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NAFTA

NORTH AMERICAN FREE TRADE AGREEMENT


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LAWYER AT LARGE, LLC.

MICHAEL LYNN GABRIEL

ATTORNEY AT LAW

B.S, J.D., M.S.M., Dip. (Tax), LL.M. (Tax)


NAFTA

TABLE OF CONTENTS

INTRODUCTION....................................................................................................1

1. CANADIAN LAW ON FOREIGN INVESTMENT........................................... 6

2. MEXICAN LAW ON FOREIGN INVESTMENTS..........................................14

3. TARIFFS AND COUNTERVAILING DUTIES ................................................25

4. CUSTOM PROCEDURES .................................................................................40

5. COMPETITION, ANTITRUST AND GOVERNMENT PROCUREMENT.......50

6. ENERGY..............................................................................................................62

7. CROSS BOARDER TRADE AND SERVICES...................................................71

8. INVESTMENT AND INVESTMENT DISPUTES...............................................89

9. FINANCIAL SERVICES....................................................................................100

10. TELECOMMUNICATIONS.............................................................................107

11. INTELLECTUAL PROPERTY..........................................................................120

12. HOUSEHOLD GOODS AND FURNITURE....................................................134

13. TEXTILES AND APPAREL INDUSTRY.........................................................148

14. MISCELLANEOUS CONSUMER INDUSTRIES............................................159

15. LUMBER, WOOD AND PAPER PRODUCTS.................................................167

16. CONSTRUCTION INDUSTRIES ....................................................................177

17. AGRICULTURE ...............................................................................................188

18. COAL AND LIGNITE MINING AND MINING EQUIPMENT INDUSTRIES.202

19. MEDICAL DRUGS AND EQUIPMENT............................................................212

20. ENVIRONMENTAL REGULATIONS...............................................................224

21. DISPUTE RESOLUTION PROCEDURES.........................................................231

22. INDUSTRIAL AND METAL WORKING MACHINERY..................................239

23. ELECTRONICS INDUSTRY .............................................................................250

24. METALS AND MISCELLANEOUS METAL FABRICATING INDUSTRY.....260

25. CHEMICAL, PLASTICS AND RUBBER INDUSTRIES...................................270

26. PUBLISHING, PRINTING AND PHOTOGRAPHIC INDUSTRIES.................278

APPENDIX ..............................................................................................................292


INTRODUCTION

The North American Free Trade agreement (NAFTA) is the most important and expansive trade agreement ever created. The signatories of NAFTA are Canada, Mexico and The United States. Several Central American countries have expressed interest in joining NAFTA as well. NAFTA is the largest free trade zone in the world. NAFTA creates a single $6.5 trillion market with 370 million persons. The primary aspect of NAFTA is its tariff elimination feature. Prior to the enactment of NAFTA Mexican import tariffs were 2.5 times greater on American and Canadian goods than the import tariffs charged by the U.S. or Canada on Mexican goods. Nearly all tariffs on Canadian, Mexican, and American goods are scheduled to be slowly eliminated within 10 years.

NAFTA is in many ways a continuation of the 1988 Canada-United States Free Trade Agreement (CFTA). As a result of the enactment of the CFTA, trade between Canada and the United States experienced unprecedented growth. Both Canada and the United States prospered as a result of the increased trade to an extent that exceeded expectations. Canadian trade in 1992 accounted for 1.5 million U.S. jobs. It was the success of CFTA that prompted Canada and the United States to approach Mexico with the idea of creating a similar program for all of North America.

Mexico, after decades of isolationism, was receptive to the idea of a North American free trade zone. Until 1986 Mexico's markets had essentially been closed to foreigners. As a result, the Mexican economy had stagnated. In 1986, Mexico had eased some of its restrictions to foreign investment and opened many of its markets. The result was an immediate success. The year Mexico opened its markets (1986) U.S. trade with Mexico was $17.8 billion. In 1992, U.S. trade to Mexico had increased to $40.6 billion, an increase of 228%. Mexico is the U.S.'s second largest market for manufactured goods, much larger than Japan. U.S. trade to Mexico in 1986 supported nearly 700,000 jobs scattered throughout the United States. NAFTA is projected to create another 200,000 U.S. jobs in its first year. Mexico was the third largest trading partner of the United States even before NAFTA. The per capita income for the average Mexican is relatively low compared to a U.S. citizen, but there are over 90 million Mexicans. The purchasing power is impressive

*** END OF SAMPLE VIEW OF SECTION ***

NAFTA will have both its good points and its bad points. Personal feeling on NAFTA will depend on how it affects the individual on a personal basis. The International Trade Commission has estimated that the U.S.'s horticultural, tuna, apparel, construction and household glassware industries are to be the most adversely affected by NAFTA. In contrast, the greatest gains are estimated in U.S. agricultural and capital goods. Capital goods are goods used in the production of other goods: industrial buildings, machinery, equipment, highways, office buildings, government installations. These goods form a nation's productive capacity.

Capital goods have been the slowest increasing export category of U.S. exports between 1988 and 1993. Capital goods remain the largest single export item to Mexico but the percentage has been dropping. In 1987, the percentage of total U.S. capital goods exported to Mexico was 40%. In 1992, this percentage reduced to 33%. The percentage is misleading to an extent because overall trade with Mexico during this period increased by 228%. So the net cash value of capital exports to Mexico was nearly twice what it had been in 1987. Capital goods account for 40% of all U.S. exports to developing countries and 39% of all U.S. exports in total. The exports of capital goods to Mexico support major employment in high paying U.S. jobs and will continue to do so for many years to come.

Prior to NAFTA, Canada had little trade with Mexico. Canada's reason for joining NAFTA was to assure that it did not lose benefits from its existing free trade agreement with the United States. Canada also recognized the possible advantage that might accrue from having the sizeable Mexican market opened to it. Generally, the tariff reduction schedule established under CFTA remains in force for trade between the U.S. and Canada at lower rates than most of the NAFTA schedules. The result is that most goods traded between Canada and the U.S. are very nearly tariff free whereas goods traded to and from Mexico will still in many cases be subject to tariffs for the next five or 10 years. Canada and the U.S. still have a slight incentive over the next few years to trade between themselves rather than with Mexico until all tariffs are eliminated.

*** END OF SAMPLE VIEW OF SECTION ***

The text of NAFTA may be obtained by calling the U.S. Printing Office at (202) 783-3238 or by fax at (202) 512-2250. Payment for the order may be made by credit card using VISA or Mastercard. Documents can also be ordered by mail sent to:

Superintendent of Documents

U.S. Government Printing Office

Washington, D.C. 40402

The prices for the NAFTA publications are:

TEXT OF NAFTA (VOLUMES 1 and 2) 041-001-00376-2 $41.00

TARIFF SCHEDULES (ANNEX 302.2):

UNITED STATES 041-001-00377-1 $34.00 MEXICO 041-001-00391-6 $34.00

CANADA 041-001-00390-8 $30.00

SUPPLEMENTAL AGREEMENTS 041-001-00411-4 $6.50

The tariff schedules are the most important NAFTA books. These schedules list the tariff rate that each party imposes on the imported goods from each of the other members and the tariff elimination schedules.


CHAPTER 1

CANADIAN LAW ON FOREIGN INVESTMENT


INTRODUCTION

This chapter is not a part of NAFTA. It is, however, included in this book to give the reader a very basic summary of how foreign investors and their investments are treated in Canada. NAFTA will have very little effect of the Canadian treatment of foreign investments in most areas. The major areas on which NAFTA will apply are covered throughout this book.

In 1988, Canada replaced its Foreign Investment Review Act and replaced it with the Investment Canada Act R.S.C. (I.C.A.) It is the stated purpose of the I.C.A. that:

"Recognizing that increased capital and technology would benefit Canada, the purpose of this Act is to encourage investment in Canada by Canadians and non-Canadians -that contributes to economic growth and employment opportunities and to provide for the review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada."

This chapter is directed toward explaining bow the I.C.A. has been applied and implemented. Investors from both the United States and Mexico will still be bound by the provisions of the

I.C.A. unless specifically changed or exempted by NAFTA. Questions regarding the I.C.A. can be answered by writing to Investment Canada, P.O. Box 2800 "D", Ottawa, Canada, K1P6A5.

Under section 10 of the I.C.A., foreign investments are subject to complying with notice requirements and review unless otherwise exempt. For new investors, the most important aspect of this section is that foreign investments in most new Canadian businesses or in non-reviewable acquisitions are not subject to the notice requirements of I.C.A, unless the cultural heritage or national identity of Canada or any of it provinces is involved. There are certain transactions, involving vital national interests, which subject to full review under the I.C.A. and must pass a "Net Benefit to Canada Test" in order to be permitted.

For the purpose of the I.C.A., the following definitions are utilized:

1. A Canadian business is defined as being one which meets all of the following requirements:

a. it carries on business operations in Canada;

b. it maintains a place of business in Canada;

c. its employs people in Canada; and

d. maintains assets in Canada for use in the business.

2. A new-Canadian business involving a foreign investor that was not previously in existence by the foreign investor and either

a. is unrelated to any other business in Canada in which the foreign investor is engaged; or

b. is affiliated to another business operated by the foreign investor which is given an exception by the federal cabinet because the business activity is considered related to the cultural heritage or national identity of Canada.

3. A Canadian is defined, under Canadian law, as being:

a. a Canadian citizen;

b. a legal permanent resident of Canada;

c. the federal and provincial government and agencies,

d. a corporation, partnership or trust that is controlled

by Canadians.

4. A non-Canadian means any corporation, partnership, trust, individual or government which is not Canadian.

**** END OF SAMPLE VIEW OF CHAPTER ***


CHAPTER 2

MEXICAN LAW ON FOREIGN INVESTMENT

This chapter is not a part of NAFTA. It is, however, included to give the reader a summary of how foreign investors and their investments are treated in Mexico. NAFTA will have very little effect on the Mexican treatment of foreign investments in most areas. The areas in which NAFTA will apply are discussed in Chapters 1 and 2 (Canadian and Mexican Foreign Investments).

Foreign investments in Mexico are primarily governed by the Law to Promote Mexican Investment and Regulate Foreign Investment (LPMI). LPMI considers foreign investment to be any investment in Mexico that is made by:

1. Foreign legal entities (corporations, trusts, partnerships or limited liability companies).

2. Foreign individuals.

3. Foreign economic entities without legal personality, such as associations.

4. Mexican corporations, trusts, partnerships or limited liability companies which are controlled by foreigners in any manner.

Investment in a business by foreign investors who are given the Mexican immigration status of "immigrados" will be deemed an investment by a Mexican national if:

1. The business activities do not relate to economic decision making or control abroad, and

2. The business activity or geographical area in which the business will operate is not restricted solely to Mexican citizens or Mexican companies with a clause in their formation documents forbidding foreign participation.

Under the LPMI, any foreigner investing in Mexico had to agree not to seek protection from his own government against unfair Mexican business practices. Under LPMI, any foreigner who complained to his government regarding treatment in Mexico risked immediate and automatic forfeiture of all his assets in Mexico. This law was used to terrorize foreign investors. NAFTA changes this law to the extent that U.S. and Canadian investors can report NAFTA violations to their country without fear of automatic confiscation of their investments. For non-Canadian or American foreign investors, the LPMI restrictions still apply.

I. RESTRICTED ACTIVITIES

LPMI specifically reserves for the government of Mexico the management and control of many of its major industries, most particularly, the following industries:

1. Petroleum, hydrocarbons and basic petrochemicals under the state enterprise "PEMEX."

2. Nuclear and electrical production under the state enterprise "CFE."

3. Mining and development of natural resources. In this area foreign investors are permitted to invest in an ordinary mining concession to an extent of 49%, for special minerals the concession is limited to 34%.

4. Railroads.

5. Banking.

6. Postal, telegraphic and radio-telegraphic communications.

7. Coining and printing of money.

Foreign investors, under the LPMI, wishing to conduct business in such industries must request permission from the government. In most instances, permission is denied. When permission is granted, it is usually in a partnership arrangement with the government wherein the government controls 51% or more of the business. In some instances, where the construction of a plant or processing facility is required, the foreign investor builds the plant and must sell it to the government upon completion. NAFTA changes some of these requirements (as discussed throughout this book). This law, however, remains in effect for foreign investors from non-NAFTA countries.

In addition to the activities and industries reserved to the government, LPMI specifically reserves participation in certain industries for Mexican citizens or Mexican companies that specifically exclude foreign investment or participation in their formation documents. These reserved industries are:

1. Radio and television.

2. Overland transportation.

3. Forestry.

4. Gas distribution.

5. Nonbanking financial services.

The above restrictions are eased and, in some cases, eliminated for foreign investors from Canada and the United States under NAFTA. The restrictions remain in effect for foreign investors from non-NAFTA countries.

LPMI specifically permits foreign participation in the following businesses:

1. Sale of telephones (not the operation of a telephone service company).

2. Explosives and firearms manufacturing.

3. Financial leasing.

4. Secondary petrochemicals to 40%.

5. Automotive parts manufacture to 40%.

6. Any other approved investment to a maximum participation of 49%.

When it is deemed in the best interest of Mexico, the National Commission on Foreign Investment may permit a higher participation by foreign investors. In determining whether or not to permit the greater participation, the following must be considered:

1. The extent of Mexican investment involved.

2. Any displacement of business as a result of the investment and business operations.

3. Effect of exports and imports,

4. Effect on Mexican employment.

5. Amount of Mexican products and components used in the finished product.

6. Capital structure of the business involved.

7. The extent the foreign investor identifies with Mexico's national interest.

8. The foreign investor's relationship with other foreign nations.

LPMI permits a foreign investor to invest to 100% in new business activity if:

1. Any amount of preoperative investment is set by the Secretariat of Commerce and Industrial Promotion in fixed assets that are used to conduct business activities.

2. All of the investment come from outside Mexico from non-Mexican contributions or non-Mexican loans. Investors doing business in Mexico may invest resources derived from Mexican operations in the new business. At the end of the preoperative period, such investments must constitute at least 20% of the aggregate investment in fixed assets.

3. The industrial facilities are not located in the highest industrial concentration zones that are already under a growth rate that is determined and controlled by the Secretariat.

4. The foreign exchange balance of payments of the business established must break even during its first three years of operation.

5. The business creates permanent jobs and engage in the training, development and education of workers.

6. The business uses appropriate technology and obeys Mexican environmental laws.

These LPMI regulations regarding foreign investments are relaxed for foreign investors from the United States or Canada under NAFTA and are discussed in their appropriate chapters throughout this book.

II. FOREIGN OWNERSHIP OF LAND OR WATER

LPMI bars foreigners, foreign companies and Mexican companies, without an anti-foreign-association clause in their formation documents, from owning any interest in land or water within 100 kilometers of the borders and 50 kilometers of the coast or tourist facilities. A foreign individual, but not a foreign company, can apply for a permit from the Ministry of Foreign Relations to own land, water or a concession to exploit water. To get a permit, the foreign individual must agree to comply with the requirements of Article 27(I) of the Mexican Constitution.


CHAPTER 3

TARIFFS AND COUNTERVAILING DUTIES

I. INTRODUCTION

The major element of NAFTA is its elimination of tariffs and import duties on goods that originate within North America. Elimination of tariffs will generate significant economic growth in each of the countries. The countries are required to confer "National treatment" on the other country's goods. Each country is required to treat goods produced by the other countries in the same manner as the same goods produced domestically are treated. There are exceptions to this National treatment. They center on Canada's treatment of liquor and distilled spirits. This National treatment of each other's imported goods is similar to obligations that already bind the countries under GATT.

NAFTA permits each of its members to enact antidumping and countervailing duties on the goods imported from the other NAFTA members. NAFTA concentrates on the review procedure used by the administrative agencies of its members on these topics. Binational review panels are created to resolve disputes regarding antidumping and countervailing duties. In addition, special procedures are set to convene a special committee to determine if a NAFTA member's domestic laws have hindered the binational review panel's work.

The fear has been raised that the tariff reductions implemented by NAFTA could result in a flood of imports that could endanger the continued existence of specific domestic industries. As a safety measure, NAFTA provides a procedure for a NAFTA nation to suspend tariff reductions to help an industry seriously affected by NAFTA imports.

A NAFTA participant may seek emergency action to suspend tariff reductions under the escape clause of the General Agreement on Tariffs and Trade ("GATT"). When a NAFTA nation exercises the GATT escape clause, tariffs import reductions on goods from other NAFTA nations will not be suspended unless they contribute substantially to the injury suffered by protected industry in the NAFTA importing nation. Emergency action is in a very real sense guesswork, and emergency safety measures are not often used. As a result, it is unclear how effective they will be if widely used. The purpose of NAFTA is to increase imports within NAFTA. Yet if increased free trade occurs, some domestic industries will be adversely affected. If this happens on a broad scale, requests for emergency relief may be too great and render NAFTA unworkable. This chapter discusses the tariffs under NAFTA and the market access provision.

II. TARIFFS ELIMINATION

Prior to the enactment of NAFTA, Mexico imposed an average tariff of 10% on most imported goods. They imposed a 20% tariff on automobile products. The United States imposed a 2.5% tariff on automobiles and an average 3.9% tariff on other Mexican imports. NAFTA schedules elimination of tariffs within 15 years. NAFTA creates four separate tariff categories. Each category has its schedule for tariff elimination. The schedules are:

1. Schedule A duties among the countries were eliminated January 1, 1994. Schedule A goods are no longer subject to tariffs among the countries. Over half of all American exports to Canada and Mexico are on schedule A and are without any tariffs whatsoever.

2. Schedule B goods remain subject to tariffs that are reduced at the rate of 20% per year until 1 January 1998, when they become duty free.

3. Schedule C goods remain subject to tariffs that are reduced at the rate of 10% per year until January 1, 2003, when they become duty free.

4. Schedule D goods remain subject to tariffs that are reduced at the rate of 6.67% per year until January 1, 2008, when they become duty free.

Under NAFTA Annex 302.2, it is agreed between Canada and the United States that the 1988 Canadian Free Trade Agreement tariff reduction schedule remains in effect. Since CFTA was in effect five years before the enactment of NAFTA, duties on goods exported between Canada and the United States will be eliminated before those goods exported to or from Mexico. Under CFTA, in 1994 Canadian steel producers will pay only 40% of the original tariffs on goods exported to the U.S., a 60% reduction under GATT. In contrast, under NAFTA, Mexican steel producers will pay 90% of the United States normal tariff.

III. IMPORT LICENSES AND QUOTAS

Under NAFTA Article 309, Mexico, Canada and the United States have specifically agreed to eliminate import licenses and quotas. Many industries, however, are exempt from this coverage. Specifically, import licenses and quotas are still imposed on:

1. Automobiles.

2. Automobile parts.

3. Agricultural produce.

4. Textiles.

5. Energy.

Mexico was given special permission, under NAFTA, to continue with licensing requirements for 10 years on designated manufactured items: until January 2003. Once NAFTA has been fully implemented, no import duties will be charged on components that originate in the one country (Mexico, Canada) for export to one of the others.

IV. EXPORT TAXES

Under NAFTA, each country does not impose taxes on exported goods unless the same tax is placed on identical nonexported goods. The United States, for example, could not impose an export tax of 10% on computer disks unless the same tax is also placed on its nonexported computer disks. An exception to this export tax prohibition is set forth in Annex 314 wherein Mexico was permitted to maintain export taxes on basic foodstuffs until January 2003. The following are the basic foodstuffs on which Mexico may continue to assess export taxes:

Beans Beef Beef Liver

Beef Steak Bread Brown Sugar

Canned Sardines Canned Nuts Canned Tuna

Canned Peppers Chicken Broth Condensed Milk

Cooked Ham Corn Tortillas Corn Flour

Corn Dough Crackers Eggs

Evaporated Milk French Rolls Gelatin

Ground Beef Instant Coffee Cookies

Margarine Oat Flakes Pasteurized Milk

Powdered Milk Rice Roasted Coffee

Salt Soft Drinks Soup Paste

Tomato Paste Vegetable Oil Vegetable Fat

Wheat Flour White Sugar

Mexico also reserved the right to impose an export tax on any other foodstuff to alleviate a critical shortage in Mexico. If there is a shortage of a foodstuff in Mexico, Mexico may impose an export tax on that item to relieve that shortage temporarily. Such an export tax may be applied for up to one year and extended thereafter with the consent of the parties.

V. DRAWBACKS AND WAIVERS

A duty drawback is the recoupment by manufacturers of import duties paid on foreign products that are later incorporated into goods produced for export among the parties. Under NAFTA Article 303, no member is permitted to refund, waive or reduce the amount of customs owed on goods imported because the imported goods are to be exported to another member or to be used as material for goods to be exported to another member or to be substituted for an identical good that is used for material of a product to be exported to another member.

Under CFTA, a similar duty drawback program was incorporated between the U.S. and Canada for import duties on Asian products exported between the countries. Under CFTA, the drawback program between Canada and the U.S. was to stop in 1994. NAFTA, however, extended the drawback program under CFTA until 1996. Under NAFTA, a duty drawback program will exist on Mexican related trade until 2001. After 2001, components shipped to Mexico from a non-NAFTA country will no longer be eligible for a duty drawback when the finished product is exported to either Canada or the United States.

VI. COUNTRY OF ORIGIN MARKINGS

*** END OF SAMPLE VIEW OF THIS SECTION ***

2. RISK ASSESSMENT

A NAFTA member is permitted to conduct risk assessments on goods and services imported into it. An importing member is not permitted to use the risk assessment as a pretext for deliberately interfering with free trade. NAFTA forbids any member from adopting arbitrary, capricious and unreasonable distinctions between domestic and imported goods regarding the level of protection that the nation chooses. Under Article 907, if a member conducting a risk assessment determines that it lacks sufficient scientific information, it may adopt a provisional technical regulation on the basis of the available scientific information. After sufficient scientific information is obtained, the party shall review its provisional regulation and revise it as appropriate.

3. CONFORMITY ASSESSMENT

NAFTA adopts a conformity assessment procedure for determining whether or not a technical regulation is being followed by a member. NAFTA requires each member to recognize the other members' conformity assessment boards in the same manner that they recognize their own boards. NAFTA also requires each member to consider another member's request to negotiate uniform agreements for conformity assessments. Each member shall take reasonable measures to facilitate access to its territory for conformity assessment activities by the other members. NAFTA requires that each member not adopt or maintain any conformity assessment procedure that is stricter than necessary to give confidence that it conforms with an applicable technical regulation or standard after taking into account the risks that nonconformity would create.

4. INTERNATIONAL STANDARDS

Under Article 905, NAFTA recognizes that each member retains the right to adopt technical standards that provide a higher level of health and safety protection than those based on international standards. NAFTA assumes but does not require that the technical standards of its members shall at least equal international standards. NAFTA members are required to establish a Committee on Standards-Related Measures. This committee is given the responsibility of:

1. Facilitating the process by which the members will adopt compatible or uniform technical standards.

2. Promoting cooperation among the members on the development of standards related measures, and

3. Monitoring each member's attempt to implement and administer its technical standards in accordance with the terms of NAFTA.

*** END OF SAMPLE VIEW OF CHAPTER ***


CHAPTER 4

CUSTOMS PROCEDURES

The greatest practical impediment to trade between countries is the paperwork which exporters must prepare in order to sell their product. The cumbersome nature of the paperwork and long delays in delivery that result from any small technical mistake has caused manufacturers to decide not to export their product. The main reason behind the paperwork is so that the importing country can collect tariffs. As tariffs are eliminated, the need for such paperwork is, itself, gradually eliminated. Towards this end, NAFTA has up customs procedures to reflect the gradually reducing tariffs and thus less paperwork as well.

NAFTA concerns increasing trade between Canada, Mexico and the United States. For that reason, it is important for a procedure to be adopted to determine what is the country of origin for products exported between the countries. Without a viable system to determine truth of origin, non-NAFTA countries can ship their product through one NAFTA country to another in order to avoid import duties.

NAFTA adopted the origin rule of the 1988 Canada-U.S. Free Trade Agreement (CFTA) as its standard. To be covered by NAFTA, exported goods must have undergone processing in North America. Many foreign corporations have significant investments in NAFTA countries. It is hoped these foreign corporations will increase their operations in Canada, Mexico and the United States to qualify for the NAFTA tariff. reductions.

I . CERTIFICATE O F ORIGIN

NAFTA creates a uniform certificate of origin for use by NAFTA countries. The Certificate of Origin can be obtained from many stationary stores and from the U.S. Custom Service. The exporter of a product seeking NAFTA tariff reduction must state in the certificate of origin that the product qualifies as an "originating good." An originating good is one that qualifies under NAFTA as a product possessing the required North American content. NAFTA does not require certificates of origin when the value of the exported good does not exceed $1,000. Importers who seek to claim tariff reductions on imported goods under NAFTA must declare the imports qualify as originating goods. The importer's declaration must be based on the exporter's certificate of origin. An importer has one year to seek refund for any excess tariff that was erroneously paid on qualified original goods. For example, assume that a product qualifies for a 10% reduction in tariffs, but the importer mistakenly pays full tariff. The importer can seek a refund for the 10% overpayment within one year of the overpayment.

False statements on a certificate of origin will subject the exporter to the same civil and criminal penalties as an importer who makes false statements to avoid tariff duties. An exporter who voluntarily corrects a false certificate will not be subject to penalties for the false statement.

II. PRODUCT TRACING

NAFTA imposes upon both exporters and importers the burden of having to maintain records for five years on products that were issued certificates of origin and received reduced tariffs. NAFTA requires that the parties keep records on:

1. The cost of the product exported.

2. The value of the product exported (its finished price).

3. Materials used for the products construction (including the source of the materials and their cost).

4. The cost of assembly of non-NAFTA materials.

5. The payment for the product.

The purpose of requiring the maintenance of these records is to assure that goods for which tariff reductions were given did, in fact, qualify for the reductions. The documentation requirement imposes a greater burden on smaller companies than larger companies. Small companies do not usually maintain such detailed records. Revamping their records policy to maintain such comprehensive records will be difficult. When the tariff savings involved are relatively low, the expense in maintaining these records may exceed the amount actually saved. In such an event, the importer may simply decide to pay the full tariff rather than be bound by unprofitable record keeping.

The customs agency has the authority to determine if exported products actually qualify for NAFTA tariff reductions. NAFTA permits a customs agency to verify the contents of a certificate of origin by sending written questions to the exporter or visiting the exporter's premises in the exporter's country. Surprise inspections of an exporter's premises are not permitted, but should an exporter deny a request for an inspection, the exporting country can then deny preferential tariff treatment to the exporter.

NAFTA permits exporters and importers to obtain advance rulings from the customs agencies. The advance rulings state how the importing country will treat certain goods if imported from the other NAFTA participants. NAFTA requires each country to establish a program for processing advance rulings. Advance rulings can provide assurance to the exporter. Most exporters want to know how their product will be treated before actually commencing trade.

III. ADMINISTRATIVE OPERATION

NAFTA requires that each NAFTA member give to exporters the same rights of review and appeal it gives to importers in its own territory. NAFTA does not require that each country adopt the same system of review and appeal. Instead, NAFTA merely requires that each country give exporters the same rights of review and appeal it furnishes its own citizens (the importers).

Uniform regulations are required to be adopted by NAFTA countries for the interpretation, application and administration of "rules of origin." They provide a uniform standard for tariff comparison and NAFTA implementation. NAFTA requires each of the countries to cooperate among themselves in its implementation. Specifically, the countries are required to collect and exchange trade data and statistics. NAFTA also requires that a working group be established to process changes to rules of origin and uniform regulations. In 1989, the United States adopted a "harmonized system of tariff classification." This system has been adopted throughout the world. NAFTA adopted this system, thereby standardizing the origin rules for the NAFTA countries.

IV. COUNTRY OF ORIGIN RULE

NAFTA Article 401 determines what exports are covered by NAFTA. Article 401 states:

A good shall originate in the territory of a party where:

(a) The good is wholly obtained or produced entirely in the territory of one or more of the parties;

(b) Each of the nonoriginating materials used in the production of the good undergoes an applicable change in tariff classification set out in Annex 401 as a result of production occurring entirely in the territory of one or more of the parties, or the good otherwise satisfiesthe applicable requirements of that Annex where no change in tariff clarification is required, and the good satifies all other applicable requirements of this chapter;

(c) The good is produced entirely in the territory of one or more of the parties exclusively from originating materials; or

(d) The good is produced entirely in the territory of one or more of the parties but one or more of the nonoriginating materials provided for as parts under the Harmonized System that are used in the production of the good do not undergo a change in tariff classification because:

(i) The good was imported into the territory of a party in an unassembled or a disassembled form but was classified as an assembled good pursuant to General Rule of Interpretation 2(a) of the Harmonized System, or

(ii) The heading for the good provides for and specifically describes both the good itself and its parts and is not further subdivided into subheadings, or the subheading for the good provides for and specifically describes both the good itself and its parts, provided that the regional value content of the good, determined in accordance with Article 402, is not less than 60 percent where the transaction method is used or is not less than 50 percent where the new cost method is used.

Goods exported from a NAFTA country to another NAFTA country will be covered by the tariff elimination schedule of NAFTA if:

1. The goods were completely manufactured or produced in a NAFTA country from materials that derived entirely from a NAFTA country, or

2. The goods contain non-NAFTA derived parts which were significantly changed as a result of production in a NAFTA country, or

3. The goods contain non-NAFTA parts and their assembly into the final product accounted for 60% of the value of the finished product, or

4. The good contains non-NAFTA parts or materials whose cost does not exceed 7% of the value of the finished products.

V. TARIFF CLASSIFICATION CHANGES

Annex 401.1 describes the tariff changes required to grant North American origin to goods containing non-NAFTA components. Annex 401.1 tariff category listings also state what the manufacturer must do to meet the NAFTA tariff elimination requirement. NAFTA differs from previous tariff treaties in that it does not require a specific percentage of the product value to be derived from the country claiming the tariff reduction. Under the Generalized System of Preference (GSP), 35% of the value of the product must be derived from work or materials provided by the GSP country seeking the tariff reduction.

*** END OF SAMPLE VIEW OF CHAPTER ***


CHAPTER 5

COMPETITION, AN TITRUST, AND GOVERNMENT PROCUREMENT

I. INTRODUCTION

NAFTA is opposed to antitrust activities by any of its members. Each NAFTA nation has pledged not to engage in antitrust activities. In comparison, the Canada-United States Free Trade Agreement (CFTA) did not have antitrust provisions. Mexico, prior to NAFTA, was not interested in enforcing antitrust law. Mexico has an antitrust law, the Antimonopoly Law, which it has irregularly enforced. Mexico has no agency, department or division primarily devoted to prosecuting antitrust conduct.

As a result of NAFTA, Canadian and U.S. companies will be at a distinct disadvantage if Mexico does not enforce its antitrust law. To protect U.S. companies from antitrust conduct in Mexico, the United States Justice Department has revived a policy of pursuing civil and criminal actions against Mexican industries in violation of Mexican law that conspire to deprive U.S. companies of their right to participate in Mexico. Enforcement of this policy will cause a great deal of friction in Mexico. The real intent of this policy is to show Mexico that antitrust is important to the United States. In fact, the debate in Congress prior to passage of NAFTA showed that Congress would consider withdrawing from NAFTA if Mexico does not enforce the antitrust provisions of NAFTA.

The biggest employer in any country is the government. In the United States nearly one out of every six citizens works for some form of government (local, state, or federal). Mexico has an even higher percentage of government employment because it has state control of the major industries (energy and natural resources). Government contracts account for a large amount of a nation's public spending. NAFTA is intended to open the government procurement contracts of its members. In Mexico, the most important government procurement will be in its oil monopoly (Petroleus Mexicanos "PEMEX") and its energy monopoly (Comision Federal de Electricidad "CFE"). Prior to NAFTA, Mexican government procurement contracts favored Mexican suppliers. Mexico is not a signatory to GATT, unlike Canada and the U.S. As a result, NAFTA has the effect of requiring the Mexican government to be nondiscriminatory regarding Mexican, Canadian and U.S. competition for government procurement.

II. NONDISCRIMINATION AND NATIONAL TREATMENT

NAFTA Article 1003 requires each nation not to discriminate in government procurement contracts except where specifically permitted. Article 1003 reads in pertinent part as follows:

1. Each party shall accord to goods of another party, to the suppliers of such goods and to service suppliers of another party, treatment no less favorable than the most favored treatment that the party accords to:

(a) Its own goods and suppliers, and

(b) Goods and suppliers of another party.

2. No party may:

a. Treat a locally established supplier less favorable than another locally established supplier on the basis of degree of foreign affiliation or ownership, or

b. Discriminate against a locally established supplier on the basis that the goods or services offered by that supplier for the particular procurement are preferred to goods or services of another party.

Article 1003 requires each party to treat goods and services of the other NAFTA members in the same manner as those goods and services of its own domestic suppliers. In addition each member must treat local subsidiaries of companies formed in the NAFTA nations the same as its own domestic suppliers. Example: The Canadian government did not purchase a product offered by a Mexican subsidiary located in Canada that was supplied by its plant in Argentina. Since the goods did not originate in Mexico, Canada or the U.S., the Canadian government can deny the contract.

III. COVERED PROCUREMENTS

NAFTA covers only purchases by the federal governments of Mexico, Canada and the United States. NAFTA does not apply to procurements from any of the individual states in the United States or Mexico nor does it apply to the provincial entities of Canada. The United States also is permitted to continue to grant preferences for small and minority-owned businesses over Mexican and Canadian competitors.

Article 1007 requires each NAFTA nation to assure that its agencies and government agencies comply with NAFTA. Article 1007 reads in pertinent part, as follows:

1. Each party shall ensure that its entities do not prepare, adopt or apply any technical specification with the purpose or the effect of creating unnecessary obstacles to trade.

2. Each party shall ensure that any technical specifications prescribed by its entities are (where appropriate):

a. Specified in terms of performance criteria rather than design or descriptive characteristics, and

b. Based on international standards, national technical regulations, recognized national standards or building codes.

3. Each party shall ensure that its entities do not seek or accept in a manner that would have the effect of precluding competition advice that may be used in the preparation or adoption of any technical qualification for a specific procurement from a person that may have a commercial interest in that procurement.

Under NAFTA Article 1007, each nation's government agencies and enterprises are required to:

1. Use "where appropriate" performance criteria, rather than design or descriptive characteristics. This means that if a supplier from a NAFTA country can provide a product that does the job, the agency should consider the product.

2. Use technical specifications that are based on recognized international and national standards and code

3. Only require specific patents, trademarks or producers to be used when there is no other way to describe the goods or services to be provided. In such instances, the agencies or enterprises must state that equivalent items may be substituted for the specified items.

VI. PROCUREMENT PROCEDURE

Articles 1008 through 1016 cover the procurement procedure for NAFTA. The provisions therein are more comprehensive that corresponding provisions of either GATT or the CFTA. Under NAFTA, each member is required to provide to foreign investors, from other NAFTA countries, who are competing for government contracts:

1. Equal access to all information needed to submit a bid. No member can create an advantage for a bidder by withholding of information from other bidders;

2. Use fair qualification procedures for bidders. NAFTA requires each member to adopt a single qualification procedure to be followed by all of its agencies and government enterprises. Specifically, NAFTA requires that all agencies must:

a. Give notice of the conditions required for qualification, including financial ability and technical criteria for the product or services.

b. Judge the financial and professional expertise of each bidder on the basis of his "global business activity" in addition to his activities within the procuring country.

c. Accept bids for procurement as long as there is time for the bidder to complete the qualification for the bid prior to the selection process.

3. Under NAFTA Article 1015(5), agencies are forbidden to make it a condition to bid or be awarded a government contract that the bidder previously was awarded a contract from the federal agency or government enterprise. In addition, it cannot be made a condition for a contract that the bidder previously had engaged in business in country. This allows companies from the other NAFTA countries to apply that have not done business in that country or have not had a government contract.

4. Under NAFTA Article 1007, invitations for bids must be issued for all procurements that relate to NAFTA. Bid invitations from federal agencies must contain all the information necessary for a bidder to understand the requirements of the bid. Government enterprises may use a qualification notice instead of a formal bid invitation. Bidders are placed on a list and when contracts come up, the bidders are sent all of the information on the contract needed to prepare a bid.

5. NAFTA Article 1007 requires government agencies and enterprises to provide a minimum of 40 days from the publication of the invitation of bids to awarding the contract. Contracts can only be awarded to bidders who are found to be capable of performing the contract and either submitted the lowest bid, or submitted the bid that is the most advantageous for the government.

VII. BID PROTESTS

Bid protests are covered under NAFTA Article 1017 which reads, in pertinent part, as follows:


CHAPTER 6

ENERGY

I. INTRODUCTION

NAFTA does not address energy issues among the participants on a broad scale. Unlike the United States, the government of Mexico controls the country's basic energy resources. In Mexico, all activities related to natural gas or oil are controlled by the government controlled monopoly, "PEMEX." All Mexican electrical and nuclear activities are controlled by the government monopoly, "CFE." NAFTA will not open any new opportunities in the oil or natural gas, refining, basic petrochemicals, or direct provision of electricity to customers. It is expected that NAFTA will, however, increase the sale of U.S. natural gas to Mexico. In 1991, Mexico purchased 0.3 percent of the total U.S. production. Mexico's yearly oil production is about a quarter of that of the United States. Mexico does not have a coal industry, and its natural gas production is only about 5% of that of the U.S.

NAFTA does provide opportunities for foreign participation in certain defined areas. Mexico's need for electricity is predicted to increase at nearly 5% per year. Mexico lacks the needed capital to build the new plants necessary to keep pace with the need, Foreign companies are permitted to acquire, build and operate plants in Mexico for the generation of electricity. The generated electricity must be either used at site or sold to the Mexican monopoly, CFE. Mexican energy imports to the U.S. account for over one half of the value of Mexico's imports to the U.S. Mexican energy imports were basically unrestricted prior to NAFTA. The real effect of NAFTA on the energy issues is to increase U.S. energy exports to Mexico. The United States imported 40% of its crude oil in 1991. Mexico was the fourth largest supplier of oil to the United States in 1991 after Saudi Arabia, Venezuela and Canada.

The energy industry is vital to the U.S. economy. In 1991, the U.S. produced $95.8 billion dollars of fossil fuels (crude oil, natural gas and coal). Crude oil and natural gas accounted for $74 billion dollars, The shipment of petroleum products were valued, in 1991, at $166.6 billion dollars. In 1991, the energy industry employed 691,000 production workers with an estimated 120,000 jobs in the refineries and gas plants.

II. PRIVATE INVESTMENT

Mexico is moving toward greater privatization of its basic industries. For the first time NAFTA permits private participation in the energy field. Specifically, NAFTA permits:

1. Private entities to operate electric facilities for their own use. This is an important concession for Mexico. It permits manufacturers to use co-generation technology to generate electricity from their manufacturing processes and thus lower manufacturing costs. This is important where the manufacturing will occur in areas not presently served with an adequate source of electricity. It encourages development.

2. The private production of electricity for sale to the Mexican government. Mexico cannot on its own keep pace with its projected electricity needs. It is willing to permit private individuals to build electric plants and sell electricity to the government. Without an increased availability of electricity, Mexico would not be able to service all of the new plants and construction anticipated to be generated by NAFTA. The electricity to be generated will be sold to CFE on terms negotiated between the facility owner and CFE.

NAFTA expanded the Mexican "Build-Lease-Transfer" program ("BLT"). This program permits foreign companies to build an electric plant on a leased site. Upon completion, the plant is transferred to CFE. NAFTA expands the program to permit the foreign company to own the plant and earn profit on the sales of electricity to CFE.

Under NAFTA, Mexico retains investment restrictions on all basic petroleum feedstocks including those used for blending gasoline. A major change: for the first time unrestricted U.S. and Canadian investment in production, distribution and foreign trade in secondary petrochemicals is permitted. Basic petrochemicals are defined in Annex 603.6. NAFTA reduced by one-half the number of basic petrochemicals. NAFTA removes the prior Mexican distinction for secondary and tertiary petrochemicals. Secondary petrochemicals are anything not listed in Annex 603.6 and include propylene and butylene. A key provision of NAFTA was the placing of the key aromatics and olefins in the secondary petrochemical list. These aromatics and olefins are the major constituents in the production of most chemicals. In addition, aromatics and olefins are needed for the manufacture of plastics and synthetic rubber. By placing these petrochemicals on the secondary list, NAFTA has opened the door for unrestricted Canadian and U.S. investment and participation in Mexico's plastic and synthetic rubber industries.

By opening the Mexican petroleum industry, even by the little amount that NAFTA does, creates very real opportunities for the American and Canadian businesses. Due to the inefficiency of Mexican production operations in the 1980's, it cost Mexico about $9 per barrel to extract oil from the ground; whereas in the United States it was $4 per barrel. There are several concerns regarding NAFTA's petroleum provisions:

1. PEMEX is the principal source of petroleum feedstocks in Mexico for the production of secondary petroleum petrochemicals. In 1991, there was a shortage in those feedstocks which limited foreign investment; if the product is not available, then there is nothing in which to invest. The inefficiency of PEMEX may result in production being unavailable for foreign investment for several more years.

2. NAFTA permits U.S. and Canadian suppliers of basic petrochemicals to contract directly with the end users in Mexico. If the chemicals are on a restricted list, PEMEX will set the price paid for these products.

3. The arbitration process for NAFTA relies heavily on the good will of Mexico. Under the NAFTA provisions, a foreign investor is only permitted legal recourse for a dispute if there is an anticompetitive practice that discriminates against foreign-owned business. Mexico has carved a huge exception for anti-competition. Mexico, through its National Commission on Foreign Investment, retains the right to reject the acquisition of a Mexican business by foreign investors without any right of appeal.

The most important consideration is that PEMEX is not and will not be able to meet all of Mexico's near-term energy demands with domestic resources. In particular, any Mexican increase in natural gas production will continue to remain low in PEMEX's plan of operation. PEMEX does not plan to increase development of its natural gas resources because it lacks the funds to do so and is not seeking foreign investors to assist. Current natural gas production will continue to be absorbed entirely as a replacement for oil in the polluted central part of Mexico.

In addition to opening the petroleum and energy industry in Mexico, NAFTA also opens its coal resources for foreign investors. Mexico does not have a national agency for the management of its coal resources (such as PEMEX for oil or CFE for electricity). As a result, Mexico has not developed its coal resources. For the first time, NAFTA permits unrestricted investment by Canadians and U.S. citizens in Mexican coal developments.

III. GOVERNMENT PROCUREMENT

Mexico is required under NAFTA to open 50% of its PEMEX and CFE procurement contracts for competition with U.S. and Canadian companies. After eight years, the number of government PEMEX and CFE contracts on which the U.S. and Canadian companies can bid will increase to 70%. After 10 years, U.S. and Canadian companies will be able to compete on all PEMEX and CFE contracts. Contracts in which U.S. and Canadian companies cannot compete will be reserved for Mexican companies. Companies from non-NAFTA countries will not be able to compete for them. The government contracts can be for equipment or services or both.


CHAPTER 7

CROSS BORDER TRADE IN SERVICES

INTRODUCTION

One area in which NAFTA is unique in its treatment of cross border trade in services. For the first time, a major trade treaty deals with free trade commitments on services provided across international borders. GATT discusses free trade treatment for both goods and services, but NAFTA actually implements it. NAFTA applies only to actions of the federal governments of Canada, Mexico and the United States. Individual states and provinces are not directly bound by NAFTA. The governments of Canada, Mexico and the United States have two years from NAFTA's implementation (January 1996) to create a list of all state, province or local restrictions that will apply to cross border service providers. The fact that local, state and provincial governments continue to maintain restrictions on foreign service providers may seriously weaken this area of NAFTA and may result in retaliatory trade actions from the local governments, states or provinces of the affected service providers.

In 1991, the U.S. exported $8.1 billion dollars of services to Mexico. Of that figure, $6.6 billion dollars related to transportation services, including tourism and travel. In comparison, the United States imported $7.8 billion dollars of services from Mexico of which $6.2 billion dollars related to transportation. The difference between U.S. and Mexican imports reflects the increased trade the United States has experienced with Mexico since 1986 when Mexico began to open its market to Americans.

Illegal immigration is a terrible problem in the United States. Illegal immigration from Mexico to the United States is estimated to be around one million persons per year. It is estimated that nearly three million illegal aliens reside in California. The cost of illegal aliens and the social services provided to them is estimated to run nearly 20 billion dollars per year. In the United States, there is a very real concern that NAFTA might result in even more illegal immigration. The United States reserved the right to continue to impose immigration restrictions it feels necessary for its own self-interest. Despite U.S. concerns on immigration, NAFTA does provide a more simplified process for the temporary business travel of citizens of one NAFTA member into the territories of the other members. These NAFTA provisions were modeled in large part on the Canada-United States Free Trade Act of 1988(CFTA). Even so, some of the treatment afforded Canadians under CFTA is not available to Mexicans under NAFTA because of America's immigration concerns.

This chapter of NAFTA deals with temporary entry for business purposes. NAFTA does not affect or change any nation's policies or laws regarding obtaining of permanent resident status. To illustrate, under NAFTA Canadian and Mexican nationals who obtain temporary entry are not given any advantage or procedure for obtaining permanent resident status in the United States over persons from other countries.

II. CROSS BORDER SERVICES

A. STANDARDS FOR TREATMENT

NAFTA is unique among trade agreements because of the scope of its involvement in the issues of cross border services. Sweeping changes to the laws of Mexico, Canada and the United States are made to permit cross border trade in the areas of finance, business services, land transportation and telecommunications. NAFTA takes the position that all cross border trade in services is permitted unless specifically excluded under the Agreement. The General Agreement on Tariffs and Trade (GATT) is just the opposite. In countries that adopted GATT, only those services specifically listed were permitted free trade status. The service provisions of NAFTA's Chapter 12 do not apply to the areas of government procurement, financial services or energy related services; they are addressed in their own chapters. Furthermore, this chapter does not apply to grants and subsidies governed by separate GATT rules in its Tariff section. Negotiations were undertaken in the Uruguay conference on GATT to add an agreement on services that has not been approved. The Canada-United States Free Trade Agreement (CFTA) had a limited provision for free trade of services. NAFTA adopts the CFTA, expands it and extends its provisions to Mexico.

2. MOST-FAVORED-NATION TREATMENT

NAFTA Article 1203 requires that a NAFTA nation give service providers of a NAFTA nation treatment that is at least equal to that given to service providers of another NAFTA or non-NAFTA nations. A NAFTA member is required to give foreign service providers of a NAFTA nation either the same national treatment it gives its own domestic service providers or the treatment that bestows the greatest benefits on the NAFTA service provider. NAFTA requires that the treatment given foreign service providers from NAFTA countries be the one which bestows the greatest benefit on the service provider. For example, if the most-favored-nation treatment is better for the foreign NAFTA member than the national treatment of domestic service providers, then the most-favored-nation treatment rule is applied.

NAFTA nations must treat foreign service providers of a NAFTA nation in a nondiscriminatory manner. The standard for this treatment is that it must be at least equal to the highest standard of nondiscrimination of either the National Treatment rule or the Most-Favored-Nation rule. NAFTA nations have agreed to give foreign service providers of NAFTA countries fair and equitable treatment along with full protection and security in accordance with the minimum standards as set by international law.

B. NO NEED TO MAINTAIN A LOCAL PRESENCE

One of the major impediments to cross border trade in services for Mexico has been its requirement that the provider had to maintain an office in Mexico. NAFTA changes that law as it affects service providers of NAFTA countries. Under NAFTA Article 1205, foreign service providers from a NAFTA nation can no longer be required to maintain an office in order to do business in a NAFTA country. The officers or directors of an enterprise formed in a NAFTA country that provides services to another NAFTA country do not have to reside in that country in order for the enterprise to do business. Example: A cleaning business is formed in Texas. It can do business in Mexico although all of its officers and directors live in Texas and not Mexico.

C. RESERVATIONS

NAFTA permits each member to exempt certain services from coverage under NAFTA Article 1206:

1. Articles 1202, 1203, and 1205 do not apply to :

a. Any existing nonconforming measure that is maintained by:

i. A party at the federal level, as set out in its Schedule to Annex I,

ii. A state or province, for two years after the date of entry into force of this Agreement and thereafter as set out by a party in its Schedule to Annex I in accordance with paragraph 2, or

iii. A local government.

CANADA

Coastal Fishing. The Department of Fisheries and Oceans is responsible for controlling activities of foreign vessels within Canadian territorial waters. Port privileges (including the purchase of fuel and supplies), ship repair, crew exchanges and transhipment of fish catches are usually granted only to fishing vessels from nations with which it has favorable fishing relations.

Cultural Property Exporter or Importer. Only a resident of Canada or an institution of Canada may be designated an "export examiner of cultural property" for the purposes of the Cultural Property and Export Act. This means a citizen or permanent resident or a corporation with its head offices in Canada.

Customs Broker Licensing Regulations. To be a licensed customs broker or brokerage in Canada:

1. An individual must be a Canadian citizen or permanent resident,

2. A corporation must be incorporated in Canada with a majority of its directors being Canadian citizens or permanent residents, and

3. A partnership must be composed of persons who are Canadian citizens or permanent residents, or corporations incorporated in Canada with a majority of their directors being Canadian citizens or permanent residents.

An individual who is not a licensed customs broker but who transacts business on behalf of a licensed customs broker must be a Canadian citizen or permanent resident.

Duty Free Shop Regulations. To be a licensed duty free shop operator at a land border crossing in Canada:

1. An individual must:

a. Be a Canadian citizen or permanent resident,

b. Be of good character,

c. Be principally resident in Canada, and

d. Have resided in Canada for at least 183 days of the year preceding the year of application for the license.

2. A corporation must:

a. Be incorporated in Canada, and

b. Have all of its shares beneficially owned by Canadian citizens or permanent residents who meet the requirements of paragraph 1.

Local Presence for Export and Import Permits. Only individuals ordinarily resident in Canada, enterprises having their head offices in Canada or branch offices Canada of foreign enterprises in Canada may apply for and be issued import or export permits or transit authorization certificates for goods and related services subject to controls under the Export and Import Permits Act.

Oil and Gas Accords. A benefits plan must be submitted prior to receiving authorization to begin any oil and gas development project. The plan must call for the employment of Canadians and for providing Canadian companies an opportunity to participate on a competitive basis in the supply of goods and services in the work or activity.

E. MEXICO

Communications. The holder of a concession for a commercial broadcast station or for a cable television system is required to obtain an authorization from the Secretaria de Gobernacion to import in any form from radio or television programming for broadcast or cable distribution within the territory of Mexico. The use of Spanish language is required for the broadcast, cable or multipoint distribution system for radio, television and cable programming including advertising unless the Secretaria de Gobernacion authorizes the use of another language.

Only Mexican nationals and Mexican enterprises may obtain a concession to own, construct or operate a cable television system.

Persons of Canada or the United States may provide all enhanced or value-added services, except videotext or enhanced packet switching services, without the need to establish local presence. Investors from the U.S. or Canada may own 100% of the enterprise established or to be established in Mexico to provide enhanced or value-added service. They may own 49% of an enterprise which provides videotext or enhanced packet switching services.

Medical Doctors. Only Mexican nationals licensed as doctors in Mexico may provide in-house medical services.

Professional Licenses. Only Mexican nationals may be licensed in professions that require a license. This restriction is to end January 1996.

Only Mexican lawyers may have an ownership interest in a Mexican law firm. Canadian lawyers are permitted to form partnerships with Mexican lawyers.

Only Mexican nationals who are licensed in Mexico as accountants may perform audits for tax purposes for state enterprises or enterprises with foreign investments. This requirement is eliminated January 1996.

Only Mexican nationals can be a commercial public notary. This requirement is eliminated January 1996.

Only Mexican nationals can be veterinarians. This requirements is eliminated January 1996.

Pesticide Spraying. Only Mexican nationals may receive a concession to spray pesticides. This requirement is eliminated in January 2000 and replaced with a permit requirement with no citizenship element.


CHAPTER 8

INVESTMENT AND INVESTMENT DISPUTES

I. INTRODUCTION

Prior to NAFTA investors faced significant problems investing in foreign countries. Mexico had many laws that seriously impinged on the freedom of foreign investors or forbade them doing business in Mexico. A prime example of Mexican hostility to foreign investment was the "Calvo Clause." Prior to NAFTA all foreign investors had to agree to the terms of the "Calvo Clause." Foreign investors:

1. Were limited to the standard of National treatment,

2. Were limited to presenting their disputes to Mexican courts, arbitration was not allowed, and

3. Were precluded from complaining about their treatment to their government under penalty of forfeiture of all of their investments in Mexico.

The result of the law, which hindered foreign investment, in Mexico was terrible. The Calvo Clause literally froze foreign investments in Mexico. Only the largest corporations with their international financial clout could risk complaining to their government regarding unfair treatment without fear that their entire investment would be seized. The government of Mexico and its government enterprises were riddled with corruption. Both U.S. newspapers and the United States Congress documented instances where U.S. citizens were illegally arrested when they disputed their treatment involving Mexican government contracts and performance. This maltreatment seriously threatened U.S. acceptance of NAFTA. Should it continue, NAFTA will probably fail. Because of its antiforeign investment policies, Mexico's pre-NAFTA economy was growing at a snail's pace and was on the verge of collapse. Having natural resources alone is not enough to assure a viable economy in a country that does not have the economic ability to develop those resources. NAFTA provides freedom of investment by NAFTA nationals to any NAFTA country. In addition, dispute resolution procedures are established to prevent improper treatment of foreign investors.

II. OPEN INVESTMENT PRINCIPLES

Under NAFTA each member has agreed to treat foreign investors and their investments in the following manner.

A. NATIONAL TREATMENT OF FOREIGN INVESTORS

NAFTA Article 1102 requires that foreign investors of a NAFTA country be treated in the same manner as domestic investors under the same circumstances. All investors, foreign and domestic, are to be treated equally concerning establishment, acquisition, expansion, management, conduct or sale of their investments.

No Party is permitted to:

NAFTA forbids its members to require that senior management of foreign investments be composed of citizens of the NAFTA nation. Example: Mexico cannot require that the senior management of a corporation from Canada doing business in Mexico be composed of all Mexican citizens. Nor can a NAFTA member require that a majority of the board of directors of a foreign NAFTA corporation doing business in Mexico be composed of Mexicans or be of a particular nationality. Mexico could not require that the boards of directors of all corporations doing business in Mexico be composed of a majority of Mexican citizens.

Under NAFTA Article 1107, a member can require that a majority of the board of directors or any committee of an enterprise of that member that is an investment of an investor of another NAFTA country be of a particular nationality or be a resident of the territory of that member provided that the requirement does not materially impair the ability of the investor to exercise control over the investment.

III. EXCEPTIONS

While the above is a general statement of the investment policy between NAFTA countries, each NAFTA nation establishes exceptions to the applicability of NAFTA. The main exceptions of both Mexico and the United States are covered below.

A. MEXICO

1. KEY INDUSTRIES. Under the Mexican Constitution, the Mexican government has exclusive control over certain key industries and activities. The key industries and activities not covered by NAFTA are:

a. Petroleum and national gas industry and petrochemicals.

b. Electrical industry.

c. Nuclear industry.

d. Satellite communications.

e. Telegraph and radio telegraph services.

f. Postal services.

g. Railroads.

h. Printing and coinage of money.

i. Maritime regulation of ports.

j. Operation of airports and heliports.

B. LAND

*** END OF SAMPLE VIEW OF SECTION ***

I. MAQUILADORAS

NAFTA reduces and eliminates in eight years the prohibition against maquiladoras in Mexico selling more than 50% of the total value of its exports. This is an important limitation of free trade; companies engaged in the Maquiladora program are still denied full access to the Mexican market.

J. MINING

For the first five years of NAFTA, foreign investors of a NAFTA nation may not own more than 49% of a Mexican enterprise engaged in the extraction of minerals. After the first five years, foreign investors may own 100% of a Mexican enterprise.

K. AIR TRANSPORTATION

Foreign investors of a NAFTA nation may not own more than 25% of a Mexican enterprise providing commercial air services. For such an enterprise, the President and two-thirds of the board must be Mexican nationals.

L. GROUND TRANSPORTATION

Mexico has adopted the following preferences concerning ground transportation:

1. For the first six years after the implementation of NAFTA, bus and truck service within Mexico shall be reserved solely to Mexican nationals. Foreign investors of a NAFTA nation will be permitted gradually to own more interest in an enterprise engaged in cross-border bus and truck service.

2. After 10 years in effect, NAFTA permits foreign investors to own 100% of an enterprise providing bus services, tourist services and truck services for the transportation of international cargo within Mexico.

B. UNITED STATES

A. AIR TRANSPORTATION

Foreign investors of a NAFTA nation may not own more than 25% of a U.S. enterprise providing commercial air services. Non- U.S. nationals may own and control foreign air carriers operating between the United States and foreign points. The United States Federal Aviation Administration must certify aircraft stations that perform work on commercial aircraft registered in the United States.


CHAPTER 9

FINANCIAL SERVICES

I. INTRODUCTION

NAFTA opens the financial and banking industry in Mexico to U.S. and Canadian participation. For over 50 years Mexico has virtually kept foreign banks and financial institutions out of the country. By pre-NAFTA law foreign investors were not permitted to own more than 5% of a Mexican bank. This protectionism hurt Mexico, hindering foreign investment at least as much as it helped the Mexican industry to prevent foreign competition.

As a result of NAFTA, Mexican banks are actively seeking foreign investors and partners. Mexican banks are seeking alliances with foreign institutions to improve their systems and banking technology so they can compete more effectively in the world-wide banking market.

II. COMMERCIAL PRESENCE AND CROSS-BORDER SERVICES

NAFTA Article 1404 permits financial service providers to conduct operations in any NAFTA country. NAFTA nations do retain the right to regulate or ban solicitation activities that seduce their nationals to purchase their financial services from another NAFTA member. Each NAFTA nation still retains the right to determine the form used to provide financial services in their country. NAFTA countries cannot forbid their nationals purchasing their financial services from providers in another NAFTA country. On the other hand, this obligation does not require a party to permit such providers to do business or solicit in its territory; yet NAFTA forbids its nations from enacting any new laws that are intended to restrict these cross-border provisions.

Without prejudice to other means of regulation of cross-border trade, a party may require the registration of cross-border financial service providers and the financial instruments of another party.

III. NONDISCRIMINATORY TREATMENT

Under NAFTA, each nation has agreed to treat foreign financial service providers and their investments in the following manner:

A. NATIONAL TREATMENT FOR FOREIGN FINANCIAL SERVICE PROVIDERS

NAFTA Article 1405 requires that foreign financial service providers of a NAFTA country be treated in the same manner as a domestic investor under the same circumstances. Article 1405 reads in pertinent part:

A. BANKING AND SECURITIES

During the transition period, Mexico will exercise control over the entry of foreign banks into its country. Mexico will exercise that control by the temporary imposition of aggregate market shares percentages for foreign banks and individual market share caps. In accordance with NAFTA provisions, Mexico, during the transition period, will:

1. Limit foreign banks to an aggregate participation in Mexico of 8% in 1994 with annual increases to 15% in 2000. The aggregate participation is based on the relationship of the foreign banks capital to that of the entire industry.

2. Limit the market share of Canadian and U.S. banks during the transition period to 1.5%. This market share will be based on the total capital of all commercial banks.

3. Limit foreign securities firms to an aggregate participation in Mexico of 10% in 1994 with annual increases to 20% in 2000. The aggregate participation is based upon the relationship of the foreign securities firms to that of the entire industry.

4. Limit the market share of Canadian and U.S. securities firms during the transition to 4%. This market share is based on the total capital of all security firms.

After January 1, 2000, a special limitation will remain in effect on foreign service providers in the banking industry. After the transition period, no foreign financial service provider can acquire a Mexican bank through either purchase or if the foreign service provider would then own or control commercial banks with aggregate capital exceeding 4%. This denies acquisition of the six largest banks in Mexico by Canadian or U.S. interests. If the United States adopts interstate branch banking, the NAFTA banking provisions will be reconsidered to permit direct branch banking rather than requiring separately capitalized subsidiaries.

D. FINANCIAL SERVICES IN THE UNITED STATES

Investments by Mexican financial institutions in the U.S. were permitted before NAFTA. To equalize the effects of the Mexican restrictions on U.S. institutions, the United States implemented restrictions on some Mexican financial service providers. Many Mexican banks were privatized in the 1990's as the result of acquisition of financial groups that controlled Mexican security houses. An area of NAFTA negotiation was how Mexican financial groups owning both banks and security houses would be treated in the U.S. As a result of NAFTA, a Mexican financial group that controlled a Mexican bank that both:

1. Had a subsidiary or branch in the U.S. prior to January 1, 1992 and

2. Acquires a Mexican security firm that owns or controls a security firm in the United States

is permitted to continue to engage in the same preacquisition activities for five years after the acquisition. The U.S. security firm will not be permitted to expand by acquisition during that five-year period. Transactions between the U.S. firms and their affiliates shall be regulated by the U.S. under the National Treatment Standard.

V. NO NATIONALITY REQUIREMENTS

No NAFTA nation can require a financial institution to employ persons of a particular nationality as key managers as a condition for doing business in the country. In addition, no NAFTA nation can require a financial institution doing business in its territory to have more than a simple majority of its nationals on the controlling board of the financial institution, or to require more than a simple majority of the board controlling the financial institution to reside in its territory.

NAFTA permits, for the first time, investors from Canada and the United States to own 100 percent of newly formed business to produce telecommunication equipment in Mexico. No government approval is needed for such investment; pre-NAFTA law limited ownership to 49%. There are limitations on foreign investment in existing businesses that produce telecommunication equipment. Canada reserved the right to approve investment by U.S. and Mexican investors in existing enterprises exceeding $150 million in Canadian dollars. Mexico reserved the right to approve investments by Canadian and U.S. investors in an existing business exceeding $25 million dollars; that increases to $150 million dollars in the year 2003.

Foreign investors from a NAFTA country have the right to take the profits out of the country. For the first time, investors from a NAFTA country are freely permitted to take their profits, dividends, interest, capital, royalties, and other investments from another NAFTA country. For Mexico, in particular, the fear of the currency restrictions has long impeded foreign investment. Now, U.S. and Canadian investors can invest with more confidence and assurance that they can readily get their profits and investments out of the country upon demand.

One of the most important aspects of NAFTA is that for the first time, U.S. and Canadian investors in Mexico are permitted to seek binding arbitration on disputes involving alleged violations of NAFTA obligations. This is an important change because Mexico has long had a law (which is still applicable to other non-NAFTA investors) which punishes a foreign investor for complaining on his treatment in Mexico by confiscating the investment.

I V. INFORMATION, PRICING AND ENHANCED SERVICES

The rates charged citizens and enterprises by a NAFTA nation must be based "on the economic costs directly related to providing such services." In addition, privately leased circuits must be available on a flat-rate basis. NAFTA nations are required to provide the public with information regarding their public services and networks. The countries are required to provide the public with information about their public services and networks. The countries are required to provide the following information:

1. Tariffs.

2. Terms and conditions of service.

3. Technical specifications for interfacing with networks.

4. Permits and licensing requirements.

NAFTA defines enhanced services as those involving computer usage. Enhanced services include:

1. Electronic mail (E Mail).

2. On-line information.

3. Data retrieval (modem or fax).

4. Data processing.

5. Alarm services.

Each NAFTA nation is required to ensure that any licensing, permit, registration or notification procedure it adopts or maintains relating to the provision of enhanced or value-added services is transparent and non-discriminatory. All applications for the providing of such services must be processed expeditiously. No NAFTA nation shall require a person seeking to provide the public enhanced or value added services (1) to cost-justify its rates or file a tariff unless a monopoly has been granted, (2) to correct an anticompetitive activity, (3) to interconnect its network with any particular customer or (4) to conform to any particular standard or technical regulation other than for interconnection to a public telecommunications transport network. Foreign providers of enhanced services for other NAFTA nations will be able to apply for and receive licenses to operate on reasonable, transparent and nondiscriminatory terms.

V. TECHNICAL STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their individual telecommunication industry. NAFTA nations are not permitted to adopt technical standards merely for the purpose of restricting access to their telecommunications network. Technical standards are to be adopted only to prevent technical damage to the public network, to prevent billing equipment malfunctions, and to assure safety and access.

NAFTA requires adoption of standards for terminal equipment attached to the telecommunication network. Standards cannot be adopted that have no relationship to safety but have the effect of inhibiting foreign competition. Each NAFTA country is required to bestow nondiscriminatory treatment on a telecommunication exporter of a fellow NAFTA country. This means that the exporter must be treated at least the same as a domestic supplier of the goods or, if none, at least the same as exporters from non-NAFTA countries. This is free trade in its simplest form. Each NAFTA country must treat the exports of a fellow NAFTA country as though it was manufactured in that country. By treating all such goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across the borders with the new effect that capitalism functions according to market operations and not artificial government regulation.

Each NAFTA nation is required to give fellow nations advance notification of any proposed changes in its telecommunication standards. This is a major improvement over the GATT process in that it provides early discussion and resolution by the nations before any such changes are implemented. If a NAFTA country permits participation in the change making process by its citizens or companies, it must also permit participation by affected citizens and companies in the fellow NAFTA countries. GATT has no set time frame for commenting on proposed changes in standards. In comparison, NAFTA requires a 60-day comment period before any changes in standards can be adopted. Mexico under its Federal Law of Meteorology and Standardization requires longer comment period than NAFTA: 90 days.

NAFTA eventually envisions a time that a single lab will be able to certify that a product meets the technical standards of all three countries. It is the intention of NAFTA nations that labs in Canada and the United States will eventually be accredited in Mexico the same as Mexican labs. U.S. labs will be able to certify a product for sale in Canada, Mexico or the United States, significantly reducing the costs of such products. Canada and the United States implemented this provision immediately on enactment of NAFTA, but Mexico was given until 1999 to fully implement this provision.

A trilateral telecommunication equipment standards subcommittee was established by the NAFTA countries. The purpose of this subcommittee is to harmonize and correlate the standards of each country to make them uniform. Ultimately, the subcommittee will establish a single set of standards and a uniform test for telecommunications equipment throughout North America.

VI. PRIVATE NETWORKS

NAFTA permits U.S. companies, for the first time, to establish private intracorporate systems to assist Mexican facilities in communicating with other North U.S. operations. For the first time, U.S. companies may operate their own communications networks without needing to be associated with a Mexican company. This is a major departure from pre-NAFTA. Mexican law required all foreigners seeking to do telecommunication business in Mexico to have in a joint-venture Mexican partner. Private networks may also be connected with the public phone network or with other private networks.

NAFTA forbids any partner allowing anticompetitive activity by monopoly telephone companies. All telecommunication tariffs must reflect the economic cost of providing service. In addition, NAFTA requires telephone companies to provide private leased lines at fixed and flat-rate pricing with the right of the lessee to resell any excess capacity.

NAFTA follows the U.S. practice of permitting customers to purchase or lease the equipment to be installed on their property: phones, computers, faxes. Customers are permitted to attach their compatible equipment to the public phone systems. NAFTA specifically permits private networks to use their own private computer interfaces and to conduct their own specialized operations for their specialized systems.

VII. TARIFFS

NAFTA permits tariffs on telecommunication equipment. The tariffs are divided into three categories and gradually will be gradually eliminated over 15 years. The tariffs on PBX equipment and fiber and cellular phones (80% of the U.S. telecommunication exports) were eliminated in January 1994. The tariffs on central office switching systems remain in force until 1999.

Upon the enactment of NAFTA, more than 80% of all U.S. telecommunication exports to Mexico became duty free. Exports of most telecommunication line equipment, private branch exchanges, cellular phones and modems receive immediate tariff relief. Telecommunications parts exports, accounting for more than 40% of total U.S. telecommunication equipment exports to Mexico, are also duty free. Tariffs on paging alert devices for tone use only, coaxial cables and antennae are to be eliminated by the year 2004. The tariffs on the remaining telecommunication exports will be terminated by the year 1999.

Mexico is precluded, under NAFTA, from raising its tariffs on U.S. telecommunications goods above pre-NAFTA rates (that ranged between 15% and 20%). Mexico is expressly forbidden under NAFTA to raise tariffs on U.S. products to "GATT Bound" levels (which can be high as 50% on the value of the products). This is an advantage to U.S. exporters, who will not have to pay such a GATT tariff. U.S. and Canadian exporters will enjoy an advantage over exporters from non-NAFTA countries who will have to pay the GATT tariff to sell their products in Mexico. Most Mexican telecommunication exports to the U.S. were duty free prior to the enactment of NAFTA and remain duty free thereafter. Upon the enactment of NAFTA, all tariffs on Mexican exports of telecommunication goods were eliminated.

Prior to the enactment of the Canada-United States Free Trade Agreement (CFTA), Canadian tariffs on U.S. telecommunications exports were as high as 17.5%. After enactment of CFTA, most Canadian duties on U.S. exports of telecommunications goods were eliminated. Under CFTA, all Canadian tariffs on U.S. telecommunications exports will be eliminated by the year 1998.

Mexico has agreed under NAFTA not to engage in antidumping activities and not to impose any countervailing duties on imported goods from other NAFTA countries. Canadian and U.S. exporters will be treated the same as Mexican importers. Disputes regarding anti-dumping and countervailing duties will be addressed through binational panels. The jurisdiction of a panel is limited to determining whether or not the country's activity is consistent with its domestic law and whether or not it is the same treatment given to its own citizens.

VIII. VALUE-ADDED SERVICES

The value-added network services (VANS) is increasing in the United States. The VANS market provides a variety of enhanced communications services to the user. Included in such services are electronic mail, computer processing through modems, electronic data exchange, electronic fund transfer, facsimile transmissions, point of sale payments, travel reservations, videotext, voice mail, computerized libraries and research activities.

In the United States, the VANS industry accounted for $3.5 billion in 1993. The U.S. VANS systems is the largest in the world and is unregulated. The growing interrelationship of the world business community is resulting in world wide growth in the demand for VAN services. U.S. firms as the world leaders in VANS are in the position to reap the growing demand for such services.


CHAPTER 11

INTELLECTUAL PROPERTY

I. INTRODUCTION

NAFTA is intended to promote the highest standards of protection for intellectual property. Patents, trademarks, copyrights and trade secrets are all regulated thereunder. NAFTA adopts and extends the protections for intellectual property contained in the International Property Rights law that Mexico adopted in June 1991. Through NAFTA, export driven growth of U.S. and Canadian technology and entertainment products will occur.

NAFTA requires each country to provide for the enforcement of the rights of authors, artists and inventors and reduction in infringement and piracy. Patent protection for U.S. and Canadian producers of computer programs, encrypted satellite signals and other creations is extended through NAFTA to Mexico. NAFTA limits compulsory licensing of patents and resolves points of long standing contention regarding patent coverage by U. S. pharmaceutical and agricultural companies.

The lack of protection for intellectual property rights in Mexico has been a serious impediment to U. S. sales there. High technology exports account for 32% of total U. S. exports but account for only 16% of exports to Mexico. NAFTA, by reducing the threat of piracy, increases the incentive for U.S. companies and inventors to develop new technologies and products. These higher levels of protection will lead to increased research and development by U. S. businesses.

II. NATIONAL TREATMENT

It is one of the stated goals of NAFTA to provide the means for adequate and effective protection and the enforcement of intellectual property rights among the NAFTA nations. Article 1703 reads in pertinent part:

"Each party shall accord to nationals of another party treatment no less favorable than that it accords to its own nationals with regard to the protection and enforcement of all intellectual property rights. With respect of sound recordings, each party shall provide such treatment to producers and performers of another party, except that a party may limit rights of performers of another party with respect to secondary uses of sound recordings to those rights its nationals are accorded in the territory of such other party."

Article 1721 broadly defines the intellectual rights. The coverage extends to:

"Copyright and related rights, trademark rights, patents, rights in layout designs of semiconductor integrated circuits, trade secret rights, plant breeders' rights, rights in geographical indications and industrial design rights."

The definition of "intellectual property rights" is more notable by what is not covered. NAFTA does not include protection against unfair competition, which is ordinarily considered part of the infringement on a trademark. Article 1702 of NAFTA does require each nation to follow the 1967 Paris Convention For the Protection of Industrial Property and its requirements for protection against unfair competition.

A. COMPUTER PROGRAMS

Computer programs are specifically stated as being covered. Article 1705:

"Each party shall protect the works covered by Article 2 of the Berne Convention, including any other works that embody original expression within the meaning of that Convention. In particular:

(a) All types of computer programs are literary works within the meaning of the Berne Convention, and each party shall protect them as such, and

(b) Compilations of data or other material, whether in machine readable or other form, that by reason of the selection or arrangement of their contents constitute intellectual creations shall be protected as such."

Article 1705 provides that computer programs of whatever typer nature are protected as literary works and data compilations. While the compilation is given protection, the data used to construct the compilation is not protected. Article 1705 adopts U.S. copyright as stated in the case Feist Publications Inc. vs. Rural Telephone Service Co. 112 S. Ct.1292 1991 and grants the authors and their successors in interest as owners of the copyright with the exclusive right to reproduce, distribute or otherwise trade in the work. The owner of a copyright also has the sole power of control of the commercial rental of copies of computer programs. The purpose of this provision is to preclude persons from renting or purchasing a computer program to make copies for sale to other persons or entities.

B. SOUND RECORDINGS

Sound recordings such as CD's, records and tapes are covered as copyrighted material. Article 1706 governs the treatment of sound recordings as follows:

"Each party shall provide the producer of a sound recording the right to authorize or prohibit:

(a) The direct or indirect reproduction of the sound recording,

(b) The importation into the party's territory of copies of the sound recording made without the producer's authorization,

(c) The first public distribution of the original and each copy of the sound recording by sale, rental or otherwise, an

(d) The commercial rental of the original or a copy of the sound recording, except where expressly otherwise provided in a contract between the producer of th sound recording and the authors of the works therein.

NAFTA requires each nation to give copyright protection to sound recordings for at least 50 years from the end of the year the recording was made. Specifically prohibited is the commercial rental of copyrighted sound recordings without the copyright owner's consent. NAFTA treats performances of sound recordings differently from records, tapes and CD's, giving the copyright owner control over the reproduction, importation and first distribution of the work.

A. SERVICE MARKS

Service marks are defined as any logo, words or symbols that are used to distinguish the services provided by one business from those services provided by other businesses. Service marks are to be given the same protection as trademarks of a business.

B. FAMOUS MARKS

NAFTA imposes the obligation on each of its nations to protect all famous trade and service marks of the nationals of the other NAFTA nations. Article 1708(6) reads as follows:

"Article 6 of the Paris Convention shall apply with such modifications as may be necessary to services. In determining whether a trademark is well-known, account shall be taken of the knowledge of the trademark in the relevant sector of the public, including knowledge in the party's territory obtained as a result of the promotion of the trademark. No party may require that the reputation of the trademark extend beyond the sector of the public that normally deals with the relevant goods and services."

Such protection is extended even if those trademarks or service marks are nor registered with the NAFTA member where the infringement occurs.

Article 1708 sets a uniform procedure for registration of trademarks within NAFTA countries. Included in the registration system are procedures for the protection of unregistered marks by virtue of their use in NAFTA countries. A mark, be it trademark or service, must actually be used in order for its registration to be maintained. NAFTA permits its nations to conform the registration of mark to its actual use. If a corporation registers a trademark and does not use it, NAFTA nations can terminate the registration and protection given to that mark. While use may be required to maintain registration, no NAFTA nation may require use of the mark prior to application for registration.

NAFTA requires its nations to assure that trademarks do not mislead the public on the origin of the goods. Article 1712(2) forbids a NAFTA nation to register a trademark that misleads the public on the geographical origin of the goods.

V. PATENTS

NAFTA requires that each of its nations bestow patent protection for the nationals of the other nations for a term of either:

1. 20 years from the date of the patent filing, or

2. 17 years from the grant of the patent.

Article 1709(1) reads as follows:

"Subject to paragraph 2 and 3, each party shall make patents available for any inventions, whether products or processes, in all fields of technology, provided that such inventions are new, result from an inventive step and are capable of industrial application. For purposes of this Article, a party may deem the terms "inventive step" and "capable of industrial application" to be synonymous with the terms "nonobvious" and "useful" respectively."

Under U. S. patent law, the duration of a patent is 17 years for utility patents and 14 years for design patents. If a NAFTA nation limits patent protection to 20 years from the date of filing, the term of protection is reduced by the period of time the patent is prosecuted. To address this concern NAFTA Article 1709 (2) permits, but does not require, its nations to extend the patent period to compensate for the delays in the regulatory process of obtaining patent approval, Article 1709(12).

Article 1709(3) permits NAFTA nations to exclude plants and animals from being patented:

"A party may also exclude from patentability:

(a) Diagnostic, therapeutic and surgical methods for the treatment of humans and animals,

(b) Plants and animals other than microorganisms, and

(c) Essentially biological processes for the production of plants or animals other than the nonbiological and microbiological processes for such production."

In addition, NAFTA also permits its nations to deny patents on microorganisms and biological processes.

There may be situations where a NAFTA nation would require a holder of a patent to give a license to a person or entity. NAFTA permits compulsory licensing if the granting of a patent on reasonable commercial terms and conditions was denied by the patent holder and the NAFTA nations finds it to its benefit to compel the licensing.

2. INFRINGEMENT SUIT

NAFTA establishes a specific burden of proof for each member to apply in an infringement suit. NAFTA requires a defendant to prove that any alleged infringement actually occurred from a process other than the patented process on which the infringement is alleged. To do that, the defendant must either prove that the process used was a new patented process or show that the patentee cannot reasonably prove that the process used was the patented one in question.


CHAPTER 12

HOUSEHOLD GOODS AND FURNITURE

I. INTRODUCTION

NAFTA will expand opportunities for U.S. exporters of household goods in Canada and Mexico. In the area of household appliances, Canada and Mexico account for more than half of total U.S. exports ($727 million in Canada and $384 million in Mexico for 1992). The United State's household audio and equipment trade with Mexico was $702 million and with Canada was $561 million in 1992. Such trade with Mexico and Canada accounted for 51% of total U. S. export of audio and video equipment. The household glassware industry in the United States exported $36 million of product to Canada and $18.3 million of product to Mexico in 1992. Exports to Canada and Mexico accounted for 36% of total U.S. exports of household glassware. Exports to Mexico, although relatively small, rose 208% between 1991 and 1992.

The household appliance industry consists of any equipment used in the home: stoves, refrigerators, fans, vacuum cleaners and dishwashers. The industry employs 104,000 workers, primarily in Arkansas, Indiana, Illinois, Kentucky, Michigan, Ohio, Tennessee and Wisconsin. In 1991, the appliance industry produced goods valued at $16.1 billion. Exports to Canada and Mexico represented 5.9% of total production. U.S. exports to Canada increased 36.1% and increased 37.9% to Mexico between 1990 and 1992.

In the United States the market for audio and video equipment may have peaked. Between 1990 and 1992, sales of audio and video equipment in the United States leveled at $7.1 billion. The production of television sets and their parts are a major part of the U. S. household audio and video industry. As sales stall or begin to peak, the demand for such products decreases. A decrease in demand is translated immediately into a reduction of employed U.S. workers manufacturing those goods. Color TV sets and VCR's appear to have peaked in the United States, while there has been a slight increase in audio sales. Big screen TV's and other big-ticket electronics experienced great growth but were an exception to the overall malaise in the industry.

NAFTA does not change the Mexican law requiring all consumer goods sold in Mexico to have a label written in the Spanish language.

II. TARIFFS

A. HOUSEHOLD APPLIANCES

Upon the enactment of NAFTA, Mexico eliminated its tariffs on 17% of U. S. imported appliances. By 1999, Mexico will eliminate tariffs on another 17% of U.S. appliances. By 2004, Mexico will eliminate the remaining tariffs on all U.S. appliances. NAFTA prevents Mexico from raising those tariffs that are still permitted above their pre-NAFTA rates: 10% on appliance parts and 20% on completed appliances. In addition, NAFTA forbids Mexico to raise its tariffs on U.S. goods to "GATT bound" levels, which can be as high as 50% ad valorem. Without NAFTA, Mexico, as a signatory to GATT, could raise its tariffs on U.S. goods to 50% of their value.

Following the enactment of NAFTA, the United States eliminated its tariffs on 85% of all Mexican exports of household appliances. The U. S. tariff on Mexican vacuum cleaner parts, which was seven percent (7%), will end by 1999. The U.S. tariff on Mexican nonelectric storage water heaters, which accounted for 8% of all U.S. household appliance imports, will be eliminated by 2004. U.S. tariffs are reduced more quickly than Mexican tariffs, but that will not markedly help Mexican exports. Even prior to NAFTA, U.S. tariffs on Mexican appliances were low, ranging from 2.2% to 4.4% ad valorem. Prior to NAFTA, most Mexican appliances were eligible to tariff-free entry under the Generalized System of Preference (GSP). The United States reserved in NAFTA a means to protect itself from any immediate surge of Mexican imports. The United States is permitted to reinstitute its tariffs of 2.8% to 5.7% on Mexican household appliances for a period of three years if Mexican imports seriously threaten to injure U. S. producers. This safeguard provision can only be used once for a particular good.

C. HOUSEHOLD GLASSWARE

NAFTA requires that Mexico eliminate the tariffs on 72% of imported U.S. glassware by 2004 as determined by Mexico's 1990 import data. This group includes the major imports of glass ceramic and lead crystal glassware. The remaining 28% of export categories will be reduced and eliminated in either a five year or 10 year period, depending on a product's unit value. Goods valued at over $5 each will have their tariffs eliminated over five years. Goods with a value of less than $5 each will have their tariffs eliminated over 10 years. The 10 year period will generally apply to drinking glasses except those made of glass-ceramic and lead crystal. Mexico is prevented from raising its tariffs on U.S. goods to "GATT bound" levels, which can be as high as 50% ad valorem. Without NAFTA, Mexico as a signatory to GATT could raise its tariffs on U.S. goods as high as 50% of their value.

Prior to NAFTA most Mexican glassware was imported duty free to the U.S. and continues duty free now. The United States will eliminate all existing Mexican glassware tariffs on a product basis over a 15 year period. Such tariffs range from 7.2% to 38% and protect lower priced drinking glasses and decorative glassware. The United States reserves in NAFTA a means of protecting itself from any immediate surge of Mexican imports. The United States reserves in NAFTA a means of protecting itself from any immediate surge of Mexican imports. The United States is permitted to reinstitute its Most Favored Nation Tariffs of 7.2% to 38% on Mexican household glassware for three years if Mexican imports seriously threaten to injure U. S. producers. This safeguard provision can only be used once for a particular good.

Foreign investors from a NAFTA country have the right to take profits out of the country. For the first time, investors from a NAFTA country are permitted to take their profits, dividends, interest capital, royalties and other investments from another NAFTA country. For Mexico, in particular, the fear of currency restrictions has long impeded foreign investment. Now, U.S. and Canadian investors can invest with more confidence and assurance that they can readily get their profits and investments out of the country on demand.

One of the most important aspects of NAFTA is that it permits U.S. and Canadian investors in Mexico to seek binding arbitration on disputes involving the alleged violation of NAFTA obligations. This is important because Mexico has long had a law (that still applies to non-NAFTA investors) that punishes a foreign investor for complaining about his treatment in Mexico by confiscating the investment.

IV. TECHNICAL STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their industries. NAFTA nations, however, are not permitted to adopt technical standards merely for the purpose of restricting access to their markets. Technical standards are to be adopted only to prevent damage to a public network or to assure safety and access. NAFTA requires that standards cannot be adopted that have no relationship to safety but have the effect of keeping out foreign competition. Each NAFTA country is required to comport nondiscriminatory treatment on an exporter of a fellow NAFTA country. This means that the exporter from a fellow NAFTA country must be treated at least the same as a domestic supplier of the goods or as exporters of non-NAFTA countries. This is free trade in its simplest form. Each NAFTA country must treat the exports of a fellow NAFTA country as though they were manufactured in that country. By treating all such goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across borders with the net effect that capitalism functions according to market operations and not by artificial government regulation.

V. RULES OF ORIGIN

NAFTA only applies to goods manufactured in Canada, Mexico or the United States. Only goods that are considered to have North American origin are covered by the free trade provisions of NAFTA. The NAFTA rules of origin that are used to determine North American manufacturing content are easier to use than those under the Canada-United States Free Trade Agreement. In addition, NAFTA has a de minimis rule that permits 7% of the goods sold to not be of North American manufacture; some products with only 93% North American content are still covered by NAFTA.

The NAFTA rules of origin require household goods to be wholly of North American origin. Any household product that is not wholly of North American origin may be treated as if it had undergone significant processing in Mexico, Canada or the United States. NAFTA has adopted the Harmonized System of tariff classification for determining if significant processing of the goods has occurred.

For household audio and video equipment there is a supplemental "regional value content" test for use with microphones, loudspeakers, headphones, and amplifiers. In the situation where a product does not meet the Harmonized System requirement for NAFTA treatment, the manufacturer can use this test. Under this test, NAFTA treatment will be accorded the product if:


CHAPTER 13

TEXTILE AND APPAREL INDUSTRY

I. INTRODUCTION

The textile industry produces the yard thread and fabric used by the apparel industry to produce garments and clothing. The two industries are interconnected and in most instances are thought to be one. The U.S. textile and apparel industries are among the largest employers; although their number of employees has fluctuated in recent years. In 1973 employment in the textile industry was a little over one million. The apparel industry employed 1.4 million. By 1991, as a result of cheap foreign labor and subsidies, employment had been reduced to 672,000 in textiles and one million in apparel. Canada and Mexico through their importing of U.S. textiles and apparel directly account for 72,000 jobs. In the United States, there are nearly 30,000 plants producing textile and apparel products. The average textile worker earns $8.60 per hour and the average apparel worker earns $7.00 per hour. The U.S. textile industry is primarily located in the states of Alabama, North and South Carolina, Georgia and Virginia. Over a quarter of the apparel industry is located in California and New York. In 1992, the U.S. textile and apparel industry produced $137 billion of product of which $12 billion was exported. Another $36 billion of product was imported.

Over 40% of the apparel sold in the United States is of foreign origin. To help preserve its textile and apparel industry, the United States is a signatory to the Multifiber Arrangement (MFA), an international agreement whereby the nations may impose quotas on textile products to protect their domestic industries from low-cost foreign competition. The foreign market for U.S. textiles and apparel is highly dependent on the foreign exchange market. A high U.S. dollar results in reduced trade. U.S. textile exports have been steadily increasing: $1.96 billion in 1987 to $4.1 billion in 1991. The U.S. exported $435 million of textiles to Mexico while importing $137 million in 1991. In Canada, the trade surplus was even higher: $1 billion exported with $347 million imported.

II. TARIFFS

Prior to NAFTA, Mexico imposed tariffs on U.S. and Canadian textile and apparel imports of 12% to 20%. The United States, prior to NAFTA, imposed a far more varied and diverse span of tariffs on Mexican textiles and apparels. In 1988, the United States imposed tariffs of 10.4% on textile imports and 18.4% on clothing and accessories. In 1989 the average U.S. tariff for textiles and apparels was 6%. This low tariff was due primarily to the tariff treatment of maquiladora products that accounted for 90% of the exports. The maquiladora program involves over 300 firms employing over 50,000 workers. Mexico does not impose tariffs on maquiladora parts if the finished goods are reexported and the United States only imposes a tariff on the value added to the product by the processing in Mexico.

Between Mexico and the United States, NAFTA provides for a 10 year phaseout of all tariffs, ending in January 2004. NAFTA establishes three categories of textiles and apparel with different phaseout schedules. NAFTA creates a unique rule of origin. The first category is for goods that satisfy the rule of origin, for which Mexico and the United States agreed to waive all tariffs starting January 1994. For the second category, the tariffs will be eliminated by January 2001. The third and final category will have tariffs eliminated by January 2004.

Category One:

a. Mexico. NAFTA tariffs were immediately eliminated on the following U. S. exports:

1. Blue denim.

2. Twills.

3. Textured polyester filament fabrics.

4. Cotton terry towels.

5. T-shirts.

6. Curtains and drapes.

7. Cotton and man-made sewing thread.

8. Nylon and polyester filament yarns.

b. United States. Some of NAFTA tariffs were immediately eliminated on the following Mexican exports:

1. Goods produced under the maquiladora program.

2. Silkworm cocoons.

3. Raw silk.

4. Wool, not carded or combed.

5. Wool carbonized.

6. Fine or coarse animal hair.

7. Cotton, not carded or combed.

8. Cotton waste.

9. Cotton sewing thread.

10. Carpets of wool or fine animal hair.

Category Two:

a. Mexico. Some of the products included in this group are:

1. 93% of all U.S. yarn and thread exports.

2. 89% of all U.S. fabric exports.

3. 60% of U.S. textile made-up exports.

4. 97% of U.S. exported apparel.

5. Cotton waste.

6. Cotton yarn.

7. Woven fabrics of cotton.

b. U.S. Some of the Mexican goods included in this group are:

1. 96% of Mexico's yarn and thread exports.

2. 83% of Mexico's textile made-up exports.

3. 95% of Mexico's fabric exports.

4. 99% of Mexico's apparel exports.

5. Cotton yarn.

Category Three:

a. Mexico. Some of the U.S. products covered in this group are:

1. The remaining exports not covered in categories one or two.

2. Wool, fine or coarse animal hair in horsehair and woven fabric.

3. Cotton not carded or combed.

The estimate is that NAFTA should increase Mexican imports of U.S. apparel by 10% per year through 1995. Exports of women's apparel to Mexico has increased 94% between 1990 and 1992 ($106 million to $205 million); more than half were U.S. exports. This trend portends a projected increase in U.S. exports of women's apparel of 15% per year. Imported fabric sales to Mexico were $1.3 billion in 1992. These sales should increase to $1.8 billion in 1998 with the bulk coming from Canadian and U.S. firms.

NAFTA's textile and apparel provisions apply only between Mexico and the United States and between Mexico and Canada. Textile and apparel trade between Canada and the United States is governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). CFTA tariffs on textiles and apparel between Canada and the United States will continue to be reduced and eliminated in accord with its original 10 year schedule. In January 1993, the tariffs were reduced to one-half their pre-CFTA rates and will be completely eliminated by 1998. The reduction of tariffs under CFTA spurred a monumental growth in trade between the countries: U.S. exports to Canada increased by 236% from 1988 to 1992. NAFTA requires Canada to remove all existing quantitative restrictions and nontariff measures and to not impose any new trade restraints on either the U.S. or Mexico.

II. RULES OF ORIGIN

NAFTA's rules of origin only apply to goods manufactured in Canada, Mexico or the United States. Canada and the United States have agreed to use NAFTA's rules of origin rather than CFTA's rules of origin for textiles and apparels. Only goods which are considered to have North American origin are covered by the free trade provisions of NAFTA. The NAFTA rules of origin for textiles and apparels are different from those for other products.

The yarn-forward rule will probably result in nearly all Mexican apparel being made with U.S.-made yarn and textiles because Mexican producers of yarn and textiles are not currently competitive with U.S. producers. Since the textile industry is not labor intensive (as opposed to the apparel industry), Mexico's cheap available labor will not give its textile industry a significant cost advantage.

IV. STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their individual textile and apparel industries. The NAFTA nations are not permitted to adopt technical standards merely for the purpose of restricting access to their economy. Each NAFTA country is required to bestow nondiscriminatory treatment to a textile or apparel exporter of a fellow NAFTA country. This means that the exporter must be treated at least the same as a domestic supplier of the goods, or an exporter from a non-NAFTA country is treated. This is free trade in its simplest form. Each NAFTA country must treat the exports of a fellow NAFTA country as though they were manufactured domestically. By treating all such goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across the borders with the net effect that capitalism functions according to market operations and not according to artificial government regulation.




CHAPTER 14

MISCELLANEOUS CONSUMER INDUSTRIES

I. INTRODUCTION

Miscellaneous consumer goods are day-to-day goods that an average person may buy during the year. Such goods include glassware, pottery, crockery, cutlery, watches, clocks, batteries, jewelry, leather, pens, pencils, and virtually any other commonplace consumer item. The industries that manufacture these items employed 256,000 persons in the United States in 1991. The combined production of this industry in 1991 was $25 billion, and 16% was exported; more than 4% went to Canada and Mexico.

NAFTA will cause significant growth in the general consumer goods industries of Canada, Mexico and the United States. Even prior to NAFTA, Canada and Mexico were the largest customers of these U.S. goods. In 1992, Canada imported $813.5 million and Mexico imported $561.2 million. Together, Canadian and Mexican imports accounted for 29% of all U.S. consumer goods exported.

Trade in miscellaneous consumer goods between Canada and the United States is regulated by the 1988 Canada-United States Free Trade Agreement (CFTA). CFTA tariffs between the two nations are to be eliminated by 1998. As a result of CFTA, miscellaneous consumer goods to Canada increased by 33% to a record $814 million.

II. TARIFFS

Mexico eliminated tariffs on 45% of all U.S. exports of miscellaneous consumer goods on the enactment of NAFTA. The major goods for which the tariffs were eliminated immediately:

1. Brooms and brushes.

2. 76% of pens and pencil products with the remaining tariffs being removed over 10 years.

3. 41% of toys and games with another 10% having their tariffs removed over five years and the remaining goods having their tariffs removed by the year 2004.

4. Most musical instruments.

5. Silverware and steelware imports (43%) were eliminated immediately, and an additional 14% will end over five years and the remaining tariffs on these goods are terminating over 10 years.

NAFTA has two safeguard provisions to protect the textile and apparel industries of both the United States and Mexico from unexpected serious damage or actual threat thereof caused by the elimination of the tariffs. During the 10 year phaseout period of tariffs, either nation may reimpose a "tariff snap-back" that permits temporary quotas or a higher tariff (not to exceed the Most Favored Nation rate) for a three year period. The standard for implementing the safeguard that of "serious damage or actual threat thereof" is a lesser standard than the "serious injury or threat thereof" that is used in other NAFTA sections. If a country imposes a safeguard action on conforming goods, that country must compensate the exporting country for the harm caused by the "tariff snapback." The compensation will usually be a negotiated reduction of tariffs on other items being imported into the country. This safeguard action is only permitted once during the 10 year phaseout period for any particular item.

The second safeguard applies to those imported goods that do not meet NAFTA rules of origin. Such goods may also have a temporary quota or an increased tariff for one time for a period of three years or less. There is no requirement for compensation to the exporting country for implementing the safeguard. After the end of the 10 year phaseout period, no safeguard action can be undertaken by either country without the consent of the other country.

NAFTA's provisions apply only between Mexico and the United States and between Mexico and Canada. Trade between Canada and the United States is governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). CFTA tariffs on miscellaneous consumer goods between Canada and the United States will continue to be reduced and eliminated in accord with its original 10 year schedule. In January 1993, the tariffs were reduced to one-half their pre-CFTA rates and will be completely eliminated by 1998. The reduction of tariffs under CFTA spurred a monumental growth in trade between the countries: U.S. exports to Canada increased by 34% from 1990 to 1992. NAFTA requires Canada to remove all existing quantitative restrictions and nontariff measures and not to impose any new trade restraints on either the U.S. or Mexico.

III. RULES OF ORIGIN

Goods exported from one NAFTA country to another NAFTA country will be covered by the NAFTA tariff elimination schedule if:

1. The goods are completely manufactured or produced in a NAFTA country from materials that derive entirely from a NAFTA country, or

2. The goods contain non-NAFTA derived parts that are significantly changed as a result of production in a NAFTA country, or

*** END OF SAMPLE VIEW OF SECTION ***

GATT has no set time period to allow comment on proposed changes in standards before implementation. By comparison, NAFTA requires that a comment period of 60 days be established before any changes in standards can be adopted. Mexico's Federal Law of Meteorology and Standardization provides for a longer comment period than required under NAFTA: 90 days.

Some consumer goods exported to Mexico, such as toys, must comply with Mexico's Normas Oficiales Mexicanas (NOM) certification requirements. Before such goods can be exported, the exporter must obtain from the Mexican Secretariat of Commerce and Industrial Development (SECOFI) a NOM certificate. Information for obtaining a NOM certificate can be obtained from the U. S. Department of Commerce using the Flash Facts system or through the Mexican government using either its Hotline or Faxline (see the chapter on Customs).

NAFTA envisions a time when a single lab will certify that a product meets the technical standards of all three countries. It is the intention of NAFTA members that labs in Canada and the United States will be accredited in Mexico the same as Mexican labs. Then U.S. labs will be able to certify a product for sale in Canada, Mexico or the United States. This should reduce the costs of the products significantly. Canada and the United States have implemented this provision, and Mexico will before 1999.

Goods exported to Mexico are still required to have a label containing all of the information required by Mexican law. This label must be affixed prior to export to Mexico. The information which must be included on the label varies from product to product. Such information can be obtained by contacting the Officer of Mexico Flash Facts system (see Chapter 4). Canada also has its own labeling requirements. These requirements can be obtained from the U. S. Department of Commerce by calling its Office of Canada (202) 482-1178.


CHAPTER 15

LUMBER, WOOD AND PAPER PRODUCTS

I. INTRODUCTION

Nearly a quarter of America's exported solid wood products go to Canada and Mexico. In 1992, these exports were valued at $807 million from Canada, $416 million from Mexico. The U. S. lumber and wood products industry is composed of 15 subindustries with the major ones being logs, lumber, millwork, veneer, plywood and reconstituted panel products. The U.S. industry employed 370,000 persons and produced $44.3 billion in products in 1991. In 1992, exports of lumber and wood products were valued at $6 billion. U.S. exports increased 5% in 1992 over 1991 values.

In wood products, the United States enjoys a distinct advantage over Mexico. The United States has significantly more forest land than Mexico. Because of limited forest land, Mexico has been forced to become an importer. The elimination of Mexican tariffs and trade barriers will be beneficial to both Canadian and U.S. exporters of wood products. The U. S. International Trade Commission estimates that NAFTA will increase U.S. exports of wood products to Mexico by a healthy 18% per year through the year 2004.

U.S. lumber trade with Canada is governed in large part by the Canada-United States Free Trade Agreement (CFTA). CFTA tariffs on lumber products were eliminated in 1993. In 1992, U.S. lumber exports to Canada increased 6% to $807 million. At the same time, the United States imported $3.7 billion in lumber products from Canada.

A. LUMBER AND WOOD PRODUCTS

NAFTA immediately eliminated Mexican tariffs on 14.7% of all U.S. lumber products. Products with tariffs eliminated include:

1. Softwood products that meet the U.S. and Canadian lumber standards used in construction.

2. Tropical woods such as dark red meranti, light red meranti and meranti bakau.

3. Tropical woods of white lauan, white meranti, white seraya, yellow meranti and alan.

4. Tropical woods of keruing, ramin, kapur, teak, jongjong, merbau, jelutong, and kempas.

5. Veneer sheets and sheets of plywood and other wood sawn lengthwise.

6. Densified wood in blocks, plates, strips or profile shapes.

Another 3.9% of U.S. exports will have their tariffs eliminated by 1999. Among such exports are:

1. Fuel wood in logs, billets, twigs and faggots.

2. Fiberboard of wood or other ligneous materials.

3. Wooden frames for paintings, photographs, mirrors.

4. Packing cases, boxes, crates, drums and similar packings of wood, cable drums of wood, pallets, box pallets and other load boards.

5. Casks, barrels, vats, tubs and other cooper's products.

6. Builders' joinery and carpentry of wood.

NAFTA only applies to goods manufactured in Canada, Mexico or the United States. Only goods considered to have North American origin are covered by the free trade provisions of NAFTA. The NAFTA rules of origin that determine North American manufacturing content are easier to use than those of the Canada-United States Free Trade Agreement. NAFTA has a de minimis rule that permits, up to 7% of the goods to be of other than North American manufacture.

The rules of origin under NAFTA require telecommunications equipment to be wholly of North American origin. Any telecommunications equipment that is not wholly of Northern American origin may be treated as such if it has undergone significant processing in Mexico, Canada or the United States. NAFTA has adopted the Harmonized System of tariff classification for determining if significant processing of equipment has occurred. In addition to the significant processing rule, NAFTA permits producers of line-telecommunications equipment to use one nonoriginating printed circuit for every nine North American printed circuits.

IV. STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their individual lumber, wood and paper goods industries. NAFTA nations are not permitted to adopt technical standards merely for the purpose of restricting access to their economy. Each NAFTA country is required to bestow nondiscriminatory treatment on a lumber, wood or paper goods exporter of a NAFTA country. The exporter must be treated at least the same as a domestic supplier of the goods or an exporter of a non-NAFTA country. This is free trade in its simplest form. Each NAFTA country must treat the exports of a fellow NAFTA country as though they were manufactured domestically. By treating all such goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across the borders with the effect that capitalism functions according to market operations and not in accord with artificial government regulation.

Each NAFTA nation is required to give fellow nations advance notification of any proposed change to its lumber wood or paper products standards. This is a major improvement over the GATT process. It allows early discussion by members before changes are implemented. If a NAFTA country permits participation in the change making process by its citizens or companies, it must also permit participation by affected citizens and companies in fellow NAFTA countries. GATT has no set time period to allow comment on proposed changes in standards before implementation. By comparison, NAFTA requires a comment period of 60 days be established before any changes in standards can be adopted. Mexico's Federal Law of Meteorology and Standardization provides for longer comment period than required under NAFTA: 90 days.

Some lumber, wood and paper goods exported to Mexico, such as toys, must comply with Mexico's Normas Oficiales Mexicanas (NOM) certification requirements. Before goods can be exported, the exporter must obtain a NOM certificate from the Mexican Secretariat of Commerce and Industrial Development (SECOFI). Information for obtaining a NOM certificate can be obtained from the U. S. Department of Commerce using the Flash Facts system or from the Mexican government using its Hotline or Faxline (see chapter 4).

NAFTA envisions a single lab to certify a product meets the technical standards of all three countries. NAFTA nations expect labs in Canada and the United States will apply for accreditation in Mexico in the same manner as Mexican labs. U.S. labs will certify a product for sale in Canada, Mexico and the United States. The costs for products will be significantly reduced. Canada and the United States implemented this provision immediately upon enactment of NAFTA whereas Mexico has until 1999 to do so.

CFTA requires Canada and the United States to harmonize their technical standards on lumber products. In 1993, Canada and the United States incorporated compatible plywood standards into their model building codes, permitting uniform sales in both countries.

Goods exported to Mexico are still required to have a label containing all information required by Mexican law. This label must be affixed prior to export to Mexico. The information included on the label varies from product to product. Such information can be obtained by contacting the Officer of Mexico Flash Facts system (see chapter 4). Canada also has its own labeling requirements. These requirements can be obtained from the U. S. Department of Commerce by calling its Office of Canada (202) 482-1178.


CHAPTER 16

CONSTRUCTION INDUSTRIES

I. INTRODUCTION

The construction machinery industry and building material industry are heavily intertwined. Both industries are directly related to building and construction. An increase in demand for the product or services of one usually has a direct and favorable increase in the demand for the product of the other. Because of the interrelationship of the two industries, they are discussed together in this chapter. There has been a steady increase of 12% per year in U.S. exports of building materials from 1990 through 1992. Certain U.S. products have experienced a higher growth in exports than others. Since 1990 concrete and gypsum product exports have increased 35%, and ceramic tile exports of building materials remained relatively flat at $875 million. The only area of measured and sustained growth of U.S. exports of building materials was with Canada and Mexico.

A. BUILDING MATERIALS

Building materials are generally defined for industry purposes as including flat glass, ceramic tile, plumbing fixtures, electrical supplies and concrete products. The segment of the industry that includes concrete products includes concrete blocks, bricks, preformed concrete building elements and concrete mix. The companies that manufacture these items employed 206,000 persons in the United States in 1991. The combined production of this industry in 1991 was $24 billion. In 1992, building materials exported to Canada were $332 million and to Mexico $42 million. Together these exports were over one-half of all U.S. exports.

NAFTA will bring significant growth in the building materials industries of Canada, Mexico and the United States. Even prior to NAFTA, Canada and Mexico were largest customers for these U.S. goods. U.S. exports to Mexico have increased 40% since 1990. In 1992, Canada and Mexico were the largest exporter to the United States of building materials. Both Mexico and Canada each supplied the U.S. with 20% of its imports of flat glass, ceramic tile, concrete and gypsum. Canadian exports in these areas, however, have decreased 11% from its 1990 high; while Mexico exports to the United States increased 16%.

B. CONSTRUCTION MACHINERY

The combined production of construction machinery in the United States in 1991 was $13.4 billion; 36% ($4.38 billion) was export. In 1992, construction machinery exports to Canada were $802 million and to Mexico were $408 million, representing 19% and 10% respectively of total U.S. exports of construction machinery.

Mexico is a net importer of construction machinery. The increasing Mexican population will require a yearly increase of nearly 600,000 homes, and Mexico currently has a shortage of 6 million residential homes. To meet this need, Mexico must build 40 new electrical generation plants and invest heavily in modernizing its economic infrastructures such as roads, highways, dams, and schools. Mexico's present construction machinery industry is ill-equipped to handle these projected demands. Mexico intends to pay for part of the necessary construction by issuing private concessions to suppliers of services or builders of the required facilities. For instance, Mexico might offer toll road concessions for 20 years or concessions to builders of hotels and other tourist facilities. Mexico hopes to obtain private investments of between $4 billion and $6 billion through the use of concessions. The World Bank has pledged $700 million in loans for the conversion of 1,250 miles of two lane highway into four lane highways.

B. CONSTRUCTION MACHINERY

Mexico eliminated its tariffs on 32% of all U.S. exports of construction machinery on the enactment of NAFTA. The major goods affected are:

1. Mechanical appliances for dispersing, projecting or spraying liquids or powders, steam and or blasting machines and parts thereof.

2. Self-propelled bulldozers, angledozers, graders, levelers, scrapers, mechanical shovels, excavators, shovel loaders, tamping loaders and roll loaders.

3. Other moving, grading, leveling, scraping, excavating, tamping, compacting extracting or boring machinery for earth, minerals or ores, pile-drivers, snowplows and snowblowers.

Tariffs on 30% of U.S. construction machinery are gradually reduced to zero by 1999. The tariffs on parts for machinery were eliminated at enactment of NAFTA.

Tariffs on the remaining 38% of U. S. products will have their tariffs terminated by 2004. The products with tariffs remaining include:

1. Pulley tackles and hoists.

2. Ships' derricks, cranes, mobile lifting frames, straddle carriers and work trucks fitted with cranes.

3. Fork-lift trucks and other work trucks fitted with lifting or handling equipment.

4. Other equipment for lifting, handling, loading or unloading (including elevators, escalators, conveyors, teleferics).

5. Off-shore oil and gas drilling platforms and equipment.

NAFTA affects licensing requirements for Mexico. Prior to NAFTA, Canadian or U.S. exporters of construction machinery had to post a bond for equipment temporarily entering Mexico to ensure that it was removed when the purpose for using it was completed. NAFTA eliminates the bond requirement for the temporary entry of equipment of North American origin into Mexico. Mexico's import licensing requirement for used equipment will end by 2004.

III. RULES OF ORIGIN

Goods exported from NAFTA country to another NAFTA country are covered by the tariff elimination schedule of NAFTA if:

1. The goods are completely manufactured or produced in a NAFTA country from materials that derived entirely from a NAFTA country, or

2. The goods contain non-NAFTA derived parts that are significantly changed as a result of production in a NAFTA country, or

3. The goods contain non-NAFTA parts, and their assembly into the final product accounts for 60% value of the finished product, or

4. The goods contain non-NAFTA parts or materials costing less than 7% of the value of the finished products.

NAFTA only applies to goods manufactured in Canada, Mexico or the United States. Only goods considered to have North American origin are covered by the free trade provisions of NAFTA. The NAFTA rules of origin that determine North American manufacturing content are easier to use than those of the Canada-United States Free Trade Agreement. NAFTA has a de minimis rule that permits up to 7% of the goods to be of other than North American manufacture.

*** END OF SAMPLE VIEW OF SECTION ***

Some building materials and construction machinery exported to Mexico, such as toys, must comply with Mexico's Normas Oficiales Mexicanas (NOM) certification requirements. The exporter must obtain from the Mexican Secretariat of Commerce and Industrial Development (SECOFI) a NOM certificate before goods can be exported. Information for obtaining NOM certificate can be obtained from the U. S. Department of Commerce using the Flash Facts system or through the Mexican government using either its Hotline or Faxline (see chapter 4).

NAFTA envisions a single lab to certify that a product meets the technical standards of all three countries. It is the intention of NAFTA that labs in Canada and the United States will eventually be able to apply for accreditation in Mexico in the same manner as Mexican labs. U.S. labs will certify a product for sale in Canada, Mexico or the United States. The costs for products will be significantly reduced. Canada and the United States implemented this provision immediately at enactment of NAFTA. Mexico will in 1999.

Goods exported to Mexico are still required to have a label containing all information required by Mexican law. This label must be affixed prior to export to Mexico. The information must be included on the label varies from product to product. Information can be obtained by contacting the Officer of Mexico Flash Facts system (see chapter 4). Canada also has its own labeling requirements. These requirements can be obtained from the U. S. Department of Commerce by calling its Office of Canada (202) 482-1178.


CHAPTER 17

AGRICULTURE

I. INTRODUCTION

Agriculture is the most important industry of any nation. NAFTA eliminates trade barriers between NAFTA nations; their agricultural products can be freely traded. NAFTA stated goals:

1. The elimination of nontariff agricultural barriers,

2. The establishment of a schedule for the elimination of all agricultural tariffs over a 15 year period,

3. The establishment of uniform standards for the classification, grading and marketing of agricultural products, and

4. The elimination of trade barriers arising from sanitary or phytosanitary standards that are not necessary to maintain or achieve a country's targeted level of health and safety protection.

Prior to NAFTA, the United States exported to Mexico less than 1% of U.S. production of grains, oilseeds and dry edible beans. Only 8% of U.S. production of corn was exported to Mexico. Changes in Mexico's domestic agricultural policies will significantly increase the Mexican demand for U.S. produce. Currently, Mexican law prohibits the feeding of corn to animals, but an estimated 12% of Mexican corn production feeds animals. Mexico is a net importer of dairy products and faces a steadily growing demand for such products with a shortage of production capacity. NAFTA eliminates Mexican requirements for import licenses on U. S. poultry and replaces them with a tariff schedule that reduces and ends tariffs by 2009. The United States dairy restrictions on Mexican goods under Section 22 of the Agriculture Adjustment Act were replaced by a tariff schedule that ends tariffs by 2004. U. S. tariffs and U. S. Meat Import Act quotas were eliminated at passage of NAFTA on Mexican exports to the U.S. of livestock (including cattle, meat products). There has been an immediate increase in Mexican exports of feeder cattle to the United States and an increase in U.S. exports of beef products to Mexico.

II. TARIFF AND NONTARIFF BARRIERS

The United States and Mexico agreed that all nontariff barriers between the countries would be eliminated at implementation of NAFTA. In 1991, there were $1.6 billion of farm imports from Mexico and $1.5 billion dollars of farm exports from the U. S. to Mexico. The United States and Mexico agreed that all nontariffs would either:

1. Be converted to ordinary tariffs, or

2. Be subject to a tariff-rate quota system. Under this system, a tariff would be applied to an import only if the total imports for that item exceed an established quota for the year of the import.

NAFTA establishes a different system for the elimination of tariff barriers on agricultural trade. Between the U. S. and Mexico, effective January 1, 1994, tariffs were eliminated on nearly one-half of all agricultural trade. The remaining tariffs are subject to a gradual phaseout. Most of the tariffs will end over a 10 year period: such as for barley, malt, rice, soybeans and wheat. Tariffs on special agricultural products such as corn and dry edible beans from Mexico and orange juice from the U. S. will end over a 15 year period.

*** END OF SAMPLE VIEW OF SECTION ***

NAFTA specifies two types of tariff-and-rate quota plans (TRO's) based on whether or not the commodity had a pre-NAFTA nontariff barrier on it. NAFTA permits a fixed amount of the commodity to be imported duty free and imported goods over the duty-free quota amount will be subject to a tariff; this plan applies to commodities that had a pre-NAFTA quota tariff. The within-quota amounts for each commodity are determined from the average level of trade for the goods over recent years and increased by 3% per year compounded. The over-quota tariffs are set to match the country's current level of nontariff protection and will be ended over a 10 or 15 year period. Mexican exports formerly subject to section 22 of the U. S. Agricultural Act are now governed by this tariff- and-quota plan (TRO) for nontariff goods. U.S. farm goods exported to Mexico that previously required import licenses are also covered by this NAFTA tariff-and-quota plan for nontariff barrier goods (such as quotas).

Mexico and the United States have each designated a small number of farm goods on which tariffs and quotas are eliminated over a period of 15 years. In the United States, these farm goods are asparagus, sprouting broccoli, cantaloupes, some types of melons, cucumbers, dried garlic, dried onions, orange juice, peanuts and sugar. In Mexico, the farm goods are dry edible beans, corn, milk powder, orange juice and sugar. The NAFTA TRQ's now replace quotas and other nontariff barriers on U.S. imported peanuts and sugar and Mexican imported dry edible beans, corn and milk powder.

III. DOMESTIC SUPPORT AND EXPORT SUBSIDIES

Domestic support in the form of subsidies distorts the true cost and price of a product. NAFTA requires that each NAFTA nation adopt domestic support policies with minimal trade distortion effect. NAFTA does not require a participant to adopt trade policies in areas that are exempt from subsidy (or other domestic support reduction) commitment under GATT. NAFTA participants agree to retain the right to change any domestic support mechanism provided such change does not violate that nation's obligations under GATT. Even so, the nations have agreed in principle to implement measures that do not distort trade or affect production (Article 704).

Export subsidies are the most contentious areas of an international agricultural trade agreement. Export subsidies are a contradiction in terms in a free trade zone. Each NAFTA nation has agreed that, "it is inappropriate for a party to provide an export subsidy for an agricultural good exported to the territory of another party where there are no other subsidized imports of that good into the territory of the other party," (Article 705). NAFTA generally bans or regulates export subsidies on agricultural products between the participants except when they are used to counter subsidized imports from a non-NAFTA country. Specifically:

1. Before a NAFTA country can grant an export subsidy on agricultural exports to a NAFTA nation, the exporting nation must give three days notice to the importing nation. If the importing nation wishes the exporting nation to reconsider its decision to grant an export subsidy, a meeting can be requested. If a request for a meeting is made, trade representatives of the exporting nation must meet with those trade representatives of the importing nation prior to granting the subsidy.

2. If a non-NAFTA country exports subsidized agricultura

products to a NAFTA nation, any of the other NAFTA

participants may request consultations with the importing nation to determine how to counter the unfair effects of the non-NAFTA export subsidy.

3. If a NAFTA nation adopts a program, tariff or subsidy to counter a subsidy on agricultural products by a non- NAFTA exporter, the other NAFTA participants will not grant subsidies on their exports to that NAFTA nation.

NAFTA does not take away or limit a NAFTA participant from applying countervailing duties on subsidized imports from any source, including other NAFTA nations.

IV. AGRICULTURAL GRADING AND MARKETING STANDARDS

Canada and Mexico are major markets for U.S. exports of processed food and beverages. In 1992, Canada imported $3 billion dollars and Mexico imported $1.9 billion dollars worth of processed food and beverage products. Canada and Mexico accounted for 23% of total U.S. exports of products in 1992. This trade represents $387 billion in products and employs 1.7 million persons in the U. S. In 10 U.S. states, more than half of the employment is in the processed food and beverage industry, and almost 63% of their product is exported to Mexico. California and Texas together accounted for 17.8% of all food and beverage manufacturing jobs in 1991 and 52% of all the total processed food and beverage exports to Mexico in 1991. Another eight states (Pennsylvania, Illinois, New York, Ohio, Wisconsin, Georgia, Florida and North Carolina) produced 32.9% of all food and beverage processing jobs in 1991, and 10.2% of the 1991 total processed food and beverage exports to Mexico. Under the Canada-United States Free Trade Agreement, most of the tariffs imposed on U.S. exports of processed foods and beverages to Canada have been eliminated. The remaining tariffs will end entirely by 1998.

A significant advantage of NAFTA to the U.S. exports is that NAFTA prevents Mexico increasing tariffs on U.S. exported produce. Tariffs are gradually being removed, tariffs that ranged from 10% to 20%. Under NAFTA, Mexico is specifically forbidden from raising tariffs to the levels permitted by GATT; they are as high as 50%. This cap on the maximum amount of tariff that Mexico can apply on their import products is of great benefit to U.S. exporters.

Just as NAFTA helps the U.S. processed food and beverage industry, it also helps the Mexican processed food and beverage industry. Prior to NAFTA, 28% of all U.S. imports of Mexican processed foods and beverages were duty free. After NAFTA, 30% more of all Mexican import tariffs on U.S. goods will end by the year 1999. The tariffs on the remaining 26% of such goods are to be phased out by the year 2004.

NAFTA recognizes there are certain goods for which special rules should apply to safeguard the national interest of a country. On goods that are extremely sensitive to the effects of imports, NAFTA provides a 15 year tariff elimination schedule. Such goods belong to a limited number of products, primarily frozen orange juice, sugar and canned tuna in oil. Mexico under NAFTA is allowed to export duty free 7,259 tons of refined sugar to the United States. Above this amount, the U. S. will impose a tariff equal to its pre-NAFTA tariff, but that tariff will end in 15 years.


CHAPTER 18

COAL AND LIGNITE MINING AND MINING EQUIPMENT INDUSTRIES

I. INTRODUCTION

The mining of coal and lignite and the mining equipment industry are so closely connected that they are often thought to be the same. An increase in one industry often spurs a collateral increase or development in the other. An increase in the demand for coal and lignite stimulates a demand for mining equipment for the mining of those minerals. For this reason, the two industries are discussed together. One of the key advantages of NAFTA is that for the first time U.S. exporters of coal and lignite will be able to bid on Mexican and Canadian procurement contracts. In Mexico this was a major advance because the government is a major participant in the mining industry as both a regulator and an operator. NAFTA also permitted Canadians and U.S. citizens to bid on mining service contracts in Mexico, something that was either prohibited or extremely regulated prior to NAFTA.

Mexico has vast deposits of recoverable coal and lignite (estimated to be 65 million metric tons) but lacks the financial resources to develop them. NAFTA is beneficial to Mexico because it opens Mexican industry to foreign investment and development. Most of Mexico's coal industry is in the State of Coahuila. Mexico's coal production has stagnated at nearly 10 million metric tons per year because of the lack of financial resources to expand operations.

A. COAL AND LIGNITE MINING

Worldwide U.S. coal and lignite exports in 1992 were $4.2 billion. U.S. exports in 1992 to Canada were $486.7 million and to Mexico $1.8 million. U.S. productivity in the industry has steadily increased in each of the last 10 years. The U.S. industry is highly competitive on the world market when price at the mine is compared. The disadvantage facing the U.S. industry is the transportation cost of shipping coal great distances. U.S. coal exports are generally of high quality with low sulfur content. Coal exports are in demand for electrical generation plants because of their lower air pollution factors.

In 1992 Mexico only purchased $1.8 million of coal from the United States. Mexico is the smallest U.S. customer for coal. Canada purchased $487 million of coal and lignite exports in 1992, accounting for nearly 12% of all U.S. coal and lignite exports. Canada produced $1.6 billion of coal in 1992; so its imports accounted for 27% of its market.

Trade in the coal industry between Canada and the United States is regulated by the 1988 Canada-United States Free Trade Agreement (CFTA). Canada has one of the largest proven reserves of coal in the world but still needs to import nearly 27% of its coal. Canada's coal industry is open to U.S. and Mexican investment under both CFTA and NAFTA, a benefit to both Canada and NAFTA investors.

B. MINING EQUIPMENT

The 1991 combined U.S. production of mining equipment for both domestic consumption and export was $1.6 billion. Nearly 48% ($811 million) of all U.S. produced mining equipment was exported. In 1992 mining equipment exports were $118 million to Canada and another $89 million to Mexico, representing a total of 26% of all U.S. mining equipment exports. Mexico is the second largest market in the world for mining equipment. The Mexican market for mining equipment has grown from $130 million in 1992. The Mexican demand for mining equipment is expected to increase at the rate of 12% per year for the next 10 years. As much as 20% of Mexico's mining equipment is obsolete or without spare parts.

B. MINING EQUIPMENT

Under NAFTA all U.S. tariffs on imports of mining equipment and machinery from Mexico were eliminated in January 1994.

Mexico eliminated its tariffs on 18.2% of all U.S. exports of mining equipment under the tariff elimination provisions of NAFTA. The major goods for which the tariffs were eliminated immediately are:

1. Mechanical appliances for projecting, dispersing or spraying liquids and powders.

2. Steam and sand blasting machines.

3. Cranes.

4. Piledrivers.

Tariffs on 40.5% of U.S. mining equipment are to be gradually eliminated by the year 1998. This group includes parts for the items on which tariffs were immediately eliminated.

Tariffs on the remaining 41.3% of U. S. products will end by the year 2004. Included in the products still protected by tariffs are:

1. Pulley tackles and hoists.

2. Derricks, cable cranes, mobile lifting frames, straddle carriers.

3. Forklift trucks.

4. Self-propelled bulldozers, angledozers, graders, levelers, scrapers, mechanical shovels, excavators, shovel loaders, tamping machines and road rollers.

NAFTA affects licensing requirements for Mexico. Prior to NAFTA, Canadian and U.S. exporters of mining equipment had to post a temporary bond for equipment entering Mexico to ensure it was removed when its specific purpose was accomplished. NAFTA eliminates the bond requirement for temporary entry of equipment of North American origin into Mexico. Mexico's import licensing requirement for used equipment will end by the year 2004.

IV. STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their individual mining equipment and mining equipment industries. NAFTA nations are not permitted to adopt technical standards merely for the purpose of restricting access to their economy. Each NAFTA country is required to bestow nondiscriminatory treatment on mining equipment and mining equipment exporters of a fellow NAFTA country. The exporter must be treated at least the same as a domestic supplier of the goods or an exporter of a non-NAFTA country. This is free trade in its simplest form. Each NAFTA country must treat the exports of a fellow NAFTA country as though they were manufactured domestically. By treating all such goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across the borders with the effect that capitalism functions according to market operations and not in accord with artificial government regulation.

Each NAFTA nation is required to give fellow nations advance notification of any proposed changes to its mining equipment and mining equipment standards. This is a major improvement over the GATT process. It allows early discussion by members before changes are implemented. If a NAFTA country permits participation in the change making process by its citizens or companies, it must also permit participation by affected citizens and companies in fellow NAFTA countries. GATT has no set time period to allow comment on proposed changes in standards before implementation. By comparison, NAFTA requires a comment period of 60 days be established before any changes in standards can be adopted. Mexico's Federal Law of Meteorology and Standardization provides for a longer comment period than required under NAFTA: 90 days.

Some mining equipment exported to Mexico must comply with Mexico's Normas Oficiales Mexicanas (NOM) certification requirements. Before goods can be exported, the exporter must obtain a NOM certificate from the Mexican Secretariat of Commerce and Industrial Development (SECOFI). Information for obtaining a NOM certificate can be obtained from the U. S. Department of Commerce using the Flash Facts system or from the Mexican government using its Hotline or Faxline (see chapter 4).


CHAPTER 19

MEDICAL DRUGS AND EQUIPMENT

I. INTRODUCTION

The medical drug and medical equipment industries are so closely connected they often are thought to be the same. An increase in one industry often spurs a collateral increase or development in the other. For this reason, the two industries are discussed together. In the United States, the drug industry employs over 185,000 persons, primarily in the states along the east coast. One of the main reasons for the increase in U.S. medical drug and equipment trade with Canada is its large percentage of citizens over the age of 65 years. In Canada, the number of senior citizens is 10% of the general population and projected to grow to 20% by the year 2030. Conversely, U.S. trade with Mexico is expected to increase because of its booming population of young people.

A. MEDICAL DRUGS

Medical drugs are also called "pharmaceuticals." The United States is acknowledged as the world leader in discovering and developing new drugs and medicines. While the United States leads the world in the development of new drugs that does not always translate into a lead in marketing. Many nations, especially in Europe, surpass the United States in their ability to conduct product testing of new drugs. These nations are able to license a drug for production and sale years sooner than the U.S. Food and Drug Agency.

The combined U.S. production of this industry in 1991 was $52 billion of which $6.8 billion was exported. In 1992, medical drug exports to Canada were $845 million and to Mexico, $142 million. Together these exports were over 15% of all U.S. medical drug exports. Canadian and Mexican drug exports to the United States accounted for only 5% of all U.S. imports.

At a yearly rate of $2.1 billion, Mexico represents the 11th largest market in the world for medical drugs. The Mexican drug market represents over 7,000 legal drugs (with or without a prescription). While most drugs are purchased for distribution by the Mexican government, private hospitals account for 20% of sales. All medical drugs sold in Mexico must be registered with the Director General de Control Sanitario, Secretaria de Salud. All foreign exporters of medical drugs are required to maintain a business relationship with a laboratory in Mexico to assure quality control. The United States has a trade surplus with Mexico for medical drugs of nearly $90 million.

Trade in medical equipment between Canada and the United States is regulated by the 1988 Canada-United States Free Trade Agreement (CFTA). Under CFTA, tariffs between the two nations will end by 1998. As a result of CFTA, medical equipment trade between the two countries has expanded. The Canadian market for medical equipment in 1992 was over $2 billion, Canada imported $1.9 billion. Nearly 50% came from the United States. Prior to CFTA, the Canadian tariffs on U.S. exports of medical equipment was 9.2%. These tariffs have nearly all been eliminated and will end completely by the year 1998. The Canadian demand for disposable medical and surgical supplies, partly as a response to AIDS, has increased steadily by 5% per year from $158 million in 1989 to $200 million in 1994.

II. TARIFFS

A. MEDICAL DRUGS

Under NAFTA, Mexico eliminated its tariffs on 92.9% of all U.S. medical drug exports. The major goods on which the tariffs were eliminated immediately:

1. Provitamins unmixed.

2. Vitamin A.

3. Vitamin B1.

4. Vitamin B2.

5. Vitamin B6.

6. Hormones, natural and synthesized.

7. Steroids used as hormones.

8. Vaccines for veterinary medicine.

Tariffs on the remaining 7% of U.S. medical drugs will end by the year 1999. Tariffs on the remaining 1.1% of U.S. medical drugs will end by 2004. This group includes the following:

1. Vitamin B12.

2. Vitamin C.

3. Vitamin E.

4. Most antibiotics.

U.S. tariffs remaining in effect for a few designated items will end by the year 1999. Medical equipment trade between Canada and the United States will still be governed by the appropriate provisions of CFTA. Tariffs on designated medical equipment, such as orthopedic equipment that have not yet been reduced to zero will end by 1998.

Throughout the phaseout period no NAFTA nation will be allowed to impose a tariff higher than 15%. Mexico is prevented from raising tariffs on U. S. made products above their pre-NAFTA rates (which were between 10% and 20%). Furthermore, Mexico is prevented from raising its tariffs to the "GATT bound" levels, which are 50% ad valorem.

NAFTA has two safeguard provisions to protect the medical drug and equipment industries of both the United States and Mexico from unexpected serious damage or actual threat caused by the elimination of the tariffs. During the 10 year phaseout period of the tariffs, either nation may reimpose a "tariff snapback" that permits temporary quotas or a higher tariff (not to exceed the Most Favored Nation rate) for a three year period. The standard for implementing the safeguard of "serious damage or actual threat thereof" is a lesser standard than the "serious injury or threat thereof" used in other NAFTA sections. If a country imposes a safeguard action on conforming goods, that country must compensate the exporting country for the harm caused by the "tariff snapback." The compensation will usually be a negotiated reduction of tariffs on other items being imported into the country. This safeguard action is only permitted once during the 10 year phaseout period for any particular item.


CHAPTER 20

ENVIRONMENTAL REGULATION

I. INTRODUCTION

The United States and Mexico have agreed under NAFTA to coordinate and fund environmental infrastructure projects for water treatment, water pollution, municipal solid waste and related border problems. Border environmental institutions will be created under NAFTA to provide technical and financial assistance to:

1. Coordinate environmental infrastructure projects.

2. Review and approve environmental infrastructure projects.

3. Assess the technical and financial feasibility of environmental infrastructure projects.

4. Oversee the financing, construction and operation of environmental infrastructure projects; and

5. Ensure a transport process incorporates the views of affected states, local communities, and nongovernment organizations.

A border institution will have the authority and ability to mobilize sources to finance environmental infrastructure projects by border environmental financing facilities, direct government support, the private sector and by capital raised directly through the institution. A border financial facility must be established under NAFTA that will be capitalized and managed by Mexico and the United States. The financing facility will explore the possibility of a future link with the Inter-American Development Bank.

II. ENVIRONMENTAL AGREEMENTS

Article 104 incorporates into NAFTA specific environmental provisions and trade obligations of particular international treaties. The following treaties were specifically incorporated into NAFTA:

1. Convention on International Trade in Endangered Species.

2. Montreal Protocol on Ozone Protection.

3. Canada-United States Bilateral Convention on Transboundary Movement of Hazardous Wastes.

4. United States-Mexican Agreement on Improvement of the Environment in the Border Area.

In the event of any conflict between the provisions of NAFTA and the provisions of any of these treaties, the provisions contained in the treaty will prevail. If there are different means available to settle a dispute under any of the above treaties, the one to be chosen is the one that is least inconsistent with NAFTA.

III. SANITARY STANDARDS

The NAFTA nations have agreed to establish a framework of rules and disciplines to regulate the development, adoption and enforcement of sanitary and phytosanitary measures. Each nation shall ensure that any nongovernmental entity on which it relies in applying a sanitary or phytosanitary measure acts in a manner consistent with the provisions set forth in NAFTA.

Article 712 reads, in pertinent pert:

1. Each party may, in accordance with this section, adopt, maintain or supply any sanitary or phytosanitary measure necessary for the protection of human, animal or plant life or health in its territory, including a measure more stringent than an international standard.

2. Each party shall ensure that a sanitary or phytosanitary measure that it adopts, maintains or applies does not arbitrarily or unjustifiably discriminate between its goods and like goods of another party, or between goods of another party and like goods of any other country where identical or similar conditions prevail.

3. No party may adopt, maintain or apply any sanitary or phytosanitary measure with a view to, or with the effect of, creating a disguised restriction on trade between the parties.


CHAPTER 21

DISPUTE RESOLUTION PROCEDURES

I. INTRODUCTION

NAFTA contains specific requirements for the management and resolution of disputes among its members. NAFTA requires that each of its members publish and make available to the other members all of its laws and regulations used to implement NAFTA. A trilateral Trade Commission is created that is required to review trade relations among the members. The Trade Commission is given the authority to create bilateral or trilateral panels composed of private sector trade experts to resolve disputes involving interpretation of NAFTA provisions. All disputes referred to the Trade Commission must be completed within eight months of their referral. NAFTA members have agreed to comply with panel recommendations or for acceptable compensation. Under NAFTA, if a member refuses to follow a panel recommendation or offer acceptable compensation, the affected member may retaliate by withdrawing "equivalent trade concessions."

Disputes involving environmental and health matters have special provisions. The burden of proof is on the complaining party. The panels appointed to adjudicate such disputes may call on expert scientific advice regarding factual matters. In actions involving environmental and health issues that are also regulated by GATT, the complaining member has the choice of resolution procedure is to be used: the one in GATT or the one NAFTA.

II. INSTITUTIONAL ARRANGEMENTS

NAFTA creates two different agencies for the resolution of disputes among its members. The disputes resolution agencies are the Free Trade Commission and the Secretariat.

The Free Trade Commission is composed of cabinet level trade representatives or trade ministers of each NAFTA member. The Commission is responsible for:

1. Overseeing the implementation of NAFTA,

2. Resolving NAFTA disputes, and

3. Supervising and administrating the work of all committees created under NAFTA.

The Commission may but is not required to establish and assign responsibilities to committees, working groups or expert groups, seek the advice of nongovernmental persons or groups and to take such action in the exercise of its functions as the parties (nations) may agree. The Commission is required to meet at least once per year in a regular session. The chairmanship is to alternate among the parties successively.

The Secretariat is established and overseen by the Commission and is composed of national sections staffed and supported by NAFTA members. The Secretariat is responsible for:

1. Rendering administrative assistance to the Free Trade Commission,

2. Assisting the panels and committees involved with the Review of Antidumping and Countervailing Duty Matters, and

3. NAFTA dispute resolution panels.

Each NAFTA member is required to establish a permanent office for its section. Each member is responsible for the operation and costs of its Section and the payment of expenses of all panelists and members of the committees and review boards established by the Commission.

III. PROCEDURE FOR REVIEW

NAFTA sets up a three stage procedure for the resolution of disputes. The stages are consultation, Free Trade Commission review and referral to arbitration. The NAFTA members endeavor to reach a uniform interpretation and application of the Agreement. The members agree to cooperate and consultations to arrive at a satisfactory resolution of all disputes.

A. CONSULTATIONS

NAFTA presumes that most disputes will be settled through consultations at cabinet level of NAFTA members. Any party (nation) may request consultations with any other party regarding disputes or potential disputes that are or may occur from actual or proposed action by the other party. The request for a consultation must be in writing and delivered to each other NAFTA nation and each of their sections of the Secretariat that handles that type of dispute. Consultations involving agricultural matters must be commenced within 15 days after the request for consultation. A third party (nation) that has a substantial interest in a dispute between the other two NAFTA nations has the right to participate in their consultations.

During the consultations each member is required to act in good faith. Towards this end, NAFTA requires each member nation provide the member nations participating in the consultation sufficient information to enable them to understand the problem. Each NAFTA member has agreed to treat any information supplied in a consultation as confidential or proprietary information and to avoid any resolution that adversely affects the interest of any NAFTA nation not participating in the consultation.


CHAPTER 22

INDUSTRIAL AND METAL WORKING MACHINERY

I. INTRODUCTION

The industrial machinery and metal working industries are important sectors of the American economy. The industrial machinery industry is itself separately divided into two segments: the general industrial machinery segment and the specialized industrial machinery segment. In the general industrial machinery segment, Canada and Mexico are the United States' largest trading partners. U.S. exports of general industrial machinery to Canada were $987 million in 1992 and to Mexico, $284 million. U.S. exports to Mexico and Canada of general industrial machinery represented 41% of the total U.S. 1992 worldwide exports of all such goods.

Canada and Mexico are also major purchasers of specialized industry machinery from the United States. In 1992, Canada imported $479 million of such machinery from the United States and Mexico imported $275 million. Together these exports represented 26% of total U.S. exports.

III. SPECIALIZED INDUSTRIAL MACHINERY

Specialized industrial machinery includes industrial machinery specifically designed and engineered to perform only designated functions, Specialized industrial machinery is most often associated with food processing equipment, paper making and processing machinery, printing equipment and textile machinery. The industry employed 75,000 people in 1992 with production of $8.5 billion; exports to Mexico and Canada were 8%. Trade with Mexico in specialized industrial machinery grew 20% between the years 1990 and 1992 to a record $261 million. During the same period, U. S. exports of such goods to the rest of the world only increased by 2%

Paper processing machinery is a major source of trade between Mexico and the United States. The U.S. paper machinery industry employs nearly 20,000 people and in 1992 produced $2.38 billion. The United States provided Mexico and Canada with one-third of their import requirements for paper machinery prior to NAFTA. In 1992, Canada imported from the United States $217 million of specialized paper processing machinery while Mexico imported $80 million.

IV. METALWORKING INDUSTRY

The United States machine tool industry produced $2.6 billion in goods in 1992. Mexico and Canada purchased 16% of all U.S. exported machine tools. The Mexican market for U.S. machine tools increased by 181% over 1981 figures. Mexico has been the largest purchaser of U.S. machine tools three times during the period between 1982 and 1992. In 1992, Mexico imported $250.6 million in U.S. machine tools while Canada only imported $163.5 million.

Mexico was the major importer of U.S. metal cutting machinery. In 1992, Mexico imported $153.8 million of metal cutting equipment, representing 24% of all such goods exported by the United States. Metal cutting equipment exported by the United States to Canada was valued at $105 million. Mexico was also the largest importer of U.S. made metal-forming machinery. In 1992, Mexico imported $91 million in metal forming goods while Canada imported another $59 million.

As a result of NAFTA, Mexican demand for U.S. metal working tools and machinery will increase by 12% per year through the year 2000. Mexico has few domestic producers of such goods and will need to import them in order to keep pace with the projected demand. In 1991, the United States supplied 50% of the Mexican market for such goods. In 1992, Japan and Germany made significant inroads into the U.S. share of the Mexican market. The tariff reduction provisions of NAFTA will restore U.S. preeminence in the Mexican market.

V. TARIFFS

1. GENERAL INDUSTRIAL MACHINERY

Mexico eliminated its tariffs on 19% of the general industrial machinery exports of Canada and the United States on the enactment of NAFTA. Mexican tariffs on another 38.5% of such goods will end by 1999. The tariffs on the remaining goods will end by 2004. NAFTA gives special treatment of 10% to 15% to tariffs on bearings. Under NAFTA, the tariffs on many types of bearings were eliminated immediately. For those bearings on which tariffs were not immediately eliminated, NAFTA provides that the tariffs be eliminated equally over 10 years. This means that the tariffs will be reduced by 1/10th for each year until 2003 when the tariff will be zero. Some of the Mexican tariffs in this area are:

1. Steam turbines and parts are duty free.

2. Gas generators are duty free.

3. Nuclear reactors are duty free.

4. Steam boilers are duty free.

5. Piston and rotary engines are duty free.

6. Diesel and semi-diesel engines are duty free.

7. Engine parts usually have a 10% tariff that will be reduced to zero in five equal stages by January 1998.

8. Hydraulic turbines have a tariff of 10% to end by 1998. those with 20% will end by January 2003.

9. Air and vacuum pumps generally have a duty rate between 15% and 20%. Those with 15% will end by 1998, those with 20% will end by January 2003.

10. Compressor parts have a duty rate of either 10%, 15% or 20%. The tariff rates will end either by January 1998 or January 2003 depending on their type.

11. Air conditioning machinery generally has a duty rate of 20% to be reduced to zero in ten stages by January 2003.

3. METALWORKING MACHINERY

On the enactment of NAFTA, Mexico eliminated tariffs on 50% of the metalworking equipment and machinery exports of Canada and the United States. Included in this category are machining centers, lathes, drilling, boring and milling machines. Mexican tariffs on another 31% of metalworking goods will end by the year 1999. Included in this category are such machines as pneumatic, hydraulic and power actuated tools. The Mexican tariffs on such goods are 10% to 20%. The tariffs on the remaining 19% of goods will end by 2004.

The United States eliminated its tariffs on all Mexican exports on the enactment of NAFTA.

Tariffs on metalworking equipment and machinery traded between Canada and the United States are governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). Prior to CFTA, two-thirds of the U.S. metalworking equipment and machinery were tariff free and the remaining goods that had tariffs were to have those tariffs eliminated by 1998. As of 1994, Canadian tariffs on goods had been reduced by one-half, on their way to zero in 1999.


CHAPTER 23

ELECTRONICS INDUSTRY

I. INTRODUCTION

The electronics industry is important to the U.S. economy. The electronics industry is itself separately divided into three major segments: computer equipment including computer software, electronic components and semiconductors. In the computer equipment segment, Canada and Mexico are the United States' largest trading partners. U.S. exports of computer hardware to Canada were $3.5 billion in 1992, making it the United States' largest customer of computer goods. Mexico ranked eighth in such trade with the United States by purchasing $970 million in goods. Mexico's demand for such computer hardware has been increasing by 20% per year from 1988 through 1992 (pre-NAFTA years). The United States in 1992 maintained a trade surplus of $1.6 billion with Canada and Mexico despite an overall world-wide deficit for such trade.

As with computer equipment and software segments, Canada and Mexico are major purchasers of electronic components from the United States. In 1992, Canada imported $1.3 billion of electronic goods from the United States while Mexico imported $1.7 billion. The Mexican market grew 23% between the years 1990 and 1992 at a time when the world wide market remained flat.

The major exported electronic components are electron tubes, capacitors, coils, connectors, electronic transformers, printed circuit boards, resistors. The U.S. electronics industry employed 347,000 people in 1992, mainly in the states of California, Indiana, Massachusetts and Texas. In 1992, industry production was $36.3 billion.

The Mexican market has only recently opened to foreign exports. NAFTA removes from Canadian and U.S. exporters the burdensome restrictions and requirements that still bind exporters from other non-NAFTA countries. The Mexican electronics industry accounted for 3% of its gross domestic product in 1991. The domestic demand for electronic products will continue to increase at a rate of 10% per year to the year 2000. The Mexican computer industry is quite small, employing only 7,000 in 1992. The Mexican electronics industry cannot keep pace with the projected demand for products. Mexico has a growing demand for Canadian and U.S. goods to fill the void.

Canada has an electronic component industry only slightly larger than Mexico's. In 1992, the Canadian electronic industry employed 10,000 people in about 250 companies. Canada's market for electronic components in 1992 was $2.7 billion and is expected to increase by 4% per year to the year 2000. The United States supplies Canada with two-thirds of its imports of electronic components. Much of the electronic components exported to Canada are reprocessed and placed in other equipment that is exported, primarily to the United States. The leading U.S. imports to Canada are printed circuit boards, ceramic capacitors, coils and transformers.

IV. SEMICONDUCTOR INDUSTRY

Mexican production of semiconductors is primarily through foreign companies doing business in the maquiladora program. In Mexico, semiconductors are usually imported to the maquiladora company; it assembles the semiconductors into a product for reexportation, usually to the United States. The semiconductors used in the maquiladora plants account for over two-thirds of all semiconductors exported to Mexico by the United States. As a result of NAFTA, Mexican demand for U.S. semiconductors will increase by 5% per year through the year 2000. Mexico has very few domestic producers of such goods and will need to import them in order to keep pace with the projected demand.

V. TARIFFS

A. COMPUTER EQUIPMENT AND SOFTWARE

To reduce barriers to trade, NAFTA nations have agreed to lower their duty rates on computer equipment to a common level. This creates a common market for computer equipment. The countries have agreed to establish a uniform tariff on computer goods being imported into their territory from non-NAFTA countries. Existing NAFTA tariff rates on computer equipment, not including computer parts and the "local area network" (LANS) will be reduced in five equal, annual stages commencing in 1999. When a common external tariff is achieved, the products imported from each NAFTA country will be accorded North U.S. status regardless of their actual country of origin. Once the uniform tariff is paid on non-NAFTA computer equipment imported into a NAFTA country, it can then be exported to another NAFTA country and be accorded NAFTA coverage.

Mexico eliminated tariffs on 70% of computer equipment and software imports from Canada and the United States on the enactment of NAFTA. Mexican tariffs on the remaining 30% of goods, including central processing units, impact printers and peripheral devices will end by 1998. Insulated wire cable and other insulated electrical conductors that have a duty rate of 20% will be reduced to zero in 10 equal stages by January 2003.

The United States eliminated its tariffs on all Mexican exports of computer equipment and software on the enactment of NAFTA.

Tariffs on computer equipment and software traded between Canada and the United States are governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). Under CFTA, tariffs on most software were eliminated in 1994 and all will be entirely ended in 1998.

NAFTA also requires that Mexico, Canada and the United States in 1999 begin to set a common external duty rate. In 1999, each country will begin reducing its external duty rate over a five year period to the agreed percentage. In 2004, all three countries will have the same external duty rate. After 2004, all computer products imported from a NAFTA country will automatically be given North U.S. origin regardless of the country (NAFTA or non-NAFTA) in which they originated if any required external duty rate was paid on them in any NAFTA country.

NAFTA also requires each member country to cease granting new tariff waivers to companies based upon performance requirements. Mexico has until the year 2001 to eliminate current tariff waivers it granted prior to NAFTA based upon investment, research and development or export conditions.

B. ELECTRONIC COMPONENTS

Mexico eliminated tariffs on 48.9% of electronic components exports of Canada and the United States (including capacitors, BV connectors, switchers, piezoelectric crystals and certain tubes and resistors) on the enactment of NAFTA. Mexican tariffs on another 28.9% of such goods will end by the year 1999. The tariffs on the remaining 22.2% of goods will end by the year 2004.

The United States eliminated tariffs on 97.1% of Mexican exports on the enactment of NAFTA. The remaining 2.9% of Mexican exports will have their tariffs eliminated by the year 2004.

Tariffs on electronic components traded between Canada and the United States were eliminated as a result of the 1988 Canada-U.S. Free Trade Agreement (CFTA). Prior to CFTA, Canada charged tariffs of around 9.2% on semiconductors exported from the United States. Partly as a result of CFTA, semiconductor trade between the United States and Canada has expanded. Based on the Canadian experience, NAFTA will result in a similar growth of trade with Mexico.


CHAPTER 24

METALS AND MISCELLANEOUS METAL FABRICATING INDUSTRY

I. INTRODUCTION

The metals and miscellaneous metal fabricating industries are important sectors of the U.S. economy. The metals industry is itself separately divided into two segments: the ferrous metals segment and the nonferrous metals segment. In the ferrous metals segment Canada and Mexico are the United States' largest trading partners. U.S. exports of ferrous metals to Canada was $1.21 billion in 1992 and to Mexico $912 million. U.S. exports to Mexico and Canada of nonferrous metals in 1992 were 61% of the total U.S. exports of such goods. The miscellaneous metal fabricating industry is so closely connected with the metals industry that any discussion of one would be incomplete without discussing the other as well.

As with ferrous metals, Canada and Mexico are major purchasers of nonferrous metals from the United States. In 1992, such purchases were $2.85 billion, which were 30% of the total U.S. nonferrous metals exports.

II. FERROUS METALS

The ferrous metals industry is the entire steel manufacturing sector of the United States. Nearly 60% of all U.S. steel production is what is called to as "flat rolled" products: sheet, strip or plate steel. In addition to flat rolled products are long steel products: primarily rods, bar and steel structurals. The other major segments of the steel industry are ferroalloy producers, pipes, tube and fabricated wire. The steel producing industry employed 246,000 workers in 1991 in the United States primarily in the states of Illinois, Indiana, Michigan, Ohio, Pennsylvania and Texas. U.S. steel exports have been increasing despite a worldwide drop in demand. In 1991, the United States exported 5.7 million tons of steel products, its second largest amount ever when their worldwide demand for steel products dropped 5% due to a worldwide recession and an international price decrease.

III. NONFERROUS METALS

The most important nonferrous metals include aluminum, copper, lead and zinc. The nonferrous metals industries primarily produce aluminum and copper in three forms:

1. Primary, which is normally used as input for the production of later products.

2. Semifabricated, which are products that have been rolled or molded into bars, tubes, plates and sheets.

3. Fabricated, which includes further processing into a finished or nearly finished form.

The industry employed 151,800 people in 1991, of which 103,000 workers engaged in semifabricating nonferrous metals. The nonferrous metals industry had production of $44.3 billion in 1991.

Mexico has significant reserves of untapped mineral wealth, particularly in gold, silver, copper, lead, tin and zinc. Mexico lacks the capital needed to develop these resources by itself. NAFTA has opened significant opportunities for Canadian and U.S. companies to participate in full development of these resources. In 1991, Mexico produced a record 284,000 metric tons of copper that was used almost entirely in Mexico. The semifabricated nonferrous metals industry in Mexico is virtually non-existent. Canadian and U.S. companies have a significant opportunity not only for exporting nonferrous metals to Mexico but to assist in the actual development of that industry in Mexico.

V. TARIFFS

A. FERROUS METALS

Mexico eliminated tariffs on 35% of the ferrous metals exports of Canada and the United States at the enactment of NAFTA. Mexican tariffs on another 2% of such goods will end by the year 1999. Tariffs on the remaining 63% of exported goods will end by the year 2004.

The United States eliminated tariffs on 5.8% of Mexican exports on the enactment of NAFTA, including:

1. Pig iron in all forms.

2. Ferroalloys containing less than 1% of carbon.

3. Ferrosilicon.

4. Ferromanganese.

5. Ferrous waste and scrap.

6. Flat rolled products of stainless steel of a width over 600 mm.

7. Flat rolled products of other alloy steel with a width of less than 600 mm.

The United States will eliminate the remaining 94.2% of its tariffs on Mexican goods by the year 2003 and in a few cases by the year 2008. Some of the goods for which these tariffs apply are:

B. NONFERROUS METALS

Upon the enactment of NAFTA, Mexico eliminated tariffs on 55.5% of the nonferrous metals exports to Canada and the United States. Mexican tariffs on another 5.8% of such goods will end by 1999. Tariffs on the remaining 39% of goods will end by 2004.

The United States eliminated its tariffs on 64% of Mexican exports on the enactment of NAFTA, including:

1. Copper mattes.

2. Refined copper and copper alloys.

3. Copper waste and scrap.

4. Copper bars and rods.

5. Copper wire.

6. Copper plates.

7. Copper tubing.

8. Nickel mattes.

9. Unwrought nickel.

10. Nickel bars, plates, rods and wire.

11. Germanium.

12. Vanadium.

13. Beryllium.

14. Zinc 99.99% pure.

15. Tin.

16. Aluminum waste and scrap, flakes, rods and bars.

17. Lead.

The United States will eliminate tariffs on another 4% by 1998, including:

VI. STANDARDS

NAFTA nations retain the right to maintain their own technical standards for their metal and metal fabricating industries. NAFTA nations are not permitted to adopt technical standards merely for the purpose of restricting access to their economy. Each NAFTA country is required to bestow nondiscriminatory treatment on a metal and metal fabricating exporter of a NAFTA country. The exporter must be treated at least the same as a domestic supplier of the goods or an exporter of a non-NAFTA country. This is free trade in its simplest form. Each NAFTA country must treat the exports of fellow NAFTA country as though they were manufactured domestically. By treating all goods equally, no country gives an unreasonable benefit to its own citizens. Goods freely trade across the borders with the effect that capitalism functions according to market operations and not in accord with artificial government regulation.

Each NAFTA nation is required to give fellow members advance notification of any proposed change to its standards for both metals and metal fabricating equipment. This is a major improvement over the GATT process. It allows early discussion by members before changes are implemented. If a NAFTA country permits participation in the change making process by its citizens or companies, it must also permit participation by affected citizens and companies in fellow NAFTA countries. GATT has no set time period to allow comment on proposed changes in standards before implementation. By comparison, NAFTA requires that a comment period of 60 days be established before any changes in standards can be adopted. Mexico's Federal Law of Meteorology and Standardization provides for a longer comment period than required by NAFTA: 90 days.


CHAPTER 25

CHEMICAL, PLASTICS AND RUBBER INDUSTRIES

I. INTRODUCTION

The chemical, plastics and rubber industries are some of the most important sectors of the U.S. economy. The United States is dependent on these industries for domestic consumption of their products for foreign trade exports. The industries themselves are so interconnected and related that this chapter covers them together rather than separately. NAFTA has also considered the products from these industries similar and treats them in nearly the same manner. Canada and Mexico are the United States' largest trading partners for chemicals, plastics, and rubber products. Trade with Canada accounted for sales of $5.77 billion in 1992 and similar sales to Mexico were an additional $3.02 billion. Together, Canada and Mexico purchased over 25% of the chemical, plastics and rubber exports of the United States.

U.S. production of agricultural chemical products reached $17.1 billion in 1991. The U.S. sold 17% of its agricultural exports to Canada and Mexico. Mexican sales in 1992 rose by 35% over 1991 sales. The Mexican market for agricultural chemicals was $605 million in 1992. Most of Mexico's fertilizer production, once handled by the Mexican state-owned fertilizer producer Fertimex has been privatized. Foreign investors can enter the Mexican market and sell their products freely for the first time. The General Directorate for Vegetable Sanitation of the Secretariat of Agriculture and Water Resources publishes a list of permitted and prohibited agricultural chemicals. This list can be obtained from the Secretaria de Agricultura y Recursos Hidraulicos (SARH), Direccion General de Sanidad Vegetal, Guillermo Perez Valensuela 127, 04000 Mexico, D.F. Phone (011-525) 658-4319.

The final segment of the chemical industry is in inorganic chemical products. The major inorganic products are acids, bases, chloroalkalies, industrial gases, rare earths. Inorganic chemicals accounted for $20 billion in products for 1991. The inorganic chemical industry employs nearly 100,000 persons and exported $5 billion of product in 1991. Canada imported $900 million of such products in 1991 while Mexico imported $350 million for a total share of 25% of all U.S. exports.

III. PLASTICS INDUSTRY

Mexico is an excellent market for plastic products. The Mexican plastic industry is small and does not produce a wide variety of products. The most common types of plastic used in Mexico are polyethylene, both high and low density, PVC, polypropylene and polystyrene. There is a significant and rising demand in Mexico for engineered resins. Such resins are usually produced in low volumes and at a higher cost than commodity resins. Mexican demand for engineered resins is satisfied almost entirely from imports. Mexico lacks both the facilities to satisfy the demand for such products and the capital to build the facilities to satisfy that demand. The main engineered resins used in Mexico are ABS, PBT, polycarbonate, polyacetal resins, nylon, fluoropolymers, polyamide, polyesters, polyurethanes, epoxy resins and urea resins. The market for plastic products in Mexico will continue to rise as the Mexican economy improves. The opportunity for Canadian and Mexican exporters of plastic products in Mexico will also increase. The reduced tariffs on their products as a result of NAFTA will give Canadian and U.S. exporters a competitive advantage over those from non-NAFTA countries.

IV. RUBBER INDUSTRY

Canada's annual production of industrial rubber products exceeds $1.5 billion, Canadian. Canada has an annual market of over $1.8 billion Canadian for such products. To fill the demand, Canada imports nearly 40% of its needs of which 90% comes from the United States. Canada has no domestic sources of rubber, so it must import all of the natural rubber it uses. With its huge domestic oil production, Canada is able to manufacture nearly all of the synthetic rubber products it needs. Commodity rubber products are 65% of Canada's production, custom molded products account for an additional 30% of the market and the final 5% of the market is in miscellaneous products. The best market for exporters of rubber products to Canada are predicted to be in basic synthetics such as polysulfide and ethylene propylene, commodity rubber products such as hoses, belts, rubber sheets and mats, and custom made rubber products of most types.

V. TARIFFS

Mexico immediately eliminated tariffs on 58.1% of the chemical, plastic and rubber exports of Canada and the United States on the enactment of NAFTA. Included are:

1. Methanol.

2. Propane.

3. Ethers.

4. Aldehydes.

Mexican tariffs on another 8.6% of goods such as polyacetates and polyesters will end by 1998. The tariffs on the remaining 33.3% of imported goods will end by the year 2003. Among such goods are:

Tariffs on chemical, plastics and rubber products traded between Canada and the United States are governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). Under CFTA, tariffs on petrochemicals have been eliminated and the remaining tariffs on chemicals, rubber and plastics were reduced by one-half as of 1994 and will be eliminated by 1998.


CHAPTER 26

PUBLISHING, PRINTING AND PHOTOGRAPHIC INDUSTRIES

I. INTRODUCTION

The publishing, printing and photographic industries are highly specialized and represent a significant source of trade by the United States with both Canada and Mexico. Because of their similarities and connecting infrastructure, the printing and publishing industries are treated together under NAFTA. The photographic industry is covered under NAFTA and is included in this chapter because of its close relationship to the printing and publishing industry. Canada and Mexico are the United States' largest trading customers for printing and publishing exports, representing one-half of all such products. In 1992, Canada imported $1.7 billion of publishing and printing exports, while Mexico purchased another $220 million. U.S. exports to Canada increased by 96% between the years 1990 and 1992. During the same period, U.S. exports to Mexico increased by 14%. The difference in the growth of this U.S. trade with Canada and Mexico is attributed to the Canada-United States Free Trade Agreement opening Canadian publishing and printing markets. NAFTA will have the same effect on the Mexican publishing and printing markets and greatly increase U.S. and Canadian sales.

Mexico represents a major market for published and printed exports from both the United States and Canada. In 1992, Mexican demand for such products was $2 billion. Mexican demand for published and printed products is projected to increase by 5% per year through the year 2000. Mexico has a small publishing and printing industry, especially in the area of graphic arts. The United States supplied Mexico with 71% of its imported printed products in 1992, a 32% increase over 1991 trade. The United States is also the largest customer of Mexican published products. In 1992, the United States purchased $85 million of Mexican exports of published products.

Canada is the largest U.S. customer for published and printed products. The total Canadian market for such goods was $11 billion of which $5.7 billion was in books and periodicals. U.S. exports to Canada accounted for 10% of the Canadian market. The Canadian publishing industry technologically is on par with the United States. Canada's publishing industry is not large enough to handle all of Canada's demand for published and printed products. Canada purchased 45% of the total $4 billion U.S. exports of these products. Canadian demand for such products is expected to increase by 4% per year through the year 2000.

II. PHOTOGRAPHIC INDUSTRY

The Mexican photographic market is the second largest in Latin America at $225 million. Only 15% of Mexico's 86 million citizens own cameras. In 1991, camera sales reached 34 million of which 17 million were 35 millimeter cameras and 25% were 110 cartridge cameras. The United States supplies Mexico with 50% of its photographic imports. The Mexican market for photocopiers and micrographics is estimated to increase by 23% per year through the year 2000. The United States supplied Mexico with 80% of its photocopiers and micrographic equipment in 1990. The removal of Mexican tariffs on U.S. and Canadian photographic products will increase the demand for such products in Mexico. As a result of NAFTA, Mexican demand for U.S. photographic products will increase by 5% per year through the year 2000. Mexico lacks the production capacity and the capital needed to expand with the projected demand.

IV. TARIFFS

A. PUBLISHING AND PRINTING INDUSTRIES

Mexico eliminated tariffs on 63% of publishing and printing exports of Canada and the United States on the enactment of NAFTA. The following are 20 of the most important items now tariff free under NAFTA:

1. Albums.

2. Books.

3. Business and legal printing.

4. Calendars.

5. Catalogs.

6. Children's picture books.

7. Color separations.

8. Directories.

The United States eliminated 89.8% of its tariffs on all Mexican exports on the enactment of NAFTA. The remaining U.S. tariffs on Mexican exports will end by 2004.

Tariffs on publishing and printing exports traded between Canada and the United States are governed by the 1988 Canada-U.S. Free Trade Agreement (CFTA). Under CFTA, tariffs on photographic exports have already been eliminated except for Canada's tariff of 1.8 per pack on U.S. playing cards.

NAFTA also requires each member country to cease granting new tariff waivers to companies based on performance requirements. Mexico has until 2001 to eliminate those current tariff waivers it granted prior to NAFTA to meet investment, research and development and export conditions.

B. PHOTOGRAPHIC INDUSTRY

On the enactment of NAFTA, Mexico eliminated 85% of its tariffs on all photographic exports. Included in this category are the following important products:

1. Film.

2. Flat pictorial paper.

3. Line reproduction paper.

4. Photo-finishing equipment.

5. Motion equipment.

6. Micrographic equipment.

7. Photo copying equipment.

8. Photographic chemicals.

9. Still picture equipment.

10. X-ray film.

Mexican tariffs on the remaining 15% of Canadian and U.S. products will end by 2004. Under NAFTA, Mexico is precluded from requiring import licenses for photographic equipment exported from the United States or Canada. Such licenses can be required from other foreign exporters.


EPILOGUE

This NAFTA volume is one in a series of self help legal books on such areas of law as:

1. Estate Planning I

2. Estate Planning II

3. Financial Planning I

4. Financial Planning II

5. Powers of Attorney

6. Incorporation

7. Limited Liability Companies

8. Partnerships

9. Nonprofit Corporations

10. Small Claims Courts

11. Chapter 7 Bankruptcy

12. Chapter 13 Bankruptcy, and

13. NAFTA

Each book in this series is a compendium compiled by an attorney

covering the substance of a major number of facets of law that the

lay person should understand. Each book is unique in that:

* It is written in straight-forward language, not legalese.

* It is brief and concise, yet covers all the major aspects the reader needs to know about that particular subject matter.

* It details both the law and the practical measures the reader must understand to complete each task or requirement described in the book. <