NAFTA: Outcomes, Challenges and Prospects

An Expert's View about Agriculture and Animal Husbandry in Canada

Last updated: 9 Feb 2011

One in a series of notes on agricultural policy issues of interest to Canada. As the remaining agriculture-related NAFTA clauses became fully implemented on January 1st, 2008, there is much evidence of the Agreement's benefits to all three members in the forms of the agricultural trade expansion within the region and the growth of foreign direct investments in members' agri-food value chains.

NAFTA: OUTCOMES, CHALLENGES AND PROSPECTS Agricultural Policy Issues Vol. 2, No. 2 One in a series of notes on agricultural policy issues of interest to Canada. This note draws on analysis from a number of institutions, listed on pages 5-6. INTRODUCTION Most of the NAFTA pertaining to the agricultural sector is actually structured as three separate bilateral agreements. Mexico signed separate agreements with Canada and the U.S. while the agreement between Canada and the U.S. was largely a continuation of 1 CUSFTA . Each of these agreements, while liberaliz- ing trade in general, also contained trade restrictions for specified commodities in the form of tariffs and st tariff-rate quotas (TRQ). On January 1 , 2008, the final phases of the agriculture-related NAFTA clauses came into force. Below, we first discuss NAFTA institutions and processes. We then review NAFTA effects on trade, investment and domestic policy formulation. Ongoing challenges are then examined before we close with a discussion of NAFTA?s future prospects. The North American Free Trade Agreement (NAFTA) NAFTA INSTITUTIONS AND PROCESSES st came into force on January 1 , 1994. When the NAFTA negotiations were concluded, they created the The NAFTA Free Trade Commission world?s largest free-trade area. NAFTA members share a territory of more than 21 million square kilo- The Commission consists of cabinet-level representa- meters, have immense natural resources, and a popu- tives from members. It oversees NAFTA operations lation of close to 400 million people. NAFTA also set and functions like a Board of Directors (Figure 1), an important precedent for trade and economic convening on an annual basis, or when particularly cooperation, creating a new partnership between two pressing issues arise. It establishes guiding principles industrialized economies and a developing economy. and supervises implementation. It helps to clarify terms and interpretations and resolves disputes aris- NAFTA?s objectives are to: eliminate trade barriers, ing therefrom. The Commission also oversees the facilitate the cross-border movement of goods and work of NAFTA?s working groups, committees and services, promote conditions of fair competition, subsidiary bodies. increase investment opportunities, and provide effective protection and enforcement of intellectual property rights. To achieve these objectives, the NAFTA Coordinators agreement included the principles of national treatment, most-favored-nation treatment, and trans- They carry out the day-to-day management of the parency ? establishing precedents that were later em- NAFTA work program and of the implementation of the braced by the World Trade Organization (WTO). Agreement more broadly. Three NAFTA coordinators, NAFTA created implementation procedures as well as one designated by each country, effectively manage mechanisms for resolving disputes. The agreement ongoing operations. also contains a framework for further trilateral and 1 multilateral cooperation to expand NAFTA and Canada ? United States Free Trade Agreement came enhance its benefits. into effect on January 1, 1989. NAFTA 2 FIGURE 1: SCHEMATIC OF NAFTA INSTITUTIONS Committee on Committee on NAFTA Commission Agricultural Trade SPS Measures Mexican U.S. Canadian Representative Representative Representative Other Working Groups Working Group on and Committees Rules of Origin NAFTA Secretariat Mexican Secretary U.S. Secretary Canadian Secretary Mexican Section U.S. Section Canadian Section members, ensuring that regulations are compatible, Committees and Working Groups scientifically based, non-discriminatory, with no or Within NAFTA, over 30 working groups, committees minimal trade-distorting effects. and other subsidiary bodies have been established to Canada has made a priority of strengthening the facilitate trade and investment and to ensure the NAFTA work program to promote transparency, ac- effective implementation and administration of the countability and efficacy of NAFTA working groups NAFTA. Key areas of work include trade in goods, and committees. Political direction for the work pro- rules of origin, customs, agricultural trade and subsi- gram is provided by Ministers through the NAFTA dies, standards, government procurement, invest- Commission. In addition, NAFTA Deputy Ministers of ment, services, cross-border movement of business Trade meet twice annually to provide high-level folk, and alternative dispute resolution. oversight of the NAFTA working groups and commit- NAFTA working groups and committees also help to tees. smooth the implementation of the Agreement and provide forums for exploring ways of further liberaliz- The NAFTA Secretariat ing trade between members; for example, two rounds of accelerated tariff removals were completed under The Secretariat is made up of national sections and the auspices of the Committee on trade in goods. The personnel from Canada, U.S. and Mexico. The NAFTA working groups and committees also provide a Secretariat provides assistance to the Commission. It forum for discussing issues and, through early dia- is also responsible for the administration of dispute logue on contentious points, the possible avoidance of settlement provisions within the Agreement. Each disputes. national section maintains a court-like registry relating One of the most active committees is the Committee to panel, committee and tribunal proceedings. In on Sanitary and Phyto-sanitary Measures (SPS). It Canada?s case, the Canadian section of the NAFTA has five active working groups: Animal Health; also reports to the Minister of International Trade. The Labeling, Packaging and Standards; Meat, Poultry International Trade Administration of the U.S. Depart- and Egg Inspection; Pesticides, and Plant Health. ment of Commerce houses the U.S. section of the Their role is to facilitate technical cooperation between NAFTA. Mexico?s section of the NAFTA secretariat NAFTA 3 falls within the Ministry of the Economy?s umbrella. change rate movements, technological advances and The NAFTA Secretariat also maintains a tri-national infrastructure also affected the size, direction and website (www.nafta-sec-alena.org/) on which updated composition of North American agricultural trade. information on active and completed NAFTA disputes FIGURE 2 is available. Agricultural Exports of NAFTA ric lt ral x rts f Agricultural Exports of NAFTA Members to North American Partners 1995-2006 e bers to orth erican artners 1995-2006 Members to North American Partners 1995-2006 Dispute Settlement Processes 80 80 80 U.S. . . U.S. Canada anada Canada One of the principal elements of the NAFTA is the 60 60 60 Mexico exic Mexico establishment of a clear set of rules for dispute 40 settlement. Chapter 19 contains dispute settlement 40 40 provisions for anti-dumping (AD) and countervailing 20 20 20 duty (CVD) matters. Chapter 20 includes provisions relating to the avoidance or settlement of disputes on 0 0 0 the application or interpretation of the NAFTA. Canada 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 regards Chapter 20 as a key part of the NAFTA. It is Source: World Trade Atlas. critical to ensuring that trade relations with the U.S. and Mexico are based on an established set of rules. NAFTA has allowed competitive market forces to play As such, the objectives of Chapter 20 provisions have a greater role in determining agricultural trade flows similarities with WTO dispute settlement provisions. between these three countries. As one might surmise, There are also special rules for disputes in Chapters several analyses using bilateral trade-intensity indi- 11 (Investment) and 14 (Financial Services). 2 ces show that for each NAFTA member intra-NAFTA Chapter 19 of the NAFTA provides for a system of bi- trade is more important than trade outside NAFTA. national panel review in place of final judicial review NAFTA also provided important rules designed to for domestic decisions regarding AD and CVD facilitate foreign direct investment (FDI) treating matters. The introduction of bi-national panel reviews, domestic and NAFTA member investors equally. as opposed to appeals to national authorities, ensures Moreover, the agreement prohibits the application of that reviews are more objective, and less subject to certain performance requirements on foreign inves- discretion and domestic political agendas. Due to the tors, such as a minimum amount of domestic content complexity of the process, only a few panels have in production. As a result, FDI in the agriculture and been convened. This process is considered as a tool food processing industry increased in all three of last resort by all three NAFTA members. member-countries. FDI provides each recipient coun- try with additional resources which, together with Trade and Investment Impacts domestic factor inputs, contribute to increases in production and productivity. American statistics show Since NAFTA?s inception, Canadian agricultural that cumulative U.S. FDI in the Canadian food proc- exports to the United States and Mexico have almost essing industry totaled close to $US 58 billion over the doubled ? totaling close to $18 billion in 2006 (Figure last 15 years. 2). Canadian agricultural imports from these two countries showed a similar increase over the same period, reaching $13.5 billion in 2006. Mexico has DOMESTIC AGRICULTURAL POLICIES th jumped from being our 6 largest export destination rd for agri-food products in 1995 to 3 in 2006. Mexico th nd has leaped from 4 to 2 with respect to Canada?s NAFTA preserved national sovereignty by allowing agri-food imports in the same time. Bilateral trade each member-country to design and implement poli- between Mexico and the U.S. has enjoyed equally cies that best suit their respective circumstances. A impressive growth. comparison of agricultural support expressed in the 3 form of Producer Support Estimates (PSE) shows It is difficult to assess exactly how much of this increase can be attributed directly to NAFTA. The 2 Bilateral trade-intensity index is a measure of relative reduction in trade barriers as a result of NAFTA varies importance of a specific exporter in supplying imports greatly by commodity and by member. The creation of compared with other supplying countries. an economic policy environment favorable to cross- 3 PSE is an indicator of the annual monetary value of gross border commerce provided additional incentive to transfers from consumers and taxpayers to support agricultural trade within the region beyond that agricultural producers, measured at farm-gate level, achieved from simple removal of tariffs and quotas. arising from policy measures which support agriculture, However, population growth, economic growth, ex- regardless of their nature, objectives or impacts on farm production or income. NAFTA Can.$ (billions) Can.$ (billions) Can.$ (billions) 4 that each NAFTA country provides support to farmers Trade Disputes in their own way (Figure 3). While some disputes arise as a result of policy FIGURE 3 differences between members, a large number are a Composition of support to agricultural producers o position of support to agricultural producers Composition of support to agricultural producers result of competitive frictions. AD actions can be in NAFTA countries, 2004-2006 in FT countries, 2004-2006 in NAFTA countries, 2004-2006 brought against foreign firms if imports are being sold Miscellaneous payments iscellaneous pay ents Miscellaneous payments Payments based on non-comodity criteria P below prices charged in the home country, or below ay ents based on non-co odity criteria Payments based on non-comodity criteria Payments based on non-current A/An/R/I, production not required Pay ents based on non-current / n/ /I, production not required Payments based on non-current A/An/R/I, production not required Payments based on non-current A/An/R/I, production required the cost of production including a margin for profit. Pay ents based on non-current / n/ /I, production required Payments based on non-current A/An/R/I, production required Payments based on current A/An/R/I, production required Pay ents based on current / n/ /I, production required Payments based on current A/An/R/I, production required Paymen CVD can be imposed on subsidized imports from ts based on input use Pay ents based on input use Payments based on input use Support based on commodity outputs Support based on co odity outputs Support based on commodity outputs foreign countries that are thought to cause or threaten 100% 100 100% to cause material injury to domestic industry. 80% 80 80% The largest proportion of disputes between NAFTA 60% 60 60% members relate to agriculture. Some disputes have 40% 40 40% proved to be very protracted, imposing significant additional costs on agri-food value chains. Examples 20% 20 20% include the U.S. ? Canada wheat dispute, U.S. ? 0% 0 0% Canada disputes over live cattle, and beef and swine Canada United States Mexico a a a ite tates exic Canada United States Mexico trade, and the Mexico-U.S. sugar and sweetener Source: OECD Database, Producer and Consumer Support Estimates, 2004-2006. dispute. In some cases, members negotiated recipro- Note: A/An/R/I is an abbreviation for area planted/animal numbers/receipts/income used in new OECD classification of support. cal concessions or used other dispute resolution mechanisms to resolve differences before reaching Market price support, which the OECD considers the litigation or investigation phase. highly production and trade distorting, remains the largest form of support in all three countries. Input subsidies, another highly distorting category, are Country of Origin Labeling (COOL) somewhat higher in the U.S. and Mexico than in Country of origin labeling (COOL) was originally Canada. Important (and increasing) shares of total enacted in the U.S. 2002 Farm Bill. It required retailers agricultural support in all three NAFTA partners are in to provide country of origin labeling (COOL) to inform the forms that are considered less production and consumers of the origins of several food products ? trade distorting by the OECD. Canada uses payments muscle cuts of beef, lamb, pork, fish and shellfish, based on whole-farm income rather than product- perishable foods and peanuts. COOL was imple- specific support. The U.S. and Mexico favor fixed mented in 2005, but only for fish and shellfish. The payments based on historical entitlements. 2008 Farm Bill amended the list of covered commodi- All NAFTA members have recently developed new ties to include chicken, goat meat, ginseng, and agricultural policies and programs. In the United macadamia nuts. As of March 16, 2009, when the final States, the 2008 Farm Bill will provide the legal rule took effect, COOL provisions became mandatory. framework for its agricultural programs until 2012. In While the final rule will allow for more flexibility on March 2007, Mexico announced its intention to extend labelling requirements in the U.S. for meat from its PROCAMPO program until 2012, while also intro- animals of American and Canadian origin that are ducing some new programs. In addition, it announced brought together during a production run, Canada actions to help smooth the transition to an open continues to express concerns that COOL may ad- NAFTA market for corn, dry bean, sugar and dairy versely affect Canadian exports, value-chain costs, producers. In July 2008, Canada replaced the Agricul- and possibly inward foreign investment, particularly in tural Policy Framework with ?Growing Forward?, a the red meat sectors. In December 2008, Canada commitment to Canada's agriculture sector that's sought formal consultations with the U.S. under the focused on achieving results, reflects input from WTO dispute settlement process on COOL measures. across the sector, and delivers programs that are It continues to convey its expectations that all simple, effective and tailored to local needs. implementing legislation will be in line with U.S. international trade obligations. ONGOING CHALLENGES Border Security Measures For most products and sectors, NAFTA markets have The Canada-U.S. border stretches for 8,891 kilome- become more integrated and have evolved in comple- ters and is critical to a trading relationship worth more mentary fashion. Some of NAFTA?s remaining chal- than $1 billion a day. However, much of the trade lenges are reviewed in this section. depends on just a few critical crossings. Long lines NAFTA % of total PSE % of total PSE % of total PSE 5 have been problematic at many crossings, particularly to both the importing country and the exporting in Ontario and British Columbia. country. In applying equivalency, provided a trading partner can demonstrate that its measures achieve Markets have also shown themselves vulnerable to the same level of protection as those domestically, the periodic disruptions, as evidenced by the aftermaths trading partner?s measures will accepted as equiva- of the 9/11 terrorist attacks. Since 9/11, additional lent. Canada has fully complied with the 2005 security-related measures have contributed to delays agreement on trade normalization for red meats. and system costs in NAFTA economies amounting to NAFTA partners are working toward its implementa- billions of dollars annually. U.S. officials in particular tion. have toughened screening, putting pressure on a complementary relationship within value chains that rely heavily on just-in-time deliveries. An increase in Prospects the cost of crossing the border raises costs of More than fifteen years after NAFTA?s establishment, production in both countries, offsetting the benefits of there is much evidence of its positive effects on the NAFTA. Such costs also undermine the competitive- agricultural sectors and economies of its members. ness of NAFTA value chains vis-à-vis emerging Agricultural trade within the region rapidly expanded, economies. accompanied by tremendous growth in FDI in the agri- The Conference Board of Canada suggests that post- food value chains of all three countries. With NAFTA 9/11 risk-based security programs, part of the now fully implemented, it is of interest to ask what Canada?U.S. Smart Border Accord, aimed to improve path NAFTA partners might choose to capitalize on security and efficiency are not yet fully realizing their opportunities that freer trade and global markets offer. benefits due to infrastructure constraints and a lack of NAFTA leaders have intermittently floated the idea of cohesion between the programs of both nations. The a free trade area that would encompass all of the same is true about U.S. and Mexican initiatives. Better Western Hemisphere. NAFTA leaders have intermit- harmonization and coordination could reduce trade tently floated the idea of a free trade area that would costs, increase predictability and ensure both eco- encompass all of the Western Hemisphere. This idea nomic and security benefits for NAFTA partners. goes back to December 1994 when leaders of North NAFTA governments continue to work together on and South American countries announced plans to security concerns and signed the Security and negotiate a Free Trade Area of Americas (FTAA). Prosperity Partnership of North America (SPP) in Nine FTA negotiating groups were established in March 2005 with the objective of ?developing new 1998, with mandates to negotiate in specific substan- avenues of cooperation that will make our open tive areas: market access, investment, services, gov- societies safer and more secure, our businesses more ernment procurement, dispute settlement, agriculture, competitive, and our economies more resilient?. Ten intellectual property rights, subsidies, anti-dumping working groups were created under SPP, with one and countervailing duties, and competition policy. responsible for food and agricultural issues. While efforts to negotiate a FTAA have stalled, all NAFTA members have negotiated separate bilateral and regional trade agreements (RTAs) with countries Dealing with BSE, Mitigating its Impacts outside the region. Despite occasional irritants, the After the discovery of BSE in Alberta in 2003, over overall consensus is that NAFTA has been beneficial for all three members. 40 countries, including the U.S. and Mexico, placed import restrictions on Canadian cattle, beef and bovine products. In 2005, NAFTA members estab- lished a harmonized approach to BSE risk mitigation SOURCES to more effectively address any BSE risk in North America. This science-based framework of risk man- Herman L., Lawrence, Making NAFTA Better: Com- agement measures for BSE was developed to help ments on the Evolution of Chapter 19, Centre for normalize trade in ruminants and ruminant products Trade Policy and Law, March 2005. within NAFTA and to embrace a mitigation strategy consistent with guidelines of the World Organization Kerr A., William, (2003) The Free-Traders Win the for Animal Health. Debates but the Protectionists Win the Elections: The Curios Case of MCOOL in the US 2002 Farm Bill. In the above measures, the concept of equivalence was recognized. In a regulatory and scientific context, North American Agrifood Market Integration Consor- ?equivalence? stems from recognition that significantly tium (NAAMIC), (2005) Agrifood Regulatory and different animal health and production systems can Policy Integration Under Stress. provide equivalent animal and human health protec- NAAMIC, (2006) Achieving NAFTA Plus. tion for the purpose of international trade, with benefits NAFTA 6 NAFTA Secretariat, text of the NAFTA agreement, The Conference Board of Canada (2007) ?Is Just-In- http://www.dfait-maeci.gc.ca/nafta-alena/agree- Case Replacing Just-In-Time? How Cross-Border en.asp#PartII Trading Behaviour Has Changed Since 9/11?. Foreign Affairs and International Trade Canada, USDA (2005). NAFTA at 11: The Growing Integration information on NAFTA institutions of North American Agriculture, USDA-ERS, Washing- http://www.international.gc.ca/trade-agreements- ton. accords-commerciaux/agr-acc/nafta- Young, L., Wainio, J., Meilke, K., Trade Remedy Ac- alena/inst.aspx?lang=en tions in NAFTA: Agriculture and Agri-Food Industries, The Conference Board of Canada (2007) ?Reaching a PDIC, March 2002. Tipping Point? Effects of Post-9/11 Border Security on Canada?s Trade and Investment?. For further information regarding this paper, contact: September 2009 Aleksandar Jotanovic (aleksandar.jotanovic@agr.gc.ca, (613) 773-2455) Brad Gilmour (brad.gilmour@agr.gc.ca, (613) 773-2452) Project: 09-060b Publication: 10648E For further information regarding this series, contact: ISSN: 1915-9110 Cameron Short (cameron.short@agr.gc.ca, (613) 773-2432) NAFTA
Posted: 26 March 2010, last updated 9 February 2011

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