The North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) became effective on 1 January 1994, after formal signing by the heads of state of Canada, Mexico, and the United States and an exchange of letters implementing the agreement. In eliminating trade barriers between these three countries, the NAFTA created an open market of over 375 million people and over US$6 trillion in annual output, about the size of the European Union.

The NAFTA's major objectives are to eliminate tariffs; to improve market access to goods and services among NAFTA countries; to eliminate barriers to manufacturing, agricultural, and services trade; to remove investment restrictions; and to protect intellectual property rights. Through side agreements, the NAFTA's labor and environmental rules have also been strengthened.

Most-Favored Nation Status

The concepts of national treatment and most-favored nation treatment are important provisions in the agreement, because they strengthen the NAFTA preferences for each NAFTA country's goods in another NAFTA country. National treatment means that goods from one NAFTA country imported into another NAFTA country are entitled to the same treatment as the same goods of the importing country. Most-favored nation treatment means goods from one NAFTA country imported into another NAFTA country are treated no less favorably than the NAFTA importing country treats goods of any other country.

Tariff Elimination

All tariffs on goods originating in Canada, Mexico, and the United States either were eliminated immediately or will be phased out over five or ten years. Tariffs on certain politically or economically sensitive items will be phased out over fifteen years. There are comprehensive rules for determining the country of origin of goods so that free trade status is effective among the NAFTA countries. Generally, 50% of the tariffs between Mexico and the United States were eliminated immediately, and 65% will be eliminated by 1999. Most Canada-US tariffs will be eliminated by 1999.

Market Access

Import-export restrictions, such as quotas and import licenses, have been eliminated. However, each NAFTA country retains the right to make restrictions to protect health; the environment; and products such as agricultural, automotive and energy-related products. Rules of origin ensure that NAFTA benefits are accorded only to goods produced or sufficiently transformed in North America. In some cases, goods must have a specified percentage of North American content. Rules of origin are intended to ensure that non-NAFTA countries do not gain duty-free access to NAFTA countries. Customs user fees are being phased out, and generally, export taxes are prohibited.

Agriculture

Mexico and the United States have eliminated tariffs and import licenses on a broad range of agricultural products. Roughly one-half of US-Mexico bilateral agricultural trade became duty free on 1 January 1994. Under the NAFTA, the United States and Canada maintain the terms of the 1989 Canada-US Free Trade Agreement, which removed many farm tariffs but did not remove export subsidies, income supports, or quotas.

Mexico and the United States have eliminated all nontariff barriers to their agricultural trade, in general through their conversion to either tariff rate quotas or ordinary tariffs. No tariffs are imposed on imports within the quota amount. The over-quota duty will progressively decline to zero during either a ten- or fifteen-year transition period, depending on the product.

Automotive Goods

The agreement eliminates barriers to trade in North American automotive goods (automobiles, trucks, buses, and parts) by removing investment restrictions and tariffs over a ten-year transition period. The NAFTA rules of origin provide that, to qualify for preferential tariff treatment, automotive goods and parts must contain a specified percentage of North American content (a minimum of 60% to 62.5% phased in over four years). Mexico permits NAFTA investors to make investments of up to 100% in Mexican national suppliers of parts and up to 49% in other automotive parts enterprises, increasing to 100% after five years. Mexico's thresholds for the screening of investment or takeovers in the automotive sector are governed by the NAFTA's investment provisions. Most trade in automotive goods between Canada and the United States is conducted on a duty-free basis.

Energy and Basic Petrochemicals

Mexico has reserved from the NAFTA goods, activities, and investments in Mexico in the oil, gas, refining, basic petrochemicals, nuclear, and electricity sectors. However, the NAFTA energy provisions allow NAFTA investors to acquire, establish, and operate facilities in Mexico in nonbasic petrochemical goods and in electricity-generating facilities for "own use," cogeneration, and independent power production. The three countries are allowed to administer their own export and import licensing systems, although they are limited to certain circumstances, such as conserving exhaustible natural resources, dealing with short supplies, or implementing a price stabilization plan.

Government Procurement

The agreement opens a significant portion of the government procurement market in each NAFTA country on a nondiscriminatory basis to suppliers from the other NAFTA countries for goods and engineering and construction services. However, the provisions do not apply to the procurement of arms, ammunition, and weapons or to other national security procurements. Each country reserves the right to favor national suppliers for these procurements.

Financial Services

To a certain extent, the NAFTA integrates the financial services markets of the three countries. Under the agreement, financial service providers of a NAFTA country can establish in any other NAFTA country banking, insurance, and securities operations, as well as other types of financial services. Each country provides both national treatment, including treatment with respect to competitive opportunities, and most-favored nation treatment to other NAFTA financial service providers operating in its territory. After transition periods to the year 2004, there will be virtually no ownership or market share limitations.

Land Transportation Services

The NAFTA provides a timetable for the removal of barriers to land transportation services (bus, trucking, rail, and port services) between the NAFTA countries and for the establishment of compatible land transport technical and safety standards. It removes many investment restrictions on these services. The NAFTA does not cover air or sea transport, except for port services as described later in this section.

Bus and Trucking Services. Mexico will allow 49% Canadian and US investment in bus and trucking companies providing international cargo services after three years, 51% after six years, and 100% after ten years. After three years, Mexico will allow Canadian and US trucking companies to make cross-border deliveries to and pick up cargo in Mexican border states. The United States will allow the same access to Mexican trucking companies. After six years, Mexico will provide cross-border access to its entire territory to trucking companies from Canada and the United States, and the United States will provide the same treatment to Mexican trucking companies.

Rail Services. Subject to a reservation by Mexico, Canadian and US railroads have market access to Mexico and may construct and own terminals and financial rail infrastructure in Mexico. Direct contracting with customers is now allowed. Mexico has reserved the right to have its national railroad continue as state owned.

Port Services. Mexico allows 100% Canadian and US investment in -- and operation of -- port facilities such as cranes, piers, terminals, and stevedoring companies, for enterprises that handle their own cargo; handling other companies' cargo is allowed after the Mexican National Foreign Investment Commission has screened the arrangement.

Communications Services

The NAFTA provides for access to -- and use of -- the public telecommunications networks of the three countries. Private firms and individuals may offer all available telecommunications and information services and technologies.

Investment & Labor

Investment: The NAFTA removes significant investment barriers, ensures basic protections for NAFTA investors, and provides a mechanism for the settlement of disputes between investors and a NAFTA country. NAFTA investors include all enterprises, even foreign-owned subsidiaries, with substantial business activities in a NAFTA country.

The national treatment and most-favored-nation treatment provisions ensure that each country will treat NAFTA investors and their investments no less favorably than its own investors and investors of other countries. The NAFTA also eliminates Mexico's performance requirements (requirements that are a precondition for locating operations).

NAFTA investors can convert local currency into foreign currency at the prevailing market rate of exchange for earnings, proceeds of a sale, loan repayments, or other transactions associated with an investment.

Canada may review acquisitions in excess of US$150 million as provided in the Canada-US Free Trade Agreement. Mexico may review acquisitions in excess of US$25 million, with that threshold phased up to US$150 million in the tenth year after the NAFTA came into effect. Equity limitations on certain vital industries, such as energy, maritime, civil aircraft, nuclear, airline, fishing, and broadcasting, remain.

The NAFTA permits greater investor access to Canadian securities and real estate.

Labor: The NAFTA does not create a common market for the movement of labor. Each NAFTA country maintains its rights to protect the permanent employment base of its domestic labor force, to implement its own immigration policies, and to protect the security of its borders.

Taxation

Tax questions are governed by applicable double tax treaties between the NAFTA countries. Canada and Mexico concluded an income tax treaty on 8 April 1991, which is now in force. Mexico and the United States signed a tax treaty on 18 September 1992, which was ratified by both countries and is now in force. Canada and the United States recently concluded a protocol to the existing income tax treaty between those countries. When the protocol is ratified, it is likely to facilitate further cross-border involvement between the two countries.

Dispute Settlements

The NAFTA provides for the establishment of a trade commission and secretariat to administer the agreement and resolve disputes among the NAFTA countries.

Expropriation

No NAFTA country may expropriate investments by investors from the other NAFTA countries, except for a public purpose and with compensation at fair market value.

Intellectual Property Rights

The NAFTA provides protection for a wide variety of intellectual property rights, such as patents, copyrights, trademarks, sound recordings, computer software, and trade secrets. It also establishes procedures for enforcement, including damages, injunctive relief, and due process. The NAFTA offers other protections, including removing licensing restrictions on agricultural and pharmaceutical producers.

Customs Administration

The NAFTA provides for uniform regulations, requirements for certificates of organization, recordkeeping requirements, advance rulings, and other matters to streamline customs administration.

Other Provisions

The following is a listing of some of the other key provisions in the NAFTA:

* Balance of payments.

* Technical and sanitary standards.

* Review of antidumping and countervailing duties.

* Cross-border trade in services.

* Competition policy monopolies and state enterprises.

Conclusion

The NAFTA is already having a major effect on trade, investment, and business among Canada, Mexico, and the United States. Deloitte Touche Tohmatsu International specialists can help businesses and investors take advantage of the substantial benefits the agreement offers.

Canada:

Joseph Martin, Toronto (BCE Place)
Telephone: +1 (416) 601-6150
Telecopier: +1 (416) 601-6151

Mexico:

Rafael Delgado, Mexico City
Telephone: +52 (5) 280 9255
Telecopier: +52 (5) 280 9422

United States:

Ben Anderson, Houston
Telephone: +1 (713) 756-2228
Telecopier: +1 (713) 756-2001

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