metropolitan areas, such as Toluca, Len and Puebla; all three larger in population than Tijuana, Ciudad Jurez, and Reynosa.

CHAPTER 1.5 Agriculture

From the earliest negotiation, agriculture was (and still remains) a controversial topic within NAFTA, as it has been with almost all free trade agreements that have been signed within the WTO framework. Agriculture is the only section that was not negotiated trilaterally; instead, three separate agreements were signed between each pair of parties. The CanadaU.S. agreement contains significant restrictions and tariff quotas on agricultural products (mainly sugar, dairy, and poultry products), whereas the MexicoU.S. pact allows for a wider liberalization within a framework of phase-out periods (it was the first NorthSouthFTA on agriculture to be signed). The overall effect of the MexicoU.S. agricultural agreement is a matter of dispute. Mexico did not invest in the infrastructure necessary for competition, such as efficient railroads and highways, creating more difficult living conditions for the country's poor. Still, the causes of rural poverty can be directly attributed to NAFTA; in fact, Mexico's agricultural exports increased 9.4 percent annually between 1994 and 2001, while imports increased by only 6.9 percent a year during the same period. One of the most affected agricultural sectors is the meat industry. Mexico has gone from a smallkey player in the pre-1994 U.S. export market to the 2nd largest importer of U.S. agricultural products in 2004, and NAFTA may be credited as a major catalyst for this change. The allowance of free trade removed the hurdles that impeded business between the two countries. As a result, Mexican farmers have provided a growing meat market for the U.S., leading to an increase in sales and profits for the U.S. meat industry. This coincides with a noticeable increase in Mexican per capita GDP that has created large changes in meat consumption patterns, implying that Mexicans can now afford to buy more meat and thus per capita meat consumption has grown. Production of corn in Mexico has increased since NAFTA's implementation. However, internal corn demand has increased beyond Mexico's sufficiency, and imports have become necessary, far beyond the quotas Mexico had originally negotiated. Zahniser & Coyle have also pointed out that corn prices in Mexico, adjusted for international prices, have drastically decreased, yet through a program of subsidies expanded by former president Vicente Fox; production has remained stable since 2000.

The logical result of a lower commodity price is that more use of it is made downstream. Unfortunately, many of the same rural people who would have been likely to produce highermargin value-added products in Mexico have instead emigrated. The rise in corn prices due to increased ethanol demand may improve the situation of corn farmers in Mexico. In a study published in the August 2008 issue of the American Journal of Agricultural Economics, NAFTA has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification. The study focused on the effects that gradual "phase-in" periods in regional trade agreements, including NAFTA, have on trade flows. Most of the increase in members agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements.

The final provisions of the North American Free Trade Agreement (NAFTA) were fully implemented on January 1, 2008. Launched on January 1, 1994, NAFTA is one of the most successful trade agreements in history and has contributed to significant increases in agricultural trade and investment between the United States, Canada and Mexico and has benefited farmers, ranchers and consumers throughout North America. With full implementation, the last remaining trade restriction on a handful of agricultural commodities such as U.S. exports to Mexico of corn, dry edible beans, nonfat dry milk and high fructose corn syrup and Mexican exports to the United States of sugar and certain horticultural products are now removed. The United States will continue to work with Mexico to build on the successes achieved to date. Since 2005, the United States has invested nearly $20 million in programs and technical exchanges to assist Mexico in addressing production, distribution and marketing-related challenges associated with the transition to free and open trade. The agricultural provisions of the U.S.-Canada Free Trade Agreement (CFTA), in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas (TRQ's), were removed before January 1, 1998.

Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5, 10, or 15 years.

Benefits to U.S. Agriculture In 2007, Canada and Mexico were, respectively, the first and second largest export markets for U.S. agricultural products. Exports to the two markets combined were greater than exports to the next six largest markets combined. From 1992-2007, the value of U.S. agricultural exports worldwide climbed 65 percent. Over that same period, U.S. farm and food exports to our two NAFTA partners grew by 156 percent. Trade with Mexico: It estimated that U.S. farm and food exports to Mexico exceeded $11.5 billion in 2007 -- the highest level ever under NAFTA. From 2001 to 2006, U.S. farm and food exports to Mexico climbed by $3.6 billion to $10.8 billion. U.S. exports of soybean meal, red meats, and poultry meat all set new records in 2006. In the years immediately prior to NAFTA, U.S. agricultural products lost market share in Mexico as competition for the Mexican market increased. NAFTA reversed this trend. The United States supplied more than 72 percent of Mexico's total agricultural imports in 2007, due in part to the price advantage and preferential access that U.S. products now enjoy. For example, Mexico's imports of U.S. red meat and poultry have grown rapidly, exceeding pre-NAFTA levels and reaching the highest level ever in 2006. NAFTA kept Mexican markets open to U.S. farm and food products in 1995 during the worst economic crisis in Mexico's modern history. In the wake of the peso devaluation and its aftermath, U.S. agricultural exports dropped by 23 percent that year, but have since surged back setting new annual records. NAFTA cushioned the downturn and helped speed the recovery because of preferential access for U.S. products. In fact, rather than raising import barriers in

response to its economic problems, Mexico adhered to NAFTA commitments and continued to reduce tariffs. Agricultural trade has increased in both directions under NAFTA from $7.3 billion in 1994 to $20.1 billion in 2006. Trade with Canada: Canada had been a steadily growing market for U.S. agriculture under the U.S.-Canada Free Trade Agreement (CFTA), with U.S. farm and food exports reaching a record $11.9 billion in 2006, up from $4.2 billion in 1990. Fresh and processed fruits and vegetables, snack foods, and other consumer foods account for close to three-fourths of U.S. sales. U.S. exports of consumer-oriented products to Canada continued to set records in 2007 in virtually every category. Additionally, new value highs were recorded for vegetable oils, planting seeds, and sugars, sweeteners, and beverage bases. With a few exceptions, tariffs not already eliminated dropped to zero on January 1, 1998. In 1996, the first NAFTA dispute settlement panel reviewed the higher tariffs Canada is applying to its dairy, poultry, egg, barley, and margarine products, which were previously subject to nontariff barriers before implementation of the Uruguay Round. The panel ruled that Canada's tariffrate quotas are consistent with NAFTA, and thus do not have to be eliminated.

CHAPTER 1.6 NAFTA Eliminates Trade Barriers

NAFTA helped to eliminate a number of non-tariff measures affecting agricultural trade between the United States and Mexico. Prior to January 1, 1994, the single largest barrier to U.S. agricultural sales was Mexicos import licensing system. However, this system was largely replaced by tariff-rate quotas or ordinary tariffs. All agricultural tariffs between Mexico and the United States were eliminated as of January 1, 2008. Many were immediately eliminated and others were phased out over transition periods of 5, 10, or 15 years. The immediate tariff eliminations applied to a broad range of agricultural products. In fact, more than half the value of agricultural trade became duty free when the agreement went into effect. Tariff reductions between the United States and Canada had already been implemented under the CFTA. Both Mexico and the United States protected their import-sensitive sectors with longer transition periods, tariff-rate quotas, and, for certain products, special safeguard provisions. However, now that the 15-year transition period has passed, free trade with Mexico prevails for all agricultural products. NAFTA also provides for strict rules of origin to ensure that maximum benefits accrue only to those items produced in North America. Protection for Import-Sensitive Products Under the General Agreement on Tariffs and Trade (Article XIX), and the U.S.-Canada Free Trade Agreement (Chapter 11), countries may take emergency action if increased imports cause injury to domestic producers. This concept was carried over into the NAFTA. Chapter 8 of the NAFTA permits, under specified conditions, the parties to impose a temporary, emergency safeguard measure that is, an increase in the tariff to the prevailing MFN level - in the event imports cause, or threaten to cause, serious injury to domestic producers. In 2008, a NAFTA partner could, assuming the associated conditions are satisfied, invoke a Chapter 8 safeguard provision until 1 year following full implementation of the NAFTA commitments, i.e., until January 1, 2009. Beyond January 1, 2009, the NAFTA Partner could maintain a safeguard arrangement only with the consent of the Party against whose good the action would be taken.

CHAPTER 1.7 Other Key NAFTA Provisions

Sanitary and Phytosanitary Measures: The NAFTA imposes disciplines on the development, adoption, and enforcement of sanitary and Phytosanitary (SPS) measures. These are measures taken to protect human, animal, or plant life or health from risks that may arise from animal or plant pests or diseases, or from food additives or contaminants. Disciplines contained in NAFTA are designed to prevent the use of SPS measures as disguised restrictions on trade, while still safeguarding each country's right to protect consumers from unsafe products, or to protect domestic crops and livestock from the introduction of imported pests and diseases. Although NAFTA encourages trading partners to adopt international and regional standards, the agreement explicitly recognizes each country's right to determine the necessary level of protection. Such flexibility permits each country to set more stringent standards, as long as they are scientifically based. NAFTA also allows state and local governments to enact standards more stringent than those adopted at the national level, so long as these standards are scientifically defensible and are administered in a forthright, expeditious manner. Export Subsidies: The three NAFTA countries work toward the elimination of export subsidies worldwide. The United States and Canada are allowed under the NAFTA to provide export subsidies into the Mexican market, under certain conditions, to counter subsidized exports from other countries. Neither Canada nor the United States is allowed to use direct export subsidies for agricultural products being sold to the other, and both countries are required to consider the export interests of the other whenever subsidizing agricultural exports to third countries. Internal Support: Under NAFTA, the parties should endeavor to move toward domestic support policies that have minimal trade or production distorting effects, or toward policies exempt from domestic support reduction commitments under the World Trade Organization. Grade and Quality Standards: The United States and Mexico agreed that when either country applies a measure regarding the classification, grading, or marketing of a domestic product destined for processing, it will provide no less favorable treatment for like products imported for processing.

CHAPTER 1.8 Rules of Origin

NAFTA improves incentives for buying within the North American region and ensures that North American producers receive the primary benefits of all newly established tariff preferences. Goods not originating from the United States, Mexico, or Canada must be significantly transformed or processed in one of those countries before they receive NAFTA's lower duties for shipment to one of the two other countries. The NAFTA rules of origin for agricultural products were constructed to prevent Mexico from becoming an export platform for processed products made from subsidized raw materials originating in non-NAFTA countries. There are also strong rules of origin for U.S. importsensitive commodities, such as citrus and dairy items. Bulk Commodities: All bulk agricultural commodities, and certain processed products such as orange juice and cheese, are exempt from the de minimis provision, which otherwise allows up to 7 percent of non-NAFTA-origin product to be included in final NAFTA goods. Citrus: All single-fruit juices (fresh, frozen, concentrated, reconstituted, fortified) must be made from 100-percent NAFTA-origin fresh citrus fruit. The de minimis provision does not apply to any citrus products. Dairy Products: Only U.S. or Mexican milk or milk products can be used to make cream, butter, cheese, yogurt, ice cream, or milk-based drinks traded under NAFTA preferential rates. Vegetable Oils: With the exception of certain industrial fatty acids and acid oils, refining of crude oils within a NAFTA country does not confer NAFTA origin. Making margarine and hydrogenated oils from imported crude oils does not confer origin. Sugar: Refining does not confer origin. In order for sugar to be considered of North American origin, all processing of sugarcane or sugar beets must take place in NAFTA territory. Peanut Products: Mexico must produce the peanuts to qualify for NAFTA preferential rates on peanuts and peanut products exported to the United States. U.S. exports of peanut products to Mexico are subject to this same rule.

Committees Help Implementation

The NAFTA Committee on Agricultural Trade monitors and promotes cooperation on the implementation and administration of the agricultural provisions. The committee provides a forum for the three countries to consult on trade issues and other matters related to the implementation of the agreement. The NAFTA Committee on Sanitary and Phytosanitary (SPS) Measures promotes the harmonization and equivalence of SPS measures, and facilitates technical cooperation, including consultations regarding disputes involving SPS measures. This committee meets periodically to review and resolve issues in the SPS area. The NAFTA Advisory Committee on Private Commercial Disputes Regarding Agricultural Goods provides recommendations to the three governments for resolving private commercial disputes that arise in connection with transactions in agricultural products. The intent is to achieve prompt and effective resolution of commercial disputes, with special attention to perishable items. The committee is composed primarily of private sector representatives but also has government participants. Lastly, bilaterally, the United States maintains annual meetings with both countries called the Consultative Committee on Agriculture (CCA). The CCA meeting is used by both countries to ensure the full and proper implementation of the NAFTA.

CHAPTER 1.9 Mobility of persons According to the Department of Homeland Security Yearbook of Immigration Statistics, during fiscal year 2006 (i.e., October 2005 through September 2006), 73,880 foreign professionals (64,633 Canadians and 9,247 Mexicans) were admitted into the United States for temporary employment under NAFTA (i.e., in the TN status). Additionally, 17,321 of their family members (13,136 Canadians, 2,904 Mexicans, as well as a number of third-country nationals married to Canadians and Mexicans) entered the U.S. in the treaty national's dependent (TD) status. Because DHS counts the number of the new I-94 arrival records filled at the border, and the TN-1 admission is valid for three years, the number of non-immigrants in TN status present in the U.S. at the end of the fiscal year is approximately equal to the number of admissions during the year. (A discrepancy may be caused by some TN entrants leaving the country or changing status before their three-year admission period has expired, while other immigrants admitted earlier may change their status to TN or TD, or extend TN status granted earlier). Canadian authorities estimated that, as of December 1, 2006, a total of 24,830 U.S. citizens and 15,219 Mexican citizens were present in Canada as "foreign workers". These numbers include both entrants under the NAFTA agreement and those who have entered under other provisions of the Canadian immigration law. New entries of foreign workers in 2006 were 16,841 (U.S. citizens) and 13,933 (Mexicans).

CHAPTER 1.10 PREAMBLE

The Government of Canada, the Government of the United Mexican States and the Government of the United States of America, resolved to: STRENGTHEN:- the special bonds of friendship and cooperation among their nations; CONTRIBUTE:- to the harmonious development and expansion of world trade and provide a catalyst to broader international cooperation; CREATE:- an expanded and secure market for the goods and services produced in their territories; REDUCE:- distortions to trade; ESTABLISH:- clear and mutually advantageous rules governing their trade; ENSURE:- a predictable commercial framework for business planning and investment; BUILD:- on their respective rights and obligations under the General Agreement on Tariffs and Trade and other multilateral and bilateral instruments of cooperation; ENHANCE:- the competitiveness of their firms in global markets; FOSTER:- creativity and innovation, and promote trade in goods and services that are the subject of intellectual property rights; CREATE:- new employment opportunities and improve working conditions and living standards in their respective territories; UNDERTAKE:- each of the preceding in a manner consistent with environmental protection and conservation; PRESERVE:- their flexibility to safeguard the public welfare; PROMOTE:- sustainable development; STRENGTHEN:- the development and enforcement of environmental laws and regulations; and PROTECT:- enhance and enforce basic workers' rights;