North American Free Trade Agreement: Impacts and Implementation

Published by the Government Accountability Office on 1997-09-11.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Trade, Committee on Ways
                          and Means, House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EDT
                          NORTH AMERICAN FREE
September 11, 1997        TRADE AGREEMENT

                          Impacts and
                          Statement of JayEtta Z. Hecker, Associate Director,
                          International Relations and Trade Issues, National
                          Security and International Affairs Division

             Mr. Chairman and Members of the Subcommittee:

             We are pleased to be here today to testify on the impact and
             implementation of the North American Free Trade Agreement, or NAFTA.
             My testimony today will focus on (1) our review of three major studies of
             NAFTA’s economic impacts and a brief overview of NAFTA’s adjustment
             programs, (2) the implementation of NAFTA’s mechanisms to both avoid
             and resolve disputes among the parties, and (3) the implementation of
             NAFTA’s supplemental agreements on environmental and labor cooperation.

             My testimony is based on our past work on NAFTA issues1 and work we
             recently conducted at your request. In addition to assessing a wide range
             of studies on the economic effects of NAFTA, we interviewed pertinent
             trade ministry officials in the United States, Canada, and Mexico, as well
             as the heads of the NAFTA Secretariat and the National Administrative
             Offices in each country. We obtained the views of representatives from
             business, labor, and environment interests in the three countries.

             NAFTA, which went into effect on January 1, 1994, was intended to facilitate
Background   trade and investment throughout North America. It incorporates features
             such as the elimination of tariff and nontariff barriers. NAFTA also supports
             the objective of locking in Mexico’s self-initiated, market-oriented reforms.
             By removing barriers to the efficient allocation of economic resources,
             NAFTA was projected to generate overall, long-run economic gains for
             member countries—modest for the United States and Canada, and greater
             for Mexico.2 For the United States, this is due to the relatively small size of
             Mexico’s economy and because many Mexican exports to the United
             States were already subject to low or no duties. Under NAFTA,
             intra-industry trade and coproduction of goods across the borders were
             expected to increase, enhancing specialization and raising productivity.
             Although a substantial majority of economic studies concluded that only
             modest economic and employment effects were likely, NAFTA generated a

              See North American Free Trade Agreement: Assessment of Major Issues (GAO/GGD-93-137, Sept. 9,
             1993). Also, see attached list of other related GAO products.
              A 1993 International Trade Commission (ITC) synopsis of 12 economic studies of NAFTA found that
             the likely long-term effect of NAFTA would be an increase in U.S. real gross domestic product by
             between 0.02 and 0.5 percent, U.S. net aggregate employment between 0.03 and 0.08 percent or by
             35,063 to 93,502 jobs, and real average wages by 0.1 to 0.3 percent or by $0.01 to $0.03 per hour. For
             Mexico, ITC reported that the likely long-term effect of NAFTA would be an increase in Mexico’s real
             GDP by between 0.1 and 11.4 percent, net aggregate employment between 0.1 and 6.6 percent, and real
             average wages between 0.7 and 16.2 percent. See Potential Impact on the U.S. Economy and Selected
             Industries of the North American Free Trade Agreement, USITC Publication 2596 (Washington, D.C.:
             U.S. International Trade Commission, Jan. 1993).

             Page 1                            GAO/T-NSIAD-97-256 North American Free Trade Agreement
              heated public debate before the agreement’s passage by Congress in 1993.
              NAFTA critics asserted that up to 1 million U.S. jobs would be lost, while the
              President projected that the agreement would generate 200,000 U.S. jobs.

              NAFTA also included procedures first to avoid, and then to resolve, disputes
              between parties to the agreement. Separately, the three NAFTA countries
              negotiated and entered into two supplemental agreements designed to
              facilitate cooperation on environment and labor matters among the three

              Before I get into the specifics of these topics, I will summarize our main

              Assessment of NAFTA’s effects is a complex undertaking. It is difficult to
Summary       evaluate the impacts of NAFTA since the agreement’s provisions are
              generally being phased in over a 10- to 15-year period, and it is hard to
              isolate the impact of the agreement from other trends and events. While
              recent studies by the International Trade Commission (ITC), the President,
              and the Economic Policy Institute offer valuable insights into the initial
              effects of NAFTA, in reviewing the studies we encountered methodological
              issues that need to be kept in perspective. Based on our review of these
              studies and other work, we have the following summary observations on
              NAFTA’s impacts and implementation to date:

          •   While NAFTA is not yet fully implemented, U.S. trade with NAFTA members
              has accelerated. Estimates of changes in total trade among the member
              countries due to NAFTA are generally consistent with pre-NAFTA
              expectations. The current estimates of its impact on gross domestic
              product range from no discernable effect to modest gains for the United
              States, also consistent with pre-NAFTA long-run projections described by
          •   At the sectoral level, there are diverse impacts from NAFTA. Within sectors,
              these may include increases or decreases in trade flows, hourly earnings,
              and employment. Economic efficiency may improve from this reallocation
              of resources, but it creates costs for certain sectors of the economy and
              labor force, including job dislocation.
          •   Estimates of the agreement’s impact on aggregate employment are widely
              divergent, ranging from gains of 160,000 jobs to losses of 420,000 jobs. We
              believe neither of these are reliable estimates of actual labor effects due to
              methodological limitations. In general, NAFTA, or broader trade policies,
              cannot be expected to substantially alter overall U.S. employment levels,

              Page 2                    GAO/T-NSIAD-97-256 North American Free Trade Agreement
    which are determined largely by demographic conditions and
    macroeconomic factors such as monetary policy.
•   While there is wide conceptual agreement on the contribution of trade
    liberalization to improvement in the standard of living through increased
    productivity and lower prices, estimating the extent to which NAFTA
    specifically furthers these goals presents a major empirical challenge that
    may never be overcome. For example, there are no estimates of NAFTA’s
    direct impact on productivity. However, growth in shared production
    activity and two-way trade suggests that increases in sector specialization,
    a mechanism through which productivity may be improved, have

    One of NAFTA’s objectives was to lock in Mexico’s market reforms and
    provide long-term economic growth in Mexico, with benefits to the United
    States through a more stable border. Mexico’s response to its financial
    crisis of 1994-95 and the recent agreement to accelerate tariff reductions
    suggest that Mexico has been committed to meeting its NAFTA obligations.
    The effectiveness of NAFTA in locking in Mexico’s long-term commitment to
    market reforms and promoting Mexican economic growth, however, is not
    yet clear.

    While data on the use of the NAFTA Transitional Adjustment Assistance
    program (NAFTA-TAA) provides sectoral and geographic information on
    potential job dislocations, NAFTA-TAA certifications should not be used as a
    proxy for the number of jobs lost. This is because certifications are likely
    to either underrepresent or overrepresent the actual number of jobs
    affected. For example, under NAFTA-TAA, potential job losses are not
    required to be linked directly to NAFTA, thus overstating the total. In
    addition, not all potentially affected sectors are covered by the program,
    thus understating the total.

    NAFTA’s system for avoiding and settling disputes among the member
    countries is a critical element of the agreement. The agreement includes
    mechanisms such as the establishment of committees and working groups
    and an early consultation process to help the parties avoid disputes.
    According to government and private sector officials, these mechanisms
    have helped the governments resolve important trade issues and have kept
    the number of formal dispute settlement cases relatively low. Under
    NAFTA’s formal dispute settlement mechanisms, as of August 1997 there
    have been 32 requests for binational panel reviews of countries’ alleged
    unfair trade practices, 2 requests for panel reviews of NAFTA’s application,
    and 2 complaints regarding investment.

    Page 3                    GAO/T-NSIAD-97-256 North American Free Trade Agreement
U.S., Mexican, and Canadian government officials with whom we met
were generally supportive of NAFTA’s dispute settlement process over the
past 3 years, noting especially the professionalism and lack of national
bias of the panelists reviewing the cases. According to these officials,
changes to NAFTA members’ trade laws agreed to under NAFTA, in particular
in Mexico and Canada, have also helped improve the transparency
(openness) of their antidumping and countervailing duty administrative
processes, thus reducing the potential for arbitrariness in their application.
Despite their generally positive views of NAFTA’s dispute settlement
process, officials and legal commentators in the three countries have
expressed some concerns about delays in NAFTA’s panel selection process
and in the speed and cost involved in pursuing a dispute. Further, some
U.S. organizations have challenged the constitutionality of the provision
allowing for binational panel review of countries’ unfair trade

It is too early to determine what definitive effect the supplemental
agreements will have on the North American environment and labor.
However, the two commissions created to implement the agreements have
been acknowledged by some government and private sector officials for
several positive achievements to date. Government officials in each of the
three NAFTA countries we spoke with generally believe the respective
agreements have positively affected their country’s understanding of and
cooperation on labor and environmental issues. In addition, the
commissions’ efforts to encourage the enforcement of domestic
environmental and labor laws through the processes allowing for
submissions by interested parties have been recognized. These processes
are being tested with the filing, to date, of 11 public submissions on the
environment and 8 on labor alleging lack of countries’ effective
enforcement of their environment and labor laws.

U.S., Canadian, and Mexican government officials and experts have also
expressed some concerns about the agreements’ implementation. For
example, some government and private sector officials have cited the need
for greater transparency in the Commission for Environmental
Cooperation’s procedures. In addition, a number of observers noted the
significant difference in the levels of support for the two commissions.
While the environment commission is funded at $9 million annually, the
Commission for Labor Cooperation’s annual budget is $1.8 million, which
reportedly has contributed to problems at the labor commission in hiring
and retaining staff.

Page 4                    GAO/T-NSIAD-97-256 North American Free Trade Agreement
                            The impact of NAFTA on the U.S. economy cannot be directly ascertained
Reviews of NAFTA’s          since changes in trade and investment also reflect other influencing
Impacts                     factors. The results of economic analyses of NAFTA’s impact on U.S. gross
                            domestic product (GDP) are consistent with the pre-NAFTA long-run
                            projections described by the ITC. In contrast, estimates of the agreement’s
                            impact on aggregate employment are widely divergent. Differences in the
                            studies’ assumptions and methodologies account for this divergence.

                            Since NAFTA’s first round of tariff reductions went into effect in 1994,3 total
                            U.S. merchandise trade (exports plus imports) with Canada and Mexico
                            has increased from an annual average of $269 billion (1991-93) to an
                            annual average of $384 billion (1994-96). (See apps. I-III.) A significant
                            factor influencing trade was the severe 1994-95 Mexican financial crisis.4
                            This growth in total trade has been accompanied by an increase in the U.S.
                            merchandise trade deficit with its NAFTA partners, from $8.6 billion to
                            $34 billion, as import growth outpaced export growth. U.S. investment in
                            Mexico has grown since NAFTA’s implementation. From 1994 to 1996, the
                            United States had an annual average of $3.1 billion in foreign direct
                            investment to Mexico, compared to $2 billion from 1991 to 1993.

Recent Studies of NAFTA’s   Mr. Chairman, let me now summarize the findings from three major
Economic Impact             reports on NAFTA’s impact: (1) the in-depth June 1997 ITC study of NAFTA;5
                            (2) the President’s July 1997 report on the operations and effect of NAFTA;6
                            and (3) a June 1997 study by some of the major critics of NAFTA.7

                             At the meeting of the NAFTA Commission in March 1997, the NAFTA trade ministers announced the
                            successful conclusion of a set of accelerated tariff reductions. Also, based on private sector interest,
                            they agreed to initiate negotiations on additional reductions to be concluded by year’s end.
                             In December 1994, nearly a year after the implementation of NAFTA, Mexico was forced to devalue its
                            currency leading to a serious economic crisis characterized by high unemployment, declining income
                            and consumption, and a sharp reduction of Mexico’s imports, including those from the United States.
                            In Mexico’s Financial Crisis: Origins, Awareness, Assistance, and Initial Efforts to Recover
                            (GAO/GGD-96-56, Feb. 23, 1996), we examined the causes of this crisis and concluded that it originated
                            in the growing inconsistency between monetary, fiscal, and exchange rate policies pursued by Mexican
                            authorities in 1994.
                             The Impact of the North American Free Trade Agreement on the U.S. Economy and Industries: A
                            Three-Year Review, USITC Publication 3045 (Washington, D.C.: U.S. International Trade Commission,
                            June 1997).
                             Study on the Operation and Effects of the North American Free Trade Agreement, U.S. President’s
                            report to the Congress of the United States (Washington, D.C.: The White House, July 1997).
                              The Failed Experiment - NAFTA at Three Years (Washington, D.C.: Economic Policy Institute,
                            Institute for Policy Studies, International Labor Rights Fund, Public Citizen’s Global Trade Watch,
                            Sierra Club, and U.S. Business and Industrial Council Educational Foundation, June 26, 1997).

                            Page 5                              GAO/T-NSIAD-97-256 North American Free Trade Agreement
The ITC 3-Year Assessment   The June 1997 ITC assessment of NAFTA impacts represents the most
                            comprehensive research effort we identified to date. Using an econometric
                            approach, ITC sought to separate other trade-influencing factors,
                            particularly Mexico’s financial crisis, from NAFTA’s impact on the U.S.
                            economy as a whole, and on nearly 200 industrial sectors of the U.S.
                            economy. In addition, the ITC assessment included a qualitative review of
                            68 aggregated sectors.

                            Based on all of its analysis, ITC concluded that NAFTA had a modest positive
                            effect on the U.S. economy during its first 3 years of operation. ITC was
                            unable to quantify a discernible effect on U.S. GDP, aggregate investment,
                            or aggregate employment that can be attributed to NAFTA during its first
                            3 years. ITC concluded that NAFTA has significantly affected the aggregate
                            levels of U.S. trade with Mexico, but not with Canada.

                            In its sectoral analyses, ITC found changes in trade, employment, and
                            earnings that were due to NAFTA in a limited number of sectors. Among the
                            nearly 200 sectors whose trade ITC modeled, U.S. exports to Mexico
                            increased significantly in 13 sectors due to NAFTA, while no sector showed
                            decreased exports to Mexico due to NAFTA. U.S. imports from Mexico
                            increased significantly in 16 sectors after the effects of other influencing
                            factors were taken into account, while U.S. imports from Mexico
                            decreased significantly in 7 sectors due to NAFTA. In an econometric
                            analysis of 120 industrial sectors, ITC found that 29 industries had changes
                            in hourly earnings and employment levels. Among these 29 sectors, hours
                            worked most often increased due to NAFTA, while hourly earnings were
                            more often found to decrease. In their qualitative sectoral analysis, ITC
                            industry experts found that employment declined due to NAFTA in 2 out of
                            68 sectors: the apparel and women’s non-athletic footwear sectors. While
                            some effort was made to address productivity impacts, ITC was unable to
                            evaluate the direct impact of NAFTA on labor productivity in the various
                            sectors due to data constraints. However, the indirect evidence examined
                            by ITC suggested a positive impact on U.S. productivity in certain

The President’s Report      The President’s report on NAFTA presents the findings of recent studies that
                            estimate the agreement’s impact. These include a commissioned DRI
                            analysis and research published by the Federal Reserve Bank of Dallas.8
                            Both studies isolate the effect of the Mexican financial crisis from NAFTA’s

                            The commissioned DRI analysis drew on a previous report—The Impact of NAFTA on Mexican Trade:
                            An Empirical Study (Lexington, MA: DRI/McGraw-Hill, Apr. 1997). David M. Gould, “Distinguishing
                            NAFTA from the Peso Crisis,” Southwest Economy, Federal Reserve Bank of Dallas (Sept./Oct. 1996).

                            Page 6                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
                              effect on bilateral U.S.-Mexico trade flows.9 In contrast to the ITC effort
                              that modeled the employment impact of NAFTA, the President’s report uses
                              a simple job-multiplier analysis that assumes about 13,000 jobs are
                              supported for every $1 billion in increased exports.

                              The Federal Reserve study modeled the impact of NAFTA on U.S. bilateral
                              trade with Mexico. They found that NAFTA has on average boosted export
                              growth by about 7 percentage points each year since implementation, for a
                              cumulative expansion of exports of about $5 billion through 1995. U.S.
                              import growth from Mexico on average has been about 2 percentage
                              points greater each year, for a cumulative impact of about $1.8 billion in
                              additional imports.10 The DRI assessment found larger trade effects than
                              the Federal Reserve study. The DRI study used a model of the Mexican
                              economy to evaluate NAFTA’s impact on bilateral trade with the United
                              States, but excluded the petroleum sector. It found that in 1996, NAFTA
                              increased U.S. exports to Mexico by $12 billion and imports from Mexico
                              by $5 billion. The estimated trade impacts were then applied to a DRI
                              macroeconomic model of the U.S. economy to simulate their impact on
                              U.S. GDP and investment. According to the President’s report, DRI
                              estimates that NAFTA contributed $13 billion to U.S. real income and
                              $5 billion to business investment in 1996, controlling for the impact of
                              Mexico’s financial crisis.11

                              The President’s report uses the export estimates from the two studies to
                              compute NAFTA’s impact on job creation. The President’s report estimates
                              that NAFTA export expansion supported between 90,000 and 160,000 jobs in
                              1996.12 The President’s report did not compute any employment impact
                              from increased imports from Mexico.

Consolidated NAFTA Critique   The Economic Policy Institute (EPI) prepared an assessment of NAFTA that
                              also used a job-multiplier analysis. This assessment was included in the
                              consolidated critique of NAFTA. However, the EPI analysis differed from the
                              President’s report in several notable respects. First, EPI did not separate

                               Neither study makes an assessment of the extent to which changes in U.S.-Mexico bilateral trade
                              reflect trade diversion away from other trading partners.
                               The Federal Reserve study reports that its estimates of the effects of NAFTA on exports and imports
                              are not statistically significant.
                               The DRI data that is reported in the President’s report differ from the data DRI submitted to the
                              President’s Council of Economic Advisers on July 1, 1997. That submission shows that NAFTA
                              contributed $21.2 billion to U.S. real income and $4.2 billion to nonresidential fixed investment in 1996.
                               The lower estimate uses an extrapolation of the Federal Reserve assessment that U.S. exports
                              expanded by about $5 billion through 1995, while the higher estimate reflects DRI’s assessment that
                              NAFTA expanded U.S. exports by $12 billion.

                              Page 7                              GAO/T-NSIAD-97-256 North American Free Trade Agreement
                   the impact of Mexico’s financial crisis from NAFTA’s effects on trade flows.13
                   Secondly, to compute job losses from NAFTA, EPI applied the export job
                   multiplier to the increase in imports rather than just to exports as done in
                   the President’s report. Also, EPI included changes in U.S.-Canadian
                   bilateral trade in its assessment of NAFTA.

                   The critique concluded that the increased U.S. trade deficit with Mexico
                   and Canada on balance has cost the United States 420,208 jobs since 1993.
                   It states that the move to a $16.2 billion U.S. bilateral trade deficit with
                   Mexico in 1996 from a bilateral surplus of $1.7 billion in 1993 cost the
                   United States 250,710 of these jobs.14 The critique also notes that the real
                   wages of U.S. blue-collar workers has declined for almost 2 decades and
                   suggests that imports from low-wage countries such as Mexico are an
                   especially important cause of increasing wage inequality.

NAFTA Adjustment   The benefits of trade agreements are widely dispersed, and the costs or
Programs           dislocation effects are more concentrated. In recognition of the
                   anticipated dislocation of some workers, the NAFTA Implementation Act
                   established the NAFTA-TAA program in 1994. The program was designed to
                   assist workers in companies affected by U.S. imports from Mexico or
                   Canada or by shifts in U.S. production to either of those countries. The
                   program is authorized to continue until September 30, 1998.15 NAFTA-TAA
                   benefits include basic readjustment services; employment services;
                   training; job search allowances; relocation allowances; and the feature
                   that most distinguishes the program from basic unemployment insurance,
                   income support for up to 52 weeks after exhaustion of unemployment
                   insurance when enrolled in training.

                     EPI reports that the overvalued peso was related to NAFTA as it artificially reduced the price of
                   Mexican imports from the United States, and helped win U.S. passage of NAFTA in 1993. The United
                   States had a trade surplus with Mexico from 1991 to 1993, giving credence to that idea. DRI argues that
                   the process leading to the start of NAFTA complicated stabilization policy in Mexico, and was in that
                   sense a contributing factor to the financial crisis. The Impact of NAFTA on the North American
                   Economy (Lexington, MA: DRI/McGraw-Hill, Jan. 1997).
                    EPI estimates that from 1993 to 1996 the increased trade deficit with Canada on balance cost the
                   United States 169,498 jobs.
                     The United States has two other major programs to aid adjustment of workers who have lost their
                   jobs: the Trade Adjustment Assistance and the Economic Dislocation and Worker Adjustment
                   Assistance programs. GAO reviews of these programs as well as the NAFTA-TAA found confusion
                   about eligibility, inadequate tailoring of services, and delays in delivery. GAO has recommended that
                   the programs be improved and consolidated. See Multiple Employment Training Programs: Major
                   Overhaul Is Needed to Create a More Efficient, Customer-Driven System (GAO/T-HEHS-95-70, Feb. 6,
                   1995); and Dislocated Workers: An Early Look at the NAFTA Transitional Adjustment Assistance
                   Program (GAO/HEHS-95-31, Nov. 18, 1994).

                   Page 8                             GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                       As of September 4, 1997, NAFTA-TAA certifications (verification of potential
                                       job losses since NAFTA’s implementation) have been issued for 1,206
                                       worker groups in firms located in 48 states.16 Department of Labor
                                       statistics indicate that 142,884 workers have been certified as eligible for
                                       NAFTA-TAA benefits due to (1) increased imports from Canada or Mexico or
                                       (2) a shift in U.S. production to Canada or Mexico. Of these certifications,
                                       623 were based on a shift of production to Canada or Mexico, 380 were
                                       based on increased customer imports, 167 were based on increased
                                       company imports, and 36 were based on high and rising aggregate imports
                                       from Canada or Mexico. As shown in table 1, the top five sectors in terms
                                       of worker group certifications and the number of workers covered were
                                       apparel, electrical and electronic equipment, lumber and wood products,
                                       fabricated metal products, and industrial/commercial machinery, and
                                       computer equipment. The top 10 states with NAFTA-TAA workers covered by
                                       certifications were Texas (12,797), Pennsylvania (12,788), North Carolina
                                       (12,001), New York (11,924), California (7,773), Georgia (6,556), Indiana
                                       (6,077), Tennessee (5,786), Arkansas (5,397), and New Jersey (4,788).

Table 1: Number of NAFTA-TAA
Certifications by Sector, January 1,                                                         Number of worker Number of workers
1994-September 4, 1997                 Sector                                               group certifications        covered
                                       Apparel                                                                  433                   42,140
                                       Electrical and electronic equipment (except                              246                   29,730
                                       computing equipment)
                                       Lumber and wood products (except furniture)                              158                     8,280
                                       Fabricated metal products                                                103                   12,750
                                       Industrial/commercial machinery and                                      103                   11,005
                                       computer equipment
                                       Other sectors                                                            163                   38,979
                                       Total                                                                  1,206                  142,884
                                       Source: Department of Labor.

                                       Because of the intense interest in NAFTA’s impact on U.S. labor and the
                                       difficulty in calculating such impact, analysts have used NAFTA-TAA data as
                                       a proxy for job dislocations attributable to NAFTA. NAFTA-TAA certifications
                                       are not an accurate measure of jobs lost due to NAFTA, however, because
                                       certifications are likely to either underrepresent or overrepresent the
                                       actual number of jobs affected. On the one hand, NAFTA-TAA certifications

                                         NAFTA-TAA petitions, which can be filed by a group of three or more workers, are first reviewed by
                                       the Governor of the state where the worker’s company is located. The U.S. Department of Labor
                                       makes the final determination whether to approve or deny these petitions, and issues certifications for
                                       approved petitions.

                                       Page 9                             GAO/T-NSIAD-97-256 North American Free Trade Agreement
              are not required to be caused by, or linked to, NAFTA—they can be due to
              general trade effects between the United States and Canada or Mexico. In
              addition, NAFTA certifications represent potential job losses, not the actual
              number of jobs lost. These factors could potentially lead to the NAFTA-TAA
              figures being overstated. On the other hand, not all categories of workers
              potentially affected are covered by the program (for example, some
              services workers). Additionally, some researchers have questioned
              whether employees of small, nonunionized firms are fully aware of
              program benefits and are thus not being served by the program. Further,
              workers may opt to apply for other programs, particularly given the strict
              training requirement for NAFTA-TAA. These factors could potentially lead to
              understatement.17 While NAFTA-TAA is fully operational, little evaluation has
              been done of how effectively the program serves to provide retraining and
              adjustment assistance to affected workers.

              The NAFTA implementing legislation established an additional program to
              deal with job dislocation effects from NAFTA: the U.S. Community
              Adjustment and Investment Program under the North American
              Development Bank. The program was designed to provide loans and loan
              guarantees (up to $22.5 million, according to authorizing legislation) to
              businesses seeking to locate or expand existing operations in communities
              with job losses caused by NAFTA. It was to be implemented by a program
              office in Los Angeles, two advisory committees, and an ombudsman
              appointed by the President. However, during the first 3-1/2 years of NAFTA,
              no loans were approved under the program. The Treasury Department
              issued its first designation of qualifying communities on August 1, 1997.
              That announcement declared 35 communities in 19 states eligible for
              business loans and loan guarantees.

Comments on   It is very difficult to evaluate the impact of NAFTA since the agreement’s
Methodology   provisions are generally being phased in over a 10- to 15-year period, and it
              is hard to isolate the impact of the agreement from contemporaneous
              economic trends and other unique events. While recent studies offer
              valuable insights into the initial effects of NAFTA, in reviewing the studies
              we encountered methodological issues that need to be kept in perspective.

              The estimates of NAFTA’s impact on GDP derived from econometric analyses
              are consistent with expectations of NAFTA’s long-term impact. The ITC
              reports that NAFTA had no discernable impact on GDP after 3 years. The
              President’s report finds that the short-term, transitory GDP gain from NAFTA

                GAO is currently reviewing the scope and coverage of the NAFTA-TAA program.

              Page 10                          GAO/T-NSIAD-97-256 North American Free Trade Agreement
was $13 billion in 1996, which represents less than 0.2 percent of U.S. GDP.
Both estimates can be considered consistent with pre-NAFTA projections
that the likely long-term impact of NAFTA would be a modest, positive
increase in GDP—between 0.02 and 0.5 percent.

Several of the reports include conclusions about NAFTA’s impact on U.S.
aggregate employment. However, there is widespread consensus among
many economists that aggregate employment is primarily determined by
demographic conditions and macroeconomic factors such as monetary
policy or interest rates. These economists would argue that trade
agreements, such as NAFTA, primarily impact labor markets by shifting the
composition of employment, potentially altering wages and income
distribution, rather than affecting the overall level of employment in the

The President’s report as well as the EPI study rely on the job-multiplier
approach to estimate the potential job impact of changes in the nation’s
trade balance. This approach is questioned by many economists for
computing the employment impacts of trade. Furthermore, as an
application of this methodology, the President’s and EPI’s analyses both
exaggerate their estimates of NAFTA’s job impact. For example, the
President’s report did not calculate any job losses associated with
increased U.S. imports from Mexico due to NAFTA.18 Likewise, the job
losses estimated by EPI are exaggerated, since some of the increase in U.S.
imports from Mexico displaces imports from other nations rather than U.S.

The impact of NAFTA on wages, low-skill workers, and income inequality is
a controversial issue related to NAFTA’s impact on the economy. ITC
analyzed the impact of NAFTA on sectoral wages but did not attempt to
determine the impact on low-skill workers or income inequality. The
President’s report largely recapped the ITC analysis. While the critique
associated trade expansion with two decades of declining real wages, it
did not analyze NAFTA’s specific impact.

An important methodological issue in analyzing NAFTA is how Mexico’s
1994-95 financial crisis is treated. Estimates of NAFTA’s impacts over its
first 3 years differ greatly based on how the crisis is considered in the
analysis. ITC’s and the President’s reports explicitly excluded its effects in

 The report argues that imports do not necessarily displace U.S. production and that because the
“mainstream economic community has not developed any broadly agreed upon methodology” to
estimate the displacement effect, the export job-multiplier computation should not be used to
calculate employment level changes due to imports.

Page 11                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
                        their analysis, while the EPI study did not. While separating the crisis’
                        impact from that of NAFTA has merit, events in Mexico leading to the
                        financial crisis and the response to the crisis are intertwined with NAFTA.
                        The financial crisis tested whether NAFTA succeeded in locking in Mexico’s
                        market-opening reforms. Mexican government officials noted that they
                        met their NAFTA obligations rather than institute immediate tariff increases
                        on U.S. products, as had occurred during a previous crisis in 1982.
                        Furthermore, they undertook additional market-opening measures such as
                        privatizing government-owned ports and railroads, according to Mexico’s
                        Trade and Commerce ministry.

                        NAFTA contains mechanisms to help avoid trade disputes and settle them
Mechanisms for          effectively when they do arise. In an effort to head off disputes, NAFTA
Avoiding and Settling   established a number of committees and working groups on key
Disputes                trade-related issues to provide a channel for discussion of member
                        countries’ ongoing concerns. In addition, NAFTA’s dispute settlement
                        process includes a consultation mechanism that encourages members to
                        make every effort to resolve differences in meetings and discussions
                        before requesting a review. Further, the agreement’s formal dispute
                        settlement mechanisms address member countries’ potential use of unfair
                        trade practices, the interpretation and application of NAFTA, and the
                        protection of investor rights. Finally, changes in NAFTA member countries’
                        trade laws were required by the agreement to increase the level of
                        transparency in countries’ trade remedies determinations.

                        U.S., Mexican, and Canadian private sector and government officials with
                        whom we spoke were generally supportive of NAFTA’s dispute settlement
                        process over the past 3 years. For example, they cited increased
                        transparency in member countries’ administration of trade remedy laws
                        required by the agreement. However, some U.S. and Canadian officials
                        were concerned about the timeliness of NAFTA’s panel selection process. In
                        addition, Mexican officials acknowledged that Mexico’s pool of potential
                        panelists is somewhat limited because Mexican attorneys are still
                        developing expertise in trade dispute matters. Furthermore, questions
                        have arisen regarding the constitutionality of NAFTA’s dispute settlement
                        provisions dealing with countries’ determinations of alleged unfair trade

Dispute Avoidance       NAFTA established a number of committees and working groups on
                        significant trade-related issues to enable member countries to discuss

                        Page 12                  GAO/T-NSIAD-97-256 North American Free Trade Agreement
              their concerns. In addition, NAFTA committees and working groups provide
              forums for consultation on comprehensive trade-related subjects, such as
              rules of origin, agricultural subsidies, financial services, standards-related
              measures, trade and competition, and temporary entry by business
              persons. They are composed of trade and other relevant officials from the
              three governments.

              Canadian, Mexican, and U.S. trade officials told us that, in general, NAFTA
              committees and working groups have helped all three countries to address
              important trade issues. They believe that these groups have prevented
              many issues from being elevated to the trade minister level and thus have
              minimized their politicization. One Canadian trade official commented that
              the working groups allowed government officials to settle their differences
              informally. U.S. embassy officials told us that Mexico and the United
              States are participating in NAFTA working groups to reduce delays that U.S.
              exporters encounter in meeting Mexican product standards. For example,
              to facilitate U.S. tire exports, Mexican officials told us they agreed to
              accept test data from U.S. tire manufacturers for the first time. A Canadian
              trade official cited a committee’s work on accelerating the elimination of
              tariffs on certain products. Other examples of committee and working
              group efforts mentioned by government officials included harmonizing
              labeling requirements on apparel among NAFTA countries and resolving
              disagreements on classifying goods to meet NAFTA rules of origin.

              NAFTA has also built into its dispute settlement process opportunities for
              disputing parties to participate in consultations, or face-to-face meetings,
              to resolve their differences. These consultations are meant to allow parties
              to air their concerns and seek mutually agreeable solutions before
              pursuing more formal institutional review under NAFTA. If the parties
              resolve their differences through consultations, they do not need to go any
              further in NAFTA’s dispute settlement process. If differences are not
              resolved, the parties can request dispute settlement panel review. For
              example, seven such prepanel consultations are currently ongoing, one of
              which recently ended in a mutually acceptable resolution.

Enforcement   The three major dispute settlement provisions of NAFTA are set forth in
              chapters 19, 20, and 11. These chapters provide mechanisms for dealing
              with the three primary areas in which disputes can arise, that is, unfair
              trade practices (chapter 19), the interpretation and application of NAFTA
              (chapter 20), and the protection of investor rights (chapter 11). NAFTA’s
              chapter 20 also promotes the use of arbitration and other forms of

              Page 13                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
alternative dispute resolution for international commercial disputes
between private parties in the free trade area, although it does not
prescribe or establish arbitration procedures.

There have been 32 chapter 19 requests for binational panel review as of
July 1997, including 14 completed cases with final panel decisions, 9 cases
still active, and 9 cases terminated without a decision (see app. IV for
more information on completed cases.) There were no requests for
Extraordinary Challenge Committee19 review under NAFTA. Officials from
all three countries with whom we spoke considered the chapter 19 process
to be working very well. They believed that the final panel decisions made
thus far had been balanced and fair and completed in a timely manner.20
They observed that in their view, concerns about panels voting along
national lines or the nature of the panel majority influencing its final
outcome have proved to be unfounded. In fact, of the 14 completed panel
decisions, 11 (79 percent) were unanimous. Chapter 19 binational panels
took 457 days on average to complete cases and issue a final decision.
Chapter 19 establishes a 315-day guideline to issue a final decision from
the date a panel was requested.21

Two requests for chapter 20 panel reviews have been made under NAFTA. In
one case, a final panel decision has been issued, and in the other case oral
argument has been held. A decision is due by the end of the year. A total of
seven prepanel consultations are ongoing, including two in which the
United States is the petitioner, and five in which the United States is the
respondent. Officials with whom we spoke believed that the chapter 20
prepanel consultation process helped parties avoid formal disputes by
allowing them to resolve their differences before requesting a chapter 20
panel. However, Mexican government officials and a member of a U.S.
business association operating in Mexico expressed concern that, in their
opinion, some of the prepanel consultations under chapter 20, were taking
too long. NAFTA provides for no time limits on consultations other than
those agreed to by the consulting parties.

  While a chapter 19 decision cannot be appealed in domestic courts, involved parties may request a
review by an Extraordinary Challenge Committee composed of three judges or former judges selected
by the parties.
 Our 1995 work on chapter 19 found some participants had concerns about the panel process, certain
panel decisions and how they were arrived at. See U.S.-Canada Free Trade Agreement: Factors
Contributing to Controversy in Appeals of Trade Remedy Cases to Binational Panels
(GAO/GGD-95-175BR, June 16, 1995).
  According to the NAFTA U.S. Section Secretary, the 315-day guideline does not include the time
when the panels are temporarily suspended. Panels can be suspended when a panelist becomes unable
to fulfill panel duties or is disqualified due, for example, to a change in circumstances causing the
appearance of conflict of interest.

Page 14                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
                             Two U.S. firms have filed complaints under the NAFTA chapter 11 investor
                             arbitration clause. In one case a panel convened in July 1997, and in the
                             other case, a panel is still being formed.

                             Appendix IV further describes the chapters 19, 20, and 11 provisions and
                             provides information on the dispute cases initiated since NAFTA’s

Implementation Progress      According to U.S., Mexican, and Canadian government officials, changes
                             in NAFTA member countries’ trade laws precipitated by the agreement have
                             increased the level of transparency in countries’ trade remedy
                             determinations, particularly in Mexico. While government officials were
                             generally pleased with the operation of NAFTA’s dispute settlement process
                             to date, they expressed some concerns about the panel selection process.
                             In addition, a constitutional challenge to the chapter 19 process is pending
                             in U.S. federal court.

Changes in Signatory Trade   All three signatories agreed to make changes in their trade remedy laws to
Laws to Conform to NAFTA     comply with NAFTA provisions. For example, NAFTA obligated Mexico to
Requirements                 make 21 procedural amendments to its laws. They were intended to
                             reduce the potential for arbitrary antidumping and countervailing duty
                             administrative determinations by increasing the level of transparency in
                             the administrative process. The amendments Mexico was obligated to
                             make to its law included allowing interested parties to fully participate in
                             the administrative process, including the right to administrative and
                             judicial review of final determinations, elimination of the possibility of
                             imposing provisional duties before the issuance of a preliminary
                             determination, and explicit timetables for determining the competent
                             investigating authority and for parties to submit evidence and comments.
                             The United States and Canada included changes required by NAFTA in their
                             implementing legislation, while Mexico amended its new Foreign Trade
                             Law shortly before NAFTA became effective.

                             In accordance with the NAFTA Implementation Act, the President reported
                             to Congress on December 27, 1993, that Mexico implemented the statutory
                             changes necessary to bring it into compliance with its obligations under
                             NAFTA. In addition, Mexican officials stated that Mexico also amended its
                             foreign investment, telecommunications, and intellectual property laws at
                             that time. Mexico’s first trade remedies law, including antidumping and
                             countervailing duty measures, was enacted in 1986 when Mexico joined
                             the General Agreement on Tariffs and Trade (GATT). According to Mexican

                             Page 15                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
                              officials and the U.S. Section NAFTA Secretariat, the law, now in its fourth
                              revision, has dramatically increased the levels of transparency and public
                              participation in Mexico’s trade remedy determinations. However, these
                              officials admitted that Mexico’s system for finding redress to unfair trade
                              practices was still slow and costly to petitioners.

                              Canadian officials told us that both U.S.-Canadian Free Trade Agreement
                              and NAFTA provisions on unfair trade practices have encouraged more
                              thorough review and documentation of original antidumping and
                              countervailing duty cases by Revenue Canada, an agency that administers
                              Canadian trade laws. Prior to these agreements, these same officials said
                              that Revenue Canada’s review processes of these cases had been less
                              documented and less subject to outside scrutiny.

Quality of the Operation of   In general, U.S., Mexican, and Canadian government officials with whom
Dispute Settlement            we spoke were favorably impressed with the operation of the NAFTA
                              dispute settlement process over the past 3-1/2 years. They considered the
                              panelists reviewing the cases brought forward to date to be of high quality,
                              professional, neutral, and unbiased. Panelists, we were told, went out of
                              their way to hear all of the arguments relevant to each case. In addition,
                              they were pleased that panel reviews and decisions were conducted with
                              little attention from the media. Officials observed that the cases that did
                              attract media attention tended to be those concerning issues that had been
                              sensitive long before NAFTA. They further noted that the controversy over
                              these cases concerned the substance of the issues rather than the dispute
                              settlement process itself.

                              U.S., Canadian, and Mexican business groups we spoke with believed that
                              the dispute settlement framework has provided an orderly, fair, and
                              predictable mechanism with which to resolve differences. One U.S.
                              business association member explained that such a mechanism provided
                              certainty and reduced risk to all participants, thereby facilitating trade
                              among the three countries. Another businessperson noted that the
                              outcome of the panel decisions was not as important as the certainty that
                              the dispute settlement system was unbiased and based upon the rule of

                              Considering the increased trade among the United States, Canada, and
                              Mexico since NAFTA’s implementation, many of the private sector and
                              government officials with whom we spoke regarded the number of dispute
                              settlement cases over the past 3-1/2 years to be remarkably low. They
                              attributed this to opportunities to work out differences through the NAFTA

                              Page 16                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
                  working groups and the consultation process built into the dispute
                  settlement process.

Panel Selection   Notwithstanding the support expressed by many business and government
                  representatives for the agreement’s dispute settlement process, some
                  participants in the dispute settlement process expressed concern about
                  the timeliness of the panel selection process.

                  NAFTA’s chapter 19 provides that involved parties agree on their selection
                  of panel members within 55 days of the request for a panel. The average
                  delay over and above the required 55 days for panel selection under NAFTA
                  chapter 19 had been 53 days. Participants attributed this delay to the
                  logistics of finding qualified potential panelists, in particular panelists who
                  meet the NAFTA code of conduct that requires that panelists meet certain
                  criteria, including lack of a conflict of interest. One participant cautioned
                  that such delays could potentially cause problems since NAFTA requires the
                  respondent to respond to the complainant’s brief within 60 days of the
                  request for a panel. In fact, thus far nine panels have been temporarily
                  suspended to deal with such situations.

                  In addition, a Canadian official responsible for monitoring NAFTA issues
                  believed that the two cases involving requests for chapter 20 panels had
                  been delayed due to the absence of a chapter 20 roster. Under NAFTA, the
                  chapter 20 panel members are normally to be chosen from a roster agreed
                  upon by all three signatories. Without a roster, panelists in the two cases
                  had to be selected from a general population of potentially eligible
                  panelists. According to a U.S. Trade Representative official, the chapter 20
                  roster has not yet been formed because the parties could not agree on its

                  Mexican officials admitted that Mexico’s pool of potential panelists was
                  rather limited because Mexican attorneys are still developing expertise in
                  trade dispute matters. Moreover, the limited number of Mexican trade
                  attorneys increases the potential that panelists might represent clients in
                  the industries subject to panel review, a situation not allowed under
                  NAFTA’s conflict of interest provisions. Mexican officials explained that
                  their government is making every effort to train more professionals in the
                  area of trade law. For example, the Mexican government is currently
                  sponsoring seminars on trade law and requiring that Mexican universities
                  provide classes in antidumping and countervailing duty law as well as in
                  NAFTA dispute settlement.

                  Page 17                    GAO/T-NSIAD-97-256 North American Free Trade Agreement
Challenge to Constitutionality   Critics have questioned whether the chapter 19 binational panel review
of Binational Panel System       system, by replacing federal court review with binational panel review,
                                 violates article III of the U.S. Constitution that provides that judicial power
                                 be exercised by U.S. federal courts. They also question whether the
                                 chapter 19 system may violate the appointments clause of article II of the
                                 U.S. Constitution, which requires that judicial officials be appointed by the
                                 President with the advice and consent of the Senate, since chapter 19
                                 panelists are not nominated by the President and confirmed by the Senate.
                                 In January of this year, the American Coalition for Competitive Trade22
                                 filed a lawsuit in the U.S. Court of Appeals for the District of Columbia
                                 Circuit charging that chapter 19 violates articles II and III of the U.S.

                                 In view of these developments, it is possible that questions concerning the
                                 constitutionality of the chapter 19 binational panel review system may be
                                 resolved by the federal courts. However, if and when the courts will
                                 ultimately decide these issues is uncertain.

                                 During the NAFTA negotiation process, parallel negotiations were
Implementation of                undertaken to address environment and labor issues. The two resulting
Environment and                  agreements emphasized cooperation to improve environment and labor
Labor Agreements                 conditions in North America; they also created mechanisms to address
                                 enforcement of environment and labor laws in each of the three countries.
                                 After 3-1/2 years of implementation, it is too early to say what definitive
                                 effect these side agreements will have on the environment and labor. The
                                 commissions set up to implement the two agreements have been
                                 acknowledged for their efforts to date to further cooperation in their
                                 respective areas, but observers also have concerns about various aspects
                                 of the agreements’ implementation.

                                   The American Coalition for Competitive Trade, a nonprofit organization incorporated under Virginia
                                 law, is a coalition of 21 organizations and corporations organized for the purpose of protecting the
                                 industrial and agricultural capacity, tax base, and economic well being of the United States.

                                 Page 18                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
Coverage and Results of   The North American Agreement on Environmental Cooperation signed by
the Environmental         Canada, Mexico, and the United States in September 1993, went into effect
Agreement                 along with the NAFTA on January 1, 1994.23 The environmental agreement
                          aims to protect, conserve, and improve the environment through increased
                          cooperation and transparency among the three governments and greater
                          public participation. In addition, the agreement provides citizens and
                          governments an opportunity to file complaints regarding a country’s
                          failure to enforce its environmental laws.

                          The environmental agreement established the Commission for
                          Environmental Cooperation in Montreal to help the three signatory
                          countries achieve the objectives set forth in the agreement. Its
                          organizational structure consists of a Council, a Secretariat, and a Joint
                          Public Advisory Committee. Since 1995, this commission has been funded
                          at approximately $9 million per year, with equal contributions from each
                          member country. In 1996, the commission created a fund for
                          community-based projects in Canada, Mexico, and the United States that
                          promotes the commission’s goals and objectives. In 1997, $1.6 million of
                          the annual budget was used for this fund.

Cooperative Efforts       Since its first full year of operation in 1995, the environmental commission
                          has undertaken a work program designed to improve environmental
                          cooperation. Work program areas and examples of projects undertaken by
                          the commission are outlined in table 2.

                            NAFTA was also accompanied by a bilateral agreement between the United States and Mexico that
                          established the North American Development Bank and the Border Environment Cooperation
                          Commission. The primary goal of these two institutions is to provide seed money for environmental
                          infrastructure and community development projects along the U.S.-Mexico border and to review
                          proposals for such funding. A discussion about the implementation of the North American
                          Development Bank and the Border Environment Cooperation Commission is beyond the scope of this
                          testimony. For a detailed analysis of these two agreements, see International Environment:
                          Environmental Infrastructure Needs in the U.S.-Mexican Border Region Remain Unmet
                          (GAO/RCED-96-179, July 22, 1996).

                          Page 19                          GAO/T-NSIAD-97-256 North American Free Trade Agreement
Table 2: Commission for
Environmental Cooperation’s Regional   Work program area                Examples
Cooperation Projects                   Conservation                     •Developing plans to conserve and protect North
                                                                        American birds and monarch butterflies
                                                                        •Developed plans to establish a North American
                                                                        Biodiversity Information Network
                                                                        •Developed plans to implement strategies to protect
                                                                        regional marine life
                                       Protecting                       •Coordinated the development of regional action plans
                                         human                          for PCBs, DDT, chlordane, and mercury
                                         health and the                 •Coordinate the completion of transboundary
                                         environment                    environmental impact assessment procedures by April
                                       Environment, trade, and the      •Fund and facilitate the creation of an information
                                         economy                        clearinghouse on environmental technology and services
                                                                        •”NAFTA Effects” projects:
                                                                           •Completed NAFTA intergovernmental institutions
                                                                        study in 1997
                                                                           •Refine the general framework for assessing NAFTA’s
                                                                        environmental impacts by completing a study on the
                                                                        environmental effects of the deregulation of the energy
                                                                        and agriculture sectors (expected in 1997)
                                       Enforcement                      •Groups established under this program have met and
                                         cooperation                    exchanged information, strategies, and expertise on
                                                                        enforcement, compliance, and legal trends
                                       Information and                  •Complete enhancements to the commission’s website
                                         public                         that will provide regional information on the environmental
                                         outreach                       dimensions of physical, socioeconomic, and ecological
                                                                        variables (expected in 1997)

                                       PCB = Polychlorinated Biphenyle
                                       DDT = Dichloro-diphenyl Trichloro-ethane

Enforcement                            The environmental supplemental agreement provides two separate
                                       mechanisms regarding a government’s failure to enforce its environmental
                                       laws: (1) articles 14 and 15 provide for citizen submissions on enforcement
                                       matters and (2) part V provides for government-to-government
                                       consultation and resolution of disputes. Environmental officials from
                                       Canada and the United States generally believe that the citizen submission
                                       process is working well. They believe the submissions are being fairly
                                       reviewed by the Secretariat. In Canada, one official commented that this
                                       process has even helped the provincial and national environmental
                                       agencies harmonize their responsibilities.

                                       Citizen submission process. Under the citizen submission process, a
                                       citizen or citizen group may submit a claim to the environment

                                       Page 20                         GAO/T-NSIAD-97-256 North American Free Trade Agreement
commission’s Secretariat that a party to the agreement is failing to
effectively enforce its environmental laws. If two out of the three countries
agree that the submission has merit, the commission will prepare a factual
record (that is, an investigation of the matter) that could lead to public
pressure to improve enforcement. Unlike part V of the agreement for
resolving government-to-government environment disputes, the citizens
submissions process does not provide this commission with the ability to
impose sanctions.

Since the citizen submission process came into effect, 11 submissions
have been filed.24 Of these 11, 3 cases were submitted alleging that the
United States had failed to enforce its environmental laws. Of these three
submissions, two were terminated because they dealt with legislative
changes or new environmental laws rather than nonenforcement,25 and the
third was withdrawn. In this third instance, the submitter alleged that the
Department of Defense’s expansion of Fort Huachuca, Arizona, would
drain the local water supply and destroy the ecosystem that is dependent
upon it. In its response, the U.S. government contended it was not failing
to enforce environmental law and that the citizen submission did not
warrant an inquiry to gather factual information. In July 1997, the
submitter withdrew the filing, and the process was terminated.

The remaining cases were against Canada and Mexico, with six being filed
against Canada and two against Mexico. The case that has proceeded the
furthest involves a submission filed by three Mexican nongovernmental
organizations in 1996, alleging that the Mexican government failed to
effectively enforce its environmental laws regarding the construction and
operation of a public harbor terminal in Cozumel. The Secretariat
recommended, and the Council approved, that a factual record be
prepared in this case. The Secretariat transmitted the final factual record
to the Council on July 25, 1997. The Council may, upon a two-thirds vote,
make the final record a public document.

Government-to-government disputes. Although a process for consulting on
and resolving government-to-government disputes regarding a “persistent
pattern of failure to effectively enforce its environmental laws” is called

  For a listing of all submissions—the country affected, the submitter, and the status—see appendix V.
  For example, the case submitted by the Sierra Club and other organizations in August 1995 alleging
that the Fiscal Year 1995 Supplemental Appropriations, Disaster Assistance and Rescissions Act
contained a rider suspending enforcement of U.S. environmental laws for a logging program was
terminated on December 8, 1995, because the Secretariat determined that the case was not a
nonenforcement case. The Secretariat’s assessment was that these organizations submitted the case as
a means of seeking an alternate forum for disputing a U.S. legislative decision.

Page 21                            GAO/T-NSIAD-97-256 North American Free Trade Agreement
                              for under the agreement, no rules of procedure for implementing this
                              segment—part V—of the agreement have been established to date.26
                              Unlike the citizen submission process identified in articles 14 and 15 of the
                              environmental agreement, part V allows an arbitration panel reviewing the
                              case to impose monetary sanctions or to withdraw NAFTA benefits if it
                              determines that the government against which a complaint was filed
                              persistently failed to enforce its environmental laws. Without rules of
                              procedure, no NAFTA member country can raise a complaint under this
                              section of the environmental agreement, which was designed to help
                              resolve disputes arising between governments.

Implementation Progress and   The environmental commission is credited with making some progress in
Issues                        implementing the environmental agreement. However, implementation
                              issues involving the focus of the commission’s cooperative work
                              programs, transparency of the enforcement mechanisms, and the
                              governments’ commitment to the agreement remain.

                              Progress on cooperation and participation. Officials we spoke with at the
                              U.S. and Canadian environmental agencies, as well as at a Mexican
                              nongovernmental organization, were generally pleased with
                              implementation of NAFTA’s environmental agreement. According to these
                              officials, the agreement and its commission provide the three countries an
                              opportunity to examine broader, regional environmental objectives and to
                              develop cooperative action plans on agreed-upon priorities. Actions taken
                              by the commission in implementing the environmental agreement are
                              listed in table 2.

                              Environmental officials in all three NAFTA countries also commented on the
                              increased level of public participation achieved through the agreement.
                              This is especially true in Mexico, according to a Mexican expert we spoke
                              with, who told us that the agreement has given the Mexican government
                              the political will to strengthen its environmental laws and include citizen
                              input. Another Mexican environmental expert has stated that the
                              commission has been an important catalyst for developing a more
                              transparent regulatory process and ensuring a more consistent application
                              of environmental laws in Mexico.

                              Similar reactions were also expressed by some other environmental
                              experts reviewing implementation of the environmental agreement. In a

                               According to a U.S. Environmental Protection Agency official, the NAFTA members expect to
                              complete these rules by the end of 1997.

                              Page 22                          GAO/T-NSIAD-97-256 North American Free Trade Agreement
    letter sent to the Council, an independent panel of experts27 said that the
    environmental agreement and the commission have done much to develop
    as an important focus for environmental cooperation and dialogue in
    North America.

    Concerns about work programs and studies. Despite the achievements
    acknowledged by government officials and experts, some observers have
    raised concerns about the work undertaken by the commission. For
    example, Mexican trade officials stressed their concerns about both the
    process and content of the work program. According to these officials, the
    commission needs more transparent criteria for its selection and funding
    of projects, and the Mexican government should have much more input
    into the funding of projects earlier on in the process. Furthermore, they
    believe that the commission is funding several environmental projects that
    are duplicative of some ongoing efforts to improve conditions along the
    U.S.-Mexico border. The U.S. Environmental Protection Agency (EPA) has
    raised other concerns about the process used to determine the studies
    undertaken by the commission. Specifically, an agency official told us that
    the process used to determine whether or not to prepare a study needs to
    be more transparent. Canadian trade and environment officials did not
    express any concerns about the commission’s work programs or studies.

    Concerns about the citizen submission process. Questions regarding the
    consistency with which the citizen submission process has been applied,
    the transparency of this process, and the guidelines developed to
    implement it were raised by officials we spoke with.

•   Mexican officials believe the environment commission has been
    inconsistent in its handling of the cases filed under the citizen submission
    process, showing more flexibility towards some governments involved in
    cases than others. Specifically, they are dissatisfied with the application of
    the process in the Cozumel public harbor case alleging Mexico’s failure to
    effectively enforce its environmental law.
•   Mexican environmental experts believe the environment commission
    needs to increase the transparency of the submission process. For
    example, they believe the submitter should be allowed to review a draft of
    the factual record prepared by the secretariat, as the government is
    allowed to do, before it is finalized.
•   U.S. environmental officials are concerned that the citizen submission
    guidelines currently allow the submitter to withdraw a filing at will. Once

     The Commission for Environmental Cooperation Secretariat convened a panel of experts in
    March 1997 to help it prepare for a mandated internal evaluation. The trinational panel included a U.S.
    Congressman and was chaired by the United Nations’ chief advisor on environmental issues.

    Page 23                            GAO/T-NSIAD-97-256 North American Free Trade Agreement
                          the Secretariat receives notification of the withdrawal, it is required to halt
                          the process of investigation. According to an official at the EPA, it was a
                          mistake to include such a provision in the guidelines because the process
                          may be halted at any stage regardless of the level of resources the
                          commission and the governments may have put into processing and
                          responding to the allegation. The official told us these guidelines are
                          currently being revised.

                          Concerns about an independent commission. A panel of experts and
                          officials at the environmental commission we spoke with stressed the
                          importance of improving the commission’s independence and its ability to
                          autonomously decide to undertake a study or a work program. Problems
                          associated with this issue arose during the annual program and budget
                          review process in which Mexican government officials withheld their
                          support and approval for a project to study the environmental effects of
                          NAFTA in certain sectors. Officials from Mexico objected to the project
                          because they believed the commission had not adequately consulted them
                          in the identification of the sectors—energy and agriculture—to be studied.
                          While support for the project, referred to as the second phase of the NAFTA
                          Environmental Effects project, was eventually granted for the remainder
                          of 1997, its continuation beyond that was made contingent upon a group of
                          trade and environment officials from each country recommending the
                          terms of reference for future work in this area.

                          Concerns about national commitment to the environmental agreement.
                          Experts, some government officials, and officials at the commission’s
                          secretariat were concerned about what they regard as a low level of
                          national commitment to the environmental agreement. A commission
                          official we spoke with commented that agencies responsible for
                          implementation of the NAFTA environmental agreement in both the United
                          States and Mexico have been constantly understaffed, which has had an
                          adverse impact on the agreement’s implementation. For example,
                          Canadian officials told us that without an adequate level of staff to
                          implement the agreement in each country, marketing of the agreement’s
                          strengths, its cooperative work efforts, and its enforcement mechanisms
                          suffer. Furthermore, officials we spoke with said that it was surprising
                          that, compared to Canada and Mexico, the United States has consistently
                          had the least number of staff—one—assigned to oversee implementation.

Coverage and Results of   The North American Agreement on Labor Cooperation signed by Canada,
the Labor Agreement       Mexico, and the United States in September 1993, went into effect on

                          Page 24                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                    January 1, 1994, along with NAFTA. The agreement aims to improve working
                                    conditions and living standards in each country, encourage exchange of
                                    information on and foster transparency in the administration of labor law,
                                    and pursue cooperative labor-related activities among the three countries.
                                    The three governments have also committed themselves to promote
                                    compliance with and effectively enforce (subject to domestic law) 11 labor
                                    principles, including the freedom of association and protection of the right
                                    to organize; the right to bargain collectively and strike; minimum
                                    employment standards; elimination of employment discrimination; equal
                                    pay for women and men; and protection of migrant workers.

                                    The labor agreement established the Commission for Labor Cooperation in
                                    Dallas as a trinational organization responsible for fostering cooperative
                                    labor-related activities and performing independent evaluations. The
                                    commission was funded in equal parts by the three countries at
                                    $1.8 million in 1996. In addition, the labor agreement permits the parties to
                                    develop a consultative system to address domestic labor-related issues.
                                    This includes a dispute settlement mechanism to address lack of
                                    enforcement by a party of certain labor law standards.

Cooperative Efforts                 The commission, in order to meet its obligations to pursue cooperative
                                    labor-related activities, has completed a number of efforts since it went
                                    into operation in September 1995. Examples include those listed in table 3.

Table 3: Commission for Labor
Cooperation’s Cooperative Efforts   Selected areas of cooperation              Recent examples
                                    Occupational safety and health             •North American Occupational Safety and
                                                                               Health Week, held June 1997
                                                                               simultaneously in each country
                                                                               • Completion of “Petrochemical Study
                                                                               Tour” on prevention of catastrophic
                                                                               explosions (October 1996)
                                    Human resource development                 •Workshop on Continuous Learning and
                                                                               Development in the Workplace (April 1996)
                                    Labor-management relations                 •Tripartite conference on “Industrial
                                                                               Relations for the 21st Century” (March
                                    Productivity improvement                   •North American seminar on incomes and
                                    Labor statistics                           •Report profiling North American labor
                                                                               markets (June 1997)

Enforcement                         The labor agreement provides for a series of processes to ensure the
                                    enforcement of each country’s labor laws, emphasizing cooperation and

                                    Page 25                      GAO/T-NSIAD-97-256 North American Free Trade Agreement
consultation throughout the various steps. If a person or group wishes to
allege that one country has failed to effectively enforce its labor laws, it
may file a submission with the National Administrative Office of another
country. The National Administrative Office receiving the submission may
then investigate the allegation, including holding public hearings to gather
information. Consultation with other National Administrative Offices
follows if the submission is accepted. The Secretary of the National
Administrative Office receiving the submission may then recommend that
ministerial consultations take place on the subject. Depending on the
nature of the allegation, additional steps in the process could include the
formation of an evaluation committee of experts if ministerial
consultations have not resolved the issue, as well as other cooperative and
consultative steps.

If cooperative efforts to resolve problems fail, the labor agreement
provides a dispute settlement mechanism in three instances where a
submission involves an allegation of a persistent pattern of failure to
effectively enforce labor rights: occupational safety and health, child
labor, and minimum wage technical labor standards. In such a case, an
arbitration panel may be formed to review the matter and make
recommendations for corrective action. Failure of one of the parties to
fully implement the panel’s recommendations could ultimately lead to a
monetary sanction to be placed in a fund to be used to improve or enhance
labor law enforcement in the non-conforming country.28 Failure to pay the
monetary sanction could result in suspension of NAFTA benefits.

Eight cases have been submitted since the establishment of the National
Administrative Offices. Seven have been submitted to the U.S. National
Administrative Office against Mexico, and one has been submitted to
Mexico’s National Administrative Office against the United States; none
have involved Canada. None of the cases submitted so far has fallen in a
category of labor principles that could ultimately qualify for dispute
settlement and sanctions.29 A more detailed description of the submissions
can be found in appendix VI.

  The North American Agreement on Labor Cooperation provided for a maximum monetary
enforcement assessment of $20 million in 1994. In subsequent years, this assessment can be no greater
than 0.007 percent of the total trade in goods between the parties during the most recent year for
which data are available.
  The first seven cases all dealt with the labor principle of freedom of association and the right to
organize. Under the North America Agreement on Labor Cooperation, cases of this sort are not eligible
for independent evaluation or arbitration. The most recent case involves the labor principle of the
elimination of employment discrimination, which is eligible for independent evaluation, but not

Page 26                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
Implementation Progress and   The labor agreement is the first international agreement to link labor
Issues                        issues to an international trade pact. Recent efforts to link trade
                              agreements and labor issues, building on NAFTA, have proven to be very
                              controversial. For example, at the first ministerial meeting of the World
                              Trade Organization (WTO) at Singapore in December 1996, WTO members
                              rejected a U.S. proposal to create a working group to study the
                              relationship between trade and labor standards. Thus, while the labor
                              agreement is limited in its scope, according to some critics, it remains a
                              visible experiment in the linkage of labor standards to international trade

                              Labor officials knowledgeable about the labor agreement in each country
                              told us that they believe that the agreement has had a positive effect on
                              increasing the level of understanding about labor issues in North
                              America—one of its major objectives. Many of the activities associated
                              with the agreement have been focused on improving the level of
                              understanding of each country’s labor system because, according to one
                              National Administrative Office Secretary, such understanding has been
                              woefully lacking in the past.

                              Personnel issues. Difficulty in hiring and retaining staff has been identified
                              as an impediment to the implementation of the labor agreement. The
                              National Administrative Offices in each country went into operation in
                              January 1994 at the same time that NAFTA went into effect. At the first
                              meeting of the commission’s Council in March 1994, labor ministers from
                              each country indicated they planned to hire an Executive Director by
                              June 1, 1994. However, the position was not filled until April 1995 due to
                              difficulties in hiring a Canadian Executive Director, according to
                              commission officials. Because of this delay, the commission’s opening did
                              not occur until September 1995, almost 2 years after the labor agreement
                              went into effect. In addition, turnover at both Mexico’s National
                              Administrative Office and at the labor commission has disturbed the
                              continuity of operations, according to U.S. and Canadian officials. Finally,
                              disparate national treatment in the application of personal taxes for
                              employees at the commission has resulted in different net salaries for each
                              nationality, and has negatively affected both recruiting efforts and morale,
                              according to commission officials.

                              Budgetary issues. Funding levels for the commission have also been raised
                              as a concern related to the effectiveness of the commission. The NAFTA
                              Implementation Act authorized a U.S. contribution to the commission of
                              $2 million for each of fiscal years 1994 and 1995. Since the burden of

                              Page 27                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
funding the commission must be borne equally by each country, this
indicated a potential annual commission funding level of $6 million.
However, the actual annual commission budget for the past several years
has been $1.8 million (U.S. contribution totalling $600,000). A commission
official explained that by the time the commission was ready to be funded,
Mexico had entered into its financial crisis and requested a temporary
funding limit on the commission of $600,000 per country.

The funding limitations are causing concern on the part of some observers
that the commission does not have adequate resources to meet its
obligations. The Director of the Mexico National Administrative Office told
us that while the commission has requested a budget raise from its
Secretariat, the Mexican government has decided not to authorize an
increase until it has had an opportunity to examine the commission’s
annual work plan. Commission officials told us that the Canadian
government has already appropriated $1 million for its share of the budget
and is diverting 40 percent of it to support NAFTA environment efforts to
remain in compliance with labor agreement provisions that no country
contribute more than any other to support the commission.

Thank you Mr. Chairman, this concludes my prepared remarks. We will be
happy to answer any questions you or Members of the Subcommittee may

Page 28                  GAO/T-NSIAD-97-256 North American Free Trade Agreement
Page 29   GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix I

Selected Statistics on NAFTA Member

                                                                        States         Canada           Mexico
              Population (1995, in millions)                                263               30                92
              Per capita GNP (1995, PPP dollars)a                      $26,980         $21,130           $6,400
              Average annual growth rate of real per                        1.4              0.4                0.1
              capita GNP, 1985-95 (percent)
              Average annual inflation rate, 1985-95                        3.2              2.9               36.7
              Investment as a percent of GDP, 1995                           16               19                15
              Exports to U.S. as a percent of total exports,                NA                80                84
              Total trade as a percent of GDP, 1995b                         24               71                48

              GDP = gross domestic product
              GNP = gross national product
              PPP = purchasing power parity
              NA = Not applicable
               Purchasing power parity is defined as the number of units of a country’s currency required to
              buy the same amount of goods and services in the domestic market as U.S. dollar would buy in
              the United States.
               Total trade share in GDP equals exports and imports of goods and services as a percentage of

              Source: World Bank Atlas, 1997.

              Page 30                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix II

Merchandise Trade Relationships Between
NAFTA Members, 1991-93 and 1994-96

              Dollars in billions
                                                                                     Annual average growth
                                                        Annual average                   rate (percent)
                                                       1991-93          1994-96           1991-93   1994-96
              U.S. exports to
              Canada                                      $91.8           $124.3              6.5       9.8
              Mexico                                        38.5             51.0            13.9      12.1
              Canada and Mexico                           130.3            175.3              8.4      10.2
              World— excluding Canada                     314.5            397.3              4.7      10.4
              and Mexico
              U.S. imports from
              Canada                                     $102.9           $146.7              6.7      12.1
              Mexico                                        36.2             62.4             9.9      22.1
              Canada and Mexico                           139.1            209.1              7.5      14.9
              World— excluding Canada                     414.9            550.3              4.4       9.5
              and Mexico
              U.S. total trade with
              Canada                                     $194.7           $271.0              6.6      11.0
              Mexico                                        74.7           113.4             11.7      16.9
              Canada and Mexico                           269.4            384.4              7.9      12.7
              World— excluding Canada                     729.4            947.6              4.5       9.8
              and Mexico
              Source: International Monetary Fund, Direction of Trade Statistics, 1997.

              Page 31                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix III

U.S. Merchandise Trade With Mexico,

Billions of dollars






     1990         1991          1992          1993              1994              1995             1996

                         U.S. exports to Mexico U.S. imports from Mexico

                                         Source: International Monetary Fund, Direction of Trade Statistics, 1997.

                                         Page 32                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix IV

NAFTA Dispute Cases

              NAFTA chapters 19, 20, and 11, respectively, deal with the three primary
              areas in which disputes can arise—unfair trade practices, the
              interpretation and application of NAFTA, and the protection of investor
              rights. In the 3-1/2 years since NAFTA’s implementation, dispute cases have
              arisen in all three areas. A brief description of the three chapters’
              provisions and information about the dispute cases initiated to date are
              provided in the following tables.

              Chapter 19 lays out the system for the review of antidumping and
Chapter 19    countervailing duty final determinations made by the domestic agency of
              the importing country in the dispute.1 Chapter 19 replaces domestic
              judicial review of those final administrative determinations with binational2
               panel review. Five-member binational panels of experts chosen from
              rosters developed by each of the three signatories review the
              determinations and issue final decisions. Panels apply the law of the
              country whose agency is under review. These panels usually consist of
              lawyers, sitting or retired judges, former government officials, noted
              academics, and others who specialize in trade dispute settlement and
              international affairs. Panels may either uphold a determination or remand3
               it to the investigating authority. The panel’s decision on the case is final
              and binding and cannot be appealed in the domestic courts. In certain
              extraordinary circumstances, such as the gross misconduct of a panel
              member, a party involved in a chapter 19 dispute can request that a final
              panel decision be reviewed by an Extraordinary Challenge Committee.
              Table IV.1 provides information on the chapter 19 NAFTA dispute settlement
              cases for which there were final panel decisions.

               Antidumping and countervailing duty laws in the United States are administered jointly by the U.S.
              International Trade Commission and the U.S. Department of Commerce, and in Canada and Mexico
              respectively by Revenue Canada and SECOFI (Subsecretaria de Negociaciones Comerciales

              Dumping is the sale of commodities in a foreign market at a price that is lower than the price or value
              of comparable commodities in the country of origin. A countervailing duty is a U.S. government fee on
              goods imported into the United States in an amount equal to any subsidy provided with respect to
              manufacture, production, or export of those goods by a government of another country.
               Panels are binational because they are comprised of members from the country of the petitioning
              party and the responding party in the case.
               A remand is a court or panel decision returning a determination to an agency for further action.
              Remands can request that agencies explain determinations, provide more information, or make

              Page 33                            GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                      Appendix IV
                                      NAFTA Dispute Cases

Table IV.1: Completed NAFTA
Chapter 19 Binational Panel Reviews   Case identification (in                               Type of determination by
Through August 1997                   descending order)         Commodity                   domestic agency
                                      USA-95-1904-05            Fresh cut flowers from      Dumping

                                      USA-95-1904-04            Oil country tubular goods   Dumping
                                                                from Mexico

                                      USA-95-1904-03            Color picture tubes from    Dumping
                                      USA-95-1904-02            Gray Portland cement &      Dumping
                                                                cement clinker from
                                      USA-95-1904-01            Porcelain-on-steel          Dumping
                                                                cookingware from Mexico

                                      USA-94-1904-02            Leather wearing apparel     Countervailing duties (CVD)
                                                                from Mexico

                                      USA-94-1904-01            Live swine from Canada      Countervailing duties

                                      MEX-94-1904-03            Crystal and solid           Dumping
                                                                polystyrene from U.S.
                                      MEX-94-1904-02            Cut-to-length plate         Dumping
                                                                products from U.S.

                                      CDA-95-1904-04            Refined sugar from U.S.     Dumping

                                      CDA-95-1904-01            Certain malt beverages      Injury
                                                                from U.S.
                                      CDA-94-1904-04            Certain corrosion-resistant Injury
                                                                steel sheet products from
                                      CDA-94-1904-03            Certain corrosion-resistant Dumping
                                                                steel sheet products from

                                      Page 34                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                       Appendix IV
                                       NAFTA Dispute Cases

Nationality of appealing                         Total number of        Unanimous
parties                    Panel majority        days to completea      decisions?            Results of panel decisions
Mexican                    Mex.                  505                    Yes                   Reduced duties for
                                                                                              3 producers from 39.95% to
Mexican & U.S.             U.S.                  511                    Yes                   Reduced duties for all
                                                                                              producers from 23.79% to
Canadian                   Can.                  326                    Yes                   Affirmed domestic agency
Mexican                    U.S.                  467                    Yes                   Affirmed domestic agency

Mexican & U.S.             U.S.                  541                    Yes                   Agency instructed to adjust
                                                                                              methodology for determining
                                                                                              rebated or uncollected
                                                                                              value-added tax
Mexican                    Mex.                  400                    Yes                   Duty lowered from 13.35% ad
                                                                                              valorem to none for
                                                                                              2 producers
Canadian                   U.S.                  560                    Yes                   Reinstated the sows and boars
                                                                                              subclass and set a separate
                                                                                              CVD rate for it
U.S.                       Mex.                  654                    No                    Affirmed domestic agency
U.S.                       U.S.                  436                    No                    Domestic agency
                                                                                              determination declared null
                                                                                              and void and duties revoked.
U.S.                       U.S.                  451                    Yes                   Panel’s remand did not result
                                                                                              in any change in the domestic
                                                                                              agency’s determination
Canadian                   Can.                  327                    Yes                   Affirmed domestic agency
U.S.                       Can.                  324                    Yes                   Affirmed domestic agency

U.S.                       U.S.                  459                    No                    Duty for one importer
                                                                                              decreased from 13.2 percent
                                                                                              to 13.1 percent; duty for
                                                                                              another importer increased
                                                                                              from 8.4 percent to 8.5 percent

                                       Page 35                       GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix IV
NAFTA Dispute Cases

Case identification (in                                Type of determination by
descending order)         Commodity                    domestic agency
CDA-94-1904-02            Synthetic baler twine from   Injury

Page 36                   GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                       Appendix IV
                                       NAFTA Dispute Cases

Nationality of appealing                          Total number of             Unanimous
parties                    Panel majority         days to completea           decisions?                 Results of panel decisions
Canadian & U.S.            U.S.                   439                         Yes                        Panel’s remand did not result
                                                                                                         in any change in the domestic
                                                                                                         agency’s injury determination
                                       Note: Cases terminated, with no panel decisions, are not included in this table.
                                        Actual calendar days from the date on which a request for panel was made to the date of notice
                                       of final panel action.

                                       Sources: U.S. Section NAFTA Secretariat; text of final panel decisions; and Federal Register

                                       Chapter 20 establishes NAFTA’s procedures for settling disputes between
Chapter 20                             the signatory governments regarding NAFTA’s interpretation and
                                       application. Chapter 20’s dispute settlement provides for (1) consultations
                                       between disputing parties to resolve their disagreement and, if that fails,
                                       referral of the dispute to the Free Trade Commission; (2) referral of the
                                       dispute to a panel of independent experts; (3) dissemination of panel
                                       findings and recommendations; (4) resolution of the dispute through
                                       nonimplementation or removal of the nonconforming measure; and
                                       (5) suspension of application of benefits by the complaining party if
                                       agreement on resolution to the dispute cannot be reached. Chapter 20
                                       panels are chosen from a roster of experts agreed upon by the three
                                       signatories. Table IV.2 provides information on the chapter 20 disputes
                                       initiated under NAFTA.

                                       Page 37                           GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                        Appendix IV
                                        NAFTA Dispute Cases

Table IV.2: NAFTA Chapter 20 Dispute Cases Through August 1997
Petitioner        Respondent       Subject of dispute                                  Status
United States    Canada           Tariffs applied by Canada to certain U.S.-origin Final panel decision to maintain Canadian
                                  agricultural goods                               tariffs, issued December 2, 1997
United States    Mexico           Retaliatory action in response to U.S.               Prepanel consultations ongoing
                                  safeguard action on broomcorn brooms
United States    Mexico           Small parcel delivery (UPS)                          Prepanel consultations ongoing
Mexico           United States    U.S. Customs classifications of limes imported       Prepanel consultations ongoing
                                  from Mexico
Mexico           United States    Requests for designation of Mexicali valley as       Prepanel consultations deferred pending
                                  disease-free area                                    discussions with USDA
Canada           United States    The U.S. Sugar Containing Products Re-export Prepanel consultations ongoing
Mexico           United States    U.S. International Trade Commission serious          Chapter 20
                                  injury determination on broomcorn brooms             panel established on January 14, 1997, and is
                                                                                       in the process of reaching a decision
Mexico and       United States    Titles III and IV of the Helms-Burton Act            Prepanel consultations in April/May 1996
Canada                                                                                 under NAFTA chapter 20. WTO (World Trade
                                                                                       Organization) dispute settlement panel
                                                                                       established through European Union (EU)
                                                                                       protest in November 1996. EU/U.S. agreement
                                                                                       in April 1997 to suspend WTO panel until
                                                                                       October 15, 1997. EU/U.S. talks ongoing
Mexico           United States    Implementation of NAFTA provisions on                Prepanel consultations ongoing

                                        USDA = U.S. Department of Agriculture

                                        Source: Office of the United States Trade Representative.

                                        NAFTA is unique among trade agreements because, under chapter 11, it
Chapter 11                              contains a comprehensive regime for settling disputes between foreign
                                        investors and host governments. International trade agreements have
                                        generally concentrated on removing government barriers to trade in goods
                                        and services and not on resolving disputes between private parties or
                                        regarding investment issues. Chapter 11 makes investor-state disputes
                                        subject to binding arbitration for monetary compensation. If a dispute is
                                        not resolved through consultations, the investor may seek arbitration
                                        through a World Bank facility or through ad hoc proceedings under United
                                        Nations arbitration rules. Table IV.3 shows the status of the chapter 11
                                        cases brought forward under NAFTA.

                                        Page 38                          GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                     Appendix IV
                                     NAFTA Dispute Cases

Table IV.3: Complaints Filed Under
NAFTA’s Chapter 11 Investor-State    Petitioner                 Respondent               Subject of dispute     Status
Arbitration Clause Through           Metalclad Corporation      Mexican                  Mexico’s               Three-member
August 1997                          (U.S. company)             government               expropriation of       arbitration panel
                                                                                         Metalclad’s            formed and
                                                                                         hazardous waste        convened
                                                                                         landfill in the
                                                                                         community of
                                                                                         Mexico, in the state
                                                                                         of San Luis Potosi
                                     Desechos Solidos de        Mexican                  Mexico’s            A panel is being
                                     Naucalpan                  government               nullification of an formed
                                     (U.S. company)                                      agreement to
                                                                                         manage solid waste
                                                                                         in the state of
                                     Source: Office of the United States Trade Representative.

                                     Page 39                          GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix V

Citizen Submissions Under the North
American Agreement on Environmental

Case no.     Country         Submitter(s) and year filed Complaint                          Status
1            United States   Biodiversity Legal             Provisions of a U.S.            Process
                             Foundation, et al. (1995)      rescissions act have            terminated—Secretariat
                                                            resulted in a failure to        determined government
                                                            effectively enforce some        response not merited
                                                            provisions of the
                                                            Endangered Species Act
2            United States   Sierra Club, et al. in the     Legislation passed by the       Process
                             U.S., and Canadian and         U.S. Congress is alleged to     terminated—Secretariat
                             Mexican environmental          include a rider that            determined submission
                             groups (1995)                  suspends enforcement of         criteria not met
                                                            environmental laws for a
                                                            logging program on U.S.
                                                            public lands
3            Mexico          Comité para la Protección      A public harbor terminal for    Factual record prepared.
                             de los Recursos Naturales,     tourist cruises on the island   Council will determine
                             A.C., et al.                   of Cozumel was initiated        whether to make public
                             (1996)                         without a declaration of
                                                            environmental impact
4            Canada          Mr. Aage Tottrup, P. Eng       Failure to enforce Canadian     Process
                             (1996)                         and Alberta environmental       terminated—Secretariat
                                                            laws resulting in the           determined government
                                                            pollution of wetlands           response not merited
                                                            impacting fish and migratory
                                                            bird habitats
5            Canada          Friends of the Old Man River Failure to enforce habitat        Process
                             (1996)                       protection sections of the        terminated—Secretariat
                                                          Canadian Fisheries Act and        determined factual record
                                                          the Canadian Environmental        not warranted
                                                          Assessment Act and
                                                          charges that there has been
                                                          a de facto abdication of
                                                          legal responsibility by the
                                                          Canadian and provincial
6            United States   The Southwest Center for       Fort Huachuca (AZ) base         Process
                             Biological Diversity, et al.   expansion will drain local      terminated—Submitter
                             (1996)                         water supply and destroy        withdrew after Secretariat
                                                            ecosystem dependent on it       reviewed U.S. government
                                                            (San Pedro Reservoir)           response
7            Canada          British Columbia Aboriginal    Failure to enforce the          Secretariat reviewing
                             Fisheries Commission, et al    Canadian Fisheries Act and      submission in light of
                             (1997)                         failure to protect fish and     Canadian response
                                                            fish habitat in British
                                                            Columbia from
                                                            hydro-electric dam

                             Page 40                        GAO/T-NSIAD-97-256 North American Free Trade Agreement
                     Appendix V
                     Citizen Submissions Under the North
                     American Agreement on Environmental

Case no.   Country   Submitter(s) and year filed Complaint                        Status
8          Mexico    Comité pro Limpieza del Rio Failure to enforce Mexican   Secretariat reviewing
                     Magdalena (1997)            environmental legislation
                                                 governing the disposal of
                                                 wastewater into the
                                                 Magdalena River in the state
                                                 of Sonora
9          Canada    Centre Quebecois du Droit    Failure to enforce              Secretariat requested and is
                     de L’environement, et al.    environmental standards         awaiting Canadian response
                     (1997)                       related to agriculture,
                                                  especially hog farms
10         Canada    Canadian Environmental       Failure to conduct an           Secretariat determined
                     Defense Fund (1997)          environmental assessment        submission criteria not met;
                                                  of “The Atlantic Groundfish     submitter has 30 days to
                                                  Strategy” jeopardizes the       resubmit filing
                                                  future of Canadian East
                                                  Coast fisheries
11         Canada    Animal Alliance of Canada,   Canada has yet to fulfill one   Secretariat reviewing
                     et al. (1997)                of its main requirements
                                                  under the Biodiversity
                                                  Convention—to pass
                                                  endangered species
                                                  legislation or regulations

                     Page 41                      GAO/T-NSIAD-97-256 North American Free Trade Agreement
Appendix VI

Labor Submissions Under the North
American Agreement on Labor Cooperation

Case no.      Submitted by                             Issue                                    Status
1             International Brotherhood of             In late 1993, Honeywell Manufacturas     The U.S. National Administrative
              Teamsters                                de Chihuahua allegedly fired about       Office concluded that the information
                                                       20 employees involved in union           in both submissions was insufficient
2             United Electrical, Radio and Machine     organization. Management allegedly       to establish that the government of
              Workers of America                       pressured these workers into signing     Mexico failed to enforce its labor
                                                       resignation forms, accepting the         laws. The Secretary of Labor
                                                       statutory severance pay, and             proposed to the governments of
                                                       relinquishing claims for reinstatement   Mexico and Canada the development
                                                                                                of a comprehensive cooperative
                                                                                                program to address these issues
3             International Labor Rights Education     Workers at a plant of Sony               After holding a public hearing, the
              and Research Fund, National              Corporation (Magneticos de Mexico)       U.S. National Administrative Office
              Association of Democratic Lawyers of     in Nuevo Laredo, Tamaulipas,             recommended ministerial
              Mexico, Coalition for Justice in the     Mexico, were allegedly intimidated,      consultations, which resulted in a
              Maquiladoras, and the American           pressured, and dismissed by the          series of seminars and other activities
              Friends Service Committee                company when they attempted to           designed to address the issue of
                                                       organize a union                         union registration in Mexico. A
                                                                                                followup review conducted by the
                                                                                                National Administrative Office was
                                                                                                issued in December 1996
4             United Electrical, Radio and Machine     The case concerned the alleged         The union withdrew the submission
              Workers of America                       violation of freedom of association    prior to the completion of the review
                                                       and the right to organize by a General process
                                                       Electric Company subsidiary in
5             Telephone Workers Union of the           The submission concerned the             Mexico’s National Administrative
              Republic of Mexico                       closure of a Sprint Corporation          Office requested ministerial
                                                       subsidiary in San Francisco prior to a   consultations. These led to a public
                                                       scheduled election on union              forum and a report on the effects of
                                                       representation                           sudden plant closings on freedom of
                                                                                                association in each country, issued
                                                                                                by the Commission for Labor
                                                                                                Cooperation in June 1997
6             Human Rights Watch/Americas,             When employees of the Mexican            After holding a hearing, the U.S.
              International Labor Rights Fund, and     federal government’s Single Trade        National Administrative Office
              the National Association of              Union of Workers of the Fishing          recommended ministerial
              Democratic Lawyers of Mexico             Ministry attempted to receive            consultations on the relationship
                                                       recognition for their union, the         between international treaties,
                                                       Mexican government allegedly             constitutional provisions, and
                                                       violated their freedom of association    domestic law protecting freedom of
                                                       and the right to organize                association. On September 3, 1997,
                                                                                                the three labor ministers agreed to
                                                                                                conduct a formal exchange of
                                                                                                information and hold a public
                                                                                                conference on issues raised by the

                                             Page 42                      GAO/T-NSIAD-97-256 North American Free Trade Agreement
                                      Appendix VI
                                      Labor Submissions Under the North
                                      American Agreement on Labor Cooperation

Case no.   Submitted by                           Issue                                  Status
7          Communications Workers of America,     When workers at Maxi-Switch in         Before the scheduled hearing, the
           Union of Telephone Workers of          Cananea, Sonora, Mexico, organized     submitters withdrew the submission
           Mexico, and the Federation of Unions   a union, the company’s management      after resolving the dispute to their
           of Goods and Services Companies of     allegedly threatened and intimidated   satisfaction
           Mexico                                 them, creating a nonexistent
                                                  “phantom union” in order to avoid
                                                  bargaining with the workers’ union
8          Human Rights Watch/ American,          The submission contains allegations    The U.S. National Administrative
           International Labor Rights Fund and    about discrimination against female    Office has accepted the submission
           the National Association of            employees in Mexico’s export           for review and is gathering
           Democratic Lawyers of Mexico           processing (maquiladora) sector,       information on the case before
                                                  including mistreating or discharging   determining if ministerial consultations
                                                  pregnant employees in order to avoid   should be requested
                                                  paying maternity benefits

                                      Page 43                       GAO/T-NSIAD-97-256 North American Free Trade Agreement
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(711250)   Page 45                  GAO/T-NSIAD-97-256 North American Free Trade Agreement
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