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05/23/95

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NAFTA institutions reshaping American relations, scholars say

STANFORD -- For the first time in Mexican history, last month lawyers in Mexico City made oral arguments before judges instead of arguing their points in the writing-only tradition of the Napoleonic civil code. It was one of many small but significant steps being taken away from the public limelight to integrate Mexico, Canada and the United States under terms of the North American Free Trade Agreement.

While worldwide attention is riveted on trade friction between Japan and the United States, crucial decisions about NAFTA's infant institutions -- designed to create a new trade order in North America -- are being made right now, three Stanford scholars who are familiar with NAFTA say. If the various panels and commissions that NAFTA calls for are set up well, these scholars say, they can help Mexico survive its current political and economic instability. In the long term, they also can economically benefit the entire Western Hemisphere.

But the fall of the peso last December and a growing isolationist attitude among voters in the United States could slow integration, these scholars say. Two of them -- John Barton, the George E. Osborne Professor of Law, and John Wirth, the Gildred Professor of Latin American Studies -- are personally involved in implementing NAFTA. The third, Judith Goldstein, associate professor of political science, monitors the developments as part of her research on foreign economic policy. All are participants in Stanford's North America Forum, which offers seminars and courses on the subject of regional economic, political and cultural integration. They gathered recently to discuss NAFTA and its current effects.

"This is a crucial time; it's not politics as normal," Goldstein said. "There is a much closer interaction of the countries and opening of the economies to trade and investment, the [development of] common solutions to problems and a whole range of new mechanisms. It probably is most striking between Mexico and Canada because they had almost no relationship before."

Barton agreed, noting that Mexicans and Canadians involved in trade disputes with the United States often consult one another now.

Mexico, Canada and the United States have "an elegant but very untried mechanism to try to maintain and create wealth and do it in such a way that the planet doesn't get wrecked," said the Canadian-born Wirth, an American citizen who is a historian of Latin America. "Now how do you get governments to go along with this? I can't emphasize enough that the power for people to know what is going on and the participation of non- governmental organizations is really a new force in [regional] politics."

Wirth is working to make that new force a reality as one of 15 members of the Joint Public Advisory Committee to the North American Commission for Environmental Cooperation. The Montreal-based commission comprises the three chief environmental regulation enforcement officers of Mexico, Canada and the United States. The commission and its advisory committee are the result of an environmental side agreement to NAFTA. The advisory committee's staff is developing procedures for citizens to bring complaints about environmental regulation enforcement to the tri-national commission. Wirth envisions the commission as a force for improving regional air quality and for helping Mexican communities, in particular, identify environmental problems that have not been addressed by their single-party government. A similar apparatus has been set up in Texas to handle disputes over labor standards.

Goldstein is less optimistic than Wirth about the ability of NAFTA institutions to solve regional problems. Since most of the new bodies don't have binding power to tell agencies within the countries what to do, she said, there is a danger that "50 people will hang out together and become good friends, but they'll be separated from the political process. They will come out with more and more ideas of what would be good, but they will never implement them." The U.S. government, in particular, cannot be counted on to cooperate with its two neighbors, she said, because it is far more powerful than the other two countries and has a more divided political system. But Goldstein added that she is encouraged by the cooperation and understanding that has developed on Barton's trade dispute resolution panels.

New courtroom procedures

Earlier this month Barton sat in a Mexican courtroom as one of five judges to hear the second set of oral arguments in Mexican legal history. As one of five members of a NAFTA trade dispute resolution panel, he listened to Mexican lawyers argue Mexican law in Spanish on behalf of American steel producers. The steel companies have appealed a Mexican administrative agency's decision that the companies are dumping products on the Mexican market at prices below their cost and therefore are subject to higher duties under Mexico's anti-dumping law. The NAFTA- generated law, patterned after the anti-dumping laws of Canada and the United States, is being used against the U.S. producers by Mexico's newly privatized steel industry. A week earlier, another bi-national trade dispute panel heard the first such trade dispute case in Mexico, and the first decision in that case is due in July. (The panels are composed of trade lawyers and academics -- three from one country and two from the other, with the majority alternating between the countries.)

"The interesting thing to me is that Mexico has not had anywhere near as strong a tradition of judicial review of administrative decision making as do Canada and the United States," Barton said. "They don't have the pattern there that anytime [a government agency] does something you don't like, you can go to circuit court."

Oral arguments in the Anglo-Saxon common law tradition are an important innovation for Mexico as well, Barton believes, because oral exploration of the issues can lead to clearer exposition of the issues than formal written legal briefs alone. They can be used to "push people to understand the factual issues [of a case] and make more sophisticated policy arguments. You can explain more complicated things, and you can play off the sides by getting them to respond to each other's arguments," he said.

Barton also sits with other international trade lawyers and academics on bi-national trade dispute panels convened in Ottawa as a check on whether Canada's administrative agencies are correctly applying Canada's laws. Similar panels convene in Washington for appeal of U.S. agency decisions.

Although these judicial panels cannot impose new laws, Goldstein said the decisions handed down by them so far indicate a common understanding is developing between the countries on the way trade disputes should be administered. "This is new," she said, and holds out the promise that "Congress cannot change the law all of a sudden by manipulating the behavior of the American bureaucracy."

The American and Canadian agencies are prosecuting fewer anti-dumping and countervailing duty cases since the NAFTA panels began, she said, which suggests the bureaucracies get tougher reviews by the specialist panels than they do by the courts and are therefore reluctant to prosecute their weaker cases. "If you look at what the courts were doing in the '80s, they were upholding the bureaucracy a lot more often than the NAFTA panels are now," Goldstein said.

Countervailing duty, anti-dumping laws

For the new trade relationships envisioned under NAFTA to work, the key political weapons used in trade battles -- countervailing duties and anti-dumping laws -- must be defused. Countervailing duties are the duties that one country sets up to try to respond to another country's subsidy. The concept has been in law since the 1890s. Anti- dumping laws followed. "What they pretend they are publicly is to protect one country from being dumped on, from having prices undercut," Barton said. "You make a big profit at home in your protected market -- of course, it is always Japan [politicians] pick on in their examples -- and then you sell at a loss in the U.S. to drive out all the U.S. competitors, and then you zap the price back up. That's the symbolism."

But the reality is for home companies to convince administrative agencies to define the production costs of foreign competitors in the maximum way so that the agencies will tack on anti- dumping duties to the foreign products, Barton said. Defining costs is particularly tricky in capital- or research-intensive industries, he said, because, in the real world, companies very often don't recover all of those costs in a given year due to normal business cycles. "In that context, the anti-dumping laws jack up the price of the imports so that I can recover my own fixed costs."

In one of his Canadian cases, for example, Barton said, U.S. accounting practices for handling pension fund law employee health care plans became an important cost issue. "If one year, I take a big bite against profits in my accounting process to cover these costs, how do I account for that in calculating the costs of goods I produced that year?" he said. "That's an example of the kinds of problems the agencies are faced with in the real world. It shows you why reasonable people can disagree about the outcome of a particular decision and why you get appeals."

History of trade fights

"The United States has tended to use these laws more against Canada and Mexico than vice versa historically," Barton said. "In the case of Canada, there were a whole lot of subsidies. In the case of Mexico, until recently, there were all kinds of artificial prices, and the lawyers tell me to treat artificial pricing as dumping, rather than as a subsidy, but one way or another, it's something understandably that the U.S. wants to respond to."

Canada relied on subsidies to hold itself together politically, Goldstein said. "When we started putting countervailing duties in, we were saying, 'No, you can't give unemployment insurance to the fishermen in the east coast when they are co-opted; you can't do stumpage fees on lumber,' a whole variety of things which was fundamentally what was holding Canada together. They had every reason to believe we were in some way aggressively undercutting the fundamental basis of politics and the political economy of Canada."

A long-standing subsidy, for instance, to east-west freight in Canada allowed "western wheat growers to get their wheat to market in a subsidized way and therefore be able to buy the products of Canadian industry in central Canada, which were more expensive than from the United States," Wirth said. "That has just now been abolished."

Canada was pushed into the free trade agreement, Goldstein said, "by an increase in what we call administrative protectionism, a rise in anti-dumping and countervailing duty suits against Canadian industries" in the 1980s. "For Mexico it was as much about investment and being able to make a credible commitment to investors as it was to trade because the trade barriers [to U.S. markets] were relatively low anyway. By allowing more investment, [NAFTA] was a means to encourage Americans to come down, build infrastructure, invest in production that Mexico thought was not going to come from [membership in] GATT alone."

For the United States, the largest potential gain was more security than economics, Barton said. "We supported the direction that the last two Mexican administrations have taken and we know this is a neighborhood where we have potentially all kinds of complications. This was a way of trying to cement that Mexican policy from our perspective and trying to build a relationship that has a chance of giving Mexico some economic development."

"For the U.S., it was a win-win situation," Goldstein said. "We already had more access to markets than Canada or Mexico, so it is not a major change for us. When the dust clears, we will have more access, but it is a small change compared to them. Their markets were much more closed before."

Mexico's entire domestic product is just 3 percent of the North American total and Canada's is 9 percent, leaving the United States with 88 percent, Goldstein said. While Canada and Mexico are the United States' two largest trading partners, their exports and imports are a much smaller portion of this country's trade volume than the U.S. provides the other two.

"I think that power relationships are always there under the surface, that there will be examples in which the U.S. isn't going to cooperate" with the NAFTA institutions, Goldstein said. Most examples of cooperation are "fueled by it being in someone's interest in the center country, the United States, to actually do it, more than any consensus that we are willing to give up sovereignty in a central sense in order to be a cooperative neighbor. We need to watch all of the [NAFTA] panels closely because my guess is that if they come out with something that is very far from the median opinion in the United States, there is going to be a mini- revolt.

"On the margins, John [Wirth] might be right, and if [cooperation] in fact happens, it will be a wonderful program for political scientists to study, because it is not supposed to happen. My guess is it's not going to happen very often. With the environmental [panels], I'm pretty sure it won't happen. If it's going to happen, it's going to happen on the trade dispute resolution panels," Goldstein said.

Environmental machinery

The environmental secretariat, a tri-national technical staff of 30 located in Montreal, took a long time to set up, Wirth said, "because the governments couldn't agree on the tax status" its employees would have. "For a while there was double taxation, so Judy's point about the possible problems with this part of NAFTA almost came to pass over taxes."

Wirth said he was put on the advisory committee because "I was someone who really believed that it could work and was felt to be someone who could understand how Mexicans, Americans and Canadians might cooperate." (Wirth recently co-edited a book of essays by scholars and prominent politicians in the three countries called Identities in North America: The Search for Community [Stanford University Press].)

The 15-member advisory group, he said, is pressing staff to speed up the writing of operational guidelines so that citizens can bring complaints about environmental regulation enforcement. The Mexicans he has met with, he said, see the new commission, secretariat and advisory committee as a way of bringing "intrusive sunshine" about environmental concerns to their government. "The secretariat, through its reporting and use of e-mail and data bases, will be able to circulate information on compliance with environmental regulations, so that people will know more." NAFTA, he believes has "legitimized" the need to open up governmental processes, which will eventually allow Mexican communities to have more voice in environmental decision-making.

The new Border Environmental Cooperative Commission is also a result of NAFTA. The bi-national group, with strong participation from environmental groups, will hear requests for infrastructure funding from communities along the U.S.-Mexico border, where water pollution is particularly a problem. "This is totally new for Mexican communities. They have always been dependent on the federal government. This new model throws it down to them to decide what they want and then to make a case for it and commit themselves to international bonding [by the North American Development Bank] for 30 years," Wirth said.

Mexico and Canada were wary that U.S. environmental groups would use the environmental arm of NAFTA to embarrass them, but the side agreement proved necessary to get NAFTA through Congress, Wirth said.

Political challenges to NAFTA

Goldstein, Wirth and Barton see two new challenges to NAFTA's progress: the current shift in Congress from Democratic to Republican control and Mexico's peso devaluation crisis.

Even without a major political shift in Congress, "the U.S. with its divided government is always a problem for these other two countries," Wirth said. "The parliamentary system of Canada concentrates authority, and the Mexicans have this authoritarian one-party state. We have this system that we are comfortable with but everyone else is puzzled by and wonders how we can possibly make it work. You want to get into a system rule-binding these [U.S. politicians] as much as possible, because they are all over the map in their own internal disputing and back-fighting and undercutting and jockeying for position."

One such shift may be occurring now on the trade-environment linkage in NAFTA. Not long ago, that linkage was necessary to get NAFTA ratification through Congress because environmentalists and other groups in the United States wanted to keep Mexico from using its lower environmental standards as a form of trade advantage, Wirth said. They wanted NAFTA institutions to keep pressure on Mexico to "harmonize its environmental laws upward."

"Now we have an extraordinary situation where the U.S. Congress under control of the Republicans may be harmonizing downward in such a way that we would be out of compliance with the very agreement that we agreed to set up, which said that you don't lower environmental standards," he said.

"What this does for the willingness of Mexicans and Canadians to go along with this environmental machinery is very interesting. They are of course sort of holding their breath to see what happens in the United States. We may simply opt out of the leadership that we took on in this very American framework. The country may blow it," he said.

Budget cutting is also a threat to the emerging NAFTA institutions, Barton said, because Sen. Jesse Helms, the North Carolina Republican who heads the foreign relations committee, and others are pushing a new wave of isolationism through proposed budget cuts. "The operations of international negotiations and panels, albeit a small amount of the overall budget, in today's climate of isolationism are at risk," Barton said. There are also proposals before Congress to shift and cut the government's trade regulatory apparatus.

Republicans generally have been supporters of free trade, but the new Republicans in the House do not have the same connections to Wall Street, Barton said, which means they are less enthusiastic than could be expected in the past for beginning negotiations with Chile to extend NAFTA further south. While those negotiations formally began this month, they are not likely to go anywhere until after the next presidential election, Goldstein said. Even the more traditional Republicans in the Senate, she said, do not want Clinton to take credit for expanding NAFTA. Also, the president's "fast-track" negotiating authority, which permitted him to take important procedural shortcuts in the congressional ratification process for both NAFTA and the Uruguay round of the General Agreement on Tariffs and Trade, expired on Jan. 1.

The temptation for politicians to use foreigners as scapegoats in the current political climate may be irresistible, Wirth said. "Both the United States and Mexico are open to nationalist demagogues right now. It is a very tricky situation. [California Gov. Pete] Wilson demagogued it on Prop. 187."

Such political stands are popular now, Goldstein said, because "people are nervous, it's hard times, and anything that looks like it could cause a decline in our standard of living is not a politically feasible position for any elected official to take, period."

All three scholars say they are concerned about the Mexican government's stability. It was weakened by the December fall in the value of the peso, which in turn, they blame on Salinas' failure to take the unpopular move of devaluing the peso before he left office last year, something past Mexican presidents have done.

"Even though I think that the current peso crisis has nothing to do with NAFTA, it certainly is clear that having to buckle up your belts again, take another pay cut, see the price of autos and spare parts go up in Mexico, that hurts," Barton said. "If in the current belt tightening [President Ernesto] Zedillo is repudiated, there is a chance that all these other things will be repudiated as well."

The fall of the peso and its political ramifications are the underside of NAFTA, Goldstein said. "Europe is integrating countries at different levels of development, but there are some redevelopment funds and some redistribution of wealth. Our integration with Mexico, without having any agreement on redistribution from the center to Mexico, is a much tougher thing," she said.

Subsistence farming, for example, is about 30 percent of Mexico's labor force, but "there is not going to be any grain production 15 years hence. They can't continue to produce corn when their neighbor is the most efficient producer of corn in the world," Goldstein said.

"Everyone has a utopian view of that integration, but this underside is part of it too. [Trade liberalization] causes redistribution. It's going to have a political price someone is going to have to pay," she said, and the most likely candidate is the Mexican government. That Salinas undertook to negotiate the free trade agreement, she said, indicates he was focused on the long term, not the short-term consequences. "This is an amazing thing that has happened in this decade," she said.

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