The Case For NAFTA

Policy Backgrounders | Trade

No. 130
Monday, November 15, 1993
by Edward L. Hudgins, Ph.D.

Principal Provisions of the Agreement

Figure II - Current Tariff Levels

NAFTA basically is an agreement that opens Mexico's market to American exports. Specifically, it brings Mexico into America's existing Free Trade Area agreement with Canada and expands the provisions of the pact. The following are the main elements of the agreement.

Tariffs. NAFTA will phase out all tariffs on goods and services traded between the member countries. Mexico's tariffs on American goods currently average about 10 percent, while U.S. tariffs on Mexican products average about 4 percent. [See Figure II.]
If the three governments approve NAFTA, some tariffs will be eliminated immediately when the pact takes effect on January 1, 1994. Other tariffs will be phased out at five-year intervals, with all tariffs eliminated after 15 years. Most trade will be duty-free after 10 years.

Rules of Origin. As with the free trade agreement between the United States and Canada, NAFTA contains rules of origin to prevent nonmember countries from using one NAFTA country as a way to channel goods into another while avoiding tariff or other trade restrictions. The most notable rule requires most motor vehicles to contain 62.5 percent North American content, an increase from the current 50 percent level. Motor vehicle parts constitute America's largest export to Mexico, while parts plus vehicles constitute America's largest export to Canada. This rule of origin is meant primarily to prevent Japanese firms from using assembly plants in Mexico as a way to increase sales of vehicles in the United States.

"NAFTA will phase out all tariffs between the two countries."

Investment. Although Mexico has liberalized its laws governing foreign investment in recent years, it maintains regulations that mandate exports or require minimum domestic content. For example, car makers are required to export two vehicles for every one they import and 36 percent of the parts and labor used to produce automobiles there must be Mexican. Under NAFTA, these restrictions will be phased out over 10 years. Further, the agreement outlaws discrimination against investors from another NAFTA country and guarantees that profits can be freely repatriated and that foreigners' property cannot be taken without fair compensation.

"The agreement guarantees that profits can be freely repatriated."

Trade in Services. NAFTA also provides for removal of most barriers to trade in services. This will allow American banks, securities firms and insurance companies - which generally have been barred from Mexico - to operate south of the border. Barriers to trade in other services will be eliminated or reduced as well. In general, NAFTA mandates "national treatment," meaning that whatever freedoms are enjoyed by domestic service providers must be extended to providers from all NAFTA countries. 

Agriculture. Mexico and the United States will convert their nontariff barriers on agricultural trade into tariffs and phase them out over 15 years. Tariffs will be immediately reduced to zero on 57 percent of the farm trade, reaching 63 percent in five years and 94 percent in 10 years.

Energy. The one major sector that Mexico refuses to open to ownership by foreigners is energy-producing minerals, mainly oil. However, in recent years Mexico has allowed foreign involvement in peripheral operations such as supplying equipment, extraction assistance or transport.

Intellectual Property. Under NAFTA, Mexico agrees to stricter protection of intellectual property rights to copyrights and trademarks. These cover such things as sound and video recordings, and computer software.1 Mexico also will have to respect U.S. patents on such items as new drugs - an extremely important change that will benefit one of America's most important export industries. Currently, Mexico allows companies to copy the formulas for drugs developed at great cost by U.S. pharmaceutical companies and pays nothing to the developer. Thus, Mexicans get all of the benefits of America's research and development efforts without sharing any of the costs.

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