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The Americas In Transition: The Contours of Regionalism, by by Gordon Mace, Louis Bélanger, and contributors
4. NAFTA and Mercosur:
Two Competing Models?
During his visit to South America in October 1997, President Bill Clinton categorically stated that the Southern Cone Common Market (Mercosur) could very well survive in a future Free Trade Area of the Americas (FTAA) (“Washington apoya” 1997). Clinton was more than likely feeling the need to reassure Argentina and Brazil about U.S. support for the South American economic bloc—the world’s fourth largest—given the avowed skepticism of the U.S. government toward Mercosur. First attacked in 1991 for its credibility and internal cohesion, Mercosur was subsequently depicted as a threat to hemispheric regionalism. 1 In contrast, the North American Free Trade Agreement (NAFTA) was portrayed as the model of reference for such a project (Feinberg 1997: 66; Watson 1994a: 22, 1994b: 155–156). With time, however, Mercosur has successfully established its international credibility, 2 thereby raising the question of whether the two regional groupings can coexist within a future FTAA.
Despite meetings in Denver (1995), Cartagena (1996), Belo Horizonte (1997), and San José (1998) between trade and economic ministers involved in the FTAA negotiations, the issue is still unresolved. So far, participating nations have agreed on a relatively uncompromising formula “for constructing the FTAA which will build on existing subregional and bilateral arrangements in order to broaden and deepen hemispheric economic integration and to bring the agreements together” (Summit of the Americas Trade Ministerial 1995). However, the formula remains ambiguous in several respects. It is vague about the place of NAFTA and Mercosur in the FTAA, as well as about their roles in the different phases of the negotiation process. Even more important, it is rooted in the still highly controversial notion that subregional integration agreements are initiatives converging toward the creation of the FTAA (Nofal 1995: 215). In fact, nothing is less certain. Although the countries involved in the FTAA negotiations are strongly committed to market liberalization and internal economic reforms, the shape of the hemispheric integration regime has yet to be determined. And even though NAFTA and Mercosur are, generally speaking, compatible with the legal framework of the World Trade Organization (WTO), they do not necessarily endorse the same concept of regional economic integration.
It is therefore vital to conduct an in-depth comparative analysis of NAFTA and Mercosur to assess the extent to which they represent compatible or competing models of economic integration. Few studies have looked directly at the two regional groupings from a comparative perspective. Instead, debate has centered on the conditions likely to favor a rapprochement between the two agreements. In particular, attention has been focused on the workings and stability of the agreements (Di Marco 1995: 19); the asymmetries between trading partners (Petrash 1997; Di Marco 1995: 20); anticipated effects on trade, both static and dynamic (Bouzas 1992: 188–192; Buxedas 1994: 24–26); and the structure of trade and U.S. involvement in the external trade of the countries concerned (Bouzas 1992: 173–188; Di Marco 1995: 18; Foweraker 1996: 159). The few comparative studies that do exist are partial and fragmented. At best, they highlight the differences related to integration objectives (i.e., free trade area versus common market), tariff and nontariff barriers, trade liberalization timetables, and the openness of the agreements to the multilateral system (Buxedas 1994: 23–24; Nofal 1995: 215–216).
But beyond these general observations, one can ask what truly characterizes NAFTA and Mercosur. In reality, if we are to speak of distinct models of regional economic integration, the arrangements must be clearly distinguishable in terms of their formal and material characteristics, their dynamics of integration, and the requirements they impose on member states. Such arrangements will attract other participants or be reproduced by other countries. The Treaty of Rome, for example, became a reference for common markets. In our view, the same can be said of NAFTA for free trade areas. Somewhere in between the two lies another model in the making: Mercosur. As Canada’s former minister of international trade Art Eggleton pointed out at the second meeting of Western Hemisphere trade ministers in Cartagena in March 1996:
Mercosur is a bold undertaking to create a common market in the southern part of our Hemisphere and continues to deepen its obligations towards achieving that objective. NAFTA is a very advanced model of a free trade agreement. These two agreements have fundamentally different objectives and could not be merged without one or the other dispensing with its core objectives. (Eggleton 1996)
This remark, made in anticipation of the creation of the FTAA by 2005, needs to be examined more closely. Although the two arrangements are often said to represent different models for regional economic integration, their fundamental differences remain to be demonstrated.
NAFTA and Mercosur as Distinct Models for Regional Economic Integration
Various criteria can be used to compare regional economic integration agreements. If the goal is simply to distinguish between them in terms of their fields of application, a horizontal approach stressing the sectors and types of intervention covered (goods, services, investments, government procurement, intellectual property) is used. If the goal is to distinguish them in terms of their envisaged levels of integration, institutional characteristics are examined, with a particular accent placed on the relative autonomy of common institutions vis-à-vis the member states—arrangements classified as simple free trade zones, customs unions, common markets, or economic unions (Soldatos 1989; Organisation de coopération et de développement economiques 1993). Finally, to situate regional economic integration agreements in relation to the multilateral framework of trade liberalization, the emphasis is placed on aspects such as their compatibility with the multilateral system, their protectionist features, and their openness to new members (De la Torre and Kelly 1992: 41–49).
Although these criteria are well established in the literature, they tend to neglect other fundamental characteristics of regional economic integration agreements that could eventually influence the choice of an integration model for the Americas. Thus it might be more relevant to examine how member states formulate commitments than to simply determine areas of application, more useful to assess the particular dynamics of each of these regional economic integration models than to ascertain their levels of institutional development, and more revealing to measure the extent to which these agreements constrain economic management by member states than to judge their compatibility with the multilateral system or their degree of openness. In our view, these elements reveal more about the substance and particular rationality of such agreements.
The Scope and Language of the Agreements
The scope and language of economic integration agreements give at the outset a good indication of how they will evolve in the future. The more comprehensive and detailed they are in their scope and normative approach, the less they leave for further negotiations. Conversely, if their reach is defined in broad and general terms, and if the obligations of the parties are simply sketched out, further discussions and negotiations will be needed to make the agreements truly operational.
NAFTA: A comprehensive and detailed agreement with precise undertakings. Anyone reading the text of NAFTA for the first time is immediately struck by its length and extreme detail. At some 700 pages, it is longer than the original General Agreement on Tariffs and Trade (GATT) document of 1947 (Winham and Grant 1995: 26) or the 1958 Treaty of Rome establishing the European Common Market. We know of no other free trade agreement of NAFTA’s magnitude. 3 In fact, very little was excluded from the negotiation of this agreement, which contains some 295 articles and 90 annexes (often themselves supplemented with appendices), as well as explanatory notes. It is indeed exhaustive: In addition to the chapters on trade of goods, which cover access to markets, rules of origin, customs procedures, energy and petrochemical products, agricultural products, and emergency measures, there are sixteen chapters covering such matters as technical barriers to trade, government procurement, investment, cross-border trade in services, telecommunications, financial services, temporary entry for businesspeople, intellectual property rights, dispute settlement in cases of antidumping or countervailing duties, and dispute settlement.
NAFTA is not limited to the actual text of the agreement. At the request of the United States, two parallel agreements were negotiated and signed at the same time, one concerning employment and the other the environment. Although they constitute separate documents, they are considered indissociable at the policy level.
Not only is NAFTA very broad in scope, which accounts in part for its length, it is also extremely precise and comprehensive. In addition to a chapter titled “General Definitions,” each chapter of NAFTA contains one or more articles (where annexes are included) providing definitions specific to the chapter in question. In all, some three hundred definitions are spread throughout the agreement in an effort to dispel any ambiguity as to the meaning of the terms and expressions used. Several of these definitions—including those for “investment” and “cultural industries”—were intended to be truly exhaustive and cover almost an entire page. This same degree of precision is demonstrated in the repeated use of often long and technical annexes and appendices. Of these annexes, special note must be taken of Annex 401, concerning rules of origin. To avoid disputes, it sets out in detail the type of processing a foreign product must undergo to be considered a product of origin. This alone takes up close to 175 pages.
One might justifiably question the need for such efforts at precision and thoroughness. The most plausible explanation is that in the absence of common institutions like those of the European Union—institutions NAFTA members obviously did not want—such precision obviates the need to return to the table to clarify members’ commitments or to settle disputes caused by misinterpretations. In this light, NAFTA is a comprehensive and technical agreement, and its enforcement leaves little leeway for politics.
Mercosur: A simple and evolving agreement with ambitious goals. In contrast to NAFTA, whose detailed legal framework leaves little room for political debate, Mercosur more closely resembles a loose structure that is evolving to meet the needs of its members and that remains in part to be determined (Arocena 1997: 155). Mercosur was built on fragile footing: With its twenty-four articles covering only twelve pages and its five brief annexes, the Treaty of Asunción set out what are at best a simple series of flexible principles establishing relations between member states, an institutional body with limited powers, and minimal rules concerning the liberalization of trade and the establishment of a customs union. This apparent laxity in the legal structure of Mercosur was identified early on as a major obstacle to creating a common market (Gamio 1995: 75; Halperin 1992). Marcelo Halperin observes that the goals of the Treaty of Asunción contrast “with the lack of precepts for the identification of legal sources, the prescriptive value given decisions and rules, and the avenues for future institutional development” (Halperin 1992: 33).
Mercosur has now attained a certain maturity thanks to a series of developments over the past six years. The Brasília (1991), Colonia (1993), and Ouro Prêto (1994) protocols served to define key elements of the agreement left unresolved in 1991, including the final operating mode for its institutional bodies, common tariff nomenclature, the dispute settlement mechanism, and reciprocal investment protection codes. Further decisions by the Common Market Council (CMC), resolutions by the Common Market Group (CMG), and Trade Commission (TC) directives periodically add to the legal foundations of the association while clarifying certain points of law necessary for day-to-day operations. From 1991 to 1997, there were no fewer than 97 decisions (CMC) and 501 resolutions (CMG), not to mention 43 directives on the development and implementation of a common external tariff issued by the Trade Commission since 1995 (Laird 1997: 5, note 8). As a result, the scope of the agreement has broadened over time to include customs procedures, rules of origin, and rules for dispute settlement, as well as emergency measures, investments, energy, and agriculture.
Despite the progress of recent years, Mercosur has yet to address key issues such as intellectual property rights, trade in services, fair competition and consumer protection standards, adjustment of the customs practices of national institutions, the effective coordination of exchange policies, government procurement, and the free movement of workers. NAFTA covers many of these sectors in detail, whereas Mercosur has barely touched on them.
The same can be said regarding the precision of the standards and rules governing relations between members. The difference between NAFTA and Mercosur is significant: The language of the latter is more ambiguous and there are fewer definitions.
Mercosur also differs substantially from NAFTA both in its legal corpus and in the clear definition of terms. As a result, one would expect Mercosur institutions, which appear to be more developed than those of their North American counterpart, to step in to fill the apparent legal vacuum in a number of sectors still under negotiation. The complexity of the Mercosur organization chart belies the fact that neither the CMC, the CMG, the TC, nor any of the other bodies 4 constitute supranational entities. In this regard, the relative success Mercosur has had in each of its development phases is no guarantor of its future. Even though its members were able to make do with the rule of consensus in the negative phases of integration—the removal of tariff and nontariff barriers—this does not mean that the positive stages, which involve a greater degree of policy harmonization and coordination, will be as successful (Gamio 1995; Laird 1997: 5). The adoption of a common external tariff (CET) was a difficult hurdle. With a number of disputes still unsettled, notably between Brazil and Argentina, the creation of a true common market will probably prove more difficult. 5
The Dynamics of Integration
To the extent that agreements such as NAFTA and Mercosur involve fundamental changes in the economic relations of their member states, it is essential to understand what causes such changes. As we shall see, NAFTA differs fundamentally from Mercosur in this respect.
NAFTA: A legal dynamic. For an agreement as complex as NAFTA, its implementation has been remarkably smooth to date, as if everything had happened automatically without political intervention. For example, January 1, 1996, ushered in a new phase of the agreement with the liberalization of goods traded among NAFTA partners and the reduction of customs duties still applicable on products of origin (a 20 percent, 10 percent, or 6.6 percent reduction, depending on the country and the product). On the same day, provisions of Article 303 concerning the elimination of existing drawback and duty deferral programs went into effect between Canada and the United States. These provisions provide for the elimination of existing programs and their replacement by new measures allowing manufacturers to collect reimbursements, a refund equal to the lesser of the duties paid on imported inputs or the duties assessed on exports of finished products. January 1, 1996, was also the deadline for the inclusion in Annex I of existing nonconforming measures maintained by a province or state concerning investments (Chapter 11) and services (Chapter 12). As these few examples show, NAFTA appears to be proceeding systematically and inexorably along its set course.
The only possible exception to the process is provided in Article 801, which allows members, during the transition period only, to counteract serious damage the agreement’s lowered trade barriers cause to their producers by suspending duty reductions for a specified period or by reinstating most-favored-nation rates. 6 These measures cannot extend beyond three years, nor can they remain in effect after the transition period, except by the consent of the member whose product is affected by them. Surprisingly, especially in the wake of the Mexican peso crisis, the bilateral emergency measures authorized in Article 801 have hardly been used to date. Whether the reason is that the conditions are too onerous or that recourse to such measures would discourage investors, they appear unlikely to affect the automatic nature of the NAFTA implementation process. After the transition period, no measures aside from tariff commitments may be taken to counter sudden increases resulting from the application of the agreement except by the mutual consent of interested parties.
To the extent that political decisions are requested for the implementation of the agreement, the Free Trade Commission could have been expected to play an increasing role in the development of NAFTA. Under Article 2001 of the agreement, the commission supervises NAFTA implementation, oversees its further development, resolves disputes that may arise regarding its interpretation or application, supervises the work of all committees and working groups, and considers any other matter that may affect the operation of the agreement. However, outside of Chapter 20, there is barely any reference to the commission. Furthermore, the commission is requested to meet “at least once a year in regular session” (Article 2001.4), which gives a good idea of the role it is expected to play. Not surprisingly, the commission, outside of its judicial role, has not shown any great desire to become actively involved in the further development of NAFTA.
An important aspect to consider in the dynamics of economic integration is the procedure for dispute settlement. Setting aside the mechanisms contained in Chapters 11 (arbitration in areas of investment) and 13 (special provisions concerning financial services), NAFTA dispute settlement is essentially covered in Chapters 19 and 20. Chapter 19, reproducing Chapter 19 of the Free Trade Agreement (FTA), provides for the replacement of judicial review by national courts of final determinations in countervailing duty or antidumping duty investigations with binding binational panel reviews. Before the introduction of the FTA and, later, NAFTA, appeals were heard before national courts, with final rulings by one or another of the governments. Under NAFTA, Article 1904 defines the mechanism by which special bilateral panels take the place of the judicial review process within these jurisdictions, thereby ensuring objective and impartial rulings by the administrative bodies concerned.
Chapter 20, reproducing with a few modifications Chapter 18 of the FTA, contains provisions that aim to avoid or settle disputes over interpretation or enforcement of the agreement. Under Article 2008, should a dispute involving NAFTA remain unresolved after talks over a prescribed period, one of the members may request that it be referred to a special panel whose rulings are nonbinding. This procedure is very similar to dispute settlement within the WTO.
From January 1, 1989, to July 1, 1997, eighty-eight cases were settled through the FTA and NAFTA dispute settlement system. The great majority, eighty-one in all, concerned antidumping and countervailing duties. Of these, nine were still under review on July 1, 1997. Of the seventy-two resolved cases on antidumping and countervailing duties, the majority came under FTA jurisdiction; twenty-two were governed by NAFTA provisions. The United States also requested that three extraordinary challenge committees be formed under FTA Article 1904.13 to revise panel decisions. For cases involving the interpretation and enforcement of FTA and NAFTA, five special arbitration panels were formed under the provisions of Chapter 18 of FTA, and two more were formed under Chapter 20 of NAFTA, for a total of seven.
Although they are slightly less frequently used than the corresponding provisions of the FTA, there is no doubt that the provisions of Chapter 19 of NAFTA still play an important role in the overall economy of the agreement. Their relative success may be explained by the fact that they are limited in their objective to making sure that national antidumping and countervailing duties legislations have been correctly applied and by the fact that they have offered in practice a much faster relief than the appeal process of the members. Chapter 19 of NAFTA, in that respect, is typical of the technical and legalist approach of the agreement. By contrast, the limited number of decisions in cases involving the interpretation and application of NAFTA (Chapter 20) may reflect the fact that these cases are somewhat more political in nature and follow a judicial process that is closer to the dispute settlement mechanism of the World Trade Organization.
Mercosur: A political dynamic. Mercosur implementation cannot be evaluated strictly on the basis of the formal time frame contained in the Treaty of Asunción and related agreements. An important aspect of the agreement lies in the ongoing process of adjustment, in which a number of parameters develop gradually through direct negotiations. Another factor that must be taken into account is the gap between the stated objectives and the situation prevailing in member countries, which must maintain a balance between commitments to their partners and the need to bring about economic changes without causing undue social unrest. For the four countries involved—Argentina, Brazil, Uruguay, and Paraguay—this dilemma represents an integral part of progress toward assuming their place on the global scene and colors the process on several levels: It paves the way for a flexible system, a less stringent application of restrictions, and relatively frequent recourse to safeguard measures and exceptions.
One of the main ways that Mercosur differs from NAFTA is in its sequence of integration. It defines automatic criteria for applying certain provisions of the agreement but leaves other issues to future talks. The introduction of a trade liberalization program and the common external tariff typifies the situation that prevails within Mercosur. Defined as cornerstones of the Treaty of Asunción, these two mechanisms have not proceeded according to the same timetable. The first was drawn up back in 1991 as an automatic, linear program meant to completely eliminate tariff and nontariff barriers within four years (Treaty of Asunción, Annex I), whereas the second was the subject of talks right up to the close of the transition period. In addition, although the decisions, resolutions, and directives adopted by Mercosur institutions were ratified by member parliaments, they were not immediately applicable by member states. Whereas NAFTA members ratified their agreement as a whole and even adopted implementation measures prior to its effective date, Mercosur members must integrate various measures progressively approved at the regional level according to a graduated process. Such delays occasionally complicate organization operations and relations between partners. 7
Furthermore, exceptions appear to be more prevalent in Mercosur than in NAFTA. Even though most exceptions apply only temporarily and have a limited impact on intraregional trade, 8 for certain countries they affect a number of product categories, 9 including key economic sectors such as the textile industry, the steel industry, agriculture, and the lumber industry. By virtue of the régimen de adecuación, areas deemed sensitive for national economies are temporarily excluded from the free trade area to allow sectoral industries to adapt to the new conditions of the subregional market. Deadlines for the total elimination of tariff barriers vary from five years (Argentina, Brazil) to six years (Uruguay, Paraguay). However, the convergence schema includes neither sugar nor automobiles, two sectors on which member states have not come to an agreement. There are also exceptions to the common tariff nomenclature: Along with those products for which tariffs will be gradually adjusted, 10 members have the right to exclude up to 300 products from the CET. 11
On a more general level, these exceptions reveal a commercial approach that allows authorities considerable leeway in the application of selective protectionist measures. Roberto Bouzas explains that sectoral pressures and the discretionary power of governments result in “the use of ad hoc means of protection such as anti-dumping duties, nontariff barriers, recourse to safeguard clauses, 12 and/or recourse to orderly marketing arrangements (OMAs) by the private sector” (Bouzas 1996: 69). Such practices were widespread between 1991 and 1994 in the paper, steel, and textile industries. Several such measures—some unilateral—caused major conflicts between member nations, at times jeopardizing the process of integration. This was the case in 1992, when Argentina decided to apply a statistical tax on imports at the same time that Brazil was buying agricultural by-products in extraregional markets (Fernández 1997: 7). Certain initiatives contravened Mercosur legal provisions, as was the case for Measure 1569 passed by the Brazilian government in March 1997, which limited the financing of imports. 13 Though its legitimacy cannot be argued, the measure has no grounding in the exceptions provided for within the common market (Instituto de Relaciones Europeo-Latinoamericanas 1997: 7).
Ultimately, however, it is the manner in which conflict has been reduced more than arbitrary recourse to protectionist measures that characterizes Mercosur. Formally, at least, members have access to a dispute settlement mechanism similar to the type found in free trade zones. The procedure defined by the Brasília and Ouro Prêto protocols is based on an arbitration approach inspired by WTO provisions (Haines-Ferrari 1998). Parties are first invited to negotiate directly. If they fail to negotiate a solution, their case is submitted to a consultative body 14 charged with making recommendations. In the absence of consensus, an ad hoc tribunal of international experts decides the issue. If the party or parties refuse to accept the decision rendered, the tribunal may initiate compulsory enforcement procedures under which the aggrieved party is authorized to respond with appropriate measures of reprisal.
Given the objectives of the member states, these measures appear modest, falling well short of comparable mechanisms within the European Union, which are backed by a veritable court of international justice. In some ways, these measures are even more limited than NAFTA mechanisms, which provide for distinct procedures and sanctions depending on whether disputes involve antidumping and countervailing duties or more general issues. But the fundamental distinction lies in the practices of the different states. Until now, conflicts within Mercosur have been resolved primarily through direct talks involving leaders from each country rather than through the use of a dispute settlement mechanism (Haines-Ferrari 1998: 284). As indicated in a WTO working paper, “by the beginning of 1997 only one dispute had been sent to a specially constituted tribunal or expert panel under the Brasília Protocol, and this was settled bilaterally (i.e. ‘out of court’) in April 1997” (Laird 1997: 5).
In short, to judge the current Mercosur dynamic, it is essential to take into account the organization’s general approach regarding the type of relations deemed appropriate between partners. Respect for standards and established deadlines seems to be sacrificed on occasion for the sake of national interest and short-term constraints, as a result modifying the relationship with the legal order and Mercosur standards. Mercosur, in its various phases of implementation, leaves room for backtracking and negotiation (Fernández 1997: 7). Sanction and enforcement of the law spring more from the socialization process among member states than from existing institutional mechanisms.
The Degree of Constraint on State Intervention in Economic Affairs
Ultimately, the success of economic integration agreements such as NAFTA and Mercosur depends to a large extent on the existence of a shared view among their members of the role of the state in economic affairs. From this point of view, NAFTA and Mercosur represent two different conceptions, one much more constraining than the other.
NAFTA: A constraining free trade zone. A closer look at the contents of the NAFTA agreement reveals a striking level of state disengagement. By “state disengagement” we mean the state’s gradual withdrawal from areas of intervention that have a distorting effect on production or trade. A number of authors have remarked upon NAFTA requirements in this regard, particularly in relation to the accession of Mexico. Gustavo del Castillo V. has described the requirements of free trade for Mexico in the following terms:
It is important to note that liberalization was not just a question of removing tariffs, but also of eliminating the econo-political system that had imposed them. These changes have implied three things: redefinition of the state as a social actor; application of self-imposed and exogenously imposed limits on the intervention of the state in economic affairs; and the crafting of the necessary economic and social conditions for putting the redefinition into practice. (Del Castillo V. 1995: 113, 115)
In a similar vein, Canadian observer Ann Weston has pointed out that by joining NAFTA, Mexico “is agreeing to abide by the same rules as Canada and the U.S., severely limiting the government’s freedom to intervene in the economy” (Weston 1995: 145, 150). And more generally, Delal Baer has stated: “By definition, NAFTA embodies a set of trinational rules governing economic behavior. Acceptance of these rules has required fundamental modifications of traditional notions of sovereignty” (Baer 1994: 183, 188). However, these claims are not backed by any articulate demonstration, which makes it difficult to develop a clear idea of NAFTA’s significance as a model for economic integration from this perspective.
To provide a better idea of NAFTA requirements in this area, we will successively outline the disciplines governing state intervention with regard to goods, services, public markets, and investment.
Goods. The state’s ability to intervene in the circulation of goods is directly affected by several NAFTA requirements. Apart from the gradual elimination of customs duties on products of origin, the basic requirements, which have been taken directly from the 1947 GATT agreement, concern the equal treatment of foreign and domestic products (national treatment, Article 301) and the ban on quantitative restrictions (Article 309). The only exceptions to these requirements are those explicitly listed in Annex 301.3, which are very limited in scope. 15
But NAFTA requirements regarding the circulation of goods are not just limited to these commitments. Although NAFTA, as a free trade agreement, leaves member states free to set customs duties for third countries as they see fit, members cannot act in such a way as to cause intrazone distortions in trade and investment. Under the terms of Article 303, both the drawback and duty deferral programs governing foreign trade zones, temporary importations under bond, and “maquiladoras” must be altered so that they no longer apply to products of origin by the end of the transition period. There are very few exceptions to these measures. As mentioned previously, the implementation date for changes in Canada and the United States was January 1, 1996. Mexico must follow suit by January 1, 2001.
A number of other NAFTA provisions clearly reveal the orientation of the agreement with respect to state interventions likely to cause trade distortions. These include the ban on export taxes if products intended for domestic consumption are not equally taxed (Article 314), the ban on agricultural export subsidies between Canada and the United States (Article 702[1]), and the special provisions on these subsidies that apply between Mexico and the other parties (Article 705).
Services. Three chapters in NAFTA deal specifically with services: Chapter 12 covers measures relative to cross-border trade in all but financial, air, social, and maritime services; Chapter 13 specifies member commitments with regard to telecommunications; and Chapter 14 deals exclusively with financial services. As a whole, the legal framework for services in NAFTA appears to be more precise, more transparent, and more restrictive than that of either the FTA or GATT.
Chapter 12 applies to all measures related to (1) the production, distribution, marketing, sale, or delivery of services; (2) the purchase, payment, or use of services; (3) the access and use of distribution and transportation systems in connection with the provision of a service; (4) the presence of third-party service providers on member state territory; and (5) the provision of a bond or any other form of financial security as a condition for the provision of a service. The main commitments by members cover the granting of national treatment and most-favored-nation status, including the obligation, when appropriate, to accord the better of the two. The parties have renounced the right to require service providers to establish or maintain representative offices or other forms of business or to be residents in order to provide a service (Article 1205). Finally, NAFTA contains a number of provisions regarding professional recognition and the right to practice that are intended to help avoid unnecessary trade barriers (Article 1210).
Chapter 12 of NAFTA is based on the principle that all services are covered except for reservations and exceptions. The majority of reservations in the services field are found in Annex I (existing nonconforming measures), with the Mexican list by far the longest (thirty measures), followed by the Canadian list (thirteen measures) and the U.S. list (seven measures). The reservations in Annex II (areas of reserved activity) are much fewer in number: seven for Canada, ten for Mexico, and five for the United States. Last, Appendix V, which covers quantitative restrictions, lists six measures for Canada, three for Mexico, and five for the United States.
Chapter 13, which covers telecommunications, sets the common rules for computer and telecommunications service providers and users in North America. The main obligations are the following: Conditions of access to public networks and services must be reasonable and nondiscriminatory; no conditions may be imposed on access to and use of public networks other than those required to safeguard the public service responsibilities of network providers or to protect networks’ technical integrity; all licensing procedures must be open and nondiscriminatory; and member states must see to it that service providers that are granted a monopoly on telecommunications services not take advantage of the situation to implement anticompetitive business practices. All of these requirements are clearly intended to keep member states away from any intervention that distorts access to their basic communications networks. Not surprisingly, as a number of observers have pointed out, most of the adjustments to meet these requirements have been made by Mexico (Lipsey, Schwanen, and Wonnacott 1994: 80).
The same holds true for Chapter 14, which addresses financial services. One of the primary Canadian and U.S. goals during NAFTA negotiations was to obtain access to the Mexican financial market. Now banks, insurance companies, and brokerage firms can set up wholly owned subsidiaries in Mexico and acquire companies there (Appleton 1994: 110–112). Another major goal was to go beyond the ad-hoc U.S. and Canadian commitments contained in the FTA to establish an all-encompassing, comprehensive regime with market access based on national treatment, most-favored-nation status, the consumer’s right to purchase out-of-country financial services, and the right to market access through the establishment of sales offices. NAFTA effectively contains specific operational principles covering these areas.
Even more interesting is Article 1403, which establishes what Jon R. Johnson calls “the prospective principles” (Johnson 1994: 360–361) of the envisaged regime, that is, the basic philosophy of NAFTA on this issue. In this article, NAFTA members recognize that trade is encouraged when investors can choose the legal form of their investments, when financial institutions can establish subsidiaries where they wish, and when no restrictive conditions prevent them from offering a range of financial services through distinct financial institutions. Implementing these prospective principles will involve considerable state disengagement from the financial sector.
Investments. NAFTA Chapter 11, on investment, borrows extensively from the FTA and, through it, from U.S. bilateral agreements on investment (Johnson 1994: 277–278). However, it goes even further by increasing the range of obligations, tightening the links between them, and providing for a conflict resolution mechanism intended to settle disputes between investors and NAFTA member states. Upon examination, it quickly becomes evident that this chapter lays out a comprehensive set of standards that has no equivalent within the WTO system.
The regime covers intra-NAFTA investments by investors from NAFTA countries. The definition of “investment” includes all forms of property or ownership, including minority ownership, portfolio investments, and fixed assets. Each member country must treat NAFTA investors no less favorably than they treat domestic or third-country investors (national treatment or most-favored-nation status).
Apart from these obligations of nondiscrimination, Chapter 11 also includes commitments that limit even further member countries’ leeway with regard to foreign investment. No party can impose performance requirements for investments on its territory—including those from third country investors—whether for set export levels, minimum national content, preference for domestic producers, a balance in technology transfer, or the obligation to supply a given product (Article 1106). Each party must also allow free and unhindered movement of all investment-related transfers (profits, loan repayments, liquidations, etc.); complementary to this commitment, no government can force repatriation of capital (Article 1109). Last, no NAFTA country can expropriate an investment belonging to an investor from another member state unless the public interest is at stake. Any such expropriation must be nondiscriminatory, follow normal legal standards, and include compensation equivalent to fair market value for the investment. Several observers have perceived this last condition as a rejection of the Calvo doctrine Mexico had subscribed to prior to joining NAFTA (Daby 1994: 1147).
In some respects, the most important NAFTA innovation in the investment field was the establishment of the detailed dispute resolution mechanism designed to take effect when host countries violate NAFTA investment rules. In such cases, NAFTA investors can either claim damages with interest through a binding arbitration procedure between the investor and the state or seek redress through the courts in the host country. An important point to emphasize is that member states agree in advance to follow up on investor requests for arbitration to the extent that the procedure provided for is followed (Article 1122).
As in Chapter 12, the chapter on investment allows member states to formulate reservations and exceptions. In fact, a substantial number of the reservations contained in Annexes I and II of NAFTA have to do with investment. As for Annex III, it focuses primarily on Mexican exceptions, that is, the right to exclude all foreign investment in the sectors identified (energy, communications, railways). Overall, however, these reservations are sufficiently limited and visible to leave Chapter 11 with considerable scope.
NAFTA investment provisions have drawn severe criticism from a number of observers who see them as a dangerous attack on the sovereignty and economic management capacity of member states. Such is the position of Thea Lee of the Economic Policy Institute in Washington, D.C., who has described NAFTA investment rules as follows:
The text is designed to foster corporate mobility, to make it as easy for a U.S. company to operate in Mataramos, Mexico, as in Milwaukee. In the process, the pact invades territory traditionally reserved for domestic policy in order to promote and protect the interests of investors. All three countries would sign away important tools of economic policy. (Lee 1993: 70, 75)
The customary response to comments like these is that if states wish to attract foreign investment, they must avoid any unnecessary restrictions on investor activity. Yet in a way, this very answer confirms the chapter’s essential objective: to restrict member state interventions intended to control foreign investment.
Government procurement. Chapter 10 of NAFTA, on government procurement, considerably extends existing obligations contained in the WTO’s Agreement on Government Procurement and the FTA. Among other things, it broadens the scope of liberalized procurement practices with a view to including construction services and markets, a major advance in international agreements on government procurement. In addition to requirements for national treatment and most-favored-nation status, NAFTA imposes procedural requirements on covered markets to foster openness and predictability through the establishment of rules governing technical specifications, supplier qualifications, the setting of deadlines, and other aspects of government contracting mechanisms. Furthermore, each member country is required to set up a claims system if it has not already done so to allow suppliers to contest contract procedures and awards. All of these requirements once again clearly illustrate the extent to which NAFTA imposes extensive state disengagement in the economic sphere.
At the end of his book on NAFTA, Barry Appleton writes: “Throughout its provisions, the NAFTA displays a classical liberal non-interventionist view on what constitutes an appropriate role for government” (Appleton 1994: 205). Referring to S. M. Lipset, he goes on to suggest that this view is in keeping with the dominant U.S. political culture, which is fundamentally antistatist, individualistic, and classically liberal, as opposed to Canada’s and Mexico’s more statist and communitarian tradition. This in turn leads him to conclude: “NAFTA will mark the transformation of the predominantly American view into the North American view” (Appleton 1994: 207). If this is true for North America, chances are that it is also true for the hemisphere.
This conclusion suggests a further question: whether the agreement, despite its apparent openness to new members (Article 2204), is in fact closed. For the majority of observers, the basic content of NAFTA is nonnegotiable to the extent that it conveys a relatively homogenous vision of the state’s role in managing the economy. NAFTA requirements in that respect are such that it is doubtful whether the states of Mercosur could join NAFTA without being forced to make internal changes even more significant than those they have undertaken thus far. Because the great majority of Latin American states are even further away from being in a position to join NAFTA, the possibility of NAFTA’s becoming the model for the FTAA can only be envisaged in a long-term perspective.
Mercosur: A flexible common market. The exact degree of government disengagement in the Southern Cone remains difficult to determine given that commitments have yet to be defined in a number of sectors. This is the case for services, government procurement, and intellectual property, areas that are incompletely dealt with. However, in areas already consolidated within Mercosur, the level of constraint imposed on member states appears to be lower than that of NAFTA.
Goods. The creation of Mercosur has had important consequences for the commercial activities of member states. Not only did member countries by and large respect the 1991–1994 program of trade liberalization, but they also managed to agree on the thorny issue of a common external tariff, which covered more than 85 percent of tariff positions in January 1995. 16 These two aspects of the integration program have substantially limited member countries’ maneuvering room in trade policy.
Aside from these changes, which have been widely discussed (Bouzas 1996; Nofal 1995), a more detailed account of the prescriptive provisions governing market access is called for. Once again, the Mercosur regime appears to offer greater latitude to members in formulating their economic and trade policies. In addition to sectors that are excluded from the free trade area 17 and exceptions allowed for key industries in certain countries, 18 many uncertainties remain about the scope of regulations aimed at reducing distortions and restrictive trade practices. National treatment is a good example: In Mercosur it applies to tax regulations but not to national laws and regulations applying to trade in general, as is the case with NAFTA (Treaty of Asunción, Article 7).
The matter of national treatment falls within the larger question of restrictions on imports and exports inside the free trade area. Mercosur countries committed early on to eliminating completely nontariff barriers, 19 a goal that has been only partially met. One difficulty is the success of the trade liberalization program, which produced pressure at the national level to erect nontariff barriers (Bouzas 1996: 71). Another difficulty lies in the identification of trade restrictions that hide under a number of guises and are difficult to control because of the complex questions they raise. The problem is also political and calls into question the will of the respective governments to abolish such restrictive measures. The creation of a Nontariff Barrier Committee (CMG, 123/94), mandated to analyze the various national approaches, is a step in the right direction but may not be enough.
Other important measures that could influence the trade of goods include provisions concerning foreign trade zones, export processing zones, and special customs zones. Mercosur does not specifically prohibit them but allows countries faced with unforeseen increases in imports that harm or threaten local production to use safeguard measures as defined in GATT and the WTO. Of final note, the Manaus and Tierra del Fuego customs zones created because of their geographical location may continue to operate under present conditions until the year 2013.
Investment. Investment is one of the rare areas where NAFTA and Mercosur have a great number of points in common. The definition of investment in the Protocol of Colonia (CMC, 11/93: Article 1) is in almost every respect identical to that found in NAFTA. The parties also agreed to confer national treatment and most-favored-nation status on each other (CMC, 11/93: Article 3). In addition, Mercosur allows unrestricted repatriation of profits, dividends, and the whole of investment realizations. The same applies to bans on expropriation or any similar act, which are covered on the same basis as in NAFTA (CMC, 11/93: Article 9). With specific regard to the dispute settlement mechanism, Mercosur also defines two areas of application for arbitration, one concerning litigation between states (CMC, 11/93: Article 8) and the other between investor and state (CMC, 11/93: Article 9).
A comparison of these formal elements must allow for investment practices and opting-out agreements that limit the scope of the above measures. In Brazil, for example, national treatment and most-favored-nation status are restricted by certain constitutional clauses stipulating, among other things, that certain investments are reserved for enterprises with “national capital” (C. Robinson 1995: 31). To this add sectoral restrictions in mining, hydroelectricity, health care, rural property, telecommunications, banking, insurance, social security, and coasting trade. Argentina also imposes limits, specifically on real estate investment along borders, air transport, shipbuilding, nuclear power plants, uranium mining, insurance, and fisheries (C. Robinson 1995: 31). Even though many of these restrictions will eventually be phased out, they remain, for now, major restraints that hamper the integration of the four countries’ economies.
Services and government procurement. In contrast to NAFTA, these two sectors have received only superficial attention in Mercosur and are the subject of exploratory talks on future regulations. In the service sector, the four member countries have yet to negotiate the liberalization of financial and telecommunications services. All they have done is partially open up land-based and maritime transport along with transportation of hazardous goods and multimodal transport (CMC, 14/94, 15/94). Brazilian and Argentine legislation in these areas differ: In Brazil the service sector continues to be subject to tremendous constitutional restraints, whereas in Argentina it has been increasingly deregulated in recent years. The Brazilian system specifically restricts the banking industry through provisions of the 1988 constitution limiting the number of foreign institutions that may operate in the country (Bouzas 1997: 80). In the insurance industry, state-owned monopolies in reinsurance have insulated Brazil from international competition (Bouzas 1997: 80).
In the area of government procurement, the situation remains largely unchanged. A technical committee was set up in December 1994 to make recommendations on government procurement (Organization of American States 1997b: 95, 120). In 1988 the presidents of the Mercosur countries met in Ushuaia, where Argentina defined general guidelines for the establishment of a government procurement regime, but no concrete measures have yet been implemented. Once again, Brazilian legislation in this area differs from that adopted by the other partners, particularly Argentina, which applies a national treatment clause in government when calling for government tenders. Brazil’s specificity in the area of procurement is linked to the same constitutional provision mentioned earlier. As the economist Roberto Bouzas has pointed out:
In Brazil preferences for domestic suppliers prevail. Article 171 of the Constitution authorizes preferential treatment for Brazilian firms of “national” capital. Executive Order No. 2300 regulating state procurement establishes that domestic producers will have preference whenever price, quality and time conditions are comparable to those of foreign suppliers. (Bouzas 1997: 81)
This last point concerning the distinctive features of the Brazilian economic system explains why Mercosur is and must be a flexible agreement. Mercosur is a work in progress and does not claim to offer a concrete vision of the government’s role in the economy as does NAFTA. Such relative flexibility allows the coexistence of somewhat different political and economic systems. Without such flexibility, it is unlikely that Brazil and Argentina would have ever agreed upon a joint cooperative project. It is equally unlikely that Mercosur would have attracted countries such as Chile and Bolivia, which have signed bilateral trade agreements with the group.
Conclusion: NAFTA and Mercosur, Two Competing Models?
Comparative analysis shows that NAFTA and Mercosur are different enough to be considered distinct models for integration. Our comparison centers on two broad concepts that best characterize the regional associations. In our view, NAFTA represents a mostly contractual approach based on legal dynamics, and Mercosur represents a participatory approach based on political dynamics. The contractual approach focuses primarily on rules that place rigid controls on the behavior of members. Goals for cooperation, the rights and obligations of the contracting parties, and contract enforcement mechanisms are strictly defined and leave little leeway for negotiation, bargaining, or altering the stated goals. This type of arrangement essentially works by restricting government powers and is usually effective provided the parties respect their commitments. The participatory approach, though not radically different, focuses on a process of political cooperation working within broad goals and flexible guidelines. In this type of cooperation, restrictions on government are often offset by efforts at compromise in the interest of all the parties. The participatory approach can be used for more than achieving formal goals of cooperation provided it defines a space of socialization for the players involved. Institutions are harnessed and restructured to meet the evolving needs of players that have to adapt to a new international environment.
Beyond the purely formal differences that such a comparison highlights, the existence of two fundamental approaches to integration is revealed. NAFTA and Mercosur are options between which regional players will have to choose. They define restraints on government management and state sovereignty, generate perceptions, bring values into focus, and ultimately help define the regional economic entity. More than a customs union or a future common market, Mercosur provides a political voice for countries with economies in transition, whose governments are still fragile and whose international legitimacy is still to be constructed. NAFTA, in contrast, reflects the concerns and the level of development of its two main architects, the United States and Canada. More rigid in the standards and restrictions it imposes on member states, NAFTA tends to favor a certain legalism in relations between member states, thereby limiting its political expression to the express contents of the contracted agreement.
In this context, the remark by Art Eggleton that the two agreements cannot be combined without sacrificing their fundamental objectives rings true. NAFTA and Mercosur will probably never become one. The question is not so much which agreement will supplant the other, but rather how they will influence the creation of the FTAA and the overall structure of economic cooperation on the continents. In this light, NAFTA and Mercosur are clearly opposing integration approaches.
This is particularly apparent when the logic of the models is transposed to hemispheric free trade negotiation. The positions put forward by the protagonists at the conference of trade and economic ministers in Belo Horizonte in May 1997 seem to point in that direction. From the outset, the U.S. text was “‘more precise’ and contained ‘more deadlines’ that could be ‘monitored and judged’” than the Mercosur draft (“U.S. Drops” 1997). The content of the different proposals would serve to highlight a number of areas of dispute. For instance, the United States supported simultaneous negotiations on all sectors, whereas Mercosur proposed a three-phase process starting with business facilitation (1998–1999), followed by the harmonization of technical standards (2001–2002), and, finally, the lowering of trade barriers (2003–2005) (“Matrix Comparing” 1997: 8–12). Differences also arose on the more basic questions of the level of commitment and the legal scope of the proposed FTAA. U.S. intentions in this respect were clear: “high levels of disciplines using as a base the WTO agreements, and even better, incorporating the best appropriate disciplines of existing sub-regional agreements” (“Matrix Comparing” 1997: 8).
The United States also insisted that all areas of economic activity be put on the table, including new sectors such as services, intellectual property rights, investments, and government procurement. The Mercosur delegation took a different line: The new sectors could be included “only if their direct relation to trade is demonstrated and their treatment has matured sufficiently at the multilateral level” (“Matrix Comparing” 1997: 9). Although some of these issues were settled at the trade ministerial in San José in 1998, two competing views still prevail. Clearly, the United States is pushing for a hemispheric integration model that is based on the highest common denominator and would essentially include the rights and obligations conferred by NAFTA. In the face of this expansionist logic, Mercosur has offered a zone of resistance that has, until now, effectively delayed deadlines, lessened the scope of commitments, fostered local particularities, and politicized certain issues on which disagreement persists.
The future FTAA will no doubt bear more resemblance to the contractual model favored by the United States, but not without a nod to the interests of influential Latin American states such as Brazil and Argentina. This was made clear during President Clinton’s recent visit to South America, when Brazil president Fernando Henrique Cardoso declared that the FTAA should represent “a space for our individual and legitimate interests” (“Brasil defendió” 1997). It remains to be seen how far the United States is prepared to go to seek compromise with Latin America. Clinton’s difficulties in obtaining fast-track approval from Congress greatly limit the United States’ ability to impose its vision of regional economic integration on the continents.
Endnotes
Note 1: The attacks on Mercosur originated in the U.S. State Department and were subsequently taken up by the U.S. trade representative Charlene Barshefsky and the office of Secretary of State Madeleine Albright. Implicit to the U.S. offensive was the belief that progress by Mercosur was harmful to the FTAA (“Clinton-Mercosur” 1997). There was even criticism from World Bank representatives. Guillermo Perry, the organization’s chief economist, highlighted Mercosur weaknesses in coordinating the macroeconomic policies of member states (“El Banco Mundial” 1997), and Allan Winters accused Mercosur of protectionism and causing trade diversion (World Bank 1997). On this subject, see also Yeats (1997). Back.
Note 2: Various attempts to sign economic cooperation agreements with the bloc by Latin American countries such as Chile and Bolivia, as well as by the European Union and even Canada, bear out Mercosur’s success in this regard. Speaking in Asunción, the director-general of the WTO described the bloc as “one of the most dynamic and imaginative initiatives on the world stage today” (Ruggiero 1997; see also Instituto de Relationes Europeo-Latinoamericanas 1997: 1). Back.
Note 3: If not the Canada-Chile Free Trade Agreement, which is essentially a replica of NAFTA negotiated in the perspective of Chile’s eventual adhesion to the North American agreement. Back.
Note 4: Joint Parliamentary Committee, Economic and Social Advisory Forum, and Administrative Secretariat. Back.
Note 5: Since January 1997, for example, no fewer than four disputes have erupted between Argentina and Brazil. Argentina is contesting the Brazilian government’s subsidized investments in the Nordeste automobile sector, controls on imported foodstuffs, and restrictions on imports following deterioration in Brazil’s balance of trade. Brazil is unhappy with Argentina, where the Senate recently approved restrictions on refined sugar imports from Brazil (“Campbell” 1997). Back.
Note 6: In the case of Canada and the United States, the bilateral emergency measures that apply are the provisions of Article 1101 of the Canada-U.S. Free Trade Agreement (NAFTA Appendix 801.1). Article 1101 of the FTA has largely the same effect, the main differences being at the level of conditions and limits. Back.
Note 7: In a working paper of the WTO, Sam Laird mentioned that “[l]egislative ratification and national implementation sometimes lag behind the commonly agreed measures.” Argentina and Brazil would have apparently ratified around 50 percent of the current decisions, resolutions, and directives (Laird 1997: 5, note 8). Back.
Note 8: A recent study by the Inter-American Development Bank reveals that the weight of these exceptions on intraregional imports stood at 13.3 percent for Uruguay, 6.8 percent for Argentina, 3.1 percent for Paraguay and 0.2 percent for Brazil. As cited in Arocena (1997: 157). Back.
Note 9: The number of categories is 1,018 for Uruguay, 427 for Paraguay, 221 for Argentina, and only 29 for Brazil. Back.
Note 10: Tariffs on capital goods and computer and telecommunications products will gradually adjust to the CET. A 14 percent tariff on capital goods will come into effect in 2001 for Argentina and Brazil, and in 2006 for Paraguay and Uruguay (CMC, 7/94: Section 3a). As for computer and telecommunications products, national tariffs will be gradually adjusted to reach 16 percent by 2006 (CMC, 7/94: Section 3b). Back.
Note 11: The Paraguayan list includes 399 products. Back.
Note 12: With regard to safeguard clauses, member countries that met at the Fortaleza summit in December 1996 agreed to the creation of a regional safeguard clause plan, the components of which will be determined sometime in the future. In the meantime, member states can temporarily impose import restrictions on the basis of safeguard clauses in their respective national legislations. Back.
Note 13: Officially, provisional measure 1569 is intended to contain Brazil’s increasingly negative balance of trade and, according to the Brazilian Central Bank, put a halt to financial speculation. Brazil is asking its importers to pay in full within 360 days for all foreign products worth over U.S.$10,000. For other Mercosur countries (as well as Chile and Bolivia), the period is 89 days for goods worth over U.S.$40,000 (Instituto de Relaciones Europeo-Latinoamericanas 1997: 7). See also “Se complica” (1997), and “Al final” (1997). Back.
Note 14: In the case of disputes between states, or between individuals and the state, the Common Market Group, with the possible assistance of a group of experts, is required to make recommendations to the concerned parties. If such disputes are related to common external tariffs, a Mercosur Trade Commission committee of experts is called upon to hear the complaint. If the experts fail to reach a consensus, the TC is required to rule on the issue within thirty days. Back.
Note 15: These limited exceptions apply to the export of logs, unprocessed fish exports, exports of alcoholic beverages to countries where alcohol is banned, imported perfume, and coasting trade, as well as certain other imports banned on moral, security, and health grounds. Back.
Note 16: Member states finally agreed on a common external tariff divided into eleven different levels that vary between 0 percent and 20 percent depending on the product category. However, the CET is still incomplete because it covers 85 percent of total tariff headings, that is, some 8,000 products (C. Robinson 1995: 15). Back.
Note 17: Trade in vehicles, automotive parts, and sugar is still excluded from the free trade zone. In the automotive sector, the different parties appear incapable of reaching a compromise. This issue was supposed to be resolved in 1997. Back.
Note 18: Steel products in Argentina (57 percent), textiles (57 percent in Paraguay and 22 percent in Uruguay), agricultural products, etc. Back.
Note 19: Article 5 of the Treaty of Asunción. Back.
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