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Speeches and Papers

NAFTA and the Environment: Lessons for Trade Policy

by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Diana Orejas, Peterson Institute for International Economics

Speech delivered at the International Policy Forum
Organized by The Bildner Center, Western Hemisphere Studies
New York
February 28, 2001

© Peterson Institute for International Economics


This speech will also be delivered at the Resources for the Future (RFF) Council and Board of Directors Meeting at San Antonio, Texas. 19-20 April 2001.

 

Short History of NAFTA Provisions

  • The United States, Canada, and Mexico face serious transborder environmental problems: air and water pollution and disposal of hazardous wastes. The Rio Grande and Tijuana Rivers are especially noxious.


  • Closer economic integration raised the profile of environmental problems. NAFTA created a "hook" for international remedies.


  • NAFTA explicitly addresses environmental issues in its preamble and in five of its 22 chapters. Other chapters relate to environmental issues indirectly.


  • Former President Clinton, during the 1992 election campaign, criticized NAFTA for not dealing adequately with environmental issues, and committed to negotiate supplemental agreements on both environment and labor. Recall that the original NAFTA, negotiated under President Bush, included environmental provisions.


  • The approach of the environmental side agreement, the North American Agreement on Environmental Cooperation (NAAEC) was to create several new bureaucracies to monitor the environment, consider disputes, and fund infrastructure improvements. The bureaucracies are the Commission for Environmental Cooperation (CEC); and the Border Environmental Cooperation Commission (BECC) and the North American Development Bank (NADB), both under the US-Mexico Border Environmental Cooperation Agreement (BECA).


  • Despite this institutional thicket, NAFTA's environmental record is mixed. Anyone who expected a rapid improvement in conditions along the US-Mexico border is disappointed.


  • The CEC has received 28 submissions concerning possible violations of environmental practices (9 versus Canada; 11 versus Mexico; and 8 versus the United States). A "factual record" (the maximum level of review) will be developed in three cases; 11 are under review; the rest have been dismissed. Meanwhile, the CEC has launched a number of studies, outreach programs, and cooperative ventures (see table). Approximately one-third of the CEC budget (about $9 million annually) is spent on specific projects, and the remainder is devoted to ongoing obligations under the NAAEC.


  • The BECC provides technical assistance (about $17 million over three years) for infrastructure projects (approximately 125 to date). In addition, the BECC certifies projects as worthy of NADB support (26 so far, which have been funded to the extent of $200 million in NADB loans, supporting about $850 million total investment).


  • The total capital of NADB is $3 billion ($500 million cash; $2,500 million callable capital). So far NADB has made under $300 million of loans. In the run up to the Bush-Fox summit in February 2001, Fox urged an expansion of NADB to $10 billion capital. In the Guanajuato Proposal, nothing specific was said about NADB.


  • Meanwhile, the application of Chapter 11 on investor disputes has agitated many environmental groups. Basically, Chapter 11 provides a secret arbitration procedure when an investor claims that one of the NAFTA countries took an action that was "tantamount to expropriation". Under this provision, some eight claims with environmental overtones have been lodged, totaling $2 billion. So far, one case (Ethyl) was settled out of court for $13 million; in one case (Desona) the arbitration decision went for Mexico; in one case (Metalclad) the arbitration went for the company with an award of $17 million (the original claim was $90 million). The award is now being challenged in Canadian court (the tribunal sat in Canada). The most controversial case, still under arbitration with a claim for $1 billion, is Methanex (Canadian company vs. California).

 

 

Recommendations for Improvement


For NAFTA's Environmental and Investment Provisions:

Growing concern about Chapter 11 (state-investor) disputes calls for an interpretive statement to: (1) clarify the meaning of a key term ("tantamount to expropriation"); and (2) increase the transparency and predictability of the Chapter's investor-state arbitration (open proceedings to the public, and/or publish a decision).

 

For the North American Agreement on Environmental Cooperation (NAAEC):

The CEC provides an institutional framework for environmental cooperation and sponsors initiatives that reduce pollution. However, the Commission has an annual budget of only $9 million, of which one-third goes for project support. Given this budget constraint, the CEC should focus on:

(1) becoming a reputable source of environment data to facilitate policymaking; and

(2) improving citizen submission process using the investigatory powers of Articles 13 and 14-15 to draw attention to environmental problems.

The dispute settlement mechanism contained in Articles 22-36 of the NAAEC should be revised so that the provisions actually address persistent patterns of non-enforcement. The present procedures make it very difficult to invoke these clauses (the time length to invoke the clauses is at least two years). At the end of the day, if it loses a case, Canada agreed only to impose monetary fines through its own court system. Both the United States and Mexico agreed to a monetary fine imposed by an arbitration panel, which, if not paid, could lead to suspension of NAFTA trade benefits. Basically the provisions are designed to be dormant. In fact there have been no cases launched. The procedural rules (if a case is launched) have not been agreed.

Publish annual North American Environment report cards to track environmental performance in the three countries.


For the US-Mexican Border:

The North American Development Bank and the Border Environmental Cooperation Commission have launched projects and collaboration has improved. Nevertheless, border conditions are bad and could be improved:

(1) The NADB and BECC should assess what needs to be done in border communities and promote financing mechanisms to ensure that projects are implemented over the next decade.

(2) The NADB and the BECC should create environmental assessment districts along the border funded with environmental fees on industries and housing development in the area.

(3) As President Fox suggested, the NADB capital should be expanded to $10 billion. Equally important, the NADB should fund projects at a faster rate.

 

 

Conclusions on NAFTA's Environmental Record

The achievements of the CEC, the NADB and the BECC fall short of the aspirations of the environmental community. All three institutions should be strengthened.

The environmental problems of North America were not the result of NAFTA nor was the NAAEC devised to address all of them.

Improvements can be made to get better results from NAFTA's environmental institutions.

NAFTA's environmental record is imperfect. It makes more sense to tackle the shortcomings than lament the existence of a free trade agreement.

 


Postscript: Other models

WTO: members can restrict imports if "necessary" to protect human, animal, and plant safety (Article XX(b) of the GATT). Panels have defined "necessary" to mean the "least trade restrictive" solution. No definitive decision on production process methods has been issued. The NAFTA states that Article XX(b) does not apply to Sanitary and Phytosanitary (SPS) measures, as between NAFTA members. Moreover, within the NAFTA context, "necessary" does not mean "least trade restrictive". Finally, the scientific basis for SPS measures is the standard set by the regulatory authority, not the dispute settlement panel. Under NAFTA, the party challenging a regulation must carry the burden of proof; under the WTO, the defended party must show that its laws and regulations are consistent with WTO obligations.

Canada-Chile: in procedural form, similar to the NAFTA side agreement. Importantly, however, monetary fines are the only remedy.

United States-Jordan: far less detailed than the NAFTA side agreement. Parties are obligated to enforce their own environmental laws. In the case of a breach, the other party can take "appropriate measures". However, private rights of action are explicitly excluded.

 


Table 1: North American Environmental Institutions

Trinational environmental institutions

The North American Agreement on Environmental Cooperation signed by Canada, Mexico, and the United States in 1993 established a framework to facilitate environmental cooperation and set up a trinational institution:

The North American Commission for Environmental Cooperation (CEC) created by the environmental side agreement to facilitate joint activities. The CEC consists of a governing body, the Council of Ministers; a Secretariat that provides the Council with technical support; and a channel for NGO influence, the Joint Public Advisory Committee (JPAC).

 

Bilateral environmental institutions

Mexico and the United States signed in 1993 the Border Environmental Cooperation Agreement (BECA). The BECA established two bilateral institutions:

The North American Development Bank (NADB) provides loans and administers grants for infrastructure projects at the border. Mexico and the United States contribute equally to the funding of this institution.

The Border Environmental Cooperation Commission (BECC) provides technical assistance and certifies projects for NADB financing.


Table 2: Activities of the North American Commission for
Environmental Cooperation (CEC)

 

CEC project budget 1996-98
( in thousands of US dollars )

1996

1997

1998

Total

Environmental conservation

 

420

 

655 665 1,740

Environment, economy, and trade

529 375 805 1,709
Enforcement cooperation and environmental law 603 420 300 1,323
Information and public outreach program

 

 

239

150 n.a.

 

389

Human health and the environment

 

2,217

 

987 1,075 4,279

Total budget on projects

4,008

2,587

2,845

9,440

Source: CEC Annual Reports. Available at http://www.cec.org

(2) Additional activities of the CEC:

Specific obligations under the North American Agreement for
Environmental Cooperation (NAAEC)

  • Facilitate public access to environmental information
  • Prepare reports
  • Process citizen submissions

North American Fund for Environmental Cooperation (NAFEC)

  • Provide funding to small communities for environmental projects

 

Table 3: NAFTA and the Environment

 

Strengths

Weaknesses

Increased cooperation between NAFTA governments Inadequate support of governments to NAFTA institutions
New trinational and binational environmental institutions Poor funding and management of institutions
Specific projects for environmental improvement Too many initiatives to be effective
Incentive for better environmental protection in Mexico Increased trade puts pressure on existing infrastructure
Greater interaction between NGOs Inefficiencies discourage NGO use of institutions
Economic integration increases harmonization effect Investor-State disputes could chill environmental regulation
Improved access to environmental information Overload of information and descriptive reports
Citizens have access to a complaint mechanism Complaints take too long & do not assure corrective measures
Dispute settlement for persistent non-enforcement Dispute mechanism design makes unlikely its use
Specific initiatives for the US-Mexico border Insufficient to cope with environmental border problems