Jean Monnet Center at NYU School of Law

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III. The NAFTA and the Political Economy of Regionalism

A. NAFTA Economic Effects

1. Intra-NAFTA Economic Effects

The economic terms of the NAFTA have been implemented substantially in accordance with its terms. [69] As a consequence, tariff and non-tariff barriers to trade in goods and services among the NAFTA countries have fallen, and cross-border flows of capital and investment have been facilitated.

Economic analysis of the NAFTA's effect is complicated by the Peso Crisis of 1994/95, which dramatically affected the terms of trade between the NAFTA Parties. Regardless of the NAFTA's effect in reducing trade barriers, the sharp drop in the value of the peso would have resulted in a short term increase in Mexican exports to the U.S. and Canada, and a short term decline in Mexican imports from the United States and Canada. [70] Nevertheless, in light of large gains in Mexico's exports dominated in dollars, and the robust pattern of trade among Canada, Mexico and the United States (which included substantial gains in U.S. exports to Mexico), it seems reasonable to attribute a positive effect of the NAFTA on increasing cross-border economic activity among its Parties. [71]

A U.S. Executive Branch Study emphasized the positive influences of the NAFTA in Mexico's relatively rapid recovery (in aggregate terms) from the effects of the Peso Crisis. [72] After the 1982 financial crisis, it took 5 years for Mexican economic output to reach pre-crisis levels. Following the late-1994 Peso Crisis (in which output dropped more quickly), Mexican economic output reached pre-crisis levels in two years. Mexico's return to international capital markets was far more rapid following the 1994 crisis than following the 1982 crisis.

On the whole, it appears reasonable to conclude that the NAFTA had a net positive economic welfare effect in its three Parties during its first years of operation. [73] The Mexican economy has substantially recovered from the Peso Crisis, and its economic outlook today is reasonably promising. [74]

2. Effects on third country trade

The classical model of regional integration economics generally posits that the global welfare effects of such arrangements may be determined by examining whether they are net trade-creating or trade-diverting. [75] If there is an increase of trade among members that exceeds the level of trade lost with non-members, [76] then there is a net positive global economic welfare effect. If the level of lost trade with non-members exceeds the increase in trade among RIA members, then there is a net negative global welfare effect. The trade statistics compiled by the United States for its three year study do not permit a complete evaluation of the NAFTA's net effect on trade creation and trade diversion. The Study indicates that diversion of trade occurred during the first three years following NAFTA's entry into force. [77] It states, for example, that Mexico's market share gains in the U.S. apparel sector displaced imports from China, Hong Kong, Taiwan and Korea, the U.S. import market share of which fell by 9 percentage points in the relevant period. [78] The fact that the NAFTA has diverted trade is consistent with the expectations of NAFTA policy planners. [79]

The NAFTA has also created a significant amount of trade among its Parties as, for example, Mexico has supplanted Japan as the United States' second leading trade partner (behind Canada). Moreover, the results of the GATT Uruguay Round were implemented after entry into force of the NAFTA. Since the substantial trade barrier reductions following the Uruguay Round should in any case have resulted in substantial increases in levels of worldwide trade, [80] it is unlikely that trade with NAFTA non-members has been diverted in aggregate terms, even if the market share of some non-members has declined in relation to NAFTA Parties.

The principal positive effect of the NAFTA appears to be its stabilizing effect on the Mexican economy. Without doubt, the Peso Crisis hurt the Mexican economy and has resulted in significant social hardship. Nevertheless, Mexico has largely been spared from the effects of the 1997-98 global economic crisis which has had an enormously destabilizing effect on many developing economies, and which has resulted in substantially lower economic growth throughout Latin America. Mexico's economy and capital markets performed well during the 1997-98 period, and the Mexican government has publicly attributed this to its NAFTA commitment.

B. NAFTA Social Effects

The NAFTA's social ambitions are modest. [81] The NAFTA and its Supplemental Agreements on the Environment and Labor created two institutions: the North American Commission for Environmental Cooperation (CEC) and the North American Commission for Labor Cooperation (CLC). [82] The CEC and CLC are each designed to promote social interests without affecting the legislative prerogatives of the NAFTA Parties and without a substantial intrusion on the administration of laws in its Parties.

The North American Agreement on Environmental Cooperation (NAAEC) establishes a procedure by which interested persons may request the preparation of a "factual record" by the CEC Secretariat. The factual record will report on whether a NAFTA Party is effectively enforcing its environmental law. The CEC Secretariat has prepared and published its first factual record in a case involving construction of a port facility in Cozumel, Mexico. [83] In addition to the factual record procedure, the NAAEC establishes a procedure under which a Party may seek a determination by an arbitral panel that another Party has persistently failed to enforce its environmental law. This procedure has not yet been invoked. The CEC has put together a program to map the North American environment, as well as a number of other research programs. The CEC provides a forum for periodic meetings of North American environment ministers, and it organizes environment-related fora. [84]

Though the tangible results of the CEC's activities are limited, the NAAEC has on balance had a positive effect. Environmental interest groups in the Parties have coordinated activities in respect to petitioning the CEC in factual record and report matters. If the various research projects are successfully completed, there will certainly be benefits in planning for future environmental programs. The NAFTA's environmental record has been criticized by a CEC-appointed group of experts because of a lack of coordination both within and among the various NAFTA bureaucracies, and because government funding for environmental programs has been limited. [85] However, while the NAFTA could certainly do more in the area of environmental protection, the institutional structure created by the NAFTA would seem to be better than the absence of such structure. The WTO has made limited progress on environmental matters, so that the NAFTA appears so far to present advantages over the multilateral trade system structure for addressing environmental concerns.

A similar picture emerges in respect to the North American Agreement on Labor Cooperation (NAALC). The CLC Secretariat does not have the power to prepare factual records as does the CEC Secretariat. However, the NAALC obligates each Party to establish a National Administrative Office (NAO) to hear complaints concerning labor law enforcement in the Parties, and each Party has established an NAO. The NAALC also provides an inter-Party complaint procedure involving allegations of persistent failure to enforce labor laws.

The NAO complaint procedure has been more robust than might have been expected. Labor unions of Canada, Mexico and the United States have initiated a number of complaints that have resulted in negotiations among Labor Ministers of the Parties, and in several cases have produced concrete results in terms of remedial action by employers or government administrative reform. [86] As the NAAEC led to increased interaction among environmental interest groups, so the NAALC has fostered substantial cooperation among labor unions of the Parties. The accomplishments of the NAALC should not be exaggerated. Nevertheless, a base of inter-Party and inter-Union labor cooperation has been established, and this is a substantial advance over action on labor matters at the WTO.

The NAFTA does not make a compelling case for action on social welfare matters by regional integration arrangements. Yet the NAFTA did not set out with a social welfare charter; it set out with an economic charter. The NAFTA has moved in advance of the WTO on environment and labor matters, and it would be hard to make a case that the NAFTA has harmed the multilateral trading system in the process.

C. The NAFTA as a Political Phenomenon

The NAFTA was initially portrayed as the first step in a regional trading arrangement stretching from Anchorage (Alaska) to Tierra del Fuego (Argentina). This strategic vision was embodied both in short term negotiations for accession to the NAFTA by Chile, and in longer term negotiations for a Free Trade Area of the Americas. Shortly after the NAFTA entered into force, momentum in the western hemisphere for pursuing this vision stalled. The U.S. Congress was sharply divided by the NAFTA debate, and a Democratic President could not induce his own party members to continue along the path of regional integration. The countries of the Mercosur (Argentina, Brazil, Paraguay and Uruguay, with Bolivia and Chile associated), have pursued their own regionalization program. Mercosur countries continue negotiations with Andean Pact and other Latin American countries.

The NAFTA was in part negotiated to counterbalance the growing economic and political influence of the EU. [87] The formation of the NAFTA in turn raised EU concerns over U.S. dominance in the western hemisphere economy. The EU has since pursued negotiations with Mercosur and with Mexico on closer economic relations. The countries of Asia expressed concern over the potential trade diverting impact of the NAFTA. Enterprises of some of these countries have responded to the NAFTA by increasing their investments in North America. Asian countries have also pursued regional integration arrangements, including APEC. [88] These arrangements remain in formative stages, and the 1997/98 economic crisis has set back their progress.

The NAFTA appears to have increased Mexico's strategic economic importance to the EU. From a U.S. standpoint, the NAFTA continues to provide a political and economic counterweight to the ever-expanding EU.

[69]This author has reviewed the implementation history of the NAFTA from a legal standpoint in two papers, Frederick M. Abbott , The NAFTA as Architecture for Political Decision (May 1997) and The NAFTA and Legalization of International Relations: A Case Study (Aug. 1998), each prepared for a Project on Legalization and World Politics. The second of these papers will be published in an edited volume of collected works resulting from the project. See generally U.S. Executive Branch, Study on the Operation and Effect of the North American Free Trade Agreement (NAFTA) , prepared and transmitted to Congress as required by section 512 of the NAFTA Implementation Act (1997), [hereinafter U.S. Executive Branch Study]. In the first three years of NAFTA operation, Mexican applied tariffs on U.S. goods declined from an average of 10 percent to 2.9 percent. During the same time period, Mexican applied tariffs on goods of non-NAFTA origin increased to an average 12.5 percent. Id. at ii & 7.U.S. applied tariffs on Mexican origin goods declined from 2.07 percent to 0.65 percent in the comparable time frame, while U.S. applied tariffs on Canadian origin goods declined from 0.37 percent to 0.22 percent Id. at ii, 7-8.

[70]The U.S. Executive Branch Study confirms that it is difficult to isolate the effects of the NAFTA on regional trade or investment flows during the first three years of its operation because the Peso Crisis overwhelms NAFTA-specified changes. The U.S economy was exceptionally strong during the measurement period, and this alone might account for changes in import-export trends. Id., e.g., at 12-14.

[71]In the period from 1994 through 1996 covered by the U.S. Executive Branch Study, there was a substantial increase in two-way trade between the United States and Mexico. There was also a substantial increase in the share of U.S. imports in the Mexican market, and the share of Mexican imports in the U.S. market. Economic movements in the NAFTA services markets were not significant during the same three year measurement period. Id. at 8-11, 29-44. Since the entry into force of the NAFTA, there has been a modest increase in the level of U.S. foreign direct investment (FDI) in Mexico. Id. at 22-24.

[72]E.g., id. , at iii-iv.

[73]If we were to attribute at least partial responsibility for the 1994 Peso Crisis to the NAFTA -- because the NAFTA may have encouraged over-investment of short term capital in the Mexican market -- the economic picture is more mixed.

[74]A useful source of current data on the Mexican economy is NAFTA Works published on a monthly basis by the government of Mexico, SECOFI office.

[75]The classical approach was developed in JACOB VINER, THE CUSTOMS UNION ISSUE (1950). For discussion, including critique on grounds that trade creation/trade diversion analysis does not adequately capture welfare effects attributable, inter alia, to accelerated growth within CU/FTA, see WTO SECRETARIAT, REGIONALISM AND THE WORLD TRADING SYSTEM (1995).

[76]Trade will be lost with non-members as tariffs are reduced among members, and as these tariff reductions are not extended to non-members.

[77]U.S. imports recorded an overall market share gain of 6.2 percentage points in Mexico's market for imported goods. Mexican imports recorded an overall market share gain (in 22 broad sectors) of 2.3 percentage points in the U.S. market for imported goods. The U.S. share of Mexico's textile import market gained 17.2 percentage points, and the U.S. share of the Mexican transport equipment import market gained 19.2 percent points . Mexico's share of the U.S. apparel market gained 5.2 percentage points. Id., e.g., at iv-vi, 35-36.

[78]Id. at vi & 39.

[79]Trade economists were aware of the potential for trade diversion arising from creation of the NAFTA. See C.A. Primo Braga, Raed Safadi and Alexander Yeats, Implications of NAFTA for East Asian Exports, draft by members of International Economics Department, The World Bank (1994).

[80]For predictive comparison of NAFTA and Uruguay Round trade creation/trade diversion effects, see C.A. Primo Braga, Raed Safadi and Alexander Yeats, id.

[81]Regarding NAFTA and the environment, see by this author, Frederick M. Abbott, From Theory to Practice: The Second Phase of the NAFTA Environmental Regime , in ENFORCING ENVIRONMENTAL STANDARDS: ECONOMIC MECHANISMS AS VIABLE MEANS? 451 (RüDIGER WOLFRUM ED., 1996 ); The NAFTA Environmental Dispute Settlement System as Prototype for Regional Integration Arrangements , 4 [1993] Y.B. INT'L ENVTL. L . 3 (Günther Handl ed., 1994); Regional Integration and the Environment: The Evolution of Legal Regimes , 68 CHI-KENT L. REV . 173 (1992); and a series of reports in the Yearbook of International Environmental Law, International Trade Rules, World Market Conditions and Environmental Effects , 8 [1997] Y.B. INT'L ENVTL. L. [] , ([] EDS. 1998); 7 [1996] Y.B. INT'L ENVTL. L. [] (GüNTHER HANDL ED. 1997); 6 [1995] Y.B. INT'L ENVTL. L. 349; 5 [1994] Y.B. INT'L ENVTL. L. 283; 4 [1993] Y.B. INT'L ENVTL. L. 281; 3 [1992] Y.B. INT'L ENVTL. L . 341; 2 [1991] Y.B. INT'L ENVTL. L . 227 .

[82]See, e.g., Remarks of Lance Compa, International Trade and Social Welfare: The New Agenda, 17 COMP. LAB. L. J. 338 (1996).

[83]This factual record is available at the CEC website,

[84]See, e.g. , Commission for Environmental Cooperation, 1996 Annual Report.

[85]NAAEC CEC, NAFTA's Institutions: The Environmental Potential and Performance of the NAFTA Free Trade Commission and Related Bodies (1997).

[86]These developments are reported at the CLC website,, with links to NAOs. Particularly useful is the Canadian NAO website,

[87]See Frederick M. Abbott, NAFTA and the Future of United States - European Community Trade Relations: The Consequences of Asymmetry in an Emerging Era of Regionalism , 16 HASTINGS INT'L AND COMP. L. REV. 489 (1993) and The North American Free Trade Agreement and Its Implications for the European Union , 4 TRANSNAT'L L. & CONTEMP. PROB. 119 (1994).

[88]Regarding APEC and its relationship to the WTO, see Jonathan T. Fried, APEC as the Asia-Pacific Model for Regional Economic Cooperation , in CHINA IN THE WORLD TRADING SYSTEM 183 (F.M. Abbott ed., 1998).

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