house republican conference issue brief - nafta_summary and analysis

8/3/2019 House Republican Conference Issue Brief - NAFTA_Summary and Analysis

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September 13, 1993Dick AnneyChairman26th District, Texas

The North American Free Trade Area (NAFT A) agreement, which brings Mexicointo the current Free Trade Area (FTA) between the U.S. and Canada and expands itsprovisions, offers an opportunity for American firms to get in on the ground floor of whatpromises to be one of the world's major new growing markets. In addition to moreemployment ancj business opportunities for Americans, NAFT A creates pressure for othercountries in this hemisphEtre to seek similar agreements with the U.S.Although some Republicans oppose NAFT A, most Republican Members believethat NAFTA is key to America's future prosperity and competitiveness as well as

hemispheric pe.ace and ~)ecurity. Because NAFTA essentially eliminates governmentcontrols over trade with Mexico and Canada, it gives individual Americans both thefreedom to sell their goods and services to a vastly expanded market as well as thefreedom to purchase a wIder variety of goods and services at more competitive prices.

This Issue Brief outlines the main provisions of the NAFT A agreement and its sideagreements on the environment and labor, and analyzes the likely economic effects ofratification.

Since the mid-1980s, and particularly under current President Carlos Salinas deGortari, Mexico has implf~mented major free market reforms, including joining the GA TTand liberalizing trade and investment laws as a means of invigorating its depressed, debt-ridden and overly socialized economy. The Mexicans hope to cap this reform with a freetrade area with the U.S.

1818l.ONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C. 20515 {202)22S-5107


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Mexico is America's third largest trading partner. Since Mexico initiated itSeconomic reform program, it has become an even larger importer of much-neededAmerican goods. (See Table 1) American exports have jumped by nearly 350 percentsince 1986.Table 1 --U.S.-Mexico Bilateral Trade

{in $billions)

From the perspective of the U.S., the North American Free Trade Area is atbottom, as its name suggests, an agreement that opens Mexico's market to Americanexports. Specifically, it brings Mexico into the U.S.'s existing FTA with Canada ar)dexpands the provisions of the pact.Tariffs. NAFT A will phase out all tariffs on goods and services tradedbetweerl the member countries. This Is a significant benefit for the U.S.becauS'8 Mexico's tariffs on American goods average about tenpercent while U.S. tariffs on Mexican products average between threeand four percent.

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If the three governments approve NAFT A. some tariffs will be eliminatedimmediately when the pact takes effect on January l' 1994. Other tariffs willbe pha..c)ed out in five year intervals. with all tariffs elim inated after fifteenyears. Most trade will be duty-free after ten years.Rules of OrlQln. As with the U.S.-Canada FTA, NAFTA contains rules oforigin to prevent non-member countries from using one NAFTA country asa way to channel goods into another while avoiding tariff or other traderestrictions. The most notable rule requires most motor vehicles to contain62.5 percent North American content. Motor vehicle parts constituteAmerica's largest export to Mexico, while parts in addition to vehiclesconstitute America's largest export to Canada. This rule of origin Is meantprimarily to prevent Japanese firms from using assembly plants In

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Mexico as a way to Increase sales of vehicles In the U.STrade In Services. NAFT A also provides for removal of most barriers totrade in services. This will allow American banks, securities firms andInsurance companies, which generally have been barred from Mexico,to operate south of the border. Barriers to trade in other services will beeliminated or reduced as well. In general, NAFTA mandates .nationaltreatment,. meaning that whatever treatment is extended to domesticservice providers must be extended to providers from all NAFTA countries.For example, if domestic Mexican companies are allowed to marketsecurities in that country, American investment houses would enjoy thesame freedom and would not be subject to discriminatory regulations issuedby the Mexican government.

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Aarlculty!!. In a major breakthrough in an historically thorny area, NAFTAprovides that Mexico and the U.S. will convert their non-tariff barriers onagricultural trade (for example, quota restrictions) into tariffs and phasethem out over fifteen years.

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Enerav. NAFT A liberalizes trade in electricity and natural gas, allowingforeign firms to bid on supply and service contracts with Pemex, Mexico'sstate oil company, and the State Electricity Commission. While underNAFT A some restrictions on foreign ownership in the energy area wouldremain, it is important to note that in recent years Mexico has allowedforeign involvement in peripheral energy-related operations, and that underPresident Salinas, the Mexican government is moving slowly towardsallowing more foreign involvement in the energy sector .

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What NAFT A Doesn't DoUnlike the current efforts by the European Community to remove all barriersto the movement of goods, services, capital and labor, NAFT A does notliberalize immigration. It does allow for temporary entry of no more than5,500 Mexican businessmen, but America can keep its immigrationrestrictions, tighten enforcement or tighten the laws themselves.

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Many ~ponents allege that NAFT A will open Mexico to a flood of Americanfirms fleeing south of the border to take advantage of cheap labor. ButMexico ,already has removed most of its restrictions on foreign investmentand ownership of manufacturing facilities. The American businesses thatwant to move to Mexico can do so already --as many have. NAFTAdoesn't create incentives to move American businesses south of theborder, but, because of the reduced Mexican tariffs, it providesIncentives to service Mexican markets from the U.S.

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.. This allegation also depends on the erroneous assumption that businessesnecessarily follow low wages. If low wages were the only factorInfluencing the migration of businesses, the low wage, less developedcountries of the world would have attracted businesses long ago andwould no longer be less developed. In reality, many factors, such as

transportation costs, energy costs, education and productivity of workforce,and government policies, affect business decisions on where to locate.. Several years ago, foreigners were allowed to own only 49 percent ofenterprises in Mexico. Over the past decade, Mexico has made more andmore exceptions to its ownership restrictions, and has scrapped many ofthem entirely. The bottom line on business relocation Is that NAFT Awill have a minimal Impact compared to Mexico's reform of Its foreign

ownership provisions.

When President Clinton assumed stewardship of NAFT A from President Bush, heinsisted on negotiating side agreements due to the concerns of labor and environmentalgroups. Business groups were critical of Clinton's initial description of the purpose of theagreements maintaining that they would subject American business to even moregovernment control. Free market supporters of NAFT A argued that the side agreementswould make a free trade agreement into a government managed trade plao, empoweringinternational bureaucrats instead of American businesses and consumers.

The political dilemma of the Clinton Administration was that if the side agreementssatisfied labor and environmental groups, they would likely alienate businesses and freetraders and vice versa. Prior to announcement of the side agreements, some laborgroups stated that they would settle for nothing less than side agreements that imposeAmerican labor standards and wages on Mexico. The final Clinton Administration sideagreements did not appease labor and it probably was not realistic to expect that theywould.Enviroomental groups also feared that under NAFT A, Mexico could radically reduce

or fail to enforce its own environmental laws as a means to attract American firms,causing similar policies to be adopted in the U.S. The side agreements have satisfiedsome but not all of the major environmental groups. Regardless of the content of the sideagreements, there probably is little danger of the .competition-through-pollution. scenariothat was originally feared, because, as discussed further below, the modernization of theMexican economy will involve using resources in a less wasteful manner.

Nor do the side agreements establish an international bureaucracy that willmanage trade and force onerous environmental and labor regulations on the NAFT A

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.The Study. Upon Council approval, the Secretariat now undertakes itsstudy of the erlforcement situation. The study is designed to be non-judgmental, focusing on the facts of the situation, presenting both thegovernment's explanation and the critics' allegations.Issuing the Report. The members of the Council are given a draft report.Two of the three must agree to make the report public. If two of the threethink the report inadequate for any reason or if the governments involvedare satisfied that the problem is being dealt with. the report is not issued.After the Report. Once the report is released, the process ends. Thereport is meant to call attention to failures by a country to enforce its ownlaws on the belief that public exposure will pressure governments to abideby their own environmental laws.

Dispute Resolution

The Consultation. If one of the member governments believes thatanother is engaging in: 1) a .persistent pattern of failure to effectivelyenforce. its own environmental laws; 2) that involves .workplaces. firms,companies. or sectors that produce goods or provide services tradedbetween the parties or that compete with goods produced -or servicesprovided by another party,. it can request consultations with the governmentin question. Patterns can only be traced beginning with NAFTAimplementation. presumably starting January 1, 1994. There is a time limitto these consultations. If the accused government convinces the othergovernment that its complaint is ill-founded or that it is taking steps toreverse the pattern, the case ends here.[)eclslon to Investigate. If a government is not satisfied in the consultativestage, it must secure the agreement of the third NAFT A government (inother words, the non-party to the dispute) to convene an investigative panel.The Panel Study .If two of the three governments ask for a panel study Ithe panel members are selected from a pre-chosen roster of experts, somepicked by each of the three NAFT A governments. The expert panelprepares the report on the complaint.Finding. of Violation. If a government is found to be engaging in apattern of failure to enforce its own laws where tradable goods and servicesare involved, that government has 60 days to offer a remedy to the practice'which the panel must certify.

If no remedy is agreed to, the accusing country can ask thehe FIne.6


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.groups will use the side agreements as a means to impose even ~regulation on the American economy as private parties do not have aright of action In U.S. courts based on a Commission panel finding.The issue is solely between the governments.. Free market advocates have also expressed concern that the side

agreements would prevent the U.S. from changing unsound environmentalor labor laws. The side agreements only deal with failures of a countryto enforce Its own laws already on the books. They do not deal withchanges In a country's laws. NAFT A itself does state that .it isinappropriate to encourage investment by relaxing domestic health, safetyor environmental standards. (Article 1114) and allows for consultations ifone country believes another is engaged in such a practice. But NAFT Adoes not provide a mechanism by which member governments can actagainst an alleged violator. The hortatory language of NAFT A does notconfer upon any international body legal authority over U.S. domesticaffairs.The environmental agreement makes clear that, while NAFT A countries areurged not to reduce environmental protection, they still retain the right tomake their own policies. Beginning the side agreement is a Preamble.Reaffirming the sovereign right of States to exploit their own resourcespursuant to their own environmental and development policies AndArticle 10 of the side agreement, while stating .each Party shall insure thatits laws provide high levels of environmental protection and shall 'strive toimprove these laws,. does so while .Recognizing the right of each Party toestablish its own levels of domestic environmental protection andenvironmental development policies and priorities and to adopt or: modifyaccordingly its environmental statutes and regulations .0.

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NAFT A In no way would prevent a country from adopting free market-oriented reforms of Its environmental laws. In fact, if laws on the booksprovide little or no protection of the environment while imposing hugeeconomic burdens on the economy, a NAFTA country will have an evengreater incentive to replace it with a property-rights, market-basedenvironmental protection law because inefficient environmental laws couldno longer be .subsidized,. or otherwise compensated for, by erecting tradebarriers.

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Do the Side Agreements Help the Environment?With or without the side agreements, environmentalists need not fear awholesale reduction in U.S or Mexican environmental standards or reducedenforcement of environmental laws. The side agreements, ~ile establishing

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the .environmental Commission, make it very difficult for the Commission toissue a critical repo!'t or impose a fine, and virtually impossible to imposesanctions. At best. the Commission is a mechanism that can expose topublic criticism serious enforcement failures. In any case, the Mexicangovernment is already moving toward Improving the quality of itsenvironmental law enforcement.Thus, regardless of the impact of the side agreement on the environment.NAFTA as a whole should be of considerable benefit to the North Americanenvironment. Economic development allows countries to better deal withtheir environmental problems. A recent Princeton study, for example,found that as per capita Incomes grow above about $4,000, theenvironment tends to be better cared for and pollution levels go down.

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This fact makes conceptual sense. Development means using resourcesmore efficiently. A Mexico modernizing its economy, for example, willpurchase more efficient industrial equipment, primarily from the U.S., whichwill be more energy efficient and pollute less.

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Pollution In socialistic countries Is In part the result of a lack ofprivate property rights. When, for example, the government of Mexicoallows farmers to cut down rain forests, over-plant for a few years, destroythe land, and then hand over another free parcel of government land todestroy; .it is ttle lack of an owner that causes the problems. There arenumerous, similar examples from the former Soviet bloc.

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Most labor union leaders sought a labor side agreement that wouldsomehow impose U.S. wages and bulrdensome labor laws in Mexico. TheNAFT A governments did not negotiate such an agreement, andsubseq~Jently these union leaders are (jisappointed with NAFT A. They pointout that. for all practical purposes, at best the Labor Commission canpublicize persistent failures by a government to enforce its own laws.

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But American workers should not be disappointed. NAFT A will createhundreds of thousands, and perhaps millIons, of new jobs forAmericans. Just as important, real w,ages in all NAFT A countries will rise.Wages --real purchasing power --irlcrease only when labor productivityrises. In other words, workers must produce goods and services moreefficiently in order to be able to trade their labor for higher real wages, that

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is, greater purchasing power.

. Free trade, by removing tariffs that reduce trade and raise prices,encourages greater production. Division of labor allows individual firms tospecialize in the production of goods and services at which they are mostefficient. This means higher output, greater wealth In a country, andconsequently higher real purchasing power for workers. Freer tradebetween two countries, as between two states within a country, makespossible greater economic output and thus higher wages overall.

The Economics of NAFT AThe economic benefits of NAFTA have been well-documented by independent,scholarly studies. The unanimous conclusion of reputable economists Is that boththe U.S. and Mexico will gain jobs and add to economic growth.Among the benefits to America:The u.s. is guaranteed access for its exports to a market of 80 millIonpeople and $300 billion In GDP ..

The u .s. will be in on the ground floor of a what prom ises to be one of thefast-growing .Latin Lions. of the future. If the U.S. had established a FT A30 years ago with Japan, it would today have a far larger share of thatmarket and would not be spending years trying to force Japan to reduce itstrade barriers. The U.S. can avoid a similar problem with Mexico throughNAFT A.

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.American firms will see exports to Mexico rise even higher than the record$40 billion in exports in 1992. In anticipation of NAFTA, numerousAmerican enterprises are poised to sell more of their products InMexico when trade barriers are dropped.

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More jobs will be created for Americans. Specifically. the International TradeCommission estimates that between 35,000 and 93,000 Jobs will becreated over five years. Independent economists Gary Clyde Hufbauerand Jeffrey J. Schott of the non-partisan Institute for InternationalEconomics estimate the number of new Jobs at 170,000.

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Mexico also stands to gain from NAFT A. The benefits to Mexico include:The Mexican government sees N AFT A as a means of making permanentthe free market reforms it has implemented. The more integrated theMexican economy is with the U.S., the more difficult it will be for a future

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Mexican governments to repeal market freedoms without destroying theireconomy.

. The confidence in the Mexican economy and reform program that will comewith passage of NAFT A will prevent current investors and lenders frompulling their funds out of Mexico, which would seriously harm that economyand perhaps create a new debt crisis.

Some NAFT A proponents consider the strategic international political advantagesof the agreement to be more important than the immediate economic benefits.. U.S.-Mexlco Relations. NAFTA places U.S.-Mexico economic and politicalrelations on a solid, friendly basis. Historically, U.S.-Mexican relations havebeen turbulent, permeated by distrust and punctuated by wars and military

interventions. A key aim of Mexico's 1910 revolution was to drive outAmerican investors and to distance the country economically from itspowerful northern neighbor. More recently, Mexico has served as a base ofoperations for agents of both Nazi Germany and the Soviet Union in thishemisphere. Political and economic instability in Mexico has led America tosend in troops and has caused waves of Mexicans to flee to the U.S.A prosperous, stable Mexico, like a prosperous, stable Canada, willhead off a potential future foreign policy nightmare very close toho",e.Comeetltlon for Free Markets. A second strategic benefit of NAFJ A isthat it creates an incentive for non-NAFTA countries to seek similararrangemerits. Rather than a .beggar-thy-neighbor- competition to closemarkets, NAFT A creates a competition for more free trade. A non-NAFT Amember is at disadvantage trying to sell its goods, for example, in Mexicocompeting against American products. Only by participating in a similarmarket liberalization agreement, will a non-NAFT A country be on an equalfree market footing.

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Leading to a Free Trade Hemisphere. Building on this incentive, a thirdstrategic benefit of NAFT A is that it may lead to a free trade hemisphere,Which will strengthen immensely America's global economic and politicalposition. Over the past decade many countries in this hemisphere have, likeMexico, been confronted with the failure of their overly socialized economiesand non-democratic political systems. Chile has been the most successfulso far in establishing a free market economy and placing democraticinstitutions on a firm footing. It has a liberal trade agreement with Mexico

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and has expressed an interest in joining NAFTA. As a long-term foreignpolicy strategy, !he lJ.S. should foster a prosperous hemisphere.Strenathens U.S. Hand at GATT. Finally, ratification of NAFTA wouldstrengthen the l_' S. in its dealings with the EC, Japan and in the GA TTbecause of the new power of the NAFT A trading bloc.

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In sum, just as individuals are better off as prosperous people in a prosperousneighborhood, so are prosperous countries better off in a prosperous hemisphere. Thiscommon sense notion leads to the conclusion that not only will NAFTA help all threecountries economically, but it will also help avoid future U.S. foreign policy and nationalsecurity problems.

A growing, prosperous Mexican economy will offer greater jobopportunities for Mexicans. This will help remove the major Impetusfor Illegal Immigration to the U.S.

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Mexico has a young and fast-growing population. That country's economymust grow by at least three percent annually simply to absorb the newworkers entering the labor market. By boosting economic growth in Mexico,NAFT A makes it more likely that unemployed Mexicans will not seekeconomic refuge in the U.S.

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CIEMEX, part of Wharton Econometric Forecasting Ass;ociafes,conservatively estimates that passage of NAFT A would reduce IllegalImmlgrsltlon by 326,000 between 1994 and 2002.

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Some critics fear that NAFTA will increase economic activity on the U.S.-Mexico border, thus giving more Mexicans an opportunity to slip into theU.S. illegally. In fact, border economic activity currently is associated withthe maquiladora factories, which re-export most of their goods back toAmerica. NAFT A will foster development In Mexico's Interior, awayfrom the border .

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The Mexican government fears that rejection of NAFT A would cause currentinvestors to pull out of Mexico. slowing down the economy. This wouldalmost guarantee thousands of additional unemployed Mexicans fleeing tothe U.S.

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With NAFT A negotiated and the side agreements soon to be signed by the threeNAFTA governments, the Administration and Congress must consult closely to devejoplegislation .necessary ana appropriate. to implement the NAFTA agreement in U.S. law.This process will occur in several stages.Currently, Administration representatives are briefing Hill staff on thegeneral concepts contained in the final Agreement and the changes in U.S.law they have identified are necessary to implement NAFT A.

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Late in September, congressional committees --coordinated by the HouseWays and Means Committee and the Senate Finance Committee along withsix or seven other committees in each house --will likely begin the so-called.mock mark-up. process. In these mock mark-ups, Members w.ill work withAdministration representatives to develop the legislation needed toimplement NAFT A. Administration representatives, for example, will adviseMembers .whether proposed amendments are consistent with the NAFT Aagreement as negotiated. The committees will ultimately vote on theproposals offered in the mark-up.

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When the committees in both houses have worked out their versions of thelegislation, a mock conference between the House Ways and MeansCommittee and the Senate Finance Committee will reconcile differences intt1e two versions. The resulting .consolidated text. will be given to theAdministration.

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T~ Administration will review this text, make any changes it thinksnQCessary, and then officially submit to Congress: 1) the NAFTAagreement; 2) the implementing legislation for NAFT A; and 3) a Statementof Administrative Intent informing Congress of the actions the Administrationwill take under its own authority to implement NAFT A. This communicationis expected in November. Under the .fast-track. legislative authority, NAFT Amust be voted on within 90 legislative days of official submission.

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The House Ways and Means Committee and Senate Finance Committeemay hold hearings on the implementing legislation as transmitted by thePresident. But since most of the battles over NAFT A will have been foughtout in the informal mock mark-up sessions, these hearings are not expectedto be lengthy.

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Finally, the full House and Senate will vote on NAFTA, with Housepreceding Senate consideration. Under the .fast-track. authority, noamendments to the implementing legislation will be in order on the floormeaning that the Agreement will be voted up or down.

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At this point, the timing of the final vote is uncertain, with estimates rangingfrom late November or early December to early 1994. As negotiated by theNAFT A countries. the Agreement was intended to take effect on January1 1994.

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house republican conference issue brief - nafta_summary and analysis

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