CHAPTER 14
North American Free Trade Law
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a part of South-Western Cengage Learning.
Coexistence of GATT and
Regional Trade Areas
• GATT Art. 24 states “ the provisions of the
Agreement shall not prevent...the formation of
a customs union or free trade area.”
• The purpose of a customs union or of a free
trade area should be to facilitate trade
between territories and not to raise barriers to
the trade of other WTO trade countries.
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The North American Free Trade Area
• Comprised of United States, Canada, and
Mexico.
• Largest free trade area in the world – GDP $15
trillion.
• NAFTA created in 1994 by President Clinton.
• Canada and U.S. are each other’s largest
trading partners.
• U.S. and Mexico trade at $332B in 2006.
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The NAFTA
• NAFTA is not a customs union or common
market, like the EU.
• Long before NAFTA, GATT allowed trade
between three countries.
• NAFTA fosters trade and lowers/eliminates tarrifs
and barriers to trade: commercial travel, the
environment, worker safety, child labor.
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National Treatment
• NAFTA has similar provision to GATT: once
goods arrive from another NAFTA country, they
are treated without discrimination and no
differently than domestic goods.
• Elimination of Non-Tariff Borders:
– Prohibits new export taxes on goods.
– Customs user fees were eliminated in 1999.
• Continuing Barriers…
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Rules of Origin
• Critical to NAFTA implementation. NAFTA tarrifs
apply only to goods that originate in NAFTA
country.
• Use tariff classification shift test rather than
substantial transformation test to determine
whether item is from one of the three countries
(each component must have undergone a tariff
classification change).
• Regional value content requirement.
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Goods Wholly Produced or
Obtained in North America
• NAFTA Article 415: applies to goods wholly
produced or obtained in North America. Goods
may not contain any non-NAFTA parts or
materials.
• Producer must be able to document all inputs to
raw materials mined, grown, or born in North
America.
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Annex 401 Tariff Shift Rule of Origin
• Non-North American good or material can be
“transformed” into a product of North America if each
non-NA input undergoes a tariff classification change.
• Changes in Tariff Classification.
• Regional Value Content Requirement: ROO based
on target classification.
• Minimal Amounts: less than 7% total cost of product.
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NAFTA- Certificate of Origin
• Required for commercial shipments unless
under $2500 US, $1000 Mexico and $1600
CAD.
• Marketing and labeling rules- Annex 311.
• Normas: Mexican standards and technical
obligations.
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Marking and Label Rules
• Set out in Annex 311 to NAFTA.
• The “Skippy” peanut butter case wanted to use
the “Made in the U.S.A.” label.
• Mexican labeling is controversial: Normas
Oficiales Mexicanas.
• What Items d Not Require Marks?
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Trade in Goods: Sectoral Issues
• Automobiles and parts: 2004 eliminated all duties on
parts originating in North America; duties will continue
on used cars.
• Textiles: phase out in 2004.
• Agriculture: most eliminated in 2004.
• Services.
• Investment.
• Intellectual property.
• Environment and labor.
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Trade in Textiles and Apparel
• NAFTA phased out tariffs on textiles in 2004 on
goods that meet North American Value content
requirement.
• WTO Agreement on Textiles and Clothing in
2005 is now expired  China is taking over,
becoming the world leader of low-cost textile
production.
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Trade in Agriculture
• 15 year phase out
• Many eliminated by 2004; all eliminated
January 2008.
• Certain sensitive produce will be regulated by
tariff rate quotas.
• Agricultural Rules of Origin.
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Government Procurement
• Maintain national defense and weapons
exceptions.
• Greater than $50,000 and construction projects
greater than $6.5 million.
• Bids from all suppliers in NAFTA countries must
be treated without discrimination.
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Trade in Services
• General principle of liberalization and access.
• Financial services- opening banks, insurance.
• Transportation 
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Transportation and Telecommunications
• TRANSPORTATION: Full access was to happen by
2000 for trucks and busses but did not
– Clinton delayed; Bush implemented.
– In the matter of Cross Border Trucking: NAFTA Arbitral Panel
unanimously held U.S. restrictions on Trucking industry violated
NAFTA 2001.
– As of 2007: Congress failed to gather enough support to
implement NAFTA cross-border rules.
• TELECOMMUNICATIONS: all tariffs on phones
eliminated in 2004. Must be allowed access to all
Mexican infrastructure.
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Cross Border Investments
• Liberalizes restrictions. However still some restrictions
(national security and particular industries).
• Article 1110 protects investors from expropriation
without compensation.
• Metal Clad Corp v. Mexico: ICSID 2000 decision finds
that Mexican treatment of a hazardous waste facility
was an expropriation and awarded money damages.
What has been the follow-up?
• Investor Claims and Dispute Resolution procedures.
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Other NAFTA Provisions
• Intellectual Property Rights: usually protected by
international treaties (GATT/TRIPS). Enforced
by NAFTA.
– Trademarks.
– Copyrights.
– Patents.
– Enforcements and Penalties.
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Other NAFTA Provisions
• Environmental Cooperation and Enforcement.
– NAAEC calls for three countries to cooperate in
protecting the environment.
• Labor Cooperation and Worker Rights.
• Antitrust and Competition Policy.
• Rights to Temporary Entry.
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Administration and Dispute Settlement
• NAFTA Fair Trade Commission: supervises
agreement implementation.
• Arbitral panels
• Antidumping and Countervailing Duty Cases.
– Appeals process has changed, now appeals go to
NAFTA binational panels. See the Synthetic Baler
Twine with a Knot Strength of 200 lbs case.
• Extraordinary Challenge committees.
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Production Sharing: Assembly Plants
and the Mexican Maquiladoras
• Process of spreading manufacturing and
assembly operations across borders is called
production sharing.
• Allows countries to do what they do best.
Proximity to US makes process efficient.
• Assembly Plant Tariff Rules: See the Samsonite
Corp. v. United States case.
– Mexican regulation of Maquiladora plants.
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Issues Related to the
Mexican Maquila Industry
• Migration of Mexican workers to border regions
creates social and health problems, crime is becoming
an epidemic (witness the recent shootings in Laredo
and Tijuana).
• There has also been great damage to the
environment, especially the Rio Grande river.
• Recent Trends (away from Mexico):
– The impact of China.
– The impact of CAFTA-DR.
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The Free Trade Area of the Americas
• FTAA is a proposal to extend NAFTA into a
single Western Hemisphere free trade area. This
may a number of years away.
• Other Western Hemipshere FT Agreements:
– CAFTA-DR (2005) provides for NAFTA-like trade
between US and Central American countries.
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Conclusion
• Clinton unable to get Trade Promotion
Authority ( formally called Fast Track
Authority) authority to extend NAFTA.
• What about Bush?
• Debate about the impact of NAFTA
• Dislocation of workers
• Impact on countries?
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