Why Fix NAFTA? The environment needs more than a fix

The current administration has promised to make drastic changes to the North American Free Trade Agreement. Most economists and analysts agree that NAFTA has been economically beneficial for the US, Canada and Mexico [1] and that pulling out from it could be a recipe for economic blues in the continent. Yet, there is one player that could benefit: The Environment.

For more than 20 years, NAFTA has tied the economies of Canada, the US and Mexico together. When it was signed 1992 by former republican president George H.W. Bush, NAFTA promised to create what in his words would be “the largest, richest and most productive market in the entire world.” [2]

NAFTA mostly eliminates tariffs on goods traded between the three North American nations and sets the framework to slash other trade barriers like the all-too-familiar quotas or more sophisticated restrictions to production–like guarantees of the non-use of child labor. The general idea of NAFTA was to create a free-trade zone where a company in Ohio would do business with a firm in Ontario just as easily as it did with one in Indiana [2].

If you have taken an introductory econ class you have been exposed to the classic economic argument for free trade: GAINS! You can think about free trade as a new of technology or a new resource to exploit–factors that would make an economy grow.

Economists preach that trade is “a non-zero-sum game” in which all the parties involved will benefit, regardless of who has the “absolute advantage” in production. What this means in colloquial English is that even if the US produces more smart-phones, barely and tomatoes than Canada or Mexico, the American economy as a whole will grow when American smart-phone producers get the chance of selling their product to Canadian and Mexican consumers and when American consumers get unregulated access to potentially cheaper Canadian beer or Mexican tomatoes. In turn, facing increased competition from across the board will incentivize domestic producers to become more efficient and will prevent local monopolies from charging too high prices. Similarly, Mexico’s and Canada’s economy will grow through the same mechanisms.

The important point to note here is that it is the economy as a whole which will benefit from trade. Of course, within the country’s economy there will be sectors that win and sectors that loose. In the case explored here, the American car industry will grow, while American agriculture will shrink. Nevertheless the losses faced by American farmers will be smaller than the gains for American smart-phone makers. In turn, the losses to Canadian and Mexican smart-phone makers will be smaller than the gains to Canadian and Mexican farmers.

Mr. Trump’s take on international trade is very different. He thinks it is more like a game of risk: a patriotic contest in which countries are rivals and they play to take each other’s job. Mr. Trump often invokes technical words like “trade deficit” and uses them without mentioning its financial counterparts to trigger panic and anger among supporters. He forgets that in international trade accounts always balance out. In that sense, the $500 billion current account deficit is exactly offset by a $500 billion investment surplus.

In that protectionist spirit, just after abandoning the Trans-Pacific Partnership, he announced he would change NAFTA dramatically with the intention of creating more jobs in the US. He will impose new tariffs and put new conditions on producers based outside the US. There are even rumors of the US could completely pull out of NAFTA.

It will be what it will be, and it is really not in our control. But let’s focus on the positive. There is one player that has been seriously neglected and harmed by NAFTA. By revisiting the details of NAFTA, Donald Trump could show a kind hand to the Natural World.

A legitimate argument against free trade agreements is one expressed by many environmentalists: the fear that such agreements will result in countries becoming a “pollution haven” for dirty foreign firms seeking weaker environmental regulation.

In the case of NAFTA, there is little evidence to confirm or deny this fear.

Unlike any preceding significant trade agreement, when NAFTA was designed, its signatories made an explicit effort to grapple with the issue of unsustainable resource exploitation and industrial practices that are be harmful to the environment [3]. NAFTA was first at including environmental provisions through a side agreement, “The North American Agreement on Environmental Cooperation.”

Yet, according to Mexican government figures, the economic costs of environmental degradation as a percentage of DGP have not changed since NAFTA was put into place. Moreover, since the size of Mexico’s economy has grown since 1994, what that figure means is that environmental degradation has actually increased in absolute terms [3].

Mexico’s poor environmental record has been in part due to the loopholes created by the NAFTA deal itself–not the side Agreement on Environmental Cooperation. Despite its apparent commitment to environmental protection, NAFTA included investment provisions that allowed corporate investors to ultimately sidestep domestic environmental laws. These investment provisions are found in Chapter 11 of NAFTA. Chapter 11 was meant to protect investors against potential corruption in Mexico and it opened legal mechanisms through which corporations could directly sue national governments in case of facing extortions or illegitimate demands. Early in the game, trade lawyers and corporations learned they could use these safeguards to undercut environmental regulations [4]. The legal record of NAFTA’s Tribunals shows that Canada’s government has fought in court to protect community values and sensitive environments against foreign companies’ plans to expand but the Mexican government has failed to stand up for the environment [5].

The problem is not NAFTA per se. The problem is corrupt officials within governments and within the NAFTA Tribunals themselves who choose to overlook environmental regulations to further their personal financial interests by allowing foreign corporations to use unsustainable exploitative practices.

Corruption is a hard issue to tackle–particularly from outside. Yet, if NAFTA is going to be changed drastically, why not take a careful look at Chapter 11 and the link between investor protections and their use to challenge environmental laws? There may be alternative ways to design a “cleaner” dispute resolution mechanism that discourages corruption and doesn’t involve giving a foreign corporation the same legal weight as a sovereign government so that the former can sue the later. Also, it may be worth revisiting the composition, procedures and regulations binding the NAFTA Tribunals–which actually turn out to be a rather secretive institution that has the power to influence the enforcement of laws in an ad-hoc manner [6].

In the meantime, students must remain hopeful that positive outcomes can result from this international trade mayhem. Moreover, I believe it is an important time to pause, think, decide what we want and then choose what we are going to do.

If someone is going to start rewriting international trade laws, let’s decide what we want these laws to look like, what we want these laws to promote and how we want these laws to be enforced. I think we can all agree in that we want to have it all. If we are going to have free trade at all, let’s have it be fair trade too. In the future, let’s support movements that promote sustainable practices. We can do that. We can demand a transparent court system. We can vote, we can choose what products to purchase. We can do our research about the causes we care for and support those causes. In the extreme case we can protest. Clearly, we have options to act. We don’t want to change a rigged system, but before we burn it, let’s decide what we want.


[1] https://www.forbes.com/sites/stuartanderson/2016/12/03/donald-trumps-trade-policies-blessing-or-curse/2/#2d22f5503402

[2] https://www.nytimes.com/interactive/2017/upshot/what-is-nafta.html?_r=0

[3] http://www.ase.tufts.edu/gdae/Pubs/rp/PardeeNAFTACh6GallagherEnvtNov09.pdf

[4] http://www.iisd.org/pdf/nafta.pdf

[5] https://news.mongabay.com/2016/11/global-trade-101-how-naftas-chapter-11-overrides-environmental-laws/

[6] http://www.nytimes.com/2001/03/11/business/nafta-s-powerful-little-secret-obscure-tribunals-settle-disputes-but-go-too-far.html

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