BY JEFFREY SCHOTT
AND GARY HUFBAUER
Throughout its duration, NAFTA has been hailed by some and derided by others. Proponents laud the pact’s contribution to regional trade and investment, and argue for an acceleration of the integration process. Critics focus on NAFTA’s impact on wages and jobs because of growing competition and immigration; some fear that increased cooperation will lead to a loss of sovereignty. Labor unions continue to attack trade pacts using their old rallying cry, “No More NAFTAs.” (…)
Why divisive? The fractious NAFTA ratification debate has had lingering effects in
NAFTA succeeded in advancing economic integration and achieving the goals agreed to in the pact — though not in reaching the inflated promises of politicians when the agreement entered into force.
While the NAFTA is comprehensive compared to other trade agreements, in some areas its footprint is small. For example, NAFTA has no rules on subsidies, nor on antidumping or countervailing duties; its side pacts on labor and the environment are limited in scope and not backed by meaningful funds; and
In addition, NAFTA lacks the medicinal powers to cure important ills of North America, including high levels of illegal immigration and trafficking of illegal drugs, slow progress on environmental problems, growing income disparities (particularly within Mexico), and weak growth in real wages. Some of these problems are correlates. Correlates of economic integration and higher incomes, though NAFTA is only a small part of the story. NAFTA was and is foremost a commercial agreement, and in commercial terms the pact is a great success. (…)
U.S.-Mexico trade has expanded at a particularly rapid clip, much faster than
One of the key Mexican objectives in NAFTA was to increase foreign direct investment (FDI), and here again the pact has had a positive impact. The stock of FDI in
NAFTA’s first decade coincided with an extended period of strong
But not every worker or community benefited, and national trade adjustment programs for hard-hit workers and communities remain meager.
On an annual basis, depending on who is counting, NAFTA-related job losses in the
What about wages? Some NAFTA critics ( … ) charge that trade pacts drive down wages of unskilled workers. In NAFTA Revisited, we examined the relationship of trade and wages in the NAFTA context, and could not detect a material difference in
In general, the dispute settlement process has worked relatively well in cases where the NAFTA obligations were clearly defined (including most Chapter 19 cases involving the ex post review of national antidumping and countervailing duty determinations), but poorly in big cases where domestic politics blocked treaty compliance (notably, U.S.-Mexico trucking,
While antidumping and countervailing cases are by far the most numerous, the most controversial dispute provisions cover investor-state disputes under Chapter 11. When NAFTA was signed, the Chapter 11 provisions were relatively uncontroversial; in fact, NAFTA arbitration was hailed as an improvement over national courts.
In practice, however, rules regarding “indirect expropriation” under Article 1110 and requirements for minimum legal standards under Article 1105 have fostered a broader range of litigation than originally envisaged.
NAFTA critics assert that Chapter 11 tribunals are riding roughshod over state and local environmental standards. There is no basis for this assertion: total awards to date are less than $100 million — a small fraction of the overblown claims of business plaintiffs and a tiny amount compared to three-way FDI within NAFTA, now amounting to almost $900 billion.
The North American Agreements on Labor Cooperation and on Environmental Cooperation were negotiated and appended to the NAFTA in 1993 at the behest of President Clinton to encourage
The NAFTA was state of the art when negotiated in the early 1990s. [Today], the pact could benefit from renovation, for three reasons:
In other words, despite a decade of progress, the three NAFTA partners still have a lot of work. Melding the security and economic objectives of the three countries will require large doses of political will and diplomatic skill.
To take full advantage of NAFTA’s opportunities,
Resolving the trucking dispute with
The NAFTA partners now face an increasingly competitive and security conscious world. To enhance the global competitiveness of
We recommend bolder progress in three concrete areas. First, by adopting a NAFTA common external tariff, the partners could promote commerce among themselves while reducing distortions generated by NAFTA rules of origin. (Since 2005, three rounds of reforms on rules of origin have already facilitated an estimated $130 billion in trilateral trade).
Second, the NAFTA partners need a higher level of cooperation on domestic regulatory standards, particularly in the area of food safety.
Third, leaders in the three countries should direct their ministers to ensure that longstanding trade disputes are resolved. The most prominent disputes involve softwood lumber, sugar and trucking. All three are on track towards resolution; what leaders must do is ensure that the disputes don’t jump off their tracks. (…)
The U.S.-Mexico trucking dispute is another lingering disagreement. The North American trucking sector was to have been fully liberalized in January 2000, but the
In February 2007, the
Tremendous numbers of Mexicans and Canadians cross the
The NAFTA labor and environmental side agreements were not designed with enough ambition to address labor and environmental problems that have been decades in the making. For labor, we recommend that NAFTA institutions should concentrate their attention on basic standards relating to workplace conditions, child labor, and forced labor.
For the environment, we recommend substantial financial commitments to underpin existing and new initiatives. The North American Development Bank (NADBank) is woefully under-funded, and Mexican municipalities are starved of revenues. The NADBank’s capital base should be increased incrementally from $4.5 billion to $10 billion. Instead of a 50-50 split between the
Given increasingly tough global competition and global security threats, the three countries need a more integrated response from North American leaders. So far, leaders have allowed the North American agenda to slip further down on their priority lists.
This column is based on a longer article from October 2007. The authors are senior fellows at the Peterson Institute for International Economics in