NAFTA-TAA Program: Certification Criteria, Procedures, and Activity

Published by the Government Accountability Office on 1997-11-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      National Security and
      International Affairs Division


      November 4, 1997

      The Honorable John S. McCain
      Committee on Commerce,
         Science, and Transportation
      United States Senate

      Subject: NAFTA-TAA Program: Certification Criteria, Procedures. and Activitv

      Dear Mr. Chairman:

      This letter responds to your letter of July 30, 1997, and subsequent discussions with
      your office regarding issues concerning the North American Free Trade Agreement’s
      Transitional Adjustment Assistance (NAFTA-TAA) program. As agreed with you, we
      are providing information about (1) the statutory basis for the NAFTA-TAA
      program, including the criteria under which workers are certified as eligible to
      receive benefits; (2) procedures followed to certify workers as eligible for these
      benefits; and (3) certification activity to date.’


      The NAFTA-T&I program was established as part of the 1993 North American Free
      Trade Implementation Act (NAFIA act).’ Under this program, assistance may be
      provided to workers who are displaced because of increased imports from or shifts
      in production to Mexico or Canada, provided certain eligibility criteria are .met.
      Neither the act nor the Department of Labor’s implementing guidance concerning
      worker eligibility for assistance under NAFTA-TAA requires that increased imports
      or production shifts be linked directly to NAFTA. State and federal governments

      ‘We are currently conducting a broader review of the NAFTA-TAA program
      requested by Representatives Evans and Lipmski.

      ‘Public Law 103-182 (December 8, 1993).

                                       GAO/NSIAD-98-51R   Certification Under NAFTA-TAA


share responsibility for determjnin g eligibility, with the final determination made by
the Secretary of Labor. As of September 4, 1997, 1,206 groups of workers,
comprising 142,884individuals from 46 states, had been certified as eligible to apply
for NAFTA-TM benefits. Cernfication was denied for 772 groups of workers,
covering 87,034 individuals, through August 31, 1997.


The NAFTA-TAA program was established under title V of the NAFTA
Implementation Act. The program provides assistance to workers in firms directly
affected by imports from or shifts in production to Mexico or Canada, if certain
eligibility criteria are met. Assistance for eligible workers may include employment
services, training, extended income support payments (up to 52 weeks after
exhaustion of unemployment compensation when enrolled in training), and job
search and relocation allowances. The NAFTA-TAA program is similar in many
respects to the general Trade Adjustment Assistance program established by the
Trade Act of 1974, which provides assistance to U.S. workers adversely affected by
the consequences of international trade.3

Eligibilitv Criteria

The NAFTA act specifies when a group of workers shaJl be certified as eligible to
apply for assistance. Specifically, certification is to be made if the Secretary of
Labor determines that a significant number or proportion of the workers in a firm
have become or are threatened with becoming totally or partially separated from
their jobs4 as a result of either (1) increased imports from Mexico or Canada or (2)
a shift in production by the workers’ firm to Mexico or Canada.

For workers to be eligible for NAFTA-TAA certification under the first criterion
relating to increased imports, three conditions must be met:

(1)   the sales or production, or both, of their firm (or subdivision of the &n)   must
      have decreased absolutely;

3The NAFTA-TAA program is codified as subchapter D of chapter 2, title II of the
Trade Act of 1974, as section 250 of that Act. Subchapter A of chapter 2 sets forth
the general Trade Adjustment Assistance Program, which remains in effect and
available for all eligible parties. The NAFTA act, section 503, provides that no
worker may receive assistance under both subchapter A and subchapter D.

4The statute provides that only those workers separated after the date of enactment
of the NAFTA act (Dec. 8, 1993) are eligible to be certified for assistance.

                            GAO/NSIAD-98-51R       Certification Under NAFTA-TAA
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(2)   imports from Mexico or Canada of articles “like or directly competitive with”
      articles produced by their firm or subdivision must have increased; and

(3)   the increase in imports must have “contributed importantly” to the workers’
      separation or threat of separation and to the decline in the sales or production
      of the firm or subdivision.5

With respect to the third condition, the NAFTA act provides that increased imports
will be considered to have “contributed importantly” to the separation of workers
and a decline in the firm’s sales or production if they are a “cause which is
important but not necessarily more important than any other cause” of worker
separation and sales or production decline.6 This definition also appears in the
general Trade Adjustment Assistance (TAA) program legislation and has been
subject to interpretation by the U.S. Court of International Trade (CIT). Noting that
the language in the TAA legislation “offers little assistance in ascertaining the
precise meaning to be accorded the word ‘important,“’ the CIT looked to the
legislative history and concluded that Congress intended that a cause be
significantly more important than “de minimis” (a very small or negligible amount)
to have “contributed importantly” to worker separations7 While the CIT has stated
that the required degree of importance is not subject to “any mechanical designation
such as a percentage of causation,“’ it has denied claims for trade adjustment
assistance where factors other than increased imports were “so dominant” that
worker separations and a decline in sales or production would have occurred even
without the presence of increased imports9

519 U.S.C. 2331(a)(l)(A).

‘Q9 U.S.C. 2331(a)(2).

7Cherlin v. Donovan, 585 Fed. Supp. 644 (1984).
‘Cherlin v. Donovan.

‘For example, the CIT has upheld worker certification denials where the Labor
Department determined, based on surveys of customers of the workers’ ti,       that
the customers of that firm were choosing to purchase from different domestic
sources. Cherlin v. Donovan. The Cl?’has also upheld denials where, irrespective
of an increase in imports, production of the product was moved to a different U.S.
plant or discontinued. Former Emnlovees of Digital Equiument Corn. v. U.S.
Secretarv of Labor, CIT Slip Op. 96-136 (Aug. 13, 1996). Similarly, “technological
unemployment”-that is, plant closure due to technological obsolescence-does not

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As noted above, the second eligibility criterion for certifymg workers under the
NAFTA act applies to shifts of production. Under this criterion, workers are
eligible for certification if there has been a shift of production by their firm (or
subdivision) to Mexico or Canada of “articles like or directly competitive with
articles” which are produced by their firrn.l’ As recognized by the Department of
Labor’s guidelines implementing the program, the law does not address ownership
of the producing firm. Thus, the shift in production can result either from the firm
moving its own plant to Mexico or Canada, or from the firm contracting with a
producing plant located in Mexico or Canada.

While the legislative history of the NAFTA act indicates that the assistance program.
was viewed as a means of helping workers dislocated as a result of NAFI’A,ll there
is no requirement in either of the statutory tests that increases in imports tiom or
shifts in production to Mexico or Canada be directly attributable to NAFTA. Thus,
the Labor Department is not required to distinguish between the effects of import
increases and production shifts caused by NAFTA and those that would have
occurred independently.12

Irnnlementinn Regulations

Section 502 of the NAFTA Act requires the Department of Labor to issue regulations
relating to the application of eligibility criteria for worker certification. In
response to this requirement, the Department has issued operating instructions in
the form of a General Administrative Letter, which is the controlling guidance in

form a basis for worker certification.
“19 USC. 2331(a)(l)(B).

%ee, for example, S. Rep. No. 103-189 at 50 (1993).

r2As a practical matter, linking imports from Mexico or Canada, and associated job
impacts, to specific NAFTA provisions would be difficult. Prior to NAFTA
implementation, Canada and Mexico ranked first and third as U.S. trading partners,
with many imports subject to low or no duties. While total trade between the
United States and its NAFTA partners has expanded since 1994, this is due not only
to NAFTA but to other factors and trends existing prior to NAFTA. Jn addition,
other factors occurring after NAPTA have influenced trade flows between NAFTA
partners, notably the implementation of the Uruguay Round.agreements, and
Mexico’s peso devaluation and subsequent deep recession.

                            GAO/NSTAD-98-51R Certification Under NAFTA-TAA
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implementing and administering the NAFTA-TAA program.13 Our review and
analysis of the operating instructions found them to be in accordance with the act.
The operating instructions define key terms and criteria contained in the NAFI’A-
TAA legislation, and they reflect the regulatory definitions for terms that also
appear in the general Trade Adjustment Assistance program legislation.14

Coverage of Secondarv Workers

In addition to the NAFTA-TAA program provided for in the act, a Statement of
Administrative Action (SAA) was issued, whereby the Administration made a
commitment to provide a program of adjustment services for certain “workers in
firms that are indirectly affected by imports from Mexico or Canada”who are not
eligible for the statutory program; that is, firms that supply or assemble products
produced by directly affected &-ms certified under NAFTA-TAA. For example,
workers who produce automobile bumpers but do not work directly for the
company affected by the increased imports in cars are eligible for benefits. For this
supplemental program, the Department stated it will use existing authority under
Title III of the Job Training Partnership Act.15 The Department has issued Training
and Employment Guidance Letter 7-93, April 19, 1994, providing additional
information on the title III program.

Department of Labor officials stated that there have only been 36 cases in which
secondary workers were certified for benefits, and that the benefits for secondary
workers are the same as those provided to NAFTA-TAA beneficiaries. In a 1994
report on NAFTA-TAA,” we found that limited guidance, unclear authority, and a
slow and cumbersome funding mechanism may make it difficult for secondary
workers to access benefits. Department of Labor officials indicated that this
underutilization of the secondary worker provisions continues to be of concern.

13SeeGeneral Administrative Letter No. 7-94, December 28, 1993, as amended.
14See 29 C.F.R. part 90, which contains definitions of key terms in the general T&I
legislation (for example, “totally or partially separated,” and a “like or directly
competitive” article).
1529U.S.C. 1651-1658.

“See Dislocated Workers: An Earlv Look at the NAFTA Transitional Adiustment
Assistance Program (GAOHEHS-95-31, Nov. 28, 1994).

                          GAO/NSLAD-9851R        Certification Under NAFTA-TAA
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Both states and the federal government play a role in the NAFTA-TAA certification
process, with the final cetication     determination made by the Secretary of Labor.
The process begins at the state level, when workers in a firm or their authorized
representative files a petition with the Governor of the state in which the affected
workers’ firm is located. Once a state receives a petition for assistance, the
Governor is required to make a preliminary f%ndingwithin 10 days about whether
the petition meets certain eligibility criteria. The Secretary of Labor is required to
make a &xal determination within 30 days of receiving the state’s preliminary

In making a preliminary fg,         state representatives consider several factors,
including whether employment, production, and sales of the affected workers’ firm
have declined, based on data collected from the firm. State officials also inquire
about production shifts to Mexico or Canada. No state-level determination is made
regarding whether a rise in imports “contributed importantly” to the workers’
separation. Once the state investigation is completed, the petition and relevant data
are sent to the Department of Labor’s Office of Trade Adjustment A&stance
(OTAA) for review. At that point, if the state makes an dative          finding, the state
is to ensure that title III Job Training Partnership Act benefits, including rapid
response and basic readjustment services (information on available assistance
programs, skill assessment, career counseling, and job placement services), are
made available.”

Once the petition and supporting materials are received from a state, OTfi
conducts its own review of the information provided and may also collect additional
data. This data collection is done from Washington, with telephone interviews,
letters, and facsimile transmissions. In cases where there is a claimed shift in
production to Mexico or Canada, investigators contact officials where workers
covered by the petition have been employed to verify the production shift and

17NAFTA-TAA certifications of eligibility for benefits remain open for up to two
years from the date the certilication is issued, and cover separations that occurred
up to one year prior to the date of the petition.
l!CItle III of the Job Training Partnership Act benefits are available to dislocated
workers who have lost their jobs and are unlikely to return to their previous
industries or occupations. This includes workers who lose their jobs because of
plant closures or mass layoffs; long-term unemployed persons with limited job
opportunities in their fields; and farmers, ranchers and other sel&employed persons
who become unemployed due to general economic conditions.

                            GAOiNSIAD-9851R         Certification Under NAFTA-TAA
Page 6

attendant job loss. Where there is claimed production or sales decline due to
increased imports, OTAA may survey up to six of the firm’s major declining
customers to see whether their reduced purchases from the firm were accompanied
by increased imports of like or directly competitive products made in Mexico or
Canada. OTAA considers in some cases aggregate import data in making
certification decisions. Recent cases where aggregate import data have been used
involve apparel or footwear, where large quantities of imports have been entering
the U.S. market.

OTAA has a training handbook on applying certification criteria originally developed
for reviewing Trade Adjustment Assistance petitions. This includes some guidance
on judging whether increased imports might be considered to have “contributed
importantly” to production declines or how to determine whether products are
‘directly competitive’ with other products. However, OTAA officials indicated that
they do not use specific numerical thresholds in making their determinations. They
maintain that numerical thresholds are not appropriate because the impact on a
firm of a certain level of import activity is dependent on a broad range of firm and
industry-specific factors. They cited apparel as an example of an industry in which
a small percentage shift toward imported products by a firm’s customer base would
be considered to affect the ti,   because profit margins are tight and firms rely on
volume production to sustain profitability.


According to OTAA officials, the majority of their certification decisions are
straightforward. These include petitions based on shifts in production to Mexico or
Canada. Other relatively straightforward cases include a clear decrease in a firm’s
sales accompanied by a clear increase in the purchase of imports from Mexico or
Canada by its customers. However, a small percentage of the certification decisions
fall into “gray areas.” These include cases where changes in sales, production, or
imports are small, and linkages can be difficult to determine.

As of September 4, 1997, 1,206 groups of workers, comprising 142,884 individuals in
48 states, had been cerQfied as eligible to apply for benefits under the program.
Certification was denied for 772 petitions covering 87,034 workers through August
31, 1997. Table 1 shows the distribution of factors supporting NAFTA-T&4
certification. Just over half (623) of the 1,206 certifications were for production
shifts to Mexico or Canada Increased customer imports, based on customer survey
data, were the factor cited in about one-third (380) of certifications, with increased
company imports and high and rising aggregate imports the factors cited in the
remaining certification cases.

                          GAO/‘NSIAD-98-51R Certification Under NAFTA-TAA
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Table 1: Factors Supporting NAFTA-TAA Cetication,                  January 1, 1994 -
         September 4, 1997

II                                      Number of Petitions
 supporting                                          Mexico or
 certification                                       Canada not
                           Mexico       Canada        identified      Total
     shifted          1     499     /     124    1        0             623


     aggregate imports 1     0      1      0     1       36             36
     Total             I    713     I     287    I       206           1,206

Source: OTAA, Department of Labor.

As noted, neither the statute nor the Department of Labor’s implementing guidance
requires that increased imports or production shifts be linked directly to NAFTA.
F’urther, NAFTA-TAA certifications represent potentially affected workers, not the
actual number of jobs lost, making certifications an inaccurate proxy for job
dislocations due to NAFTA.”

Table 2 summarizes reasons for NAFTA-TAA denials. Sixty-two percent (481) of
these petitions were denied because no shift in production occurred and no
increased customer imports were identihed. In 16 percent (127) of the cases, the
workers did not “produce an article” (because the certification criteria require that
the workers’ firm produce an article, service workers such as trucking or
warehouse employees are not covered under NAFTA-TAA). Other factors cited for
denials included domestic production transfers and no employment decline or
sales/production decline.

lgFor information on NAFTA-TAA certifications for key sectors and states, see North
American Free Trade Agreement: Imnacts and Imnlementation (GAO/T-NSIAD-97-
256, Sept. 11, 1997).

                              GAO/NSIAD-9851R           Certification Under NAFTA-TM
 Page 8

Table 2: Factors Supporting NAFTA-TAA Denials, January 1, 1994 - August 31, 1997

 Factors supporting                            Number of
 denial                                         petitions
 No shift in production and no
 increased customer imports                       481
 Workers did not produce an article               127
 Domestic production transfer                      86
 Workers not separated or threatened
 with separation or no production shift            33
 No sales/production decline and no
 production shift to Canada or Mexico              28
 No worker separation within the
 required Z-year window                            17
 Total                                            772

Source: OTAA, Department of Labor.


To understand the statutory basis for the NAFTA-TAA program, including the
criteria under which workers are ceded as eligible to receive benefits, we
reviewed the NAFTA act, the legislative history of the act, and relevant Court of
International Trade decisions. We also examined the Department of Labor General
Administrative Letters that serve as controlling guidance in administering the
program, and reviewed the guidance for consistency with the NAFTA-TAA
provisions. We also reviewed the SAA that accompanied the implementing

To document procedures followed to certify workers as eligible for NAFTA-T&I
benefits, we interviewed OTAA administrators, examined forms used to collect
information to support certification decisions, and analyzed 20 randomly selected
case files. To profile NAFTA-TAA certification activity to date, we obtained
descriptive statistics on certification decisions from OTAA administrators. These
statistics were derived from the OTAA management information database
maintained on certification decisions. While we did not independently verify these
data using original sources, we did discuss with OTAA officials their procedures for

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maintaimng accurate records, such as data entry procedures and steps taken to
check information. We also obtained and reviewed a printout of relevant data frc
the management information system database through September 9, 1997. These
data encompassed information on each petition reviewed, including the
identification number and cemcation date, company name and location, decision
status, estimated number of workers, and products made by the workers.

We are providing copies of this letter to other interested congressional committees,
the Secretary of Labor, and the Director of the Office of Management and Budget.
Copies will be provided to others upon request.

Contributors to this letter were Celia Thomas, Phillip Herr, Nina Pfeiffer, and Ernie
Jackson. Please contact me at (202) 512-8984if you or your staff have any
questions regarding this letter.

JayEtta Z. Hecker, Associate Director
International Relations and Trade Issues


 Page 10                   GAO/NSIAD-9851R        Certification Under NAFTA-TAA
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