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Summer 1997 - Volume 3, No. 1

Deciphering the NAFTA
by Kim Green, International Trade Specialist, Tennessee Export Office

When the full text of the NAFTA agreement was made public in September of 1992, after a seeming eternity of secretive negotiations, the sheer complexity of this behemoth of a treaty led many to wonder if its release had actually shed any light upon its substance. With over 1,000 exceedingly dense pages of text and an additional 2,000 pages of annexes, anyone not well-versed in the nuances of trade would find NAFTA's provisions esoteric and mind-numbingly tedious.

The controversy preceding NAFTA's ratification on January 1, 1994, served to further obscure understanding of the possible ramifications to the U.S. economy and to our neighbors to the north and south. More than three years later, the debate still rages about the impact of the creation of the world's second-largest trading bloc (after the European Union). Supporters cite job growth and expanding exports, and refer to their opponents as "xenophobic." Critics contend that NAFTA will facilitate the exploitation of workers from the Yucatan to the Yukon, as wages fall, and call their opposition "ruthless capitalists." Amid this storm of controversy, how does one figure out what's really going on?

Let's start with the facts: What does the NAFTA agreement actually say?

First, the treaty creates a list of objectives for NAFTA:

  • the elimination of barriers to trade in goods and services
  • the promotion of "conditions of fair competition" within the free trade area
  • an increase in investment opportunities within the free trade area
  • the effective protection and enforcement of intellectual property rights
  • the creation of a framework for further cooperation to enhance the benefits of the agreement

The eighteen chapters which follow outline the specifics of how these objectives are to be achieved.

Chapter 3, entitled "Tariff Elimination and Market Access," discusses the schedule for tariff reduction and the removal of non-tariff barriers on various product categories. In many categories, tariffs were immediately reduced or eliminated (e.g. computers and autos), while tariffs on other product categories will be gradually phased out at intervals of 5, 10, and 15 years. Other barriers, such as import licenses and quotas, were also removed for certain categories.

Chapter 4 deals with NAFTA's convoluted rules of origin, which provide preferential treatment for goods which satisfy its criteria. Complying with the rules of origin formulae is about as simple as understanding the U.S. tax code, and the five-year Certificate of Origin record-keeping requirement can be onerous for smaller companies. Tracing component and production stage costs may be particularly difficult, as small and medium-sized firms normally do not maintain records in such detail. New-to-export businesses need to assess the potential of tariff savings versus the costs of initiating compliance.

The remaining chapters address a number of other issues, including:

Other traditional non-tariff barriers to trade, such as phytosanitary restrictions on agricultural products, arbitrary technical standards on manufacturing products, and "non-scientifically based" environmental restrictions.

Fair competition and antitrust measures for state enterprises, government procurement, and certain formerly government controlled industries, such as telecommunications and energy.

Decreased restrictions on trade in services, investment, and finance.

Policies for emergency safeguards for especially vulnerable industries, treaty dispute settlement procedures, and intellectual property protection and litigation procedures.

Net surfers with time on their hands can peruse the full text of the treaty at a number of sites on the World Wide Web (MIT maintains one at http://the-tech.mit.edu/Bulletins/nafta.html). Others might prefer to check out one of the many detailed summaries prepared by experts (Trade Point U.S.A. has a NAFTA analysis at http://www.i-trade.com/dir05/book/).

However, understanding the actual document provides few clues about NAFTA's long-term effects on individual businesses and on the U.S. and Mexican economies as a whole. Without question, the treaty will make U.S. goods more competitive in the traditionally protectionist Mexican market, especially in industries with historically high tariffs, such as agriculture. But how this will translate to U.S. economic growth remains unclear.

The mistake that both NAFTA critics and supporters tend to make is to expect immediate results. Gradual changes in our trade balance with Mexico, a relatively small economy, could scarcely affect the overall number of jobs and/or the standard of living in the U.S. Promises of immediate job creation were most likely used to sell short-sighted politicians on a long-term approach to economic growth.

The peso crisis of 1994 impeded former President Salinas' attempts at economic and political reform which had begun to open Mexico to U.S. exports. Mexico's current pace of recovery from this crisis mirrors the more realistic reform efforts of many of the Eastern European nations. Economic reform is generally a slow and painful process, especially when former industry protections and subsidies are suddenly removed.

Thus a more realistic way to view NAFTA is as a farsighted foreign policy initiative, a buttress for continuing Mexican economic and political reform, that can only stand to benefit all of North America in the long run. As evidence of U.S. and Canadian confidence in the Mexican economy, NAFTA serves as an investment in Mexico's future, and therefore, the future of the U.S. Because even a struggling nation in the throes of tortuous reform makes a much better neighbor than a population of the angry, the marginalized, and the impoverished, the likely result of any U.S. isolationist backlash.

For more information:

"NAFTA Summary and Analysis. Trade Point USA, Dispatch Media Group. All Rights Reserved.

Paul Krugman, "How is NAFTA Doing?" The New Democrat, May/June 1996.


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