Canada-Mexico-United States linkages

Contents - Previous - Next

Even before NAFTA, Canada and Mexico were the second and third largest markets for United States agricultural exports and the first and second largest suppliers of United States agricultural imports. Since the 1989 Canada-US Free Trade Agreement (CUSTA), two-way agricultural trade between the two countries had risen from $5.4 billion to $9.4 billion in 1992, a 74 percent increase. During the same period, Canada's share in world markets of United States agricultural exports and imports also increased. Two-way agricultural trade between the United States and Mexico increased by almost 97 percent from $3.1 billion in 1986 to $6.1 billion in 1992. Mexico's share in world markets of both United States agricultural exports and imports also increased during the period.

Trade among the three countries is projected to increase under NAFTA. For example, the United States is the major exporter of coarse grains to Mexico but, in the past, imports were limited by tariffs and import licences. The Mexico-United States agreement on agriculture calls for the tariffs and licensing to be phased out by 2008. It is also expected that the United States will export more soybeans and livestock products such as pork, beef and poultry. One study has estimated the gain in United States agricultural exports to be from $2 billion to $2.5 billion even without NAFTA. Mexico's main agricultural exports to the United States are coffee, cocoa, bananas, vegetables, fruit and live cattle. NAFTA could increase these exports by $500 million to $600 million annually by the end of the transition period.

After extensive debate on the possible effects of NAFTA on jobs, the environment, food safety and agriculture, the United States Congress ratified the Agreement in November 1993. NAFTA will phase out all tariffs and quotas among the member countries by the end of 2008, the 15th year of the transition period. It establishes a free trade area in accordance with Article XXIV of GATT. The objectives of NAFTA are to: liberalize trade in goods and services; remove barriers to investment; protect and enforce intellectual property rights; and establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of the Agreement (see Box 4, p. 76).

NAFTA is a product of four major trade agreements. In addition, three side agreements on labour, the environment and import surges have been signed to deal with issues not specifically covered in the original agreement. As in the Uruguay Round Agreement, agriculture remains a sensitive area for all three countries and is the only area where NAFTA comprises three bilateral agreements. First, the CUSTA agricultural provision has been included in NAFTA, while Mexico has negotiated two independent free trade agreements for agriculture - one with the United States and the other with Canada.

BOX 4: Key NAFTA provisions


MARKET ACCESS
Article 302 provides for the phased elimination of United States, Canadian and Mexican tariffs on goods traded between the three countries that qualify under the rules of origin. Article 703 includes commitments of the NAFTA countries regarding market access for agricultural goods. Specific market access provisions of CUSTA continue to apply to agricultural trade between Canada and the United States.

Within 15 years of implementation, all tariffs will be eliminated on products traded by NAFTA members. Most products traded between the United States and Canada will be tariff-free by 1998 under CUSTA. Tariff reduction between Mexico and the United States and between Mexico and Canada will be phased out in four stages - immediately, in five, ten and 15 years. Sensitive products, such as sugar for the United States and maize for Mexico, will have a 15-year tariff phase-out period.

In addition to tariffs, NAFTA will eliminate quantitative restrictions such as quotas and import licences for commodities traded between Mexico and the United States. Quotas and import licences will be replaced with either tariff-rate quotas (TRQs) or ordinary tariffs. Lower or no tariffs will be imposed on imports within the TRQ amount. Imports above the TRQs will face tariff levels which will be phased out during the transition period. Non-tariff barriers for dairy, poultry and sugar products remain intact under the Mexico-Canada agricultural trade agreement. The three countries also agreed to phase out customs user fees.

RULES OF ORIGIN
NAFTA will create a "North American Made" standard. Only products that qualify for "North American Made" will receive preferential treatment in the application of NAFTA tariffs. Non-NAFTA products must be transformed or processed significantly in a NAFTA country to qualify for tariff preferences. For example, milk, cream, cheese, yoghurt, ice-cream or milk-based products must be made from NAFTA milk or milk products. Sensitive products for the United States, such as peanuts, peanut products and products containing sugar, receive special treatment.

NAFTA imposes stricter rules of origin than would otherwise be applicable. For example, to qualify for NAFTA benefits, peanuts exported to the United States must be harvested in Mexico and peanut products such as peanut buffer must be made from peanuts harvested in Mexico. Similar rules apply to sugar and sugar products.

DUTY DRAWBACK
Current practices of duty drawback, such as in Mexico's maquiladora programmes, and other duty waivers are eliminated under NAFTA. In the past, industries participating in Mexico's maquiladora programme could import duty-free inputs to produce goods for export out of Mexico. Eliminating duty drawback will be a disincentive for Asian and European countries to establish export platforms in Mexico or Canada.

SPECIAL SAFEGUARD PROVISIONS FOR IMPORT ADJUSTMENT
During the transition period, a specific quantity of a commodity may enter a NAFTA country at NAFTA preferential rates but imports at higher levels will face higher tariff rates.

SANITARY AND PHYTOSANITARY PROTECTION
All NAFTA countries will continue to protect animal and plant health. The Agreement recognizes each country's right to determine the level of protection necessary as long as it is based on scientific evidence. NAFTA encourages trading partners to adopt higher international and regional standards.

SIDE AGREEMENTS
The current United States administration has negotiated three main side agreements on labour, the environment and import surges with Canada and Mexico. These enhance the original Agreement, signed by the previous administration, by strengthening domestic laws; establishing commissions for settling disputes on labour and the environment; safeguarding against import surges; strengthening border clean-up; and encouraging high standards.


The Mexico-United States bilateral agricultural trade accord deals with both tariff and non-tariff barriers in all commodities. Sensitive farm products such as maize for Mexico and sugar for the United States have longer phase-out periods (see Box 4).

Mexico has higher tariffs than the United States although, since joining the GATT in 1986, its tariffs and non-tariff barriers have been reduced. For example, Mexico's maximum tariff rates were reduced from 100 to 20 percent.

When NAFTA was ratified, the average import duty on United States products entering Mexico was 10 percent, 2.5 times greater than that levied by the United States (which averaged 4 percent on Mexican products). Mexico's tariffs on all industrial goods will be phased out within ten years and, within 15 years, its tariffs on all products, including agricultural commodities, will be eliminated. Non-NAFTA country products imported into Mexico will face tariffs as high as 20 percent. In addition to tariffs, non-NAFTA countries will continue to face Mexico's import licences for maize, wheat, barley, malt, dry beans, poultry, eggs, non-fat dry milk, table grapes and potatoes. Some other Latin American and Caribbean countries that have bilateral or multilateral trade agreements with Mexico receive preferential tariff treatment at the level stipulated in the agreements (for instance, Chile under the Mexico-Chile FTA and a group of Central American countries under the Central America Common Market [CACM]).

The economic integration that NAFTA achieves will result not only in trade gains but also in increased economic growth through competition-based productivity growth and economies of scale. A number of studies have shown that all three countries - Canada, Mexico and the United States - should gain from the elimination of tariff and non-tariff barriers. in the longer term, the greatest gains are projected for Mexico. According to static studies, Mexican real income should increase from 0.3 percent, assuming constant returns to scale and no capital inflows, to 6.8 percent, allowing for labour migration and for the Mexican capital stock to grow by 7.6 percent. Without new investment, the elimination of border trade measures would result in only slight welfare gains in real income in Mexico and in no changes in real income in the United States. Wage rates, especially for rural workers in Mexico, are expected to decline without capital increases. Assuming capital growth, more positive gains are projected, especially for Mexico. Capital inflows, either from outside Mexico or from intersectoral mobility, should increase investment and productivity and could push real income growth rates much higher than projected increases in either the United States or Canada. In dynamic studies, Mexico's NAFTA-induced welfare gains or changes in real income growth could reach 8 percent, and agricultural trade should also increase.

In the short term, if capital mobility has not taken place, Mexico is expected to face more adjustment than either the United States or Canada. Estimates of the effects of trade liberalization and domestic policy changes point to an overall rural migration of 500000 to 700000 workers by the end of the transition period. Anticipating this, Mexico has imposed a new farm policy, PROCAMPO, which will provide direct income support mainly to subsistence farmers (see Regional review, Latin America and the Caribbean).

Overall NAFTA will have a small effect on the United States economy; as a result, there should be an increase of less than 1 percent in the country's GDP. However, research indicates that United States agriculture is a major beneficiary of NAFTA, which is expected to create nearly 200000 new export-related jobs, of which 56000 in agriculture and related industries. Under NAFTA, half of the products that the United States normally exports to Mexico could be sold in Mexico completely duty-free as of 1 January 1994. This proportion is expected to increase to more than two-thirds within five years.

Mexico will send more fruit and winter vegetables to the United States as seasonal tariffs of these commodities in the United States are phased out. Maize producers, especially those entering commercial channels, will switch their production to other commodities under PROCAMPO. As a result, Mexico will import more maize. It is also expected to import more livestock and livestock products under NAFTA as Mexican import tariffs on cattle and beef are eliminated. However, it is expected that Mexico will export more feeder cattle to the United States under NAFTA. In the short term, although Mexico will have to adjust more in agriculture, it should have permanent access to the United States market under NAFTA. The toughest adjustment will be among rural maize producers, who will need to switch to other commodities.

Prior to CUSTA, Canadian tariffs on United States dutiable goods averaged 9.9 percent, while United States tariffs on Canadian goods averaged 3.3 percent. At the end of NAFTA's 15-year transition period, most agricultural trade of NAFTA-originating products among the three countries will be duty-free. The 1989 CUSTA has been incorporated in or amended under NAFTA, except for its agricultural provisions. For example, the tariff phase-out schedules for cars and other goods traded between the United States and Canada will remain the same but, since rules of origin, safeguards and sanitary and phytosanitary standards were negotiated trilaterally, the NAFTA rules of origin, rather than the CUSTA rules, will apply to automobiles, textiles and agricultural products. Since all obligations under CUSTA are amended under NAFTA, the United States and Canada will suspend the operation of CUSTA on NAFTA's entry into force. Although trade between the United States and Canada has increased since CUSTA took effect in 1989, Canada's gains in agriculture under NAFTA will -be small.

The bilateral Mexico-Canada trade deal will have a small effect on Canada. More than 85 percent of Canada's agricultural imports from Mexico are already duty-free. NAFTA would allow Mexico to gain access in coffee, orange juice and some meat products. Although all tariffs will be phased out over a ten-year period, most NTBs on sensitive products will remain intact. All trade between Mexico and Canada was only $3.3 billion in 1992, of which $357 million was agricultural trade; this is not expected to increase significantly as a result of NAFTA.

The impact of economic integration such as NAFTA on productivity growth is not only important to the countries directly involved, but it could also provide a stimulus for the rest of the Western Hemisphere. Therefore, larger benefits from NAFTA will result primarily from efficiency and productivity gains through new or increased investment.

An enlarged NAFTA?

Two issues will determine what the future will bring. First, which country or group of countries will be next to join NAFTA (and what are the criteria for joining)? Second, what would be the structure of the proposed Western Hemisphere Free Trade Agreement (WHFTA) and would agriculture be given special treatment? NAFTA has reconfirmed what the Enterprise for the Americas Initiative (EAI) proposed: that there be further economic integration between the United States and the rest of the Western Hemisphere. The United States' implementing legislation for NAFTA indicates that countries wishing to negotiate future FTAs with the United States must meet certain criteria - they must have democratically elected governments and a strong economic base. No later than 1 July 1994 and again by 1 July 1997, United States President must submit to the Congress a report of his recommendation for free trade negotiations with countries other than Canada and Mexico. The findings of the report will provide one mechanism for further regional economic integration.

A few countries with substantive economic and trade reforms under way would meet the criteria outlined in the NAFTA implementing legislation. Chile has a strong, stable economy and a high economic growth rate and is expected to be the next country either to join NAFTA or negotiate a bilateral FTA with the United States. An FTA with Chile would have little effect on the United States economy whereas Chile would gain substantially.

It is still early for other countries in the process of restructuring their economies. It may be several years before they reach the levels of fundamental reform and restructuring found in Mexico and Chile. Some countries - Argentina, Colombia and Venezuela - may not be too far behind Chile. However, other countries in Central America and the Caribbean have much to accomplish to meet the criteria. Also, both groups already receive preferential treatment from the United States under the Caribbean Basin Initiative (CBI), the GSP and special import duty treatment for exports from export-processing zones.

Experience from NAFTA indicates that market access is not the only criterion for negotiating an FTA with the United States. Other issues such as intellectual property rights, the environment and food safety are among the chief concerns of the United States. Furthermore, the potential increase in United States grain exports to Latin American and Caribbean countries would put pressure on farmers in these countries, while the potential increase in trade of lower-cost labour-intensive goods would also create some concern in the United States.

For many countries the magnitude of long-term economic gains from regional free trade will depend on how the trade area is formed and structured. Access to the larger United States market seems to be a primary objective of many countries seeking to negotiate a free trade pact.

A true free trade area consists of member countries that adhere to the same trade pact and reduce or eliminate trade barriers equally among themselves. A regional free trade area built around a series of separate bilateral or trilateral agreements limits the potential for full economic gains from trade. The current integration arrangements in the Western Hemisphere are cross-memberships and, in some cases, small integration arrangements within larger ones. For example, all five members of the ANDEAN Pact are also members of the larger Latin America Integration Association (ALADI), as are members of the Southern Common Market (MERCOSUR) and the Chile-Mexico FTA. In addition to its agreement with Mexico, Chile also signed an FTA with two other ALADI members, Bolivia and Venezuela. Mexico, in addition to its membership of ALADI, the Chile-Mexico FTA and NAFTA, has also negotiated another FTA with Colombia and Venezuela, which are also ALADI members. Similar cross-memberships of integration arrangements occurred within the CACM. This proliferation of economic integration and multiple memberships must be sorted out because each arrangement has its own rules, which may not be consistent with the others. Consequently, the current pattern of integration arrangements is overly complex and prevents a more coherent process of negotiating the proposed WHFTA.

Chile, for example, is quite interested in a bilateral trade pact with the United States but has also expressed an interest to negotiate accession to NAFTA. Such an approach spread across a large number of countries in the region would lead to a series of separate trade pacts. Economists refer to this structure as a hub-and-spoke system. The spoke countries are not directly linked to each other; instead, they are linked only through the hub country. Countries (spokes) in a hub-and-spoke system may not gain fully from free trade, since greater opportunities for specialization and trade through the lowering of market access barriers are not realized.

The United States' approach to regional free trade - through the CBI, CUSTA, NAFTA and a series of "framework" agreements with ten other Latin American countries to negotiate a free trade pact at some future date - resembles a hub-and-spoke system. Its approach to regionalism appears to have changed, however. The United States' implementing legislation for NAFTA allows countries to negotiate entry into NAFTA. In addition, some Latin American countries have expressed interest in negotiating a Latin American Free Trade Area (LAFTA) and then, on the basis of a stronger bargaining position, negotiating a WHFTA with the United States. With either approach - through NAFTA or a larger LAFTA to include the United States and Canada - it appears now that a WHFTA would emerge more as a true free trade area, with members removing barriers to market access for all other member countries.

A second "structural" issue has to do with agriculture and how this sector would be handled as membership in NAFTA or a WHFTA grows. Agriculture was negotiated separately in both CUSTA and NAFTA, for much the same reasoning that was behind the differential treatment afforded agriculture in the Uruguay Round of GATT negotiations. Border measures for food and agricultural products are often key elements in a country's domestic agricultural support system. Eliminating or changing those border measures would require placing the respective country's agricultural policies on the negotiating table.

For CUSTA and NAFTA, the United States, Canada and Mexico were not willing to make their basic agricultural policies the subject of negotiation. Besides, the removal of trade-distorting support for agriculture was to be a major element in the recent GATT agreement. The Uruguay Round Agreement on Agriculture will not, of course, result in the removal of all trade-distorting policies inherent in a country's agricultural support system. The interesting question is: how far can membership in NAFTA or a WHFTA be expanded before member countries' domestic agricultural policies become subject to negotiation? For full economic gains to be realized from a regional trade pact, free trade in food and agricultural products must be included.

Current issues in fisheries

Food security and economic development in small island countries

Fish and fishery products play a special role in the food security equation of small island developing states, most of which have limited opportunities for land-based development and are crucially dependent on their marine fisheries resources both for food and socio-economic development.

Most small island developing states can only support the production of a limited range of agricultural crops. Moreover, there is generally little scope for extensive animal production, although the production of small animals and poultry is often promoted by their governments. Consequently, the total and per caput amount of food available from land-based sources is severely restricted in many of these states, particularly in those that consist of largely infertile atolls. In addition, food shortages resulting from devastation by natural disasters, which appear to be occurring with greater frequency, further increase the islanders' dependence on their fisheries resources for food.

Small island developing states have among the highest annual per caput rates of fish consumption in the world. In 1990 per caput consumption in many of these states exceeded 50 kg, compared with an average of 9 kg in other developing countries and 27 kg in developed countries. Indeed, in some small island developing states, fish account for as much as 95 percent of the population's total animal protein intake. In view of this extreme dependence on fish for food, the rational utilization of fisheries resources, and in particular inshore fisheries resources, must be promoted vigorously and existing management mechanisms strengthened as a means of ensuring sustainable resource use and avoiding food insecurity.

The restricted opportunities that many small island developing states face for industrial development require them to pursue economic development strategies closely linked to the use of their fisheries resources. Indeed, revenue that some earn from the exploitation and processing of their fisheries resources accounts, for more than 50 percent of public sector revenue. This means that, in these states, the fisheries sector represents the national engine of growth, supporting broader social and economic programmes such as health and education.

Effective fisheries management in small island developing states is of critical importance in ensuring that resources are utilized and, where possible, developed in a sustainable manner. In many of these states, inshore fisheries resources, especially those near urban or peri-urban areas, are subject to heavy fishing pressure; this situation will continue, as most have high rates of population increase.

A key consideration for enhancing fisheries management in small island developing states is the need to strengthen national institutional capacity. Characteristically, these countries' fisheries administrations are small and fragile and lack a range of technical expertise. Programmes to strengthen fisheries administration are thus important for improved fisheries management and development practices.

In those island states where fisheries have traditionally been managed by resource-owning groups, the importance of this approach to management should be recognized and ways should be explored in which traditional management practices may be used successfully today to enhance the management of inshore resources.

Aware of their individual physical and economic vulnerability and the importance of fish to the lives of all islanders, small island developing states have formed different regional fishery bodies to coordinate fisheries management and development activities. These bodies have played a notable role in helping the states implement the provisions of the 1982 UN Convention on the Law of the Sea and the recommendations and policies agreed at the 1984 FAO World Conference on Fisheries Management and Development.

Compliance with international conservation and management on the high seas

For centuries, ship operators have found it convenient to fly the flags of certain states. In recent years, the so-called "flags of convenience" have offered low taxes and other benefits to shipowners. Some flag states have not demanded high standards of ship maintenance, and crew standards have been well below the requirements of the recognized "national registers".

The issue of reflagging fishing vessels only became prominent in the mid-1980s, as more vessels operating on the high seas sought to avoid the regulatory systems set up by international agreements to manage fisheries.

In 1992, the International Conference on Responsible Fishing, held in Cancún, Mexico, condemned the practice of reflagging and called for early action. Later, in November 1992 the 105th Session of the FAO Council proposed that an agreement to deter reflagging should be elaborated as a matter of priority.

A series of consultations were held by FAO, starting with a small group of experts in February 1993. It soon became clear that the competent authority for matters relating to the allocation of a flag by a state to a fishing vessel rarely was the same as for fisheries management. Thus, it was held that, in order to deter reflagging of fishing vessels, the authority for flag allocation should be transferred to fisheries managers. Therefore, when the 20th Session of the Committee on Fisheries (COFI) met in March 1993, it established an open-ended working group to develop further the concept of authorizing vessels to fish on the high seas and of tying conditions to be set by fisheries managers to this authorization.

The Agreement to Promote Compliance with International Conservation and Management Measures by Fishing Vessels on the High Seas was adopted by the 27th Session of the FAO Conference in November 1993 and will enter into force when the 25th letter of ratification is deposited with the Director-General of FAO.

The Agreement provides for flag states to take measures as may be necessary to ensure that vessels flying their flags do not engage in any activity that undermines the effectiveness of international conservation and management measures. They must not allow any of their flag vessels to be used for fishing on the high seas without authorization by the appropriate national authorities. Furthermore, the flag states must not grant authorizations to fish on the high seas unless they are satisfied that they are able, taking into account the links that exist between themselves and the vessels concerned, to exercise their responsibilities in the agreement effectively in respect of those fishing vessels. The Agreement also seeks to limit the freedom of vessels that have a bad compliance record from changing flag and obtaining a new authorization to fish on the high seas (unless it can be shown, without any doubt, that there has been a true change of ownership).

The Agreement provides for flag states to inform FAO of the technical details of vessels they authorize to fish and to ensure that there is an adequate flow of information between FAO and all parties. Similarly, FAO should be informed of action taken by flag states against offending vessels.

In general, the Agreement applies to all vessels operating on the high seas. For vessels of less than 24 m, in length, however, there are exemptions from some provisions of the Agreement, but not from the main obligation undertaken by the state to ensure that the vessels concerned do not undermine the effectiveness of international conservation and management measures.


Contents - Previous - Next