Emergency Committee For American Trade - Publications

SECTION IV.3: WESTERN HEMISPHERE

Expansion of U.S. trade and investment in the Western Hemisphere strongly contributes to the growth of the U.S. economy. In 2005, U.S. trade with the 34 countries in the Western Hemisphere negotiating the Free Trade Area of the Americas (FTAA) equaled $977 billion, and the region accounted for 44 percent of U.S. goods exports.

The United States must maintain its leadership role in promoting progress toward an integrated hemisphere, including through:

building upon the success of the North American Free Trade Agreement (NAFTA) by ensuring its full and effective implementation;
fully implementing the U.S.-Central America-Dominican Republic Free Trade Agreement (DR-CAFTA) and the U.S.-Chile Free Trade Agreement (FTA); ?? approving and implementing the U.S.-Peru-Colombia FTAs; and
seeking to expand trade with the other countries of the region as negotiations for the FTAA and other regional and bilateral free trade agreements proceed.

In several instances, particularly with the NAFTA, the critics and disputes have loomed large, overshadowing the very strong and mutually beneficial relationship that the economic partnerships and integration in our hemisphere have produced. The United States should stay on track in promoting integration and expeditiously resolve existing disputes that undermine strong relationships.

This section reviews the NAFTA, the Caribbean Basin and Andean trade preference programs and integration among the Southern Cone countries. Implementation of the DR-CAFTA, the approval and implementation of the U.S.-Peru-Colombia FTAs, and the status of the FTAA negotiations are discussed in section II.2.

North American Free Trade Agreement

Just over 12 years ago in November 1993, the U.S. Congress approved the North American Free Trade Agreement – NAFTA – after one of the most charged debates over trade that our country had seen in several decades. It passed the House by 34 votes (234-to-200); it passed the Senate by 61-to-38. As explained below, NAFTA has been critical to expanding and improving the U.S.-Canada-Mexico trading and investment relationship, bringing substantial benefits to all three countries.

The NAFTA entered into force in 1994 and remains one of the world’s most comprehensive free trade agreements, covering a region with 430 million people who produce over $11 trillion worth of goods and services. Between 1993 and 2005, U.S. goods trade with Canada and Mexico grew by 166 percent, from $293 billion to $790 billion, accounting for nearly one-third of total U.S. trade in 2005. Services trade in 2004 equaled $81.2 billion, nearly double the three-way services trade of $44.8 in 1993. On average, NAFTA trade in goods alone equals approximately $2.2 billion a day.

The NAFTA agreement phases out tariffs among the United States, Mexico, and Canada on goods produced in North America. The agreement provides for the elimination of tariffs on three-way trade by 2008. Tariffs on qualifying goods between the United States and Canada were eliminated on January 1, 1998. With current reductions, Mexico’s average tariffs on U.S. goods equal less than one-half of one percent (compared to the pre-NAFTA average of 10 percent). The NAFTA agreement includes broad disciplines providing for the elimination of non-tariff barriers on goods and services, increased access to government procurement, non-discriminatory treatment for investment, removal of foreign investment restrictions, and protection for intellectual property rights. In addition, it provides several dispute settlement mechanisms. As well, there are three side agreements to the NAFTA: the North American Agreement on Labor Cooperation, the North American Agreement on Environmental Cooperation and the Understanding Between the Parties to the North American Free Trade Agreement Concerning Chapter Eight: Emergency Action.

Success of NAFTA

Trade and investment among NAFTA member countries have increased significantly during the first 12 years of the agreement, helping to expand economic opportunities, enhance economic growth and raise the standard of living in the United States and our NAFTA partners.

U.S. goods exports to the NAFTA countries more than doubled between 1993 and 2005, from $142 billion to $331 billion, while U.S. exports to the rest of the world rose at a much lower rate. On average, NAFTA trade in goods alone equals approximately $2.2 billion a day. Mexico is America’s second largest trading partner after Canada. Imports too have increased, increasing the variety and availability of products throughout the United States, and, thereby, benefiting U.S. consumers with improved choices and prices. Imports are also important to improve the competitiveness of U.S. companies, who have greater choice of inputs. As well, imports play a major role in dampening inflationary pressures and, in turn, helping to keep interest rates low. Claims that NAFTA has resulted in a massive trade deficit with Mexico, for example, ignore that Mexico suffered a severe (and unrelated) depreciation of its currency soon after the NAFTA was implemented – the so-called peso crisis – making Mexico’s exports to the United States much cheaper. Indeed, in significant part as a result of the NAFTA, Mexico kept its market open and its economy recovered must faster than it had in earlier crises.

Similarly, services trade expanded immensely since the entry-into-force of the NAFTA. U.S. services trade with Canada and Mexico equaled $612 billion in 2004, nearly double the U.S.-Canada-Mexico services trade of $325 billion in 1994.

Investment flows between the United States, Canada and Mexico have also expanded tremendously after the entry-into-force of the NAFTA, with its strong provisions in increased access to investment and its strong protections for investors, as discussed in section III.2. In particular, U.S. foreign direct investment in the NAFTA countries more than tripled, from $91.2 billion in 1994 to $283 billion in 2004. Investment in the United States by Canada and Mexico has also more than tripled, from $43.3 billion in 1994 to $141.6 billion in 2004. U.S. investment with its NAFTA partners is second only to U.S. investment flows with the European Union.

Since NAFTA went into force, average Mexican tariffs on U.S. products have fallen from 10 percent to less than one-half of one percent, while average U.S. tariffs on Mexican products have fallen from approximately 4 percent to less than 0.35 percent. As a result, U.S. firms have gained more than a nine-percentage point margin of preference in NAFTA markets over non-NAFTA competitors. Virtually all goods traded between the United States and Canada are free of any tariffs. The U.S. auto, chemical, textiles, and electronics sectors have seen particular benefits from NAFTA. In January 2001, the NAFTA countries announced the third set of accelerated tariff reductions, eliminating tariffs on approximately $867 million in trade among the three countries, including on certain footwear, chemicals, pharmaceuticals, auto parts, and batteries. In January 2002, the NAFTA countries announced the fourth round of accelerated tariff reductions on $25 billion in trade, covering such goods as rubber and plastic footwear, motor vehicles, electrical and electronic goods, toys and chemicals.

During Congressional consideration of the NAFTA, proponents and opponents alike made enormous claims of the potential effect of the NAFTA on the economies of our countries, our jobs, our labor and environmental conditions and our futures in the global economy. With the benefit of more than 10 years of hindsight, it is clear to most that NAFTA was a major breakthrough for trade and investment liberalization in the region and for the world at large, producing substantial benefits for all three countries and their citizens.

It was a comprehensive agreement, not only covering comprehensively for the first time all major trade sectors, from goods to services, but covering investment protections and liberalization in the same agreement as well.
The timing of the agreement was very important; indeed, it is cited as a primary reason that Mexico was able to maintain more open policies that allowed it to recover from the peso crisis fairly quickly. NAFTA helped to make Mexico’s recession of the mid-90s shorter and less severe than its 1982 recession. NAFTA also helped Mexico withstand internal pressures to impose trade-restrictive measures in response to the recession. As a result, U.S. exports to Mexico recovered within 18 months of the 1995 crisis.

While some argue that the commercial impact has been exaggerated, given that 13 years ago, in 1993, America's GDP was almost 20 times larger than Mexico's, and U.S. tariffs on Mexican goods already averaged a low 4 percent, there can be no question that the U.S. economic relationships with Mexico and Canada are stronger today.

The NAFTA codified and expanded an already vibrant trade relationship. Between 1993 and 2005, the value of two-way U.S. goods trade with Mexico has more than tripled, from $81 billion to $290 billion. Services and investment also increased tremendously.
Canada and Mexico are now America's number one and two trading partners, respectively.
And contrary to the critics, employment in the United States rose – from 120 million in 1993 to 135 million in 2001, before the recent drop, caused not by NAFTA, but by broader economic circumstances in the U.S. and global economies.

At the same time, it is clear that trade and investment are not panaceas and that perhaps their most significant effects will take decades to take root. NAFTA did not cause, nor has it solved, for example many of the economic problems in the agricultural sectors of the three countries. These problems, particularly in Mexico, preexisted NAFTA and will take economic growth and development, which NAFTA can help spur, to resolve.

At the end of 2003, the World Bank published an extensive study on the NAFTA entitled: Lessons from NAFTA for Latin American and Caribbean (LAC) Countries: A Summary of Research Findings, by Daniel Lederman, William Maloney, and Luis Servén. The report found that:

“The report’s main conclusion regarding NAFTA is that the treaty helped Mexico get closer to the levels of development of its NAFTA partners. The research suggests, for example, that Mexico’s global exports would have been about 25% lower without NAFTA, and foreign direct investment (FDI) would have been about 40% less without NAFTA. Also, the amount of time required for Mexican manufacturers to adopt U.S. technological innovations was cut in half. Trade can probably take some of credit for moderate declines in poverty, and has likely had positive impacts on the number and quality of jobs. However, NAFTA is not enough to ensure economic convergence among North American countries and regions. This reflects both limitations of NAFTA’s design [strict rules of origin and trade remedy laws] and, more importantly, pending domestic reforms.”

Other key conclusions of the report include:

“NAFTA has brought significant economic and social benefits to the Mexican economy.” (pg. viii)
“Contrary to some predictions, NAFTA has not had a devastating effect on Mexico’s agriculture. In fact, both domestic production and trade in agricultural goods rose during the NAFTA years.” The report goes on to explain why, citing factors as increased demand and productivity (pg. xiii)
“In spite of popular perception, there is little ground for concerns that NAFTA, or FTAs more generally, are likely to have a detrimental effect on the availability and/or quality of jobs. Consistent with the region-wide evidence, there is little indication of higher unemployment, increased volatility of the labor market, or increased informalization associated with trade liberalization. In fact, Mexican firms, as those of the region, more generally, that are exposed to trade tend to pay higher wages, adjusted for skills, are more formal, and invest more in training.” (pp. xx-xxi)

Moving beyond the commercial aspects, there are also extremely important regional and foreign policy benefits that NAFTA helped to foster. While not the sole or even greatest influence, NAFTA – through its encouragement of economic cooperation and transparency – was, nonetheless, a major contributing factor in Mexico’s move towards a more mature and open democracy and towards modernizing and liberalizing its overall economy.

Mexico’s leadership in promoting trade and investment liberalization in the region and beyond can also be in part attributed to the NAFTA and the habits it spurred in Mexico. Mexico now has more regional FTAs than the United States, with countries as diverse as Chile, El Salvador, Guatemala, Honduras, Venezuela and Brazil. It is also playing an important role in the WTO.

In March 23, 2005, Prime Minister Martin, President Bush and President Fox announced the establishment of the Security and Prosperity Partnership (SPP) to further enhance the security of North America and promote the economic well-being of citizens. Key initiatives to be undertaken pursuant to the SPP include:

Regulatory cooperation to generate growth
Sectoral collaboration to facilitate business
Investing in people through partnerships in education, science and technology
Reducing the cost of doing business, through the more efficient movement of goods and people
Joint stewardship of the North American environment
Creating a safer and more reliable food supply while facilitating agricultural trade
Enhancing public health cross-border coordination

The SPP and other initiatives represent extremely important activities that can build upon the successes of the NAFTA and enhance economic growth and prosperity among the NAFTA countries.

NAFTA Dispute Settlement – Chapter 20

Chapter 20 of the NAFTA addresses the avoidance and settlement of all disputes relating to the interpretation of the NAFTA, with the exception of matters covered in Chapter 11 (Investment), Chapter 14 (Financial Services) and Chapter 19 (Antidumping and Countervailing Duty final determinations). If disputes are not settled through consultation, either Party may refer the issue to a non-binding panel. Three cases have been completed under this process – the United States’ challenge to Canadian agricultural tariffs, Mexico’s challenge to the U.S. safeguard on broomcorn brooms, and, most recently, Mexico’s challenge to U.S. restrictions on cross-border trucking services (which is discussed below under trade issues with Mexico).

NAFTA Dispute Settlement – Chapter 19

Chapter 19 of NAFTA provides a process for independent binational panels to review U.S. and Mexican determinations in antidumping and countervailing duty cases in lieu of judicial review in national courts. Chapter 19 does not require the United States to make any substantive changes in its antidumping or countervailing duty laws, but it did require Mexico to implement procedural reforms guaranteeing U.S. exporters effective judicial review. The Chapter 19 review process is based on a similar mechanism applied under the U.S.-Canada Free Trade Agreement.

The NAFTA working group on dispute settlement is continuing to examine ways to improve the Chapter 19 dispute settlement process, including addressing problems associated with delays in the Chapter 19 review process arising from inadequate funding, problems in selecting panelists, transparency issues, and translation difficulties.

As discussed below with respect to Canada, a coalition of some U.S. lumber producers filed a constitutional challenge to NAFTA Chapter 19 on September 13, 2005, arguing that the grant of judicial powers to the binational panels violated the Due Process clause, the Appointments clause and other parts of Article II and Article III of the U.S. Constitution. The U.S. government is actively opposing this challenge to the constitutionality of Chapter 19. It is notable that Congress thoroughly considered the constitutionality of these provisions during consideration of NAFTA and concluded that the process was established in a manner that meets constitutional requirements. ECAT believes that the constitutional challenge is unwarranted and a successful challenge could have very negative implications for the U.S.-Canadian trading relationship and the broader objectives of the NAFTA.

NAFTA Chapter 11

Chapter 11 of the NAFTA sets forth the Parties’ obligations with respect to investment and related issues. It requires the Parties to eliminate barriers and adopt market-oriented domestic policies that treat investment fairly and in a non-discriminatory manner. It also establishes a fair and objective dispute settlement mechanism that provides investors the ability to seek review of investment disputes before neutral international arbitration tribunals. A full discussion of the NAFTA Chapter 11 commitments, recent cases and the basic investment provisions is found in section III.2.

NAFTA and the Environment

The North American Agreement on Environmental Cooperation (NAAEC) created the Commission for Environmental Cooperation (CEC) and aims to foster the protection and improvement of the environment in the United States, Canada, and Mexico through cooperative activities and the creation of a system for addressing environmental disputes. The agreement explicitly provides that each of the member countries retains the right to set its own environmental standards; it requires only that the three countries ensure that their environmental laws are adequately enforced and provide access, transparency, and due process. The NAAEC promotes cooperative activities to foster the protection and improvement of the North American environment. It also established two dispute resolution procedures to address allegations that a country has failed to enforce its environmental laws – a government-to-government procedure (with the possibility of fines and the suspension of NAFTA benefits) and a review of complaints submitted by non-governmental organizations (NGOs) (with the possibility of a factual record being prepared on the issue, but no possibility of fines or sanctions).

The CEC, which oversees implementation of the agreement, is a trinational organization composed of a governing Council of the environmental ministers from each country and a Secretariat located in Montreal. Since its establishment, the CEC has engaged in a wide variety of cooperative activities focusing on environmental conservation, water use, human health, law enforcement and public outreach. It has developed trilateral action plans to eliminate toxic chemicals in the North American environment and promoted species and habitat protection. In December 2002, it adopted a 2003-2005 Program Plan, under which it will focus on four core areas: the environment, economy and trade; conservation of biodiversity; pollutants and health; and law and policy. To help carry out its mandate, the CEC created the North American Fund for Environmental Cooperation (NAFEC) in 1995 to provide community-based grants. Since it was established in 1995, the NAFEC has issued over 196 grants totaling more than $9 million.

No Party has requested government-to-government consultations. Through February 2006, there have been, however, 53 citizen submissions, 11 of which have resulted in the CEC preparing factual records.

The United States and Mexico also created the Border Environment Cooperation Commission (BECC) and the North American Development Bank (NADB) in 1993 to help border communities with environmental infrastructure projects. The BECC provides technical assistance and grants to border communities and certifies environmental infrastructure projects for financing consideration by the NADB. The NADB facilitates financing for the implementation of projects certified by the BECC, provides financial and managerial guidance, structures financial packages and provides loans to fill financing gaps. The NADB also administers the U.S. Environmental Protection Agency’s grant resources for the border region. Both the BECC and NADB focus on communities located within 100 miles of the U.S.-Mexico shared border. By the end of 2005, the BECC and NADB had help promote over 105 projects, with a total cost of approximately $2.4 billion. The BECC’s technical assistance program has already allocated more than $30 billion to the development of 237 environmental infrastructure projects.

NAFTA and Labor

The North American Agreement on Labor Cooperation (NAALC) created the Commission for Labor Cooperation (CLC) and aims to improve working conditions in the three NAFTA countries and promote core labor standards. The NAALC explicitly provides that each country retains the right to set its own labor standards but commits the three NAFTA countries to ensure that their own labor laws are adequately enforced. The NAALC aims to promote cooperative activities among the three NAFTA countries to improve working conditions and promote core labor standards. It established two procedures for reviewing a country’s compliance with its labor standards: (1) a government-to-government dispute settlement system that could result in fines or the suspension of NAFTA benefits for a country’s persistent failure to enforce its labor laws with respect to occupational safety and health, child labor, minimum wage, and technical labor standards, and (2) a process for reviewing complaints by private parties (with no possibility of fines or sanctions). The CLC, which oversees implementation of the Agreement, is a trinational organization composed of a governing Council of the labor ministers from each country and a Secretariat based in Dallas, Texas. Each country has also set up a National Administrative Office (NAO) to coordinate participation in the Agreement and to review complaints.

Since its formation, the NAALC has engaged in a wide range of cooperative activities, including seminars, training sessions, exchanges of professional and technical delegations, and joint reports. No government-to-government consultations have been requested under the dispute settlement system. To date, more than two-dozen cases have been filed by private parties under the NAALC, covering issues ranging from freedom of association and illegal use of child labor to allegations that manufacturers in Mexico discriminate against pregnant women.

ECAT Position: ECAT finds that the NAFTA has produced substantial increases in trade and investment among the United States, Canada and Mexico in a manner that has promoted significant economic opportunities, increased economic growth and a higher standard of living. While not a panacea for all issues in the trilateral relationship, NAFTA has helped promote greater respect for the rule of law and improved cooperation on environmental and labor issues. The constitutional challenge to NAFTA Chapter 19 is unwarranted and ECAT urges the United States and Canada to increase efforts to negotiate a resolution to the underlying lumber dispute which gave rise to the constitutional challenge. ECAT also strongly supports work to build upon the NAFTA, including the Security and Prosperity Partnership announced by the three NAFTA governments in March 2005.

Canada

Canada remains America’s largest trading partner, accounting for two-way goods trade of nearly $500 billion in 2005 and nearly $50 billion in services trade in 2004. Bilateral investment flows have also expanded to nearly $350 in 2004. The U.S. and Canadian economies are more integrated than ever. Both countries also share common interests in pursuing FTAA negotiations and achieving a successful WTO round.

Bilateral relations with Canada are frustrated, however, by several ongoing disputes as discussed below, including the recent constitutional challenge to the NAFTA’s chapter 19 dispute settlement provisions. ECAT urges greater efforts to resolve these issues quickly and without damaging important cross-border trade and investment that promotes economic opportunity, economic growth and a higher standard of living for both the United States and Canada.

U.S.-Canadian Trade and Investment

U.S. goods exports to Canada in 2005 equaled $211.4 billion, an 11 percent increase from 2004 and an 111 percent increase over U.S. exports to Canada in 1993 (before NAFTA entered into force) of $100 billion. Primary exports in 2005 include vehicles, machinery, plastics, fuel products and medical instruments. U.S goods imports from Canada have also increased to $287.9 billion in 2005, an increase of 12.5 percent over 2004 imports and a nearly 160 percent increase over U.S. imports from Canada in 1993 of $110.9 billion. The United States’ primary import from Canada is oil and energy products, followed by vehicles, machinery, wood and wood products, plastics and paper products. Approximately $54 billion (or 30 percent) of the total increase in U.S. imports from Canada since 1993 is accounted for by oil and energy imports, which accounted for 22.9 percent of all U.S. goods imports from Canada in 2005.

Services trade has also expanded to $49.7 billion in 2004, up 90 percent from $26.1 billion in 1993. U.S. services exports to Canada equaled $29.7 billion in 2004, while Canada’s services exports to the United States totaled $20 billion.

Investment flows have also grown, with U.S. foreign direct investment in Canada expanding from $74 billion in 1993 to $216.6 billion in 2004. Canadian investment in the United States also grew, from $41 billion in 1993 to $133.8 billion in 2004.

As explained in section I.1, the expansion of trade and investment produces important economic growth gains, as well as a higher standard of living.

Major U.S.-Canadian Trade Issues

Over recent years, the United States and Canada have had trade and investment disputes in a number of areas. Some, such as Canada’s export subsidies on dairy, have been largely resolved through the WTO and NAFTA dispute settlement processes. Softwood lumber and wheat, however, remain significant areas where resolution has not been reached

Softwood Lumber

U.S. trade remedy actions against softwood lumber imports from Canada remain the most difficult issue in U.S.-Canada trade relations. With the challenge to the constitutionality of the NAFTA Chapter 19 dispute settlement process launched in September 2005 by a group of some U.S. lumber producers, this controversy has been elevated to an even more serious and adverse level. Background: Over more than a decade, a coalition of some U.S. lumber producers have brought repeated cases under the U.S. antidumping and countervailing duty law seeking the imposition of duties on imports of Canadian softwood lumber to offset what they view as unfair subsidies and price practices arising from Canadian government-set stumpage prices and provincial log export restrictions. The Canadian industry and government adamantly disagree with the suggestion that their practices result in subsidies and argue that antidumping duties are not appropriate given the significant openness of both the U.S. and Canadian trading sectors.

In 1996, the United States and Canada concluded the U.S.-Canada Softwood Lumber Agreement, under which Canada agreed to impose fees on softwood lumber exports from four Canadian provinces in return for a commitment from the United States to refrain from initiating any unfair trade cases against the Canadian softwood lumber sector for five years.

Following the March 31, 2001, expiration of the Softwood Lumber Agreement, a coalition of some U.S. lumber producers filed antidumping and countervailing duty cases against softwood lumber imports from Canada. The U.S. Commerce Department announced final countervailing duties of 19.34 percent and final antidumping duties of 2.26 percent to 15.83 percent on March 22, 2002, and the U.S. International Trade Commission (ITC) made affirmative determinations, allowing the imposition of final duties.

In response, Canada filed numerous WTO and NAFTA challenges against both the U.S. antidumping and countervailing duty cases, including the calculation of margins and the finding of threat of material injury. As a result of the NAFTA cases, the ITC reversed its finding of injury and the U.S. Commerce Department reduced the countervailing duty from 16 percent to a de minimis level and also significantly lowered its antidumping margin. The NAFTA Extraordinary Challenge Committee (ECC), that was requested by the U.S. Government, upheld the NAFTA panel decision on injury.

At the same time, a separate WTO panel reached similar conclusions regarding flaws in the U.S. injury decision, which required the ITC to review its findings and issue a new decision, where it found that softwood lumber imports threatened injury to the U.S. lumber industry. The WTO panel reviewing the new ITC decision upheld the decision as compliant with WTO rules. Canada also successfully challenged the antidumping and countervailing duty calculations, resulting in a lowering of duties.

The U.S. and Canadian governments have engaged in extensive negotiations to try to resolve these longstanding issues, but have yet to reach a resolution.

Constitutional Challenge to NAFTA Chapter 19: On September 13, 2005, a coalition of some U.S. lumber producers challenged the constitutionality of NAFTA Chapter 19 arguing that the grant of judicial powers to the binational panels violated the Due Process clause, the Appointments clause and other portions of Article II and Article III of the U.S. Constitution. The U.S. government is actively opposing this challenge to the constitutionality of Chapter 19. It is notable that Congress thoroughly considered the constitutionality of these provisions during consideration of NAFTA and concluded that the process was established in manner that meets constitutional requirements. ECAT believes that the constitutional challenge is unwarranted and a successful challenge could have very negative implications for the U.S.-Canadian trading relationship and the broader objectives of the NAFTA.

Wheat

On February 15, 2002, the Bush Administration made an affirmative Section 301 finding that the Canadian Government grants the Canadian Wheat Board (CWB) special monopoly rights and privileges, which disadvantage U.S. wheat farmers and undermine the integrity of the trading system. In particular, USTR found that the CWB’s monopoly has been able to take sales away from U.S. farmers because it is insulated from commercial risks, benefits from subsidies, has a protected domestic market, and has competitive advantages due to its monopoly control over a guaranteed supply of wheat. USTR announced a four-prong approach to resolve this problem, specifically: (1) examining whether to bring a WTO case against Canada and the CWB; (2) examining the possibility of initiating countervailing duty and antidumping cases; (3) working with the U.S. wheat industry to identify specific Canadian barriers to U.S. wheat; and (4) pursuing comprehensive and meaningful reform of monopoly state-trading enterprises in the WTO agriculture negotiation.

On October 23, 2002, the Administration initiated antidumping and countervailing duty investigations into Canadian wheat as requested by the North Dakota Wheat Commission. The Commerce Department made affirmative decisions. The ITC found no injury in the case of durum wheat, but found injury from imports of hard spring wheat, resulting in the imposition of 14.5 percent tariffs. Canada filed a NAFTA appeal, in which the panel upheld the order in part and remanded it in part.

In December 2002, the United States requested WTO consultations with Canada, arguing that the export practices of the Canadian Wheat Board as well as Canada's handling and transporting of imported grain violate Canada's obligations under the WTO. In April 2004, the WTO panel considering the case, found in favor of the United States, ruling that Canada’s grain handling system and rail transportation regime discriminated against foreign grain. The panel found in favor of Canada with respect to the Canadian Wheat Board, stating that the WTO did not prohibit state-trading companies from using their monopoly position to disadvantage foreign suppliers. The United States appealed that part of the decision; in August 2004, the Appellate Body upheld the panel’s findings. Canada announced before August 1, 2005, that it had implemented the panel’s ruling on grain handling and rail transportation.

Canadian Trade Agreements and Negotiations

Canada is also continuing to seek out other countries with which to negotiate free trade agreements in order to build on NAFTA, Canada’s free trade agreement with Israel, and its NAFTA-like agreement with Chile. In 2001, Canada concluded an FTA with Costa Rica and a trade and investment agreement with Nigeria. Canada has initiated FTA negotiations with Central America (El Salvador, Guatemala, Honduras and Nicaragua), the European Free Trade Association (Iceland, Norway, Switzerland and Liechtenstein), Singapore, and is actively exploring the feasibility of FTAs with Korea, the Andean and CARICOM countries and others.

Mexico

U.S. trade with Mexico has grown significantly since the implementation of NAFTA. Mexico has surpassed Japan to become America’s second largest goods export market and second largest trading partner. Services and investment flows have also increased significantly.

Both countries also share common interests in pursuing FTAA negotiations and achieving a successful WTO round. Bilateral relations with Mexico are frustrated, however, by several ongoing disputes. ECAT urges continued efforts to resolve these issues quickly and a continued focus on creating new opportunities, economic growth and increases in the standard of living of both countries.

U.S.-Mexican Trade and Investment

Both U.S. exports and imports have increased substantially, growing from $81 billion in 1993 (before NAFTA entered into force) to $290 billion in 2005. The United States exported $120 billion in goods to Mexico in 2005, more than double U.S. exports to Japan in 2005 of $55 billion. Primary U.S. exports to Mexico in 2005 included machinery, vehicles, plastics, fuel products, medical instruments, chemicals and paper products. U.S. goods imports from Mexico totaled $170.2 billion in 2004, a 9.2 percent increase over 2004 imports. Over $20 billion (or 15 percent) of the growth in U.S. imports from Mexico since 1993 has been the result of higher energy imports, which accounted for 15 percent of all U.S. goods imports from Mexico in 2005.

U.S. services exports to Mexico have grown significantly to $18.0 billion in 2004 from $10.9 billion in 1993. Mexican services exports to the United States have also increased, from $7.4 billion in 1993 to $13.5 billion in 2004.

Investment flows have also expanded, with U.S. foreign investment in Mexico of almost $66 billion in 2004, nearly four times the $17 billion in investment in 1993. Mexican investment in the United States has also expanded, from $2 billion in 1993 to $7.9 billion in 2004. As explained in section I.1, the expansion of trade and investment produces important economic growth gains, as well as a higher standard of living.

Major U.S.-Mexican Trade Issues

The United States and Mexico are continuing work to resolve several important trade disputes, including the United States’ cross-border trucking restrictions, Mexico’s imposition of antidumping duties on high fructose corn syrup (HFCS), and discrimination in Mexico’s telecommunications sector.

Cross-Border Trucking

The final report in Mexico’s NAFTA Chapter 20 challenge to the United States’ restrictions of cross-border trucking services, was issued on February 6, 2001. The Panel unanimously found that the United States had not adequately implemented its commitment to open cross-border trucking services to Mexico as required under the NAFTA. (The NAFTA required the United States to allow Mexican trucks in four border states by 1995 and the entire United States by 2000. The Clinton Administration had refused to implement this provision, arguing that Mexican trucks were unsafe.)

While the Panel decision upholds the principle that the United States can impose its own safety requirements, the Panel found that the blanket exclusion of Mexican trucks was unjustified. At the U.S.-Mexican summit on February 16, 2001, Presidents Bush and Fox issued a joint communiqué stating that the two governments would begin “immediate discussions” to implement the NAFTA panel decision. After extensive discussion between the Administration and Congress throughout 2001, House and Senate negotiators reached a compromise agreement on the imposition of safety measures to implement the NAFTA panel ruling in November 2001. Included as part of the conference report to the Transportation Appropriations Act (H.R. 2299), the compromise requires the Administration to carry out certain safety precautions before Mexican trucks can enter the United States, including safety inspections, a certification by the Secretary of Transportation that Mexican trucks do not pose an unacceptable safety risk, an electronic verification of the validity of Mexican licenses and the establishment of a system for giving each truck a unique Department of Transportation number. The legislation also requires physical inspections of trucks every 90 days. The Transportation Department Inspector General must also conduct an audit of the U.S. government’s ability to enforce the safety standards on Mexican trucks before they can operate in the United States.

The Department of Transportation issued final rules to implement this legislation in November 2002, and the Administration lifted the U.S. ban. In June 2004, the Supreme Court reversed the decision of the U.S. Ninth Circuit Court of Appeals, which had blocked the lifting of the ban. In order to be eligible to enter the United States, Mexican trucks must first undergo mandatory inspections, which Mexico has resisted.

High Fructose Corn Syrup

In March 2004, the United States also initiated a WTO challenge to Mexico’s tax on soft drinks produced with HFCS, adopted in January 2002 (following its termination of antidumping dumping duties found to be contrary to WTO rules). In October 2005, the WTO panel reviewing the case ruled in favor of the United States, finding that Mexico’s tax was discriminatory and violated WTO rules. In March 2006, the WTO Appellate Body upheld that ruling. The United States is urging the Mexican government to eliminate this tax as quickly as possible. The United States and Mexico are also continuing discussions about Mexico’s NAFTA Chapter 20 complaint regarding access to the U.S. sugar market.

Telecommunications

On August 17, 2000, the United States also requested WTO consultations with Mexico regarding its implementation of telecommunications commitments under the General Agreement on Trade in Services. In particular, the United States has been concerned that Mexico is (1) not maintaining adequate disciplines over Telmex, its former monopoly telecommunications provider; (2) not ensuring timely, cost-effective interconnection for competing carriers; and (3) continuing its practice of charging U.S. companies above-cost rates for international calls. On October 10, 2000, the Mexican Government issued new rules to regulate anti-competitive practices by Telmex and reduced long-distance interconnection rates for 2001. On November 10, 2000, the United States requested the establishment of a WTO dispute settlement panel. Consultations with Mexico were held in January and in March 2001. Some progress was made on this issue in late 2000 and 2001, after U.S. carrier WorldCom reached a rate agreement with Telmex and Mexico promised additional reform. On February 16, 2002, however, the United States again requested establishment of a WTO panel – this time only with respect to Mexico’s discriminatory treatment with regard to above-cost rates for international service. In March 2004, the WTO panel ruled largely in favor of the United States, finding that Mexico’s telecommunications regime violated its WTO commitments. Mexico did not appeal the decision. Mexico modified its international telecommunications rules to allow the negotiation of interconnection rates in August

2004 and enacted new rules allowing the resale of international and long distance services in July 2005. The United States and Mexico subsequently informed the WTO that the case was resolved.

Trade Remedy Cases

In June 2003, the United States requested WTO consultations on Mexico’s imposition of antidumping duties on rice and beef and related matters. A WTO panel was formed in February 2004. In June 2005, the WTO panel upheld the U.S. claims, finding that Mexico’s actions violated its WTO commitments with respect to trade remedies. Mexico appealed the decision and, in November 2005, the WTO Appellate Body upheld the panel ruling finding Mexico’s actions in violation of its obligations.

Concerns have arisen in several Mexican trade remedy cases over the transparency and conduct of these cases. ECAT urges continued efforts to resolve these issues quickly and a continued focus on creating new opportunities, economic growth and increases in the standard of living of both countries.

Mexican Trade Agreements and Negotiations

Mexico continues its efforts to negotiate free trade agreements. It currently has FTAs and similar bilateral agreements with: Bolivia, Chile, Colombia, El Salvador, European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), European Union, Guatemala, Honduras, Israel, Japan Nicaragua, Uruguay, and Venezuela, the. Mexico also has more limited agreements with Argentina and Brazil.

Central America and the Caribbean Basin

In 1983, the United States sought to pursue economic growth and development with the countries of Central America and the Caribbean Basin through the grant of special trade preferences under the Caribbean Basin Economic Recovery Act (CBERA). This program provided duty-free entry to many imports from the following 24 countries in Central America and the Caribbean: Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago, and British Virgin Islands. In 2000, duty-free benefits were expanded to products not eligible for the original CBERA benefits, as described below.

Total U.S. trade with the Caribbean and Central America has more than tripled between 1990 and 2005. In particular, U.S. goods exports to the 24 countries of the region have grown from $7.7 billion in 1990 to $27.8 billion in 2005. Imports of goods have followed a similar course, reaching $32.1 billion in 2005.

Implementation of the Caribbean Basin Trade Partnership Act

After several years of Congressional review and consideration, the Caribbean Basin Trade Partnership Act (CBTPA) was enacted as part of the Trade and Development Act of 2000 to provide duty-free, quota-free treatment for certain apparel products from eligible Caribbean Basin countries and to provide duty-free treatment for products not eligible for duty-free treatment under CBERA. The primary provisions are as follows:

Eligibility Criteria: In determining whether Caribbean Basin countries will be eligible for the CBTPA benefits, the President must find that a country has met the eligibility criteria under the CBERA and must take into account several additional factors, including a country’s commitment to undertake WTO obligations and participate in FTAA negotiations, protection of intellectual property and internationally recognized worker rights, participation in the Inter-American Convention Against Corruption, and government procurement practices.
Textile and Apparel Provisions: The CBTPA provides duty-free, quota-free treatment for the following articles:
- apparel assembled in a CBTPA country made from U.S. fabric that is made from U.S. yarn;
- apparel cut and assembled in a CBTPA country from U.S. fabric that is formed from U.S. yarn, if the articles are also assembled with U.S.-formed thread;
- certain apparel knit-to-shape in a CBTPA country from U.S.-formed yarn and knit apparel articles cut and wholly assembled in CBTPA countries from U.S. or regional fabric that is made from U.S. yarn. Knit apparel products are capped at 250 million square meter equivalents and outerwear T-shirts are capped at 4.2 million dozen, with an annual increase of 16 percent for the first four years of the program;
- certain brassieres;
- certain apparel that is both cut (or knit-to-shape) and sewn or otherwise assembled in a CBTPA country from fibers, fabric, or yarn not available in commercial quantities in the United States; and
- certain textile luggage.
Safeguards against Import Surges and Transshipment: The CBTPA provides for a snapback of the tariff preferences on textiles and apparel if import surges cause serious damage to the U.S. industry. The CBTPA also authorizes the denial of trade benefits to exporters found to be involved in transshipment and the reduction of benefits for countries that fail to prevent transshipment.
Additional Tariff Preferences: The CBTPA provides additional tariff benefits to other products not currently eligible for tariff preferences under the 1983 CBERA, including canned tuna, certain footwear, petroleum and petroleum products, certain watches and watch parts, and certain leather goods. Tariffs on these products are reduced to the rate that applies to imports from Mexico.
Customs Procedures: The CBTPA requires beneficiary countries and importers claiming CBTPA tariff benefits to comply with customs procedures, including requirements for certificates of origin, equivalent to those required under the NAFTA.

As part of the Trade Act of 2002, Congress amended the CBTPA to provide that the benefits with respect to textile and apparel goods made from U.S. fabrics would only be available if the fabric were dyed and finished in the United States. This modification unfortunately narrows the benefits provided by the original legislation. Congress also amended the Act to clarify that knit-to-shape products are eligible for duty-free, quota-free treatment contrary to an earlier Customs Service interim ruling.

Following enactment of the CBTPA, all 24 countries were found to be eligible for CBTPA’s benefits (following, in some cases, additional commitments regarding labor, anticorruption and other issues). Designated Caribbean countries also became eligible for most duty-free treatment effective December 21, 2000. Designated countries are only eligible for the duty-free apparel benefits after the Administration determines that they have implemented provisions to comply with the certificate of origin requirements. At the end of 2002, the following 14 countries were designated as eligible for the apparel benefits: Barbados, Belize, Costa Rica, Dominican Republic, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama, Santa Lucia, and Trinidad and Tobago.

On October 5, 2000, the U.S. Customs Service published interim rules to implement the benefits of the CBTPA and the Africa trade bill discussed below. These rules have yet to be finalized, which has limited the full benefits available under the CBTPA. Several problems also exist in the regulations, including the exclusion of knit-to-shape apparel, which Congress corrected last year. In addition, CBTPA HTS designations created by the Customs Service for CBTPA products and the Customs Service’s interpretations of the legislation are severely limiting the ability to use U.S. components. Another such problem is the requirement that every importer provide sourcing and supply chain details on the CBTPA. This information is extremely confidential and if disclosed to a competitor could be very harmful.

In 2004, the United States signed the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA), which was ratified by the United States and five of the other parties (Dominican Republic, El Salvador, Honduras, Guatemala and Nicaragua); Costa Rica has yet to ratify the CAFTA. CAFTA entered into force between the United States and El Salvador on March 1, 2006, terminating as a result El Salvador’s eligibility under the CBTPA. As discussed in section II.2, ECAT is very concerned about potential unintended consequences from the staggered entry-into-force of the CAFTA that would deny duty-free benefits to apparel co-produced in several CAFTA countries and reduce opportunities for U.S. textile, yarn and thread producers to the region. ECAT also remains concerned about attempts made by several Central American countries, to introduce sudden changes to the regulatory frameworks in several sectors, including energy, due to external factors like international fuel prices.

ECAT Position: ECAT supports U.S. efforts to promote greater economic reform and growth in Central America and the Caribbean Basin. In particular, ECAT supports full implementation of the Caribbean Basin Trade Partnership Act in a manner that will promote greater U.S. trade with the Caribbean Basin. ECAT remains concerned that the U.S. Customs Service is interpreting the CBTPA in a manner that is not consistent with the legislative intent of the Act. Given the strong co-production and interrelationship of commercial interests in the United States and the CAFTA countries, particularly in the production of textiles and apparel, it is critical that the entry-into-force of the CAFTA on a staggered basis improve, and not undermine, existing commercial activities promoted by CBERA and CBTPA. In particular, ECAT remains very concerned by implementation decisions that deny duty-free access to textile and apparel products from the CAFTA countries that are provided for under the CBTPA and the CAFTA because of the staggered entry-into-force. Implementation issues must be resolved in a manner that improves U.S. competitiveness and seeks to promote continued and expanded commercial interests in the region. ECAT also supports U.S. efforts to promote level playing field and transparency in Central America and the Caribbean Basin countries aiming at improving the business outlook and protecting existing and future investment made by U.S. companies.

Andean Pact Countries

In 2002, Congress passed and the President signed into law a renewal and expansion of the 10-year-old Andean Trade Preference Act (ATPA) as part of the Trade Act of 2002. Renamed the Andean Trade Promotion and Drug Eradication Act (ATPDEA), this legislation aims to expand economic and trade incentives for four Andean countries – Bolivia, Colombia, Ecuador, and Peru – and to encourage the production of legitimate products by these countries in order to help them move out of the drug trade.

U.S. goods exports to the Andean countries totaled $9.9 billion in 2005, an increase of 16.5 percent of 2004 exports of $8.5 billion. Imports from these countries equaled $20 billion. U.S. foreign direct investment in the Andean countries equaled nearly $8 billion in 2004, with most investment in Peru ($3.9 billion) and Colombia ($3 billion).

The ATPDEA extends the original ATPA and authorizes the President to grant duty-free treatment to ATPDEA beneficiary countries through December 31, 2006, for non-import-sensitive items that were excluded from the original legislation, including specified footwear, petroleum products, watches and watch parts, handbags, luggage, flat goods, work gloves, leather wearing apparel, and certain tuna in foil or certain flexible containers (if harvested by U.S. vessels or ATPDEA beneficiary country vessels). The ATPDEA excludes from duty-free treatment certain textiles and apparel articles ineligible on January 1, 1994: rum; tafia; sugars, syrups, and sugar-containing products subject to over-duty rates; and tuna prepared or preserved in any manner in airtight containers (except as otherwise provided).

The ATPDEA provides duty-free, quota-free treatment for apparel articles sewn or assembled in one or more ATPDEA countries or the United States from any combination of the following:

Fabrics wholly formed or knit-to-shape in the United States from yarns formed in the United States or ATPDEA beneficiary countries (with all dyeing and finishing in the United States).
Fabrics formed or knit-to-shape from yarns from ATPDEA beneficiary countries if such fabrics are in chief value from llama, alpaca, or vicuna.
Fabrics or yarn not produced in the United States or in the region, to the extent that apparel articles of such fabrics or yarn would be eligible for preferential treatment, without regard to the source of the fabrics or yarn, under Annex 401 of the NAFTA (short supply provisions).
Apparel articles sewn or otherwise assembled in one or more beneficiary countries from fabrics or fabric components formed or components knit-to-shape, in one or more beneficiary countries, from yarns formed in the United States or in one or more ATPDEA beneficiary countries, whether or not the apparel articles are also made from any of the fabrics, fabric components formed, or components knit-to-shape in the United States. Imports of apparel made from regional fabric and regional yarn would be capped at 3 percent of U.S. imports growing to 6 percent of U.S. imports in 2006, measured in square meter equivalents.
Certain textile luggage.

The ATPDEA directs the Commissioner of Customs to study and report to Congress on the extent to which each ATPDEA beneficiary country has cooperated fully with the United States with regard to circumvention of existing quotas on imports of textile and apparel goods.

In designating beneficiary countries, the President was directed to consider certain criteria, including: (1) whether the country has demonstrated a commitment to undertake its obligations under the WTO and to participate in negotiations toward a Free Trade Area of the Americas (FTAA); (2) the extent to which the country provides protection of intellectual property rights consistent with or greater than that required under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights; (3) the extent to which the country provides internationally recognized worker rights; (4) whether the country has implemented its commitment to eliminate the worst forms of child labor; (5) the extent to which the country cooperates with the United States in counter-narcotics efforts; (6) the extent to which the country has taken steps to become a party to and implement the Inter-American Convention Against Corruption; (7) the extent to which the country applies transparent, nondiscriminatory, and competitive procedures in government procurement and contributes to international efforts to enhance transparency in government procurement; and (8) the extent to which the country has taken steps to support U.S. efforts to combat terrorism.

On October 31, 2002, the President designated the four Andean countries as generally eligible for the benefits under the ATPDEA, as well as eligible for the textile and apparel benefits. The President authorized duty-free treatment for over 600 products and did not designate any products as import-sensitive.

As discussed in section II.2, the United States has concluded FTA negotiations with Colombia and Peru. FTA negotiations with Ecuador remain ongoing, but concerns remain that Ecuador is failing to live up to its investment commitments, which would put it out of compliance with the ATPDEA’s eligibility requirements. FTA negotiations have yet to begin with the fourth Andean beneficiary country, Bolivia.

ECAT Position: ECAT supports full implementation of the Andean Trade Promotion and Drug Eradication Act in a manner that fosters greater trade and investment between the United States and the Andean countries and supports greater economic growth and opportunities for the Andean countries. As discussed in section II.2, ECAT also supports the approval and implementation of the U.S.-Peru and U.S.-Colombia trade agreements. ECAT remains concerned, however, that the Ecuadorian government is failing to live up to its existing investment obligations in a manner that jeopardizes its trading relationship with the United States.

MERCOSUR

Established in 1991, the Southern Cone Common Market (Mercado Comun de Sur, MERCOSUR), made up of Argentina, Brazil, Paraguay and Uruguay, is the largest economic grouping within Latin America, comprising over 210 million people. Following the creation of a free trade area in goods in 1995 (when most duties were phased out for intra-regional trade), the MERCOSUR countries continued work on creating a common market by establishing common external tariffs, ranging from zero to 20 percent on most goods. Some goods remain outside the common external tariff structure and will gradually be covered, including capital goods and certain information technology goods. The countries have a goal of consolidating the customs union by 2006. The common external tariff declined considerably (from 41 percent in 1986 to below 13 percent in 1999).

In 1997, MERCOSUR countries signed an agreement on trade in services to provide each other most-favored nation treatment with respect to service providers. In December 2000, at the MERCOSUR Presidential Summit, the four MERCOSUR members agreed to a six-year phase in of automobile trade into the common external tariff, with Argentina and Brazil agreeing to an immediate 35-percent common external tariff on passenger vehicles. Argentina and Brazil are continuing negotiations to extend the transition to free trade under the MERCOSUR automobile provisions.

Trade within the MERCOSUR union has grown five-fold since its creation in 1991. In the past few years, however, trade disputes over textiles, pork, poultry, steel, and footwear products have strained relations among MERCOSUR members. In 1998-99, for example, the MERCOSUR countries relied upon a three-member Tribunal to resolve disputes over Brazil’s imposition of licensing restrictions on various imports. This was the first time that MERCOSUR countries resorted to this dispute settlement mechanism since its creation in 1994.

U.S.-MERCOSUR Trade and Investment

In 2001, MERCOSUR faced significant pressure as a result of Argentina’s deepening financial crisis. Argentina has considered whether to withdraw from MERCOSUR’s common external tariff, but in an October 2001 agreement with Brazil, agreed not to do so in exchange for Brazil’s willingness to discuss Argentina’s proposed safeguard measure on Brazilian imports. Discussions are ongoing.

U.S. trade with the MERCOSUR countries has more than tripled since 1990, from $16 billion to $50.5 billion in 2005. U.S. goods exports to the MERCOSUR countries totaled $20.7 billion, an increase of 13.7 percent over 2004 exports of $18.2 billion. U.S. goods imports from the MERCOSUR countries equaled $29.8 billion in 2005. U.S. services exports totaled over $6.7 billion and services imports totaled over $2.7 billion in 2004. U.S. foreign direct investment in MERCOSUR equaled $45.5 billion in 2004, with 73 percent of the investment in Brazil.

As part of the so-called Four Plus One framework (initiated in 1991), the United States and MERCOSUR resumed meeting more regularly in September 2001. The Four Plus One met in April 2002 and continued its agenda of discussing multilateral trade and other issues, with working groups on agricultural trade, industrial trade, investment development and electronic commerce.

The United States and Brazil and, to a lesser extent, the other MERCOSUR countries, continue to have differing views on how to proceed with the Free Trade Area of the Americas, as discussed in more detail in section II.2.

Several ongoing disputes remain in the U.S.-Brazil trading relationship, including the existence of major non-tariff barriers, including licenses, registration and similar barriers; non-transparent government procurement practices; unscientific barriers to agricultural trade; and investment and other barriers. There are also significant concerns over Brazil’s protection of intellectual property rights.

In March 2005, the WTO Appellate Body largely upheld Brazil’s challenge that U.S. farm programs unfairly subsidize cotton contrary to U.S. commitments. The United States repealed the Step 2 program for cotton as part of the Deficit Reduction Omnibus Reconciliation Act of 2005, effective August 1, 2006. As a result, export subsidies and import substitution subsidies are terminated.

U.S. companies have been adversely affected by Argentina’s asymmetrical pesification policies and are pursuing a number of investment cases pursuant to the U.S-Argentina Bilateral Investment Treaty.

MERCOSUR Trade Agreements and Negotiations

MERCOSUR has also attempted to expand, admitting Chile as an associate member in 1996 and Bolivia in 1997. MERCOSUR and the Andean countries concluded an FTA in 2003 and MERCOSUR and the Southern African Customs Union concluded a preferential trade agreement in 2004. MERCOSUR and the EU have completed a framework cooperation agreement, as have MERCOSUR and India and MERCOSUR and Mexico. The coverage of each of these agreements varies and, in general, is much less comprehensive than a typical U.S. FTA.