Introduction

0.1 - Circumstances preceding the conclusion of the FTA between the United States and Canada

Before NAFTA became a reality in 1991, the FTA was the free-trade treaty that had binded Canada and the United States in a free trade zone since 1986.

The underlying motives for the conclusion of the FTA were very different than those which led towards the creation of the European Union in the 1950's.

• The United States - Canada border is the single most important commercial frontier in the world. 85 per cent of Canadian exports are destined to the US and 65 per cent of US exports go to Canada. According to 1991 figures, more than 210 billion dollars per year were exchanged in goods and services between these two countries, which is a lot more than US and Japan trade accounts for. Today, more than 500 billion dollars in goods, services and capital flow annually among the NAFTA countries, the US, Canada and Mexico, 250 billion dollars of which are goods and services.
• By its sheer size and importance, the American-Canadian trade border demands a legal framework that can guarantee common market access and that can provide a shelter against national political variations.
• The characteristics of Canadian demography, in which 95% of the population lives within a hundred miles of the US border, forces this country to have very close relations with its southern neighbour.
• FTA negotiators made clear that it was vital for both countries to guarantee access to their internal markets to private and publics operators.
• The mere creation of a free trade zone is very much in accordance with new economic dogmas which dictate that an optimised system of competition and open market access lead to a better redistribution of wealth.
• A third of all jobs in Canada are export-related.
• The history of the North-American continent is still pretty much in its infancy. The economic evolution of Canada and the US has been quite similar. Out of this phenomenon came almost spontaneously the idea of uniting the two countries in a free-trade zone.
• Technical norms harmonisation never having been much of a problem in North America, the task of the FTA negotiators was much simplified. A simple overlook of the European Union reveals that national technical norms still pose quite a challenge to harmonizers:
  • Space between railway tracks: Spain and the United Kingdom cannot use the same trains as Europeans do.
  • Electrical plugs are frequently a national issue in Europe.
  • Road signs vary from one country to the next.
  • National food laws and regulations are a common way of keeping imports out in Europe: German laws on beer and lager purity forbids any beer which is not made solely from hops, malt and water, durum semolina for pastas is mandatory in Italy, and the European Commission has many concerns about the vast majority of French cheeses which are made from unpasteurised milk, and British " crisps " or chips which contain some suspect chemical additives.
• Flows of capital have always been quite free of constraints between Canada and the US. Contrary to the European model, there has never been any major restrictions on capital movement so as to keep foreign investment to a minimum.
• Even before FTA came into force, about 80 per cent of all imports and exports between Canada and the US were free of any duty and excise rights. FTA was concerned mainly with the elimination of barriers which were applied to the 20 per cent of remaining products.. This fact greatly contributed to making the FTA an inevitable and much downsized event for North-Americans.
• The political climate in North America has, until recently, been more stable than its European counterpart. Talks of a political union under a common authority were not at all an imperative for FTA negotiators.
• The United States always thought of the FTA as a way to tell GATT countries to speed up the Uruguay Round talks towards their completion.

0.2 - NAFTA negotiations: the pursuit of FTA goals

By its very nature, NAFTA has the same goals and ambitions as the FTA had. The main differences obviously apply to American considerations regarding Mexican integration into the free-trade zone (As Canadian trade with Mexico is quite insignificant, its motives have not been a leading concern for NAFTA negotiators.):

• The mere possibility of creating the largest economic association on the planet, with more than 360 million individuals, certainly was a important lure for politicians, especially American ones.
• NAFTA would become the logical Atlantic counterpart of the European Union, who posed as the first regional economic association.
• The United States certainly wished to kill Mexico's protectionist trade policies.
• Also, there might have been a desire from America to improve the living conditions of the Mexican population. In doing so, demographic pressure for immigration to the United States would surely lower in the near future.
• The United States, being one of the only industrialised countries to a have a direct border with a developing one, wishes to pull it back further South to ensure their own economical and political security.
• Finally, NAFTA negotiations were an excellent occasion for the United States to reopen talks with Canada on matters in which they seemed at a disadvantage. For example, the fact that rules of origin for textiles and garments were much reinforced in NAFTA, at the expense of Canada, certainly constituted a major, though hidden aspect of trilateral negotiations.

0.3 - The essence of the North American Free Trade Agreement

• NAFTA is not an organisation. Strictly speaking, there is no such thing as a " North-American Free Trade Association ". The NAFTA acronym only stands for " North-American Free Trade Agreement ". This fact clearly shows the difference between an international organisation and a free-trade zone which is created by an international treaty, to unite totally sovereign states. In spite of this,, I will from time to time refer to NAFTA as being the " North-American Free trade Association ", because this expression includes a political reality that the legal one does not encompass.
• It is a free-trade zone (according to section XXIV of the GATT treaty)
• It does not provide for any supra-national bodies, apart from the free-trade commission which can only make recommendations. The member-states can always retract from the treaty as they can still use retaliation and reprisal measures under certain conditions. No delegation of powers has been made from member-states to any supra-national body.
• NAFTA, as was the FTA, is an economically-oriented treaty, as it does not contain any social measures nor any " real " legal constraints. ( Technical norms harmonisation and political co-ordination are not direct goals of the NAFTA treaty.)
• NAFTA, which came into force on the first of January 1994, is quite different from its ancestor, the Free Trade Agreement. Accordingly, most case law under FTA has become obsolete.
• NAFTA is a hybrid treaty:
  • it contains lots of very technical and restrictive sections concerning, for example, the rate of customs disarmament, the different steps of an arbitration procedure, valuation methods and complex equations to determine the national vs. foreign content of a product.
  • On the other hand, NAFTA frequently includes some very broad and " shallow " declarations of principles. Those sections usually begin with: " The member-states wish to, [ or ] member-states tend to [ or ] act in the best possible manner ... ". This type of legal clause has a very limited effect and constitutes no less than a non-binding declaration of intent.

A synthesis of the North-American Free Trade Agreement

General provisions

NAFTA creates a free-trade zone in compliance with section XXIV of the GATT treaty. This section allows GATT members to create, under certain conditions, either a customs union or a free-trade zone. Essentially, the difference between these two forms of associations resides in the fact that participating countries in a customs union need to align their customs tariffs into a single one, which applies equally to all imports. In a free-trade zone, each country keeps its own customs tariffs, so that imports are charged differently, on a national basis.

NAFTA's most important obligations and advantages, generally applied throughout its various chapters, are expressed by two principles of commercial international law:

• National treatment: a member-state must provide, for goods and services originating from another member-state, the same conditions, no more, no less, as it provides to similar nationally-produced goods and services. Having gone through customs, imports from a member-state must be treated the same way as internal products. Generally, national treatment forbids all forms of taxation or discriminatory measures inside a member-country, but not at its borders, where customs are free to apply the full range of restrictive and selective norms.
• Most-favoured-nation treatment: created under GATT, this clause states that a member-country must provide conditions, for goods imported from another member, which are no less favourable than those it provides to the country that profits from the best conditions and customs tariffs. In other words, goods and services benefiting from this clause are imported with the best and most favourable conditions that the recipient country gives to all other member-states. This clause applies to all advantages, favours, privileges, immunities, custom rates, payment conditions and terms, taxation in any form, tax collection procedures, as to all formalities applying to imports and exports.

With these two principles, NAFTA-states wish to:

• Favour free-trade
• Abolish customs tariffs and all other barriers to goods and services trade.
• Create a suitable climate for transborder investments
• Promote fair competition
• Create effective procedures for the application and administration of the treaty, as well as for dispute resolution
• Provide adequate protection and enforcement of intellectual property rights
• Cooperate on a trilateral, multilateral, and regional basis to expand and enhance the benefits of the Agreement.

After considering its goals and means, it becomes clear that NAFTA is strictly a commercial treaty. It does not directly intend to lay the basis of a political union. However, this economically-oriented treaty suffers a contradiction. While trying to embrace and regulate all the economic activity of its members, it does so mainly by sectorial arrangements which are practically independent from one another. It is a sectorial treaty with a global scope.

In a first series of chapters, NAFTA deals with the trade of goods and products. Following these are specific and sectorial sections and chapters, which are self-contained. Finally, institutional, administrative, and litigation chapters close the treaty.

1 - Trade of goods and products

1.01 - General provisions

Here are the rules regulating all trade of goods and products between the Parties:

• National treatment applies at the federal, provincial and state level
• A schedule plans for total customs disarmament between member-states. There are specific rules for:
  • Drawbacks (compensation mechanism for overpaid or underpaid duty rights) : it applies to imports in one member-state that are re-exported to another member-state. Since there is no customs union, a different rate is asked for. Consequently, a reimbursement or a new collection must be made.
  • Custom exempted imported goods
  • Temporary admission of samples, tourist-imported necessities, and products for repair.

• NAFTA plans for a complete disarmament of all non-tariff measures (quotas and technical norms among others) as well as the elimination of restrictions on imports and exports
• A Committee on trade in goods is created.
• A new consultation mechanism allows member-states to co-ordinate reprisal measures against a third-party country which dumps or permits its exporters to dump products in the free-trade zone.

1.02 - Special rules applying to particular trades

Two areas are submitted to a complementary set of rules because of their sheer importance for the economies of each member-state. Also, NAFTA negotiators had to consider that these areas are already ruled by various international treaties. The areas in question are:

• The Automobile Industry (Annex 300-A): Essentially, NAFTA confirms the continuity of the Auto Pact between Canada and the United States. Also, it provides Mexico with a transitory period before it is forced to open its markets to member-states imports.
• The Textile and Garments industry; (Annex 300-B): while the international multi-fiber treaties still apply within the free-trade zone, any incompatibility with NAFTA shall be interpreted in favour of the latter. Rules of origin are also greatly reinforced.

1.1 - Rules of origin applying to products

In this matter, the general principle states that a product is considered as originating in a member-state if it is entirely produced or obtained on its territory. A plethora of specific rules of origin apply to almost every imaginable " grey zone " case. But in general, the rules of origin have been reinforced over its FTA counterparts. For example, minimal north-american automobile content has been pushed from 50 to 60 or 62.5 per cent. Under these levels, products cannot benefit from NAFTA's preferential treatment.

1.2 - Control mechanisms for the origin of products

Chapter 5 of NAFTA deals with transit and proof of origin within the free-trade zone.

• To prove the north-american origin of its product, an exporter must obtain an origin certificate for every export within member-states which is worth more than a thousand US dollars.
• If he wants to benefit from preferential treatment, the importer must fill, after having got the origin certificate, a declaration stating the goods do originate from one of the NAFTA countries.
• The exporter must keep all origin certificates for a period of five years.
• Also, national Administrations, if they get permissions to this effect, can visit and inspect the installations of an exporter located in another member-state.
• An anticipated decision procedure allows a member-state to warn the exporter if he will, or will not, benefit from the preferential treatment for certain goods to be exported. The test for this decision consists to apply rules of origin to the eventual export. National treatment must be conceded by national Administrations to those exporters who challenge successfully the anticipated decisions.
• Gradually, uniform rules concerning origin controls shall be implemented among NAFTA partners. To attain this goal, all parties must cooperate and advise the others whenever a administrative change takes place.

1.3 - Emergency measures

As in all other classical international treaties, NAFTA allows member-states to take emergency procedures against predetermined imports which cause important prejudice to the national economy. These procedures include among others, customs rates increases and all forms of taxation applying to a Party, a category of imports, or all imports.

To circumvent what should be a very exceptional event among partners in a free-trade zone, NAFTA plans for the creation of ad hoc committees which shall control the existence of important prejudices, or the threat of a prejudice. Committee decisions are revisable by administrative or judicial courts, according to national legislations.

Even with this kind of control, it is very surprising to ascertain that Parties can still adopt emergency measures of any type, overall economic security and market access therefore being greatly compromised.

1.4 - Technical obstacles to trade

Technical obstacles to trade are a part of non-tariff barriers, that is to say barriers which are not customs or duty rights nor any other form of quantifiable import control. Technical obstacles may be labelling or packaging conditions, security controls or sanitary restrictions etc.

Under NAFTA, member-states can still:

• adopt, maintain, and apply norms in the following areas:
  • Security
  • Protection of life
  • Human and animal health
  • Vegetal preservation
  • environment and consumers protection
  • Regulations to put these measures in effect.
• These measures will also include:
  • Imports prohibitions, even against a member-state
  • Restrictions against services that do not satisfy technical norms
  • Absolute liberty in the choosing by a member-state of the level of protection deemed necessary to attain, by the means of technical restrictions.

So, NAFTA does not accomplish much in this field. At least, it forces a member-state to notify the others in the event of a modification of its technical norms, and it also plans for greater co-operation among members so as to better the global level of protection and welfare.

The first part of this text was a synthesis of general rules applying to the trade of goods. In the second phase, specific and sectorial rules will be described.

2 - Sectorial Provisions

In terms of volume, sectorial rules constitute the most important part of the NAFTA treaty. This is due to the fact that, intending to regulate very sensitive and important fields of activity, these rules have been greedily negotiated. Agreement on general principles implemented in NAFTA never posed much of a difficulty, merely reflecting the very foundations of the treaty. However, questions concerning sectors such as agriculture, energy, telecommunications, transborder services were so difficult to resolve that they almost made the whole construction collapse.

2.01 - Rules for the Automobile Industry, and Textile and Garments industries

( See above in section 1.01)

2.1 - Energy

In this field, which historically is narrowly bonded to national sovereignty issues, NAFTA only materialises the wishes of member-states to eventually liberalise the trade of energetic products. At most the Agreement forbids parties to impose a minimum or maximum price level for energy resources, as well as a general interdiction on export taxation.

2.2 - Agriculture

Two distinct series of questions are dealt with in this chapter.

First, NAFTA deals with market access concerns:

• Parties must:
  • facilitate the trade of agricultural products
  • diminish obstacles to imports
  • enlarge national market access
• Though they still have the power to maintain:
  • mandatory marketing offices and bureaux
  • farmer support programs
  • as long as neither greatly alter competition.
• Parties wish to eliminate export subsidies. In so doing, they create a committee on agricultural trade. They also create a common dispute resolution system for private commercial litigations.

Secondly, NAFTA displays a very long list of provisions applying to non-tariff agricultural barriers. In legal jargon, these are called sanitary and phytosanitary measures. Very detailed and technical, these rules try to determine which measures, after a transition period, will be acceptable.

2.3 - Telecommunications

This chapter establishes a framework for public network telecommunications transport, and also what is called " upgraded service providing ". Public network access is guaranteed to individuals of member-states, in a non-discriminatory fashion, and it states that the price billed for such services must be proportional to costs. What's more, public monopolies must not try to take advantage of their predominant position on the market to alter competition.

2.4 - Transborder services

This field is considerably liberalised under NAFTA. National treatment, most-favoured-nation clause and non-discriminatory treatment all guaranteed access to member-states markets. However, financial, petro-chemical and air travel services are excluded from this chapter because they are specifically dealt with in other chapters.

Member-states can no longer require a minimal presence on their territory before granting preferential treatment. Since the first of January 1996, all requirements of nationality and residency are obsolete. Also, authorisations and recognitions relative to reglemented professions must be attributed on a objective and transparent basis.

In pursuit of the harmonisation of professional norms, national administrations must cooperate and meet every two years so they can agree on the elimination of remaining quantitative barriers.

A special section states that lawyers may give legal counsel in a member-state country, as long as it only regards their own legal system. Similarly, engineers are limited in their scope of action. A progressive liberalisation of norms should allow them in the near future to perform transborder services.

2.5 - Temporary admission of business persons

The goal of this chapter is to simplify business travel which are not part of a service contract. Parties must allow temporary admission to business persons as long as they provide a proof of citizenship and a document confirming the international nature of the ongoing business. Only restrictions relative to public health and national security could constitute an exception to the above-mentioned conditions. However, special treatments apply to investors, dealers and workers transferred within the same enterprise.

2.6 - Investments

The desire of the Parties to liberalise investments has not materialised in a very successful way. Even if most-favoured-nation clause is generally applicable, national treatment benefits only the establishment, acquisition, enlargement, management, exploitation and the selling of an enterprise, exhaustively. Parties cannot discriminate using the nationality of the investor or of the executive board members.

All payments and money transfers relating to an investment are free of any national constraints. Included in this are profits, dividends, capital gains, fees and management expenses.

NAFTA also prohibits any expropriation of an investor by a member-state, except in cases where public interest is concerned.

The great originality of this chapter lies in the creation of a dispute resolution mechanism. It is mandatory to all litigations between a member-state and a private investor. It plans for a preliminary conciliatory phase, followed by an arbitration whose decision is guaranteed to be executable by the Parties on their territories.

2.7 - Financial services

Independent from the general transborder services section, this chapter declares that:

• right of establishment is granted to financial institutions known to be important operators in the targeted market.
• member-states citizens are free to shop and buy financial services anywhere in the free-trade zone.
• no new financial restrictions can be levied against financial services
• new financial services and products must be automatically accepted in all member-states if they are legitimate in their country of origin.
• establishment and acquisition of financial institutions is submitted to national treatment.
• the most-favoured-nation clause applies.
• nationality requirements for employees of financial institutions are forbidden.
• the general dispute resolution mechanism drafted in chapter XX applies to this section.

2.8 - Public markets

The provisions in this chapter are not that constrictive. For the most part, they declare that member-states will try to liberalise public market access, so that in the near future contract submissions can be treated in a fair, non-discriminatory, foreseeable and transparent fashion. Given that the very process of public contract submission is almost always subject to political and national lobbying, the agenda for future realisations already appears much filled.

However, NAFTA still contains a few measures that carry out these objectives:

• National treatment and non-discriminatory contract attribution is mandatory in the following cases:
  • When federal or central governments are publishing a submission for a service contract worth more than 50 000 american dollars, or a building contract submission worth more than 2 million american dollars.
  • When regional, state or para-governmental institutions are publishing a service contract submission worth at least 250 000 american dollars, or a building contract submission worth more than 6 millions dollars.

Parties' administrations must cooperate and make public or widely known their contact attribution system. They must also meet before the end of 1998 to negotiate further liberalisation of public markets access.

2.9 - Regulations for competition, monopolies and state enterprises

National legislations and regulations are maintained, as long as they respect the broad objectives of the NAFTA treaty, which consist in the elimination of unjustified trade barriers. A consultation mechanism between the Parties is created, as well as a co-operation and co-ordination procedure among national administrations. Also, NAFTA creates a workgroup on commerce and competition which must make recommendations before the year 2000 on ways to improve the north-american competition system.

2.10 - Intellectual property

Surely NAFTA's most innovative chapter, the intellectual property rights provisions is detailed and binding for the Parties and their citizens. The general principle in this matter differs from the other parts of the Agreement. It is not drafted as a typical national treatment clause: " Article 1701: Each Party shall provide in its territory to the nationals of another Party adequate and effective protection and enforcement of intellectual property rights, while ensuring that measures to enforce intellectual property rights do not themselves become barriers to legitimate trade. ". In short, this article stands as an obligation of efficiency and balance, that does not seem to allow as many dodges and subterfuges as would a biased application of national treatment.

• Many international intellectual property treaties are incorporated within NAFTA:
  • the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorised Duplication of their Phonograms, 1971 (Geneva Convention);
  • the Berne Convention for the Protection of Literary and Artistic Works, 1971 (Berne Convention);
  • the Paris Convention for the Protection of Industrial Property, 1967 (Paris Convention); and
  • the International Convention for the Protection of New Varieties of Plants, 1978 (UPOV Convention), or the International Convention for the Protection of New Varieties of Plants, 1991 (UPOV Convention).

In some specific fields of intellectual property, the " efficiency obligation " combines with the national treatment obligation. Also, specific provisions and planned modifications of national laws apply to the following:

• Computer programs will henceforth be considered as literary works
• compilations of data will constitute intellectual creations
• Sound recordings and creations: the producer will be granted wider control on various business tools such as licensing and distribution
• Trademarks will undergo an important reform
• Patent laws will also be reformed
• Integrated circuits layout designs will be protected
• Trade secrets will be protected and enforced by national administrations
• Topographical indications will be protected
• Industrial design laws will be reformed

NAFTA forces member-states to create remedies that shall be expeditious, effective, preventive and dissuasive against all actions that might imperil intellectual property rights. Conditions and guidelines are to be met in the elaboration of these remedies by member-states. They will include damages actions and injunctions.

3 - Administrative and institutional provisions

Strangely, negotiators have put institutional and administrative matters in the last three chapters of the treaty. They probably did so to put emphasis on the more substantial chapters of the treaty, those which deal with trade liberalisation.

3.1 - Publication, Notification and Administration of Laws

In essence, this chapters plans for:

• the creation of " contact points ", small specialised committees in charge of facilitating communication between member-states.
• the prompt publication of all laws, regulations, procedures and administrative rulings that have any impact or consequence on NAFTA's application.
• Immediate notification of any proposed or modified measure that may substantially affect NAFTA.
• the creation of remedies for individuals who are subject to legal procedures under the Agreement. These remedies must permit reasonable summons delays, the opportunity to present facts and arguments, and an appeal mechanism before judicial courts.

3.2 - Review and Dispute Settlement in Antidumping and Countervailing Duty Matters

This chapter certainly is one of the foundations of the Agreement. After multiple trade wars between Canada and the United States, FTA negotiators absolutely had to implement a dispute resolution system that would prevent lengthy and costly wars, and would also put a break on politicians' will to accommodate local interests. Though it has been modified in NAFTA, the dispute resolution mechanism still basically relies on hearings before binational panels that deliver declaratory opinions.

• national antidumping and countervailing duty laws are maintained, but they can't be modified without prior notification and consultation, and only if the proposed modifications do not interfere with NAFTA and GATT's goals. Binational panels, when requested by a member-state, determine the existence of an interference and make recommendations. If the disagreement persists thereafter, member-states may apply reprisal measures or even terminate the Agreement.
• member-states must hold annual consultations to examine various problems in this field, find ways to implement this chapter's provisions and recommend solutions.
• A candidate's roster for binational panels is established. Candidates shall be of good character, high standing and repute, and shall be chosen strictly on the basis of objectivity, reliability, sound judgement and general familiarity with international trade law. Candidates shall not be affiliated with a Party, and in no event shall a candidate take instructions from a Party. They should in most cases be judges or lawyers.

3.3 - Dispute Settlement

This procedure applies to dispute concerning the interpretation of the Agreement or to mixed litigations concerning NAFTA and GATT treaties.

In any case, parties to a litigation must cooperate and consult each other continuously until the unravelling. Emphasis is put on what Americans call " Alternative Dispute Resolution ", which is usually faster and cheaper than classical judicial hearings.

The steps in a public dispute settlement are:

• mandatory and continuous consultation between the member-states;
• in the case of failure, member-states request the intervention of the Free-Trade Commission. It tries to find an acceptable compromise and makes recommendations to this purpose.
• As a last resort, a special arbitration is called upon. Composed of five members chosen from a list established by the member-states, it writes, subsequent to hearings, a " final report " that parties must try to put into effect.

Dispute settlement of a private litigation is different:

• A procedure for the special referrals of matters is called upon whenever a question of interpretation of the Agreement arises before a judicial or administrative court.
• Preferably, member-states must favour any alternative dispute resolution mechanism (Consultation, mediation, arbitration, mini-trial etc.). They must also guarantee that arbitration sentences are properly executed on their territory.

3.4 - Institutional provisions

Negotiators have expressed themselves rather timidly in this field. No binding supra-national institution like the European Commission is created by NAFTA. This is due to the fact that the Parties only wanted to build a commercial alliance, not a political one.

• The Free Trade Commission is composed of representatives of the Parties at cabinet-level:
• Its duties are to:
  • supervise the implementation of the Agreement
  • oversee its further elaboration
  • resolve disputes that may arise regarding its interpretation or application
  • supervise the work of all committees and working groups established under NAFTA
  • consider any other matter that may affect the operation of the Agreement
• Its powers allow it to:
  • establish, and delegate responsibilities to ad hoc or standing committees, working groups or expert groups
  • seek the advice of nongovernmental persons or groups
  • take such other action in the exercise of its functions as the Parties may agree

• The Commission establishes its own rules and procedures. Its decisions are taken by consensus, except as it may otherwise be agreed.
• The Commission reunites at least once a year in regular session. Regular sessions of the Commission are presided successively by each Party.

• The Secretariat created and supervised by the Commission, is composed of national sections.
• Its duties are to:
  • assist the Commission
  • provide administrative assistance to panels and committees established under the Agreement

3.5 - Final provisions

NAFTA declares in its 21st chapter that some sectors and fields of activity are not included within its scope. These fields comprise:

• Fiscal measures
• Cultural industries except which relate to the elimination of customs duties.

Copyright 1996 © Guillaume Carrier. All rights reserved.

Many more explanations and details could be added to complete this NAFTA resume, but I hope that these notes will be useful in their present form

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