FreightWaves Flashback: What NAFTA means for cross-border trade

Textiles and trucking are among industries with the most at stake in the North American Free Trade Agreement.

NAFTA will lift tariffs and other barriers to commerce between the U.S., Mexico and Canada. The agreement has drawn criticism from U.S. unions and some manufacturers who fear they’ll be undercut by cheap Mexican competition. NAFTA supporters, however, say it would be a boon — not only for imports from Mexico but U.S. exports.

The goal of the agreement is to create a single North American market for goods and services. NAFTA would eliminate tariffs on goods produced and traded among the three nations.

The detailed agreement covers various issues ranging from energy to financial services to environmental safeguards. In the area of cross-border trade, however, much of the attention has focused on textiles and apparel and on transportation.

Transportation

In the transportation category, NAFTA applies mainly to trucking. The agreement would end restrictions that prevent U.S. and Mexican truckers from carrying cargoes across the border.

After an initial one-to-three-year period of harmonization of safety and regulatory standards, U.S. motor carriers will get gradually greater access into Mexico and investment restrictions will ease.

At the end of a 10-year phase-in period, U.S. truckers will be able to fully own a Mexican carrier involved in international commerce. Mexican truckers involved solely in domestic movements will be protected from foreign ownership, and for the first few years, Mexican carriers will enjoy sole service to maquiladora operations along the border until access provisions take effect.

Maritime issues were not on the table in the NAFTA talks, but U.S.-flag ship lines won concessions to control of landside activities in Mexican ports. Mexico will allow U.S. ship lines to run private terminals with related stevedoring, customs brokerage and warehousing services.

Textiles, apparel

The agreement’s section on textiles and apparel has drawn opposition from unions and mixed reviews from U.S. manufacturers.

Some U.S. apparel companies fear they’ll be hurt by cheap labor from south of the border and that Mexico will be used as a way for producers in Asia and other regions to circumvent U.S. quotas.

But NAFTA supporters say the agreement’s rules on origin of imported material will prevent Mexico from being used as a “platform” for exports to the U.S. from Asia, Central America and the Caribbean.

The agreement’s section on textiles and apparels provides special rules for trade in fibers, yarns, textiles and clothing in the North American market. These provisions take precedence over the Multifiber Arrangement and other textile agreements involving NAFTA countries.

The three nations will eliminate immediately or phase out over a maximum of 10 years their customs duties on textile and apparel goods that are manufactured in North America and meet the NAFTA rules of origin.

Blue jeans, blouses and other apparel would have to be made from yarn spun in North America to qualify for tariff benefits, and fabric would have to be made from North American fibers to qualify.

Canada and Mexico will be allowed to ship a specified amount of clothing and textiles to the U.S. each year made from foreign materials. This quota will rise slightly over five years.

Other points

Textiles and transportation are but two aspects of NAFTA that would affect cross-border trade. Others include:

• Elimination of tariffs. NAFTA provides for the progressive elimination of all tariffs on goods qualifying as North American under the agreement’s rules of origin. For most goods, existing customs duties will be eliminated immediately or phased out in five or 10 equal stages. For certain sensitive items, the phaseout will be stretched to 15 years.

Tariffs will be phased out from the applied rates in effect July 1,1991, including the U.S. Generalized System of Preferences and the Canadian General Preferential Tariff rates. Tariff phaseouts under the Canada-U.S. Free Trade Agreement will continue as scheduled. NAFTA permits the countries to speed up the phaseout of tariffs.

• Import and Export Restrictions. All three countries will eliminate prohibitions and quantitative restrictions applied at the border, such as quotas and import licenses. However, each country will still be able to impose border restrictions in limited circumstances, such as for health or environmental reasons. Special rules apply to trade in agriculture, autos, energy and textiles.

• Drawback. NAFTA establishes rules on the use of “drawback,” which provides for the refund or waiver of customs duties on materials used in the production of goods subsequently exported to another NAFTA country. Existing drawback programs will terminate by Jan. 1, 2001, for Mexico-U.S. and Canada-Mexico trade.

• Customs user fees. The nations have agreed not to impose new customs user fees similar to the U.S. merchandise processing fee or the Mexican customs processing fee, which the two nations have agreed to eliminate by 1999. For goods originating in Canada, the U.S. will phase out its merchandise processing fee by Jan. 1, 1994.

• Waiver of customs duties. NAFTA prohibits any new performance-based customs duty waiver or duty remission programs. Existing programs in Mexico will be ended by 2001.

• Export taxes. NAFTA prohibits all three countries from applying export taxes unless such taxes also are applied on goods to be consumed domestically. Limited exceptions allow Mexico to impose export taxes to relieve critical shortages of foodstuffs and basic goods.

• Other export measures. If a NAFTA country restricts export of a product, it can’t reduce the proportion of total supply of that product below the level of the preceding three years or other agreed period. It also cannot impose a higher price on exports to another NAFTA country than the domestic price, or require the disruption of normal supply channels. Mexico has insisted on being exempt from this provision.
• Automotive goods. NAFTA will eliminate barriers to trade in North American automobiles, trucks, buses and parts within the free trade area, and eliminate investment restrictions in this sector, over a 10-year transition period.

Each NAFTA country will phase out all duties on its imports of North American automotive goods during the transition period. Most trade in automotive goods between the U.S. and Canada already is conducted on a duty-free basis.

To qualify for preferential tariff treatment, automotive goods must contain a specified percentage of North American content (rising to 62.5% for passenger automobiles and light trucks as well as engines and transmissions for such vehicles, and to 60% for other vehicles and automotive parts).

In calculating the content level of automotive goods, the value of imports of automotive parts from outside the NAFTA region will be traced through the production chain.

• Used-vehicle imports. Canada’s remaining restrictions on the import of used vehicles from the U.S. will be eliminated Jan. 1, 1994, under the U.S.-Canada Free Trade Agreement. Fifteen years after NAFTA takes effect, Mexico will begin a 10-year phaseout of its prohibition of imports of used vehicles from other NAFTA countries.

• Agriculture. Under NAFTA, Mexico and the U.S. will immediately eliminate tariffs on about half of the bilateral agricultural trade between the countries. Other tariffs will be phased out within 10 years, except for certain sensitive products, including com and dry beans for Mexico, and orange juice and sugar for the U.S. Tariff phaseouts on these products will be completed after five more years.

To protect domestic producers, NAFTA’s agricultural provisions allow tariffs to be imposed when imports reach a “trigger” level during the first 10 years the agreement is in effect. The trigger levels are established by the agreement for a small number of commodities.

• Rules of origin. Goods that are considered wholly North American, and eligible for favorable treatment under NAFTA, would have to originate in North America or undergo a substantial transformation in the U.S., Canada or Mexico.

In some cases, the goods would have to include a specified percentage of North American content in addition to meeting the tariff-classification requirement.

A “de minimus” rule prevents goods from losing eligibility solely because they contain minimal amounts of “non-originating” material. Under this rule, goods that would otherwise fail to meet a specific rule of origin will nonetheless be considered North American if the value of non-NAFTA materials comprises no more than 7% of the price or total cost of the goods.

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