20 Things You Need To Know About Nafta

November 14, 1993|By Washington Bureau

The House of Representatives will vote Wednesday on the North American Free Trade Agreement, a complex and ambitious piece of legislation to create the world's largest free-trade zone. It is timely, then, to look at what is proposed and why it has aroused such opposition:

1. What is NAFTA? The North American Free Trade Agreement would eliminate most barriers to the export and import of goods and services among the United States, Canada and Mexico over the next 15 years. It is also designed to encourage investment among the three partners and to protect their patents, trademarks, copyrights and recordings.

2. What would it do? It would unite 360 million consumers in the three countries, with a total annual economic output of $6 trillion, into an open, barrier-free market. Half the existing tariffs would be eliminated immediately, another batch would disappear after 10 years, and the levies on a final, small group of goods -- mainly agricultural products -- would end after 15 years. U.S. tariffs against Mexican goods average 4 percent. Mexican tariffs against U.S. goods average 10 percent. This means the U.S. stands to gain more than Mexico from removal of the tariffs. Tariffs would remain against goods from outside the free-trade zone, putting the Japanese and Europeans at a trading disadvantage.

3. When would NAFTA go into effect? The agreement is slated to take effect Jan. 1, 1994, if Congress approves it. It has already been approved by the legislatures in both Canada and Mexico. The new Liberal government in Canada is seeking settlement of other trade issues with the United States before giving its seal of approval to NAFTA, but this is basically a bargaining posture.

4. Is it a treaty? It is not a treaty. It is an international agreement. This is why it requires approval of both the Senate and the House of Representatives. Treaties require only approval of the Senate. NAFTA faces its biggest challenge in the House, which votes Wednesday.

5. Whose idea was it? It was first proposed by President George Bush and Mexican President Carlos Salinas de Gortari in June as "a powerful engine for economic development, creating new jobs and opening new markets" in both countries. Canada, which created a free-trade zone with the United States in 1989, agreed to join the wider bloc.

6. Why has NAFTA come up now? President Bush signed the original agreement in December 1992. During the 1992 presidential campaign, Bill Clinton endorsed NAFTA on the condition that side agreements be negotiated to strengthen Mexico's implementation of labor and environmental standards. Negotiations on the side agreements lasted until August, delaying congressional consideration. Without the side agreements, it had no chance of congressional approval. Even with them, the outcome of the House vote is uncertain.

7. What is the argument about? The core issue is whether NAFTA will create or cost jobs. Most studies suggest that there ** will be a short-term loss of jobs but a long-term net gain in employment. Overall, the labor impact will be small, because Mexico's economy is only one-twentieth the size of the U.S. economy. But any job losses or plant closures will be locally painful. Other arguments center on protection of the environment and the imposition of higher labor standards in Mexico.

8. What will it cost? The only direct cost to the U.S. government will be loss of revenues from the U.S. trade tariffs that will be eliminated under the agreement. The administration estimates this cost at $6.9 billion between 1994 and 2003. The Joint Economic Committee said last week that this underestimated the lost revenues by $700 million because the administration failed to factor in Mexican growth rates. It also failed to include $224 million for creation of a North American Development Bank, a late addition to the agreement to sweeten it for Latino members of Congress. Under current budgetary law, all lost revenues must be made up in new taxes, federal savings or program cuts. The administration plans to offset the cost by raising $7.6 billion in a variety of ways, including accelerated tax payments, lower federal subsidy outlays because of increased business opportunities, and more efficient customs operations outside the free-trade area.

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