You Decide

…that NAFTA threatens our own environmental regulations? 

Meet Chapter 11 of the agreement, which established an arbitration process that operates independently from the judicial system of all three countries. Under the terms of Chapter 11, any company can claim monetary damages from the Canadian, Mexican or U.S. government if the government’s laws or actions interfere with the company’s operations in that country (meaning if the government’s actions adversely affect that company’s investments).

Chapter 11 was put in place largely because of concerns that Mexico would use its own court system to rule against and extract money from foreign investors. Mexico does, after all, have a holiday honoring the day in 1938 when the country seized 17 foreign oil companies and nationalized its oil industry after the companies balked at an order by the Mexican Supreme Court to pay 26 million pesos in lost wages to an oil workers’ union.

But since NAFTA went into effect, Chapter 11 has largely been used by corporations as a lever against local social, health and environmental policies in all three countries. Methanex, a Canadian company, tried to extract $970 million from the U.S. government after the state of California banned MTBE, a gasoline additive that Methanex manufactured and that was found in many wells in the state, arguing that the ban harmed the corporation’s sales of methanol. In another case, an American company, Metalclad, won $16.5 million from the Mexican government after a local governor shut down a hazardous waste dump Metalclad had built nearby. In both these cases, Chapter 11 made it possible for NAFTA panels to in essence overrule local authorities and, one could argue, supersede perfectly reasonable environmental objections raised in communities adversely affected by the business’s operations.

Moreover, Chapter 11 arbitration rulings are made by a small group of trade lawyers and cannot be appealed. All aspects of the arbitration can be — and usually are — held in complete secrecy, making them ripe for corrupt deal-making.

Critics argue that Chapter 11 has become a racket — one in which corporations can use the threat of arbitration to pressure a country to waive its own laws. Do we really want to be a member of a trade agreement that allows participant nations’ sovereign legal systems to be overruled, including our own?

…that NAFTA in effect prevents what could be a dangerous tariff war between the United States, Mexico and Canada?

Without free trade agreements, countries levy tariffs (taxes on imported goods) so that they make some profit. Although NAFTA is more complex and wide-ranging than many trade agreements of the past, it is at its core an agreement between Mexico, Canada and the United States to not slap tariffs on almost all of each other’s exports.

Even though NAFTA displaced tariffs and they're not very fashionable these days, let’s back up a moment and look at what tariffs do and how they function. In many ways, they make sense. An umbrella, for example, that is made in another country isn’t made by a person who pays taxes to our government, and that person isn’t going to spend the income from making the umbrella on groceries or cocktails or Monster truck rallies in America. In theory, tariffs ensure that some profit from imports goes to the country importing the product, not just to the country of origin.

Now take a look at how the tariff dynamic has played out in history: Back when the Great Depression hit the United States in the 1930s, it seemed like a good idea to charge other countries more to sell their goods in this country, so tariffs were raised. Then, the thinking went, not only would the American economy benefit from the tariffs, but better still, Americans would be more inclined to spend their money on cheaper goods made in the country, which would then mean more jobs for the people who made those goods, easing the effects of the Great Depression.  

But that’s not what happened. Rather, countries that America was trading with raised their own tariffs on American goods almost instantly. Exports from the United States to Europe fell from more than $2 billion in 1929 to $784 million in 1932 — a devastating 61 percent drop. Trade between countries slowed to a trickle, and the economies of both Europe and the United States remained stagnant. It’s been argued that with less trade, distrust between nations grew, creating fertile ground for the rise of fascism and the carnage of World War II.

In a post–World War II world, economists and historians came to the conclusion that countries that traded with one another were less likely to go to war with one another. They ushered in an era of worldwide tariff reduction and lowering of trade barriers that continues to this day. In 1940, the average duty on U.S. imports was 40 percent; today, it’s 3 percent. With the current financial crisis, trade agreements like NAFTA fend off tariff wars. Fiddle or dismantle with NAFTA, and we could set off a diplomatic chain reaction that could make things even worse.