The Case For NAFTA

Policy Backgrounders | Trade

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

The Side Agreements: Offensive but Impotent

The side agreements to NAFTA establish two commissions. President Clinton insisted on an environmental commission to appease U.S. environmental groups that feared Mexico would try to attract foreign investment by lowering its environmental standards or not enforcing its laws. The labor commission was meant to appease American union leaders who feared that lower wages and lax labor law enforcement would pull American factories south of the border. The environmental agreement satisfied only a few environmental groups. The labor agreement satisfied no major labor union leaders.

"Of the 12 states with the largest value of sales to Mexico, six are in the northeast and north central areas."

Each commission consists of representatives of the three NAFTA governments and a secretariat. A principal responsibility of the secretariat is to handle fact-finding investigations. The representatives of the three governments primarily oversee dispute resolution.

Some critics fear that the NAFTA labor and environmental commissions - especially the latter - might take away American sovereignty or give radical American environmentalists more power. These are valid concerns. But a review of the provisions for these commissions shows that no real danger exists. The commissions have no power to affect or override American laws and give no special powers to American environmental groups.

Unneeded Commissions. Fears that Mexico, under NAFTA, could radically reduce or blatantly ignore its own environmental laws - and induce similar policies in the United States - are ill-founded. There probably is little danger of competition through pollution. Modernization will bring environmental improvements to Mexico, regardless of any agreement with the United States.

"Mexico already has raised spending on the environment to 11 times what it was in 1989."

For example, Mexican industry will import more energy-efficient machinery. In addition, only a prosperous country can devote resources to environmental cleanup or worry about environmental concerns. Studies show that a country's environment tends to improve with economic growth. The major ingredients of air pollution decline when a country's gross domestic product exceeds $5,000 per capita - about where Mexico is now.10 Mexico already has raised spending on the environment to 11 times what it was in 1989.11 On the other hand, if the Mexican economy weakens without NAFTA, that country will have every incentive to ignore environmental standards.

The Fact-Finding Function. The first function of the commissions is fact-finding. The secretariat of the environmental commission can investigate cases called to its attention by private citizens or groups of a country's failure to enforce its own laws. Labor complaints must go through a special office established by each government for that country's citizens. The commissions cannot search for cases or subpoena evidence. They can issue reports of their findings. But the reports don't affect the power of the American people to conduct policy as they see fit.

The Dispute Resolution Function. The second function of the commission is dispute resolution. Two NAFTA member governments can require a dispute resolution panel if they believe that another member is engaging in a "persistent pattern of failure to effectively enforce" its own environmental or labor laws regarding a tradeable good or service. But even if a country found to be engaging in such a pattern refuses to change its practices, the panel can levy a fine of no more than $20 million. If the country refuses to pay the fine, the worst the panel can do is allow the aggrieved country to restore certain limited tariffs to pre-NAFTA levels to collect the fine. This is similar to retaliation under GATT. It does not limit sovereignty.

"NAFTA does not confer legal authority to overrule U.S. laws."

Allowing Countries to Make and Change Their Own Laws. NAFTA critics often claim that NAFTA Article 1114 limits America's sovereignty. The article states that "it is inappropriate to encourage investment by relaxing domestic health, safety or environmental standards." But NAFTA contains no mechanism by which member governments can act against alleged violators. NAFTA's hortatory language does not confer legal authority to overrule U.S. laws.

  • The preamble to the side agreements urges countries not to reduce environmental standards, but begins by "Reaffirming the sovereign right of States to exploit their own resources pursuant to their own environmental and development policies..."
  • Article 3 of the side agreement, while calling for high levels of environmental protection, does so while "Recognizing the right of each Party to establish its own levels of domestic environmental protection and environmental development policies and priorities, and to adopt or modify accordingly its environmental laws and regulations..."

Finally, radical environmentalists in America cannot use the commissions to impose more regulations on the U.S. economy. According to Article 2021 of NAFTA, private parties have no right of action in U.S. courts based on a commission finding.

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