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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 It superseded the Canada United States Free Trade Agreement between the U.S. and Canada.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. NAFTA fuels economic growth and dynamic trade, stimulates investment while creating productive partnerships, works for small and medium-sized businesses and provides fairness and certainty. NAFTA partners promote environmental protection, and provide greater job opportunities in North America. With the entry in force of the North American Free Trade Agreement (NAFTA), the Parties have experienced a significant increase in the trade of goods and services between them. The three Customs Administrations have agreed that the Rules of Origin as set out in the NAFTA and the NAFTA Rules of Origin Regulations (the Regulations), define the framework to be observed by exporters/producers in order to have their goods qualify as "originating goods", and be eligible for a NAFTA preferential tariff treatment when imported into the territory of any of the other Parties to the Agreement. As a result, it has become important for the Customs Administration of each Party to verify that the goods for which NAFTA preferential tariff treatment has been claimed comply with the Rules of Origin. In this respect, the three Customs Administrations have considered that the establishment of verification guidelines is important and useful. The Customs Administrations of all Parties have consulted during the development of this manual and these guidelines include general, examination and reporting standards for NAFTA origin verifications. This manual is intended to be used by: Origin Audits Unit of Revenue Canada (Canada); Direction of International Audit of the Ministry of Finance and Public Credit (Mexico); and, the offices of Regulatory Audit and Field Operations, U.S. Customs Service (United States). However, portions of this manual may also be used by other areas within each Customs Administration as deemed appropriate.

The main purpose of this document is to establish the recommended technical verification framework to be observed when conducting NAFTA verifications. The application of the provisions included therein should take into consideration the circumstances involved in each verification and be adapted accordingly. It is understood that this document will be updated on a continual basis. This of the NAFTA Verification Manual provides revisions to the November 1995 version to reflect changes in the Regulations which became effective on October 1, 1995. Isolating the effects of NAFTA on its partner countries is particularly difficult given the significant other shocks that have occurred over the past decade. NAFTA undoubtedly had a significant impact on the macroeconomic environment facing Mexico, given the decline in trade barriers and increased market access that the agreement provided Mexico. The key provisions of NAFTA and changes in trade barriers between the member countries are documented in Section II. However, as discussed in Section III, distinguishing the effect of these changes is complicated by the fact that many of these were anticipated well in advance of the agreements ratification, and by the fact that the liberalization was phased in only gradually. In addition, a host of significant other shocks had important effects on Mexico and its NAFTA partners during this period, including: (i) the severe financial crisis that Mexico suffered in 1994 (the Tequila crisis), which forced a sharp devaluation of the peso; (ii) The wide range of other free trade arrangements that the NAFTA partners signed during the same period; and (iii) The broader global cyclical environment, which included a recovery from recessions in the early 1990s, the boom through to the end of the decade, and the more recent global slump. The increase in regional integration among NAFTA partners has had a substantial effect on business cycles in Mexico. Section V documents that output variability declined in Mexico after the inception of NAFTA, and Section VI shows that there has been a significant increase in co movement of business cycles within the NAFTA region during the past decade. Deeper analysis using a dynamic latent factor model suggests that these stylized facts reflect the manifestation of structural changes in the Mexican economy that have decreased the role of country-specific shocks in driving the Mexican business cycle and led to a concomitant increase in the role of region-wide shocks. The importance of structural factors is further 3

confirmed by studying a stochastic dynamic general equilibrium model, which is calibrated to reflect some basic features of the NAFTA economies. The model illustrates that reductions in trade frictions that boost trade flows can cause a concomitant increase in business cycle interdependence. NAFTA also appears to have favourably affected Mexicos growth performance over the past decade. This conclusion is confirmed by a broad range of studies, which are surveyed in Section VII. In particular, there has been a dramatic increase in the average growth rate of investment after NAFTA. The dynamics of economic growth in Mexico also have changed as contributions of exports and investment to GDP growth have sharply increased following the introduction of the agreement. Moreover, using industry- and firm level data, recent empirical studies suggest that NAFTA has significantly improved total factor productivity in Mexico.


One of the major objectives of NAFTA from the Mexican governments point of view was to modernize agriculture, increase productive efficiency, and reduce the high cost of agricultural subsidies. While many of these changes have taken place within the Yaqui Valley, along with these benefits participation in NAFTA has incurred social consequences that, though predicted, have largely gone unaddressed by government policy. On the positive side of post-NAFTA developments, diversification is slowly starting to occur in the Yaqui Valley, particularly with the help of private investors. Although foreign direct investment in agriculture has not risen to the same extent as in other sectors of Mexicos economy, foreign companies interested in the promotion of modern production technologies have played and will continue to play an important role. Current changes in agricultural production in the Yaqui Valley are as much a result of environmental factors as of government policy. According to Luque Favela, it has unfortunately required the problem of drought to advance the process of diversification, as farmers are finally starting to realize the importance of having different kinds of crops and multiple income-earning activities, to cope with adverse climate and market conditions. The fall in maize prices following the implementation of NAFTA reforms caused the restructuring of the agricultural sector in Veracruz. Despite predictions of the decline of maize production, many small-scale farmers remained in the agricultural sector, cobbling together a livelihood through the production of maize and the sale of various crops, through various off-farm jobs, and through the contributions of family members working both domestically and abroad. While the impacts of NAFTA and the lack of effective social safety nets have adversely impacted farmers in Veracruz, many also appear to have been surprisingly resilient in weathering the economic changes and in grasping new trade opportunities. Now, 10 years later, commercial maize production is going through a sort of resurgence, as farmers in southern Veracruz fight to make it a viable income-earning activity. Nor in northern Veracruz have farmers forgone the production of maize. Instead, they are capitalizing on new export opportunities involving the sale of maize husks. Throughout the state, farmers have increasingly turned toward cooperation and collaboration as tools to survive and even thrive in conditions of economic upheaval. Farmer organizations and cooperative marketing 5

strategies have gained importance as farmers struggle to replace public services with their own networks. Whereas the Mexican government expected NAFTA reforms to restructure and remove small farmers from the agricultural sector, coping with the new conditions of agricultural production has ironically made many of these farmers stronger and more willing to fight to be considered a part of Mexicos economic future.








How to grow their national economies, create good jobs, and generate the revenues necessary to provide basic public goods such as human health and environmental protection. Their task is burdened by more than two decades of weak economic performance that has failed to create jobs for a workforce expected to grow by 1.9 percent a year from 2001-2010. Nearly one person in ten is out of work. Current per capita income stands at a meager US dollar 3580 and according to the Inter-American Development Bank, approximately 150 million peopleone out of every three people living in Latin America and the Caribbean earn less than US dollar 2 a day. To compound the problem, governments throughout the region admit that, while they may have enacted sound environmental and public health laws, the laws are rarely enforced, especially in rural areas. Hoping to avoid another lost decade similar to the 1980 s, thirty-four governments from the Western Hemisphere met in 1994 to outline an ambitious agenda to advance prosperity, democratic values and institutions, and security throughout the hemisphere. Negotiating a Free Trade Area of the Americas (FTAA) was central to their agenda. According to the heads of state attending the 1994 meeting, Free trade and increased economic integration are key factors for raising standards of living, improving the working conditions of people in the Americas, and better protecting the environment. Many officials and observers in the hemisphere believed that free trade would remedy ailing economies. Twenty-ve years ago, Mexico faced a similar economic situation, and adopted a similar prescription. Mexicos earlier economic strategy of import substitution and a large role for the public sector had increased jobs and economic output, but it had also left Mexico with a crushing external debt that sparked a major economic crisis in 1982. Mexican president Miguel de la Madrid Hurtado responded by moving Mexico toward an export economy. 6

Despite considerable domestic opposition, in 1986 Mexico joined the General Agreement on Tariffs and Trade (predecessor to the World Trade Organization, or WTO). President Carlos Salinas de Gortari built on de la Madrids initial steps toward liberalization by reducing the size of the public sector, promoting land ownership reform, and securing a commitment from the United States and Canada in 1991to negotiate a free-trade agreement.2 The North American Free Trade Agreement (NAFTA) went into force in 1994, marking the rst major trade deal between developed and developing country.

Negotiation and U.S. ratification

Following diplomatic negotiations dating back to 1986 among the three nations, the leaders met in San Antonio, Texas, on December 17, 1992, to sign NAFTA. U.S. President George H. W. Bush, Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas, each responsible for spearheading and promoting the agreement, ceremonially signed it. The agreement then needed to be ratified by each nation's legislative or parliamentary branch. Before the negotiations were finalized, Bill Clinton came into office in the U.S. and Kim Campbell in Canada, and before the agreement became law, Jean Chrtien had taken office in Canada. The proposed agreement had been very controversial and divisive in Canada, and the 1988 Canadian election was fought almost exclusively on that issue. In that election, more Canadians voted for anti-free trade parties (the Liberals and the New Democrats) but the split caused more seats in parliament to be won by the pro-free trade Progressive Conservatives (PCs). Mulroney and the PCs had a parliamentary majority and were easily able to pass the Canada-US FTA and NAFTA bills. However, Mulroney himself had become deeply unpopular and resigned on June 25, 1993. He was replaced as Conservative leader and prime minister by Kim Campbell. Campbell led the PC party into the1993 election where they were decimated by the Liberal Party under Jean Chrtien, who had campaigned on a promise to renegotiate or abrogate NAFTA; however, Chrtien subsequently negotiated two supplemental agreements with the new US president. In the US, Bush, who had worked to "fast track" the signing prior to the end of his term, ran out of time and had to pass the required ratification and signing into law to incoming president Bill Clinton. Prior to sending it to the United States Senate, Clinton introduced clauses to protect 7

American workers and allay the concerns of many House members. It also required US partners to adhere to environmental practices and regulations similar to its own. With much consideration and emotional discussion, the House of Representatives approved NAFTA on November 17, 1993, 234-200. The agreement's supporters included 132 Republicans and 102 Democrats. NAFTA passed the Senate 61-38. Senate supporters were 34 Republicans and 27 Democrats. Clinton signed it into law on December 8, 1993; it went into effect on January 1, 1994. Clinton while signing the NAFTA bill stated that "NAFTA means jobs. American jobs and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement.

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. 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 one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all US-Mexico 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.

In the area of intellectual property, the North American Free Trade Agreement Implementation Act made some changes to the Copyright law of the United States, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within NAFTA) on certain motion pictures which had entered the public domain.

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. Tariff eliminates for qualifying products. Before NAFTA, tariffs of 30 percent or higher on export goods to Mexico were common, as were long delays caused by paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the tariffs were abolished immediately when the agreement took effect, and the remaining tariffs were targeted for gradual elimination. Among the areas specifically covered by NAFTA are construction, engineering, accounting, advertising, consulting/management, architecture, health-care management, commercial education, and tourism. 9

Elimination of nontariff barriers by 2008 includes opening the border and interior of Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff barriers were the biggest obstacle to conducting business in Mexico that small exporters faced. Establishment of standards the three NAFTA countries agreed to toughen health, safety, and industrial standards to the highest existing standards among the three countries (which were always U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The speed of export-product inspections and certifications was also improved. Supplemental agreements to ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution, special side agreements were included in NAFTA. Under those agreements, the three countries agreed to establish commissions to handle labour and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently. Environmental and labour groups from both the United States and Canada, however, have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced. NAFTA also resulted in a substantial increase in the variety of products traded between Mexico and its partners. The impact of increase in the variety of products on the volume of trade between Mexico and the United States. They find that almost 25 percentage points of the 190 percent increase in Mexicos exports to the United States was attributable to the increase in the number of traded good varieties while more than 8 percentage points of the 93 percent increase in the exports of the United States to Mexico was accounted for by the growth of product variety. For example, the share of the motor cars for transport of passenger and engines sector in total Mexican exports to the United States increased from under 1 percent in 1988 to 15 percent in 1999


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.

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. NAFTA included various provisions covering investment flows, financial services, government purchases, and protection of intellectual property rights. For example, NAFTA removed many investment barriers and included clauses protecting the rights of direct investors. NAFTAs financial services provisions covered banking, insurance, and securities industries and provided the right of establishment in these industries, subject to some exceptions. Government procurement provisions of NAFTA eliminated Buy National restrictions on the majority of nondefense goods and services that were supplied by firms in North America to the federal and state governments of the member countries. In addition, NAFTA established comprehensive standards for the protection and enforcement of intellectual property rights in the member countries. 11

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.

1. 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.

2. Internal Support:
Under NAFTA, the parties should endeavour 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.

3. 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 favourable treatment for like products imported for processing.



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. Meetings at the officials level were held on April 30, 1996 in Washington and June 18, 1996 in Ottawa. A detailed term of reference and workplan for 1996/97 was agreed upon. The first meeting of the Advisory Committee, which will include industry representatives from each of the parties, is scheduled for February 1997. The Working Group met on June 18, 1996 in Ottawa. The meeting provided an opportunity for the parties to examine and identify ways to implement the Group's mandate to work toward the elimination of all export subsidies affecting agricultural trade between the parties. In this regard the parties have agreed to a joint work plan for 1996/97 based upon cooperative research and the possibility of coordination of positions in international fora. 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 Pesticides Technical Working Group (TWG) was established in 1995 under Article 722 of NAFTA to address pesticide issues among Mexico, Canada and the United States. Although the primary reporting of the Pesticides TWG is to the SPS Committee, it could report to the NAFTA Committee on Standards-Related Measures for pesticide issues relating to that Committee. The inaugural meeting was held March 27-29, 1996, in Washington. The meeting provided an opportunity for the Parties to discuss the ongoing harmonization work on scientific and policy considerations for pesticide regulation, for example, the harmonization of MRLs and the pesticide registration activities. The next meeting is scheduled for November 1996 in Ottawa. In the upcoming year, the NAFTA Committee on Sanitary and Phytosanitary Measures will focus on facilitating activities which should lead to a decrease in the number of potential trade irritants. The Committee will undertake to identify future areas for harmonization and areas where equivalency could be recognized. Priority will be given to the harmonization of tolerances for pesticides and for food additives, pesticide registration procedures and veterinary drug residue levels. The relationship between the SPS Committee and the existing bilateral and trilateral Working Groups will be formalized. The SPS Committee will consider 13

the issue of trade in genetically modified material. The SPS Committee will continue to exchange information and to provide a forum for the discussion of bilateral issues. 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. NAFTA requires the Advisory Committee on Private Commercial Disputes (Committee) to report and provide recommendations to the NAFTA Commission on general issues referred to it by the Commission respecting the availability, use and effectiveness of arbitration and other procedures for the resolution of private international commercial disputes in the free trade area.



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. import-sensitive 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 minims provision, which otherwise allows up to 7 percent of non-NAFTA-origin product to be included in final NAFTA goods.

All single-fruit juices (fresh, frozen, concentrated, reconstituted, fortified) must be made from 100-percent NAFTA-origin fresh citrus fruit.

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. The de minimise provision does not apply to any citrus products.

Vegetable Oil:
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.

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 Product:
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.

Article 401: Originating Goods

A good shall originate in the territory of a Party where: a) the good is wholly obtained or produced entirely in the territory of one or more of the Parties, as defined in Article 415; b) each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification set out in Annex 401 as a result of production occurring entirely in the territory of one or more of the Parties, or the good otherwise satisfies the applicable requirements of that Annex where no change in tariff classification is required, and the good satisfies all other applicable requirements of this Chapter; c) The good is produced entirely in the territory of one or more of the Parties exclusively from originating materials; or d) except for a good provided for in Chapters 61 through 63 of the Harmonized System, the good is produced entirely in the territory of one or more of the Parties but one or more of the non-originating materials provided for as parts under the Harmonized System that are used in the production of the good does not undergo a change in tariff classification because i. the good was imported into the territory of a Party in an unassembled or a disassembled form but was classified as an assembled good pursuant to General Rule of Interpretation (a) of the Harmonized System, or ii. the heading for the good provides for and specifically describes both the good itself and its parts and is not further subdivided into subheadings, or the subheading for the good provides for and specifically describes both the good itself and its parts, provided that the regional value content of the good, determined in accordance with Article 402, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the


net cost method is used, and that the good satisfies all other applicable requirements.

This report has two objectives. First, is set out to determine how the quality of life in North America, particularly in Mexico, has fared as a result of trade liberalization in North America. While we touch on the experience of all three countries, we emphasize Mexicos experience since the enactment of NAFTA, as it is more relevant to other developing countries interested in strengthening their economic ties with wealthy countries such as Canada and the United States. The study is different from those already done by some research institutions, advocacy groups, and intergovernmental organizations because we answer this question about the lessons of NAFTA by analyzing what conventional NAFTA studies pass over. The analysis focuses on people, their communities, and the choices they make as they attempt to negotiate their social and economic environments. They emphasize changes in household income, pay checks and productivity, rural employment, and agricultural production and land use, and the overall effect of these changes on migration and environmental quality. They then examine how NAFTAs trade rules and institutions played a role in these changes. In short, while most positive analyses focus on the macro level and most negative analyses rely only on losses and not gains, our analysis provides a rigorous and balanced assessment of NAFTA by focusing on its effects on peoples lives, livelihoods, and households. Their second objective is to offer insights to other countries, particularly in Latin America, that are interested in strengthening their bilateral and multilateral economic ties within the region. While not entirely similar, Mexicos economic and cultural history and rich ecosystem are more closely linked to those of its Latin American neighbours than to those of the United States or Canada. These similarities mean that NAFTAs record can offer insights to other countries as they consider the potential costs and benets of agreements such as CAFTA and FTAA.


Article 101: Establishment of the Free Trade Area

The Parties to this Agreement, consistent with Article XXIV of the General Agreement on Tariffs and Trade, hereby establish a free trade area.

Article 102: Objectives

The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favoured-nation treatment and transparency, are to: Eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; Promote conditions of fair competition in the free trade area; Increase substantially investment opportunities in the territories of the Parties; Provide adequate and effective protection and enforcement of intellectual property rights in each Party's territory; Create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement. The Parties shall interpret and apply the provisions of this Agreement in the light of its objectives and in accordance with applicable rules of international law.

Article 103: Relation to Other Agreements

1. The Parties affirm their existing rights and obligations with respect to each other under the General Agreement on Tariffs and Trade and other agreements to which such Parties are party. 2. In the event of any inconsistency between this Agreement and such other agreements, this Agreement shall prevail to the extent of the inconsistency, except as otherwise provided in this Agreement.


Article 104: Relation to Environmental and Conservation Agreements

1. In the event of any inconsistency between this Agreement and the specific trade obligations set out in: a. The Convention on International Trade in Endangered Species of Wild Fauna and Flora, done at Washington, March 3, 1973, as amended June 22, 1979, b. The Montreal Protocol on Substances that Deplete the Ozone Layer, done at Montreal, September 16, 1987, as amended June 29, 1990, c. the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, done at Basel, March 22, 1989, on its entry into force for Canada, Mexico and the United States, or d. The agreements set out in Annex 104.1, Such obligations shall prevail to the extent of the inconsistency, provided that where a Party has a choice among equally effective and reasonably available means of complying with such obligations, the Party chooses the alternative that is the least inconsistent with the other provisions of this Agreement. 2. The Parties may agree in writing to modify Annex 104.1 to include any amendment to an agreement referred to in paragraph 1, and any other environmental or conservation agreement.

Article 105: Extent of Obligations

The Parties shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments.









Conservation Agreements
1. The Agreement between the Government of Canada and the Government of the United States of America Concerning the Tran boundary Movement of Hazardous Waste, signed at Ottawa, October 28, 1986. 2. 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, signed at La Paz, Baja California Sur, August 14, 1983.

This provides a procedure for the interstate resolution of disputes over the application and interpretation of NAFTA. It was modelled of the Canada-United States Free Trade Agreement. NAFTA's effects, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, and NAFTA Revisited by the Institute for International Economics. Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 199495 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from US agribusiness, and negative impacts on US workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and Mexico. Some economists believe that NAFTA has not been enough (or worked fast enough) to produce an economic convergence, nor to substantially reduce poverty rates. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture. An investor of a Party may invoke the mechanism, either on its own behalf or on behalf of an enterprise, if it has incurred a loss or damage as a result of the failure of another Party to observe the provisions or the provisions relating to State enterprises contained in Article 20

1502.2 and Article 1503.3 of the Agreement. Note that the investor has the right to resort to the dispute settlement mechanism if it has incurred loss or damage as a consequence of the breach of a provision of the Chapter. The fact that the Party receiving the investment has adopted a measure contrary to its obligations is not sufficient for recourse to the dispute settlement mechanism. The arbitral proceeding may be started up to three years after the date on which the investor acquired knowledge, or should have acquired knowledge, of the alleged breach and of the loss or damage incurred. In other words, the action must be brought within three years. NAFTA created formal mechanisms for solving trade disputes. The principal dispute mechanisms covers disputes related to investment, and disputes related to services. So far, agricultural trade disputes have been addressed of the agreement. It also concerns the

application of anti-dumping and countervailing duty laws. The disputes that relate generally to the interpretation or application of NAFTA are also there. While the dispute settlement mechanisms under the two chapters differ in some details, in general they are similar in their development of strict rules of procedure and timetables for panel selection and panel decisions. The rights of each party to choose panellists who are charged with acting in a neutral, expert, and personal rather than national capacity, and the use of arguments, submissions and rebuttals are specified. At the close of the review period, panels issue initial declaratory opinions, along with recommendations for remedial action if the panel's findings are affirmative. Parties may object to or appeal the panel decision. In this case, an extraordinary panel will reconsider the panel's findings, and either uphold them or remand them to a newly formed panel. Under Chapter 20, the panel may re examine the finding before publishing its final opinion, which is not subject to appeal. Under both chapters, the resolution of the dispute should be the removal of the offending practice, but failing that, the offending party must make compensation or the injured party may take comparable action against the offending party.


Government to Government Negotiations

Government negotiations offer a venue for resolving disputes before they reach the litigation or investigation stage. Ad hoc governmental negotiations have addressed trade disputes as they occur, and some negotiations are conducted in standing committees, in particular the Committee on Agricultural Trade and the Committee on Sanitary and

Phytosanitary Measures (SPS Committee).The Committee on Agricultural Trade is responsible for monitoring and promoting cooperation on the implementation of the agriculture provision of NAFTA and for providing a forum for consultations on

agricultural trade issues. For example, clarification and publication of Mexican requirements for the issuance of SPS import permits for wheat imports was achieved following consultations on this issue in the NAFTA Committee on Agricultural Trade. The NAFTA SPS Committee's role has been to facilitate technical cooperation between NAFTA partners and to enable consultation on SPS measures. This has provided a venue for resolving, and preventing, disputes relating to SPS measures, which have grown significantly in recent years. One achievement has been the implementation within NAFTA of "regionalization," a concept originally contained in the Canada -U.S. Free Trade Agreement and further developed in the WTO SPS Agreement and the NAFTA SPS provisions. This term refers to the process in which certain regions of countries are declared to be free of certain pests or diseases, even though these diseases or pests are present in other parts of the country. Regionalization permits some trade to take place, even though the SPS regulations of the importing country would have otherwise prevented it. While the scope of NAFTA does not extend to domestic programs, government negotiations have resolved cases in which domestic programs or policies had significant trade impacts, and helped smooth out differences in incompatible policies or

regulations. Examples are the negotiated changes in Mexico's dry bean auction system, to stabilize auction timetables and definitions of qualified bidders; and the U.S allocation for Canada under the U.S. sugar and sugar containing products TRQs.


Private Industry Negotiations

Private industry has begun to play a larger role in dispute resolution within NAFTA. In two recent disputes over grapes and cattle, producer groups in Mexico and the United States worked jointly to resolve trade disputes resulting from regulatory incompatibilities and allegations of dumping. A combination of private industry and government consultations led to creation of the Northwest Cattle Project to simplify and facilitate the importation of U.S. feeder cattle into western Canadian feedlots. In an effort to strengthen private dispute resolution capacity, particularly for small and medium sized businesses which need an economical and cost effective way to resolve disputes, the NAFTA governments established the Advisory Committee on Private

Commercial Disputes. This trilateral committee has helped to develop model contractual clauses relating to arbitration and mediation. There are numerous private arbitral institutions available in the three countries, including the American Arbitration Association, the Mexico City National Chamber of Commerce and the International Chamber of Commerce, and the trilateral Commercial Arbitration and Mediation Center for the Americas

(CAMCA). An impediment for small business is the difficulty of enforcing arbitral awards on foreign firms, but the existence of NAFTA has helped to make mediation more effective and enforceable.

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. Since the implementation of NAFTA, the countries involved have been able to do the following. Trade between the United States and its NAFTA partners has soared since the agreement entered into force. U.S. goods and services trade with NAFTA totalled $1.6 trillion in 2009 (latest data available for goods and services trade combined). Exports totalled $397 billion.


Imports totalled $438 billion. The U.S. goods and services trade deficit with NAFTA was $41 billion in 2009. The United States has $918 billion in total (two ways) goods trade with NAFTA countries (Canada and Mexico) during 2010. Goods exports totalled $412 billion; Goods imports totalled $506 billion. The U.S. goods trade deficit with NAFTA was $95 billion in 201 Trade in services with NAFTA (exports and imports) totalled $99 billion in 2009 (latest data available for services trade). Services exports were $63.8 billion. Services imports were $35.5 billion. The U.S. services trade surplus with NAFTA was $28.3 billion in 2009. The impact of NAFTA just after its introduction in 1995 marked the sign of Mexico becoming a high growth economy. Harald Feldhaus chairman of Brockman Schuh as appeared in Brian (1994) noted that Mexico after NAFTA now has single digit inflation, double digit growth and an increasingly deregulated economy. However Brian (1994) emphasized that the benefits of NAFTA would only truly be recognized if Mexico was able to develop its infrastructure to meet the pace of the growing economy. According to a study conducted by Tamayo-Flores (2001) Mexico has received a disproportionately higher level of FDI in its northern states than typical southern states such as Oaxaca. The study focused on the impact on economically neglected Mexican regions resulting from the process of economic integration, specifically the case of NAFTA. Ultimately it was theorized that Mexico had a long history of industrialization as well as urbanization that favoured some regions over others and that economic integration with Canada and the United States resulting from increasing trade liberalization is expected to increase economic disparities between Mexican States specifically Oaxaca and Northern regions such as Chihuahua. As such Tamayo-Flores (2001) stated that there is little doubt that Mexico has benefited from exponential growth resulting directly from the implementation of NAFTA citing that in the five year period after the implementation of NAFTA (1994-1998) Mexico received over US$53 billion in FDI which is a proportionately threefold increase over the five years leading up to NAFTA. In the 2001 study, the one-hundred investments by trans-national corporations in their Mexican subsidiaries, the automobile industry accounted for 47% of the investments with northern areas accounting for the bulk of this investment.


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 totalled $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 totalled $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.



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, up 23.4% ($78 billion) from 2009 and 149% from 1994 (the year prior to Uruguay Round) and up 190% from 1993 (the year prior to NAFTA). 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).

US exports of agricultural products to NAFTA countries totaled $31.4 billion in 2010. Leading categories included red meats, fresh/chilled/frozen ($2.7 billion); coarse grains ($2.2 billion); fresh foods (excluding nuts) ($1.8 billion); and fresh vegetables ($1.7 billion).

US exports of private commercial services, excluding military and government, to NAFTA were $63.8 billion in 2009 (the latest data available), down 7% ($4.6 billion) from 2008, but up 125% since 1994.


1. The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4% increase ($25 billion) over 2009. 2. The US goods trade deficit with NAFTA accounted for 26.8% of the overall U.S. goods trade deficit in 2010. 3. The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).

1. The US foreign direct investment (FDI) in NAFTA Countries (stock) was $357.7 billion in 2009 (latest data available), up 8.8% from 2008. 2. The US direct investment in NAFTA countries is in nonbank holding companies, and in the manufacturing, finance/insurance, and mining sectors. 3. 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. According to standard trade and growth theory, the large differences among the economies of the US, Mexico, and other countries should generate large flows of trade and investments I among the regions. In terms of trade, Mexico, and Latin America should, in general, have comparative advantage in skilled labour and natural resources of intensive goods. Regarding 27

capital or labour flows, the large difference in the stocks of physical capital per capita, according to the neoclassical growth model, should generate large flows of capital from the US to Latin America and/or large flows of workers from Latin America to the US. While human capital may be diminish and even revert these implications, the direction of actual flows is in line with the predictions of the basic economic models. Indeed, trade and investment flows are significant and have grown over time. The US is the major trade partner and the main investor for most, if not all, the countries in the region (with some obvious exceptions like Cuba). Like most North-South models, trade with the US is vertical, not horizontal. The direction of factor flows is also in line with the implications of the model. For instance, temporary worker programs have been present between the US and Mexico and have mobilized large flows of labour from Mexico to the US. Immigration has been significant especially after the 70s and has accelerated in the 1990s. The role of the US economy as a source of FDI for Mexico has also increased over time. The fraction of net US FDI to Mexico with respect to total net FDI to Mexico. Over the sample period, there seems to be an increase in the participation of US investors with respect to other investors. But this fraction has fluctuated. It is important to note, however, that there are no reasons to believe that NAFTA would necessarily increase the US participation, as investors from other countries would also benefit from the access to US markets available to goods produced in Mexico. Interestingly, over time, both forms of FDI have been present in Central and South America. The first forms of FDI were directed to the most traditional sectors of the region (agricultural and mineral goods), which constituted the main countries exports (cooper, bananas, oil, etc. were -originally produced by foreign companies). During the Import Substitution era, Central and South America significantly raised the tariffs, which attracted significant flows of horizontal FDI. Indeed, companies such as Firestone, Pfizer, Colgate, Sherwin Williams and many others established production plants in Central America. Automakers established production units in Brazil, Argentina, and Mexico. It is easy to realize that tariff jumping was one of the major motivations for those investments. Nowadays, however, the most relevant form of FDI is very likely to be vertical, especially in Central America and the Caribbean. In fact, during the 1980s, the debt crisis together with the political instabilities in Nicaragua and El Salvador practically shut down the Central American Common Market (MERCOMUN). As a response, those countries, 28

pioneered by Cost Rica, started the promotion of exports to alternative markets, first with direct fiscal subsidies and later with tax exemptions in Export Processing Zones (EPZs).

U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994, but at the sectoral level, it is difficult to measure the specific effects of NAFTA on specific industries. The automotive, textile, and apparel industries have experienced the most significant changes in trade flows, which may also have affected employment levels in these industries. Not all changes in trade and investment patterns since 1994 can be attributed to NAFTA because the U.S. economic expansion during the 1990s and the Mexican peso devaluation of 1995 also affected trade patterns. This section discusses five major U.S. industries that have high volumes of trade with Mexico and Canada. These industries include the automotive industry, chemicals and allied products, computer equipment, textiles and apparel, and microelectronics. The expansion of the U.S. economy during the 1990s could be the most important factor to consider in evaluating the trade trends since NAFTA. As the U.S. economy expands, so does the demand for imports. Part of the growth in imports from Mexico after NAFTA implementation could have been due to economic growth in the United States, and not entirely attributable to a reduction in trade barriers. In addition, the peso devaluation of 1995 reduced the purchasing power of the Mexican people which likely reduced the demand of Mexicos imports from the United States, at least in the short term. The automotive industry had the highest dollar increase ($71.48 billion) in total U.S. trade. In percentage terms, the textiles and apparel industry had the highest increase (222%). The industries with the highest percentage growth in U.S. imports from Mexico and Canada were computer equipment (397%), and textiles and apparel (386%). In dollar terms, imports in the automotive industry had the highest increase ($49.66 billion). In exports, the

microelectronics industry had the highest percentage increase (268%), while the automotive industry had the highest dollar increase ($21.82 billion). 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 29

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 Maquiladoras-border states has decreased. This has allowed for the rapid growth of non-border metropolitan areas, such as Toluca, Leon and Puebla; all three larger in population than Tijuana, Ciudad Juarez, and Reynosa. While some U.S. industries may have benefitted from increased demand for U.S. products in Mexico or Canada, creating new jobs, other industries have experienced job losses. As mentioned previously, data on the effects of NAFTA is very limited and the effect on specific U.S. industries is difficult to quantify. Trade related job gains and losses since NAFTA may have accelerated trends that were ongoing prior to NAFTA and may not be totally attributable to the trade agreement. Quantifying these effects is not easy because of the other economic factors that influence trade and employment levels. The devaluation of the Mexican peso in 1995 resulted in relatively lower Mexican wages, which may have provided an incentive for U.S. companies to move to lower their production costs. Trade-related employment effects following NAFTA could have also resulted from the lowering of trade barriers, and from the economic conditions in Mexico and the United States influencing investment decisions and the demand for goods.

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. 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 30

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. 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 the ISDS provisions. 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 nontariff 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.

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 North South FTA 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 small-key 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.

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 thirdcountry 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 32

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).



Leading up to the introduction of NAFTA in 1994, Mexicos economy was in the latter stages of a stabilization and reform program that started in the late 1980s. This program was similar to those adopted elsewhere in the region in the 1990s, featuring inflation control in the form of an exchange rate-based monetary anchor and market liberalization measures, notably in the financial sector. However, the challenges of sustaining this program in Mexico increased over time, as the peso became overvalued and external competitiveness declined. In addition, imprudent fiscal policies and excessive reliance on external borrowing contributed to financial fragilities. Against this background, by early 1994, Mexico was facing serious macroeconomic imbalances. These include a widening current account deficit in the face of strong domestic spending, emerging problems in the financial sector, increasing concerns about the fiscal outlook, and outflows of private capital. The initial response of the authorities to market pressures was to shift toward increasingly risky financing instruments as other credit channels dried up. When the crisis eventually hit at end-1994, the impact was amplified by the balance-sheet effects of exchange rate depreciation, which required extensive government intervention in support of financial institutions. The currency depreciated sharply, output plunged, and inflation rose significantly. In some respects, this unstable macroeconomic environment was an unpromising setting for Mexico to reap the benefits of North American trade integration. Significant exchange rate and inflation uncertainty, coupled with a sharp contraction in domestic financial intermediation and external capital flows, had severely damaged investor confidence. In some respects, however, the crisis left Mexico better positioned to take advantage of trade liberalization. Notably, the crisis left Mexico with a highly depreciated real exchange rate and a firm commitment to a strengthened policy framework, including a flexible exchange rate, inflation control combined with measures to strengthen the fiscal position and comprehensively deal with problems in the banking sector.


The speedy recovery from the 199495 crisis partly stemmed from the credibility offered to the Mexican reform process by participation in NAFTA. In 1982, Mexico imposed prohibitive restrictions on imports, such as tariff increases to 100 percent and strict licensing requirements on all imports. In the 199495 crisis, while Mexico increased some tariffs on imports from non-NAFTA countries, it respected its NAFTA obligations and continued to implement the reform program. The change in policy response affected the dynamics of trade flows: the growth of exports and imports was much faster after the 199495 crisis than in 1982. Moreover, while it took seven years for Mexico to return to international capital markets after its 1982 crisis; it took seven months after the crisis in 199495. Several studies argue that NAFTA played an important role in shaping the policy responses of Mexico and the United States to the 199495 crisis. The World Bank (2000) claims that there was an implicit understanding that Mexico would receive preferential treatment for U.S. assistance as long as it maintained its reform program. Mexico stayed on course in terms of firmly implementing its reform agenda during the crisis. The United States, in return, fully supported Mexicos stabilization and reform programs by providin g a large loan to help Mexico to deal with its balance of payment problems. The 19962000 periods was characterized by strong growth in real output, in conjunction with a significant opening of the economy in terms of rising shares of imports and exports in GDP. Most significant was the increase in trade with the NAFTA partners as extensively discussed in the next section. The substantial opening of Mexicos export sector provided a key engine of growth in the process of recovering from the Tequila crisis. At the same time, trade deepening made Mexico more resilient to shocks to international capital flows by redressing the previous imbalance between the large sizes of capital flows compared with small trade flows. In contrast, some other countries in the region, such as Argentina and Brazil, experienced little trade deepening during the 1990s, in part because inflexible exchange rate regimes did not provide scope to stimulate exports through nominal exchange rate depreciation.


Like the United States and Mexico, Canada, the leading exporter of goods to the United States, has experienced economic growth since NAFTA's implementation. If anything, Canada has seen the strongest gains, though again it is difficult to attribute direct causation, particularly given that Canada and the United States had a free trade deal that predated NAFTA. Canada's GDP has grown at a faster rate than either Mexico's or the United States' since 1994. Between 1994 and 2003, Canada's economy showed average annual growth rates of 3.6 percent, compared to 3.3 percent in the United States and 2.7 percent in Mexico. Canadian employment levels have also shown steady gains in recent years, with overall employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian manufacturing employment held steady, though Schott and Hufbauer note that Canadian economists remain concerned about the "productivity gap" between the Canadian and U.S. economies. U.S. labor productivity has consistently outpaced Canada's, and the gap has broadened since NAFTA was put in place. An important benefit of the NAFTA for Canada has been the much improved access to the Mexican market. Canadian firms have been able to expand sales in sectors that were previously highly restricted, such as automotive products, financial services, trucking, energy and fisheries. Also, Canadian exports have become steadily more diversified, with value added manufactured products accounting for the largest share of total exports to Mexico in 1998. Mexico is now Canadas 13th largest export market and fourth largest import source. Despite the economic adjustments required in Mexico as a result of the financial crisis of December 1994 and its aftermath, Canadian exports to Mexico have raised consistently since the implementation of the NAFTA, reaching $1.4 billion in 1998, an increase of 65% over the Agreements first five years. Canadian imports from Mexico have more than doubled since 1993, increasing to $7.6 billion by 1998. Overall, twoway trade between Canada and Mexico has shown impressive growth over the NAFTAs first five years, doubling to $9 billion in 1998. It is important to note that existing statistics are believed to significantly underreport the true magnitude of Canadian exports to Mexico given the high estimated volume of transhipment via the United States. This in turn results in considerable variance in our respective national trade statistics (with Mexican figures showing bilateral trade at $11 billion and Canadian exports to Mexico at more than $3 billion in 1998). The statistical 36

agencies in the three NAFTA countries are cooperating with a view to reconciling discrepancies between them, and this work is continuing in 1999. One of NAFTA's biggest economic effects on U.S.-Canada trade has been to boost bilateral agricultural flows. Canada is the leading importer of U.S. agricultural products and U.S. agricultural exports to Canada roughly doubled between 1994 and 2003. The U.S. Department of Agriculture offers a sector-by-sector review (PDF) of U.S.-Canada trade since NAFTA's implementation, which shows broad increases in trade in several different sectors. On the economic side, Canada also just all other countries has its ups and downs. Canada being an industrial and highly technological country has a very large Gross Domestic Product as well. During 2007, its GDP was $1.3 trillion, with a fairly low growth rate of around 2.5%. As a result of a large GDP, and a relatively small population size, Canada ends up with a high GDP per capita or around $38000. Canada has a labour force of 18 million (2007), and an unemployment rate of 6%. The majority of this labour force, 76% is employed by the services area, about 13% are involved in manufacturing, and the rest of them are involved in agriculture and construction. The unemployment rate was not as low as 6% all the time. Just one year earlier, 2006, it was 6.4%, but the economy was showing signs of improvement. The biggest negative thing, with respect to the labour force during 2006, was the loss of 82600 manufacturing positions since the beginning of the year. Although all these negatives were taking place in Canada during 2006, by December the unemployment rate dropped to 6% which was a 30 year low and this was the result of a tremendous job creation of about 62000 by the end of the year. The economic improvement continued during 2007, and that is how the unemployment rate dropped to 6%. Another topic of interest is the inflation rate. In 2007 the inflation rate of Canada was almost nonexistent. It was as low as 2%. In 2006 though inflation went as high as 2.8%, because of the rise in gasoline prices. Around May of 2006, the Bank of Canada increased its interest rate to fight inflation, and most economists were sure that that was the last hike, but when the inflation rate hit 2.8% they were not sure any more. Another important aspect of the Canadian economy is trade. During 2007, Canada had total exports of $440 billion, composed mostly of motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment, chemicals, just to name a few. Most of these exports, around 82% went to the U.S., and the remaining to the rest of the world. 37

Canada also imports a lot of things, and in 2007 the imports totalled $394.4 billion, obviously an overall surplus of $45.7 billion. The imports included machinery and equipment, motor vehicles and parts, crude oil, chemicals, etc, of which 54.9% were imported from the U.S., 8.7% from China and 4% from Mexico. Canada has been running a trade surplus for years, but it seems that the composition of the surplus is changing. In fact the surplus now depends mostly on energy and commodity exports. In support of this, all know that in the 90s most of Canadas surplus was created by the exports of cars, trucks and auto parts, but these exports have been declining steadily since 2000, to the point that automotive trade had a deficit towards the end of 2006. In concluding this section, based on the data presented, that Canadas economy is not bad. With an inflation rate of 2.5%, a growth rate around 3%, and a trade surplus of $50 plus billions, it seems that they are on the right direction. The only thing they should keep an eye on is the unemployment rate which is 6%, although even that by the end of 2007 showed signs of decline due to the creation of thousands of jobs. The fastestgrowing component of services trade has been in the computer and information services area, in which there is a high degree of specialization. In fact, bilateral trade between Canada and the United States in informatics services has emerged as one of the fastestgrowing sectoral relationships in the world. Exports to the United States have also increased in such areas as communications, architecture, engineering and other technical services. Imports of services to Canada from the United States, meanwhile, have increased in areas such as management and advertising services. Although trade in services is on the rise, it currently corresponds to only 12.4% of Canadas total merchandise trade with the United States. Given the large contribution of services to Canadas gross domestic product (GDP) (services currently make up almost two thirds of GDP), the rapid growth of the services sector in both economies and the NAFTAs provisions to liberalize services trade between the NAFTA parties, this trade is expected to increase in the future. Many academics in Canada also agree that the NAFTA has played a significant role in making Canadian companies more efficient and in preparing them for the challenges of the global economy in the new millennium. Professor John Kirton from the Centre for International Studies at the University of Toronto asserts that [the] NAFTA has forced us to rationalize, to get our cost structure down and to learn how to market and produce for countries that are very different from ours. Professor Steven Globerman from 38

Simon Fraser University in B.C. maintains that the economic integration of Canadian industries with those of the United States and Mexico has prompted specialization across and within Canadian businesses. With increased specialization, Globerman argues, comes increased productivity

The U.S. Congress approved the North American Free Trade Agreement (NAFTA) after an intense political debate. Opponents voiced a number of concerns, focusing on the impact of the agreement on U.S. labour markets. Often these arguments took on a mercantilist tone, with NAFTA opponents arguing that imports from Mexicoaccompanied by surging capital ows to Mexicowould destroy jobs in the United States. Other concerns were more subtle and related to the effect trade liberalization in Mexican agriculture would have on labour market transitions in Mexico and unskilled labour emigration to the United States. For example, there was concern that Mexicos traditional anti-poverty policies for rural labour, which accounted for approximately 25 percent of the labour force in the early 1990s, were partially supported by trade restrictions. The anticipated expansion of U.S. grain exports to Mexico under NAFTA raised concerns that Mexicos rural labour market would collapse, leading to a surge of migration of unskilled workers to the United States. On the other side, NAFTA supporters argued that trade liberalization would create gains from increased trade based on comparative advantage. They pointed out that cheaper imports from Mexico helped U.S. consumers (in purchases of nal goods) and producers (in purchases of intermediate goods). In the long run, as Mexicos economy grew and demanded more goods and services, there would be an expanding market for U.S. exports. Furthermore, they argued that the agreement would have a relatively small impact on the U.S. economy since Mexico accounted for a small share of U.S. trade and the U.S. average tariffs against Mexico were already low. Like many NAFTA opponents, supporters also often relied on mercantilist arguments that exports to Mexico were good for the United States because they created jobs. Real exports and imports for the U.S. economy since 1980, along with bilateral real exports and imports with Mexico and Canada, U.S. trade with Mexico has grown more rapidly than overall trade since Mexico started its domestic reform process in the mid-1980s. U.S. trade with Mexico accelerated since NAFTA was enacted in 1994, although there was a 39

dip in 1995 when Mexico went through its peso crisis (to be discussed in the next section). The Canada-U.S. Free Trade Agreement (CUSFTA) went into effect earlier, in 1989, and so Canadian trade shows only a minor acceleration since the enactment of NAFTA. Mexico has not relied on the available extended phase-in period for corn in part because it has undertaken major reform of its agricultural policy system, including replacing price supports with income subsidies under the Procampo program initiated in late 1993. Mexican agricultural policy has not been constrained by NAFTA, but the existence of the NAFTA timetable has given credibility to the domestic reform process since farmers can see that the old policieswhich relied on trade restrictions to support domestic prices in sectors such as maize cannot be reinstated. Instead, Mexico has committed itself to free trade and has locked into such policies via NAFTA. Between 1993 and 1998, U.S. agricultural exports to NAFTA countries increased by an annual average of 9.5 percent compared to a 2.8 percent annual increase to its non-NAFTA partners (calculations based on trade data in U.S. Department of Agriculture, 1999). U.S. agricultural imports from NAFTA countries increased an average of 13.8 percent annually, compared to 7.7 percent from non-NAFTA partners. According to U.S. Department of Agriculture simulations of a base model without NAFTA, the agreement has had small but positive effects on U.S. agricultural trade. Independently of NAFTA, the United States and Canada have reformed domestic agricultural support policies to reduce distortions in production decisions. The changes in domestic reforms in all three countries have had a bigger impact on agricultural output, employment, and trade than has NAFTA. The policy changes are consistent with the reality of an integrated regional economy in which it is difficult to support different domestic agricultural prices in individual members countries.


NAFTA and U.S. Labour Markets

Perhaps the worst fear in the United States about NAFTA was that U.S. workers could not compete, and there would be a surge of imports based on low Mexican wages. Ross Perot memorably spoke of a giant sucking sound south of jobs moving to Mexico because of NAFTA. In 1991, the average hourly compensation in Mexican manufacturing was only about 14 percent of the U.S. gure: $2.17 in Mexico versus $15.45 for the United States There was also concern that investment would move from the United States to the Mexican economy, further eliminating U.S. jobs. The broad consensus from research in the early 1990s suggested that these fears were overstated. For example, the Congressional Budget Office (1993) estimated that the total number of U.S. workers who might have to change their jobs due to NAFTA was likely to be substantially less than half a million, spread out over at least a decade. To put this number in perspective, the CBO noted that in the 1980s, nearly 20 million workers lost their jobs and were not recalled by their former employers. Similarly, a Department of Labour (1992) survey of potential employment effects of NAFTA found that sectoral employment changes would be small, in most cases less than 2 percent of current sectoral employment and much less than normal turnover rates. Empirical studies at the time of the NAFTA debate also predicted very small wage effects. For example, the International Trade Commission (1992) survey of a symposium of academic research noted that aggregate real wages of U.S. workers would rise, with the increases ranging from 0.1 to 0.3 percent. Likewise, the CBO (1993) found that NAFTA would have a small effect on wages, with most estimates of changes in real wages being less than 1 percent.


NAFTA is one of the most successful treaties of the times in terms of growth in trade i.e. imports & exports, G.D.P etc. But on the other hand it is also responsible for causalities like loss of jobs, migration, rising level of inequality and many others. Thus it is important that the treaty should be carried forward concerning about taking steps for the problems originated due to NAFTA ,otherwise it will create inequality in many terms which can lead to bad conditions in future for all the three countries. First, economists can do a reasonably good job of protecting the gains from trade liberalization agreements. The mainstream forecasts during the NAFTA debate were basically correct: NAFTA has had relatively small positive effects on the U.S. economy and relatively large positive effects on Mexico. The only blemish marring this otherwise exemplary use of economic analysis in a policy debate was the occasional use of mercantilist arguments that attempted to infer the effect of trade liberalization by applying simple multipliers to projected bilateral trade balances. Such methods are inappropriate for the analysis of the benets and costs of trade liberalization, and were criticized during the debate. Second, a debate over the effects of removing trade distortions should not discuss the aggregate trade balance. Regional trade liberalization primarily affects resource allocation, production, and trade patterns. While regional trade agreements may affect bilateral trade balances, a countrys aggregate trade balance is determined primarily in asset markets. The only way a regional trade agreement NAFTA has not helped the Mexican economy keep pace with the growing demand for

jobs. Unprecedented growths in trade, increasing productivity, and a surge in both portfolio and foreign direct investment have led to an increase of 500,000 jobs in manufacturing from 1994 to 2000. The agricultural sector, where almost a fth of Mexicans still work, has lost 1.3 million jobs since 1994. Real wages for most Mexicans today are lower than they were when NAFTA took effect.

However, this setback in wages was caused by the peso crisis of 1994- 1995not by NAFTA. That said, the productivity growth that has occurred over the last decade has not translated into growth in wages. Despite predictions to the contrary, Mexican wages have not converged with U.S. 42

NAFTA has not stemmed the ow of poor Mexicans into the United States in search of

jobs; in fact, there has been a dramatic rise in the number of migrants to the United States, despite an unprecedented increase in border control measures. Historical migration patterns, the peso crisis, and the pull of employment opportunities in the United States provide better explanations for the increase in migration than NAFTA itself. The fear of a race to the bottom in environmental regulation has proved unfounded. At

this point some elements of Mexicos economy are dirtier and some are cleaner. The Mexican government estimates that annual pollution damages over the past decade exceeded US $ 36 billion per year. This damage to the environment is greater than the economic gains from the growth of trade and of the economy as a whole. More specically, enactment of NAFTA accelerated changes in commercial farming practices that have put Mexicos diverse ecosystem at great risk of contamination from concentrations of nitrogen and other chemicals commonly used in modern farming. Mexicos evolution toward a modern, export oriented agricultural sector has also failed

to deliver the anticipated environmental benets of reduced deforestation and tillage. Rural farmers have replaced lost income caused by the collapse in commodity prices by farming more marginal land, a practice that has resulted in an average deforestation rate of more than 630,000 hectares per year since 1993 in the biologically rich regions of southern Mexico. Put simply, NAFTA has been neither the disaster its opponents predicted nor the saviour hailed by its supporters. But while NAFTAs overall impact may be muddled, for Mexicos rural households the picture is clear and bleak. NAFTA has accelerated Mexicos transition to a liberalized economy without creating the necessary conditions for the public and private sectors to respond to the economic, social, and environmental shocks of trading with two of the biggest economies in the world. Mexicos most vulnerable citizens have faced a maelstrom of change beyond their capacity, or that of their government, to control. In response to the growing challenges facing rural Mexico, many households have developed survival strategies to meet basic subsistence needs. These strategies include a mix of increased cultivation of basic crops and off-farm employment, often in the informal sector, and in some cases in maquiladora plants that have relocated away from the northern border into the hinterlands. Many rural workers have non-agricultural activities as their primary occupations, while relying on sporadic agricultural work to supplement their incomes. Mexicos agricultural policies provide commercial farmers with substantial support, but do 43

not benets subsistence farmers. More than ever, families rely on remittances sent home by those who migrate to the United States; with or without legal status. Finally, to reduce expenses, rural households also fall back on more traditional approaches to heating their homes and feeding their families. The net environmental loss associated with an increase in the farming of marginal land and illegal logging and poaching for fuel and food places some of the most important biological reserves in the hemisphere at risk of irreparable damage. Trade agreements do not need to result in this kind of hardship for the worlds rural poor. Negotiated properly, they can open doors to new markets while providing adequate protections from the stress associated with exposure to global competition and the increased pressure on natural resources. Trade should not be seen as an end in itself; instead, it should be used as a tool to strengthen economies through the operation of comparative advantage. At the same time, governments must respond to economic opening with effective policies, such as the deployment of social safety nets and trade adjustment assistance, and develop and implement programs that protect labour rights and the environment. As nations consider how best to use trade agreements to foster development, offer the following insights: Developing countries interested in freer trade should negotiate longer and more gradual tariff reduction schedules for agricultural products imported from wealthy countries, and negotiate special safeguards to protect against the dumping of subsidized crops. The need for shock absorbers is especially great for the poorest developing countries where agriculture is a principal source of employment. Regional and bilateral trade agreements should not allow developed countries to duck the crucial issue of producer subsidies in agriculture. Trade agreements should allow developing countries to adopt policies that maximize employment gains from trade by promoting the development of domestic suppliers and that do not favour imported components. Whether the suppliers are owned by domestic or foreign rm is not relevant; what is relevant is whether the suppliers create jobs. To minimize the environmental implications of trade liberalization for agriculture, and the tendency of export growers to adopt chemical intensive production methods, trade agreements should set standards that allow developing countries to take advantage of the growing demand for organic food products. The movement of workers is a powerful social and economic force, and countries at all levels of development have good reason to discuss temporary migration in a variety of contexts, which may include future free-trade negotiations. However, given the political sensitivity of 44

the issue, migration should not be allowed to jeopardize agreements on the movement of goods and capital and on other ways of providing services. Free-trade agreements should not be thought of as an end in themselves; nor should they be loaded with unrealistic expectations. Instead, they should be viewed as part of a larger effort toward substantive bilateral and regional cooperation toward common goals. Migration, labour, and environmental protection are examples of topics on which deeper cooperation is sorely needed. Trade liberalization is facing a crisis of legitimacy among people around the world, from rural farmers in Latin America to cotton producers in Africa to manufacturing workers in the United States and Europe. Governments can win back public support for new trade agreements, but they must change their current tactics first, they must stop making empty promises that trade liberalization alone will bring new jobs or clean environments, or stem the ow of illegal migration. Second, they must enhance long-term development and avoid unnecessary setbacks by strengthening their domestic economies capacity to respond to shocks when exposed to the global marketplace. The needs of developing countries must be taken into account in trade negotiations in meaningful ways that create real opportunities for development and growth, so that these countries citizens can also become consumers in the global economy. That, in the long-term, is how everyone will achieve greater prosperity. Mexico has an abundance of labour. Very high population growth rates through the mid1970s translated into a demographic bulge in the workforce through the late 1990s, as people born during the earlier high-growth years matured and began to look for work. In addition, during the 1980s and 1990s, women joined the workforce at increasing rates, in part because of the decline in the reproductive rate, but also out of the need to support household incomes during recurrent economic crises. Overall, the Mexican labour force grew from 32.3 million immediately before NAFTA to 40.2 million in 2002, meaning that Mexico needed almost a million jobs a year simply to absorb the growth in labour supply. Economic theory suggests that opening to trade will increase the demand for labour in a labour-abundant country and therefore will increase the number of jobs, the wages paid, or both. Clearly that would be a desirable effect for a country with a large and growing workforce such as Mexico. However, in practice, the effect of a trade pact like NAFTA depends on many factors, including which tariffs were reduced or eliminated by each country, at what pace, and in what sequence. It also depends on other negotiated provisions of the pactand related government policies that affect decisions about investment, production, and jobs, and on the overall balance of gains and losses from the trade agreement as negotiated. Thus, it is necessary to look at both 45

the elimination of tariffs on exports from Mexico to its northern neighbours (which could increase exports and therefore increase jobs) and the elimination of Mexican tariffs on U.S. and Canadian goods (which could increase Mexicos imports from the United States and Canada and thereby eliminate jobs in Mexico) to understand the impact of NAFTAs tariff cuts on Mexican jobs. The following discussion focuses on tariff changes between Mexico and the United States, because trade between Mexico and Canada is a very small part of Mexicos total trade. Under NAFTA, the United States cut tariffs on most Mexican manufactured goods, with the largest cuts on textiles and apparel, followed by more modest but still signicant reductions on footwear, chemicals, miscellaneous manufactures, and transportation equipment. The United States also cut agricultural tariffs and increased quotas, although one of Mexicos main agricultural products, sugar, continues to be restricted through tariffs and quotas. Other Mexican crops face seasonal restrictions that are scheduled to end by 2008. Meanwhile, Mexico cut tariffs dramatically on both agricultural and livestock products and virtually all manufactured goods from the United States. Some tariffs will be maintained on sensitive agricultural products such as maize and beans until 2008, but in practice the Mexican government has already allowed substantial above-quota tariff-free imports of corn. The pattern of trade between the two countries changed in a number of ways as a result of these cuts. From Mexicos standpoint, the cumulative changes resulted in a shift from a net trade decit with the United States before NAFTA to a substantial net trade surplus in 2002. The overall net surplus masks a growing decit in agricultural trade with the United States that is more than offset by a surplus in manufactured exports from Mexico. Trade in services shows a small decit for Mexico. The impact of NAFTA on the United States economy, employment, and the welfare of its citizens is signicantly less than its impact on Mexico or Canada, for several reasons. The U.S. economy is much larger than that of either of its neighbours; it is less dependent on trade because of its huge (and wealthy) domestic market; and only one-third of its total trade is with its NAFTA partners. Further, U.S. tariffs were substantially lower than those of Mexico and Canada before NAFTA (and its predecessor, CUFTA), and its tariff reductions were proportionately much smaller than the tariff cuts made by those countries. Since NAFTA has had a much smaller overall impact on the U.S. economy, its impact on jobs, wages, and household incomes in the United States is also much less than in Mexico and Canada.


Economic inequality in the United States has been increasing for most of the last two decades. Since the early 1980s, the richest quintile (top 20 percent) of U.S. households has increased its share of national income from 44 percent to over 50 %.Meanwhile; each of the other four household quintiles has seen its share of national income decrease. The growing wage gap between high skilled and low-skilled workers is one of the causes, and to the extent that trade is a factor in the wage gap, it is also implicated in growing inequality.