TED Case Studies

NAFTA Treaty (NAFTA)

CASE NUMBER: 49

CASE MNEMONIC: NAFTA

CASE NAME: North America Free Trade Agreement

I. Identification

1. The Issue

In August of 1992, the governments of the United States, Canada and Mexico concluded negotiations on the North American Free Trade Agreement (NAFTA). Four months later, the historic trade accord was signed by the respective heads of state. The accord came into force on January 1, 1994 after ratification by each country's legislature. The NAFTA is considered historic for three reasons: (1) it represents the most comprehensive free trade agreement ever agreed to between regional trading partners; (2) it is the first reciprocal trade agreement between a industrialized country and a developing one; and (3) offers the unique opportunity to integrate environmental protection across a continent with a free trade pact.

2. Description

Although the NAFTA is a tri-lateral agreement, its environmental concerns are largely between the United States and Mexico. However, the United States and Canada have disagreed on matters of transborder pollution and other trade and environmental issues in the past, starting with the Trail Smelter case of 1937 and more recent problems over fishing regulations (see SMELTER and LOBSTER cases). There are three principal environmental concerns about NAFTA. The first is the potential expansion of Mexico's Border Industrialization Program (hereafter referred to as the maquiladora program) along the U.S./Mexican border. The maquiladora program allows foreign-owned and managed companies duty free imports of manufacturing equipment, tools, machinery and spare parts required for production into Mexico. The goods can then exported to any country in the world with only a value-added tax assessed. Since its inception in 1965, the maquiladora industry has grown to include over 1900 plants employing close to 450,000 people. Most of the program's growth came after 1982 when Mexico's economy suffered severe disequilibrium due to the debt crisis, a fall in basic commodity export prices, and balance of payment problems. Concomitant to the increase in the numbers of maquiladoras plants was rapid population growth, overdevelopment, and environmental degradation. Perhaps the peso's 1995 troubles will lead to another expansion in the maquiladora industry.

Many environmental groups and Congressional members fear that NAFTA will precipitate a mass exodus of U.S. industry to the border region, adversely affecting the region's ecosystem. In 1983 the United States and Mexico signed the "Agreement between the United States of America and the United Mexican States on Cooperation for the Protection and Improvement of the Environment in the Border Area," usually called the 1983 U.S.-Mexico Border Environmental Agreement, (see LAPAZ and COLORADO, and BORDER cases).

The second concern is the potential for Mexico's weaker environmental and enforcement standards to undermine tougher U.S. environmental standards. To some, this would represent a hidden subsidy for maquiladoras since they would not have the expense required by U.S. laws governing environmental pollution. Lastly, significant questions have been raised concerning global environmental issues, rainforest destruction and pollution in Mexico City.

Environmental protection in Mexico is the responsibility of the Secretaria Desarrollo Urbano y Ecologia (SEDUE), the counterpart to the U.S. Environmental Protection Agency (EPA). In an effort to counter charges that it was neglecting it domestic environment, the Mexican government enacted several environmental laws. In 1988 it promulgated the General Law for Ecological Equilibrium and Environmental Protection, a comprehensive framework for environmental protection and natural resource preservation. Based on the U.S. Environmental Protection Act of 1970, the law addresses air, water and soil pollution, hazardous wastes contamination, use of pesticides and toxic substances, ecosystem conservation and consumption of natural resources. While its regulations and standards are fairly stringent, and in some cases exceed even U.S. laws, they are enforced infrequently, lack clear policy directives, and have inadequate resources for staffing, training and enforcement needs. Moreover, there is an absence of accountability and lack of public participation in environmental matters. The cornerstone of the law is the requirement that all new public and private investments in the maquiladora industry must conduct an environmental impact assessment (EIA) to determine the extent of possible contamination due to hazardous wastes.

As part of its Action Plan, the Bush Administration initiated the Integrated Environmental Plan for the Mexican-US Border Area (First Stage, 1992-1994). The Border Plan deals with many of the questions overlooked by the La Paz Agreement and attempts to coordinate environmental improvements along the border. It has received criticism for vagueness, particularly in terms of concrete program planning and long-term funding.

Another significant mechanism in NAFTA is the creation of the North American Agreement on Environmental Commission (NAAEC), in part a response to the criticism of the Border Plan and in part a response to past failures to protect the border region's ecosystem. The commission's mandate is threefold: to provide a forum to discuss common environmental problems between the three countries, to encourage cooperation on solving the myriad of environmental problems and to act as a clearinghouse for environmental information and expertise.

A related legal issue centers on specific NAFTA provisions relevant to the environment. Article 712.1 of the agreement contains language very similar to that of the GATT rules governing measures on "the protection of human, animal, or plant life." The measures are applied "only to the extent necessary to achieve the appropriate level of protection, taking into account technical and economic feasibility." GATT panels have interpreted this phrase as the "least trade restrictive" or the "least GATT- inconsistent" environmental measure. A related issue to environmental measures implemented "to the extent necessary to achieve the appropriate level of protection" concerns process standards. For instance, the agreement does not examine the potential harm of processes done to the environment whether it be global, as in the dolphin case (see TUNA case), or transborder in the case of sewage flowing into San Diego from Tijuana (see SANDIEGO and TIJUANA cases). Here the agreement falls short in articulating guidelines on how process standards affect the nature of the process itself and its economic impact.

The last legal issue concerns dispute resolution and dispute settlement procedures. The NAFTA provides several dispute settlement arrangements by establishing committees for Sanitary and Phytosanitary Measures, Standards-Related Measures and Investments. Lacking is any mention concerning avenues available to citizens, public-interest groups or non-governmental organizations concerning legal and administrative processes that would force state and/or federal governments to enforce standards or regulations. The legal ramifications here are vast and would include the right of standing, excessive litigation, injunctive relief and penalties and sovereignty.

3. Related Cases

Keyword Clusters

(1): Trade Product = MANY

(2): Bio-geography = DRY

(3): Forum = NAFTA

4. Draft Author:

Duaine Priestley

II. Legal Clusters

5. Discourse and Status:

AGReement and COMPlete

6. Forum and Scope:

NAFTA and REGIONal

In an effort to assuage foreign governments concerns about U.S. ability to negotiate trade agreements without excessive interference and amendments by the Congress, the NAFTA received "fast track" authorization. Fast track authorization is a procedural mechanism whereby the Congress allows the Executive Branch to negotiate bi-lateral and multi-lateral trade agreements that require implementing legislation. The Congress voted up-or-down on the entire agreement, thereby preventing the dilution of the original agreement by amendments. It passed by a narrow margin.

There are a number of related pieces of legislation, including the Trade Agreements Act of 1979, (P.L. 96-39) Sec. 402(2)(B)(i)(III) and IV, 19 U.S.C. 2532 and the Omnibus Trade and Competitive Act of 1988, Sec 1101(b)(9)(13) and Sec 1101(b)(11)(13), 19 U.S.C. 2901. The United States and Mexico are signatories to several multilateral agreements that relate to trade and environment, including: the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer (see MONTREAL case), the 1989 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal (see BASEL case), the 1973 Convention to Regulate International Trade in Endangered Species of Wild Fauna and Flora (CITES) and the General Agreement on Tariffs and Trade (GATT).

7. Decision Breadth:

3 (USA, CANADA and MEXICO)

Neither Canada nor Mexico see the NAFTA as the appropriate forum for solving disagreements over environmental issues. Their primary concern is that the United States will cater to domestic environmental interest groups and use NAFTA for extending their environmental standards throughout the continent. From their perspective, environmental issues are best served at the local level since conditions are not going to be the same throughout the North American continent. However, NAFTA has brought to the forefront three issues: (1) sustainable development along the border, especially if industrialization continues abated and unplanned, (2) concern over environmentally hazardous dumping in Mexico due to their lax environmental enforcement structure and (3) the downward harmonization of environmental standards.

8. Legal Standing:

TREATY

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: North America [NAMER]

b. Geographic Site: North America [NAMER]

c. Geographic Impact: NAFTA

Spread across a political boundary of nearly 1,600 miles that stretches from the Gulf of Mexico to the Pacific Ocean, and encompassing the jurisdiction of four U.S. states and six Mexican states, the U.S./Mexico border shares three major deserts, several groundwater aquifers and air sheds, two major river systems, the Rio Grande and the Colorado, as well as several smaller river basins and a diverse collection of wildlife species. Much of the border region is characterized as an arid area with some forests and irrigated farmlands.

Demographically, the border area is sparsely populated. However, the region experienced rapid population growth in the 1980s. Currently, its total population is over six million people, double the population of 1980. Ninety percent of its inhabitants live in six "sister cities" immediately across the border from each other. The largest sister city is Tijuana/San Diego with a combined population of approximately 2.5 million, followed by Ciudad Juarez/El Paso with 1.3 million. The smallest sister city is Nogales with a population of 126,000. Additionally, the U.S./Mexico border is the most heavily travelled international border in the world. Conservative estimates indicate that over 200 million crossings occur each year, both legal and illegal.

10. Sub-National Factors:

NO

11. Type of Habitat:

DRY

The whole NAFTA region includes are variety of habitats. The chief concern, however, is for the desert region along the U.S.- Mexico border.

IV. Trade Clusters

12. Type of Measure:

MANY

There are several trade or regulatory measures in NAFTA will use that will have either real or potential impact. They include import standards, countervailing duties, regulatory standards, intellectual property rights, and possibly border taxes. NAFTA also includes rule of origin standards, health and safety requirements, and standards on toxic wastes and agricultural products which use pesticides. Standards for environmental regulations are similar between the United States and Mexico; in fact much of Mexico's legislation is based on the U.S. National Environmental Protection Act. Mexican enforcement, however, is contentious.

13. Direct v. Indirect Impacts:

BOTH

The impact of NAFTA on trade and environmental issues is likely to both direct and indirect. Many measures will be applied at the border and the United States reserves the right to exclude the importation of goods that do not meet U.S. standards.

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: YES, many

b. Indirectly Related to Product: YES, many

c. Not Related to Product: YES, RETALiation

d. Related to Process: YES

15. Trade Product Identification:

MANY

The product type of goods imported into the United States falls into the following categories. It should be noted this is not a complete listing of all products types that would fall under NAFTA schedules. As such, this shows only those product types manufactured by maquiladoras and totals for the year ending 1991. All goods are considered to be final products (see Table 49-1).

Table 49-1: USA Imports from Mexico, by Product in 1991
Product Type Amount (US millions)
Food $ 7,789
Textiles and apparel $ 45,726
Footwear and leather goods $ 7,289
Furniture and wood/metal products $ 26,528
Transportation equipment $111,956
Nonelectric machinery and tools$ 4,894
Electrical machinery & equipment $ 49,267
Electrical material and accessories $112,540
Toys and sporting goods $ 7,451
Other manufacturing industries$ 71,680

16. Economic Data

According the Banco de Mexico, the maquiladora exports represent approximately 37 percent of Mexico's total exports, with industry output of $14.3 million and employment of 467,454.

17. Impact of Trade Restriction:

MEDIUM

It would be tempting to consider the amount and extent of trade protection for the maquiladora industry to be equal to the difference between the budgets of SEDUE and the EPA, but that would obviously be a spurious assumption. One possible indicator would take the difference between aggregate maquiladora exports to the United States to the output of maquiladoras, thus capturing non-tariff barriers in the calculus. For 1991 the amount of trade protection using this formula would be about 25 percent of the total value of the product (see Table 49-2).

Table 49-2: Maquiladora Value-Added Ratio (In US millions)

Maquiladora Imports Maquiladora Exports Value Added
$11,694 $15,828$4,134

There are numerous and obvious problems with this formula, most notably the degree to which either government truly understands the extent of environmental degradation, the number of waste-water treatment plants needed and the cost of transporting hazardous and toxic wastes according to law, to name but a few. U.S. tariffs on Mexican goods now averages less than 10 percent ad valorem and Mexican tariff levels on U.S. goods are about 10-20 percent on average. No reasonable estimate on the impact of non-tariff barriers is these countries exists.

18. Industry Sector:

MANY

19. Exporters and Importers:

NAFTA and NAFTA

V. Environment Clusters

20. Environmental Problem Type:

MANY

The environmental problems of the border region are numerous. The problems found in Mexico are endemic to many other developing countries. One positive aspect of the NAFTA has been to raise the level of awareness of environmental problems and to precipitate an indigenous environmental movement. Of the environmental problems types listed, NAFTA effects:

(1) Pollution, Air: Air quality data for the U.S. side is well documented. It indicates two features: (1) most of the larger U.S. border cities fail to meet one or more national air quality standards and (2) the source of air pollution along the border is the result of transborder flight of contaminants from Mexico.

(2) Pollution, Land: Although significant data on hazardous and toxic wastes is lacking, the problem is considered to be the most serious one facing the border region. While Mexican law requires maquiladoras to ship hazardous and toxic wastes generated by production back to the United States, studies by the General Accounting Office have shown that adherence and enforcement are negligible. Municipal solid waste is considerable. Of the 3,500 tons of garbage generated in Mexican border cities, only half is collected and of that two-thirds is sent to open-air dumps.

(3) Water: There are two aspects to the water problem along the border: the diminishing source of water, (currently the only sources are the Rio Grande and the Colorado, both of which are overtaxed at current rates) and (2) the pervasive lack of adequate sewage treatment facilities.

(4) Global Problems: In comparison to other developing countries, Mexico is not a major contributor. Mexico was the first country to sign the Montreal Protocol on Substances that Deplete the Ozone and is a signatory to the Global Climate Change Convention that was signed at the Rio Conference.

(5) Waste: The maquiladora industry generates a number of hazardous wastes from semiconductor manufacturers, paint companies, and component and finishing plants, including solvents, acids, caustic materials and paint wastes. Although Mexican law regarding hazardous wastes is premised on a "cradle to grave" system of tracking hazardous wastes and storage of source hazardous raw materials and waste materials are required, little in fact has been done. SEDUE estimates that 52 percent of the country's 1963 maquiladoras have generated some sort of waste, only 307 operating licenses have been obtained and only 19 percent report returning the waste to its country of origin as required by law.

(6) Biodiversity Loss: The border region is suffering species loss in all areas including wetlands and streams, grasslands and desert scrub and forests due to encroachment by development. Of these, coastal wetlands and estuaries are the most adversely affected.

(7) Species Loss: Approximately 50 threatened and endangered species and over 100 candidate endangered species are found along the U.S./Mexican border region.

21. Name, Type, and Diversity of Species

Name: MANY

Type: MANY

Diversity: MANY

22. Resource Impact and Effect:

HIGH and MANY

An agreement of this magnitude will have a high impact on the environment in many ways.

23. Urgency of Problem:

LONG and 100s of years

24. Substitutes:

MANY

VI. Other Factors

25. Culture:

YES

No doubt many cases will arise that will have a cultural component. For example, Tex-Mex cuisine is leading to a loss of the mesquite tree on both sides of the border.

26. Trans-Boundary Issues:

YES

NAFTA is in large part a response to the countries of North America to deal with trans-border problems and opportunities. Many believe NAFTA is the result of trans-border problems.

27. Rights:

YES

Questions about labor rights in maquiladora firms have already existed for some time. The Chiapas uprising which began on January 1, 1994, the day that NAFTA came into being, is clearly a powerful sign of the agreement's implicit relation to human rights. On the one hand it can be argued that the uprising was a cry against pure market policies that do not favor the disenfranchised. On the other, it is said that NAFTA forced the Mexican government to utilize negotiations rather than military force because of the question of Mexico's stability and political institutions. The Chiapas rebellion in Mexico on the birthday of NAFTA was a powerful sign that human rights are an issue.

28. Relevant Literature

Emerson, Peter M. and Elizabeth Wallace Bourban. The Border Environment and Free Trade. The North American Institute, Santa Fe, New Mexico, November 1991.

Grunwald, Joseph and Flamm, Kenneth. The Global Factory; Foreign Assembly in International Trade. The Brookings Institute, Washington, DC, 1985.

Hufbauer, Gary Clyde and Schott, Jeffrey J. North American Free Trade; Issues and Recommendations. Institute for International Economics, Washington, DC, 1992.

Hufbauer, Gary Clyde and Schott, Jeffrey J. North American Free Trade; An Assessment. Institute for International Economics, Washington, DC, 1993.

Lusting, Nora, ed. North American Free Trade: Assessing the Impact. The Brookings Institute, Washington, DC, 1992.

McKeith, Malissa Hathaway. "The Environment and Free Trade: Meeting Halfway at the Mexican Border." Pacific Basin Law Journal 9 (Summer 1991): 701-729.

US General Accounting Office. "U.S.-Mexico Trade: Information on Environmental Regulation and Enforcement" (May, 1991).

US General Accounting Office. "Management of Maquilidoras' Waste Hampered by Lack of Information" (February, 1992a).

US General Accounting Office. "U.S.-Mexico Trade: Assessment of Mexico's Environmental Controls for New Companies" (August, 1992b).

US General Accounting Office. "North American Free Trade Agreement: U.S.-Mexican Trade and Investment Data" (September, 1992c).

US Congress, Office of Technology Assessment. Trade and Environment: Conflicts and Opportunities. Washington, DC: OTA, May, 1992a.

US Congress, Office of Technology Assessment. US-Mexico Trade; Pulling Together of Pulling Apart? Washington DC: OTA, May, 1992b.

US Environmental Protection Agency. "Integrated Environmental Plan for the Mexican-U.S. Border Area" (First Stage, 1992-1994)

US Trade Representative. "Review of U.S.- Mexico Environmental Issues." Prepared by and Interagency Task Force Coordinated by the Office of the US Trade Representative, October 1991.


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