NAFTA Key Provisions

From the NAFTA Homepage
http://www.mac.doc.gov/nafta/3001.htm

NAFTA is a comprehensive trade agreement that improves virtually all aspects of doing business within North America. NAFTA will eliminate tariffs completely, and removes many of the non-tariff barriers, such as import licenses, that have helped to exclude U.S. goods from the other two markets, especially Mexico.

NAFTA ensures that investment will not be coerced by restrictive government policies, that U.S. investors receive treatment equal to domestic investors in Mexico and Canada. At the same time, NAFTA's extensive easing of cross-border services rules ensures that if U.S. companies do not wish to invest in another country to provide their service, they do not have to.

The best intellectual property provisions ever negotiated by the United States ensure that the U.S. competitive advantage in high technology is fully protected. NAFTA provides for guaranteed access to lucrative government procurement contracts in Canada and Mexico.

Market Access

Tariffs: Dramatic Market Opening

Within 10 years of the January 1, 1994 implementation of NAFTA, all tariffs will be eliminated on North American industrial products traded between Canada, Mexico and the United States. A few tariffs on U.S. exports of agricultural products to Mexico will be phased out over 15 years. As provided in the U.S.-Canada Free Trade Agreement (CFTA), all trade between the United States and Canada will be duty-free by 1998. Most U.S.-Canada trade is duty-free already.

Prior to NAFTA, Mexican tariffs, which ranged from 0 to 25 percent, were 2.5 times U.S. tariff rates – and about the same as (pre-CFTA) Canadian rates. Without NAFTA, international trade rules would have permitted Mexico to raise its tariffs as high as 50 percent without paying compensation. Under the NAFTA however, tariffs on all goods entering Mexico from the United States will be eliminated.

On January 1, 1994, Mexico eliminated tariffs on nearly 50 percent of all industrial goods imported from the United States, including some of our most competitive products such as machine tools, medical devices, semiconductors and computer equipment, and telecommunications and electronic equipment. Within five years, sixty-five percent of all U.S. exports of industrial products to Mexico will enter Mexico tariff-free, including light trucks, most auto parts, and paper products.

Elimination of Non-Tariff Barriers

In addition to elimination of tariffs, Mexico will eliminate non-tariff barriers and other trade-distorting restrictions. Upon implementation, U.S. exporters started to reap the benefits from the removal of most import licenses, which had acted as quotas, essentially limiting the importation of products into the Mexican market. The benefits are two-fold: 1) exporters are able to ship more of their products into Mexico; and 2) exporting is more cost effective since exporters will no longer have to deal with the uncertainty and administrative burden associated with obtaining an import permit.

NAFTA also eliminates a host of other Mexican barriers, such as local content, local production and export performance requirements, that have acted to limit U.S. exports. Local content requirements condition permission to sell a product on the incorporation of a mandatory percentage of local parts or labor. In other cases, companies must produce locally if they want to sell to the domestic market, or they must export a certain percentage of production. NAFTA eliminates all these requirements.

Rules of Origin

NAFTA reduces tariffs only for goods made in North America. Tough rules of origin whether a good qualifies for preferential tariff treatment under NAFTA.

Strong Rules Benefit U.S. Workers and Firms

Goods traded duty-free under NAFTA must contain substantial North American content. Rules of origin reward companies using North American parts and labor. As duties are phased out, the incentive to use North American goods increases.

Rules of origin prevent "free riders" from benefiting through minor processing or transhipment of non-NAFTA goods. Mexico and Canada cannot be used as export platforms into the U.S. market.

NAFTA Rules Improve on the CFTA

NAFTA rules strengthen, clarify, and simplify rules contained in the U.S.-Canada Free Trade Agreement (CFTA), and therefore, NAFTA rules supersede the CFTA rules.

The improvements are summed up below:

few NAFTA rules require cost accounting; those that do are based on simple formulas.
most NAFTA rules are based on simple, predictable tariff classification principles.

Customs Administration

Under the NAFTA, Mexico, Canada and the United States have agreed to implement many uniform Customs procedures and regulations. These provisions benefit U.S. companies by ensuring predictability and transparency in the exporting process. Small to medium sized companies especially benefit, since they often have limited resources to devote to dealing with complex Customs procedures. Uniform procedures ensure that exporters who market their product in more than one NAFTA country do not have to adapt to multiple Customs regimes.

Many procedures governing rules of origin documentation, record keeping and origin verification are the same for all three NAFTA countries. The same NAFTA certificate of origin form is used by the Customs administrations in all three countries. In addition, Mexican, U.S. and Canadian Customs administrations will issue advance rulings, upon request, on whether or not a product qualifies for tariff preference under the NAFTA rules of origin. This removes a great deal of uncertainty from the exporting process.

HOW RULES OF ORIGIN WORK

Each product has a rule of origin that applies to it. The rules are organized according to the Harmonized System (HS) classification of the product. There are two types of rules; both require substantial North American processing, but they measure it differently.

Rule Type	Description	Example
Tariff-Shift Rule	All non-NAFTA inputs must be in a different tariff classification than the final product. The rules state the level of tariff classification shift required. The rules may require that the non-NAFTA input be in a different HS chapter, heading or tariff item number. Most goods are subject to a tariff classification shift requirement.	Paper (HS Chapter 48) made from wood pulp (HS Chapter 47) imported from outside North America would qualify for NAFTA tariffs because the manufacturing process results in the required shift in HS chapter.
Value-Content Rule	A set percentage of the value of the good must be North American (usually coupled with a tariff classification shift requirement). Some goods are subject to the value-content rule only when they fail to pass tariff classification shift test because of non-NAFTA inputs.	If perfume (HS# 3303), for example, fails the applicable tariff classification shift rule, it must contain 50-60 percent (depending on the valuation method) North American content in order to get preferential treatment.

Safeguards

NAFTA provides timely, effective relief to American workers and firms needing time to adjust to injurious imports from Mexico. The provisions of the CFTA continue to apply to bilateral safeguard actions with Canada.

Two Important Safeguards

A bilateral safeguard permits "snap-back" to pre-NAFTA tariff rates for up to 3 years — or 4 years for extremely sensitive products — if increases in imports of Mexican goods cause or threaten to cause serious injury to American firms or workers. "Snap-back" means resetting a tariff at its original level. A global safeguard retains our right to impose quotas or tariffs on Mexico and/or Canada as part of a multilateral safeguard action, when imports from that country account for a substantial share of total imports and contribute importantly to the serious injury or threat thereof.

Specific safeguards are also provided for certain agricultural products and textiles.

Protection Against Unjustified Actions

NAFTA protects U.S. jobs and firms against unjustified safeguard actions by Canada or Mexico by establishing clear procedures for taking safeguard actions. Any NAFTA partner taking a safeguard action must compensate the country whose imports are affected.

Investment

NAFTA eliminates investment conditions that restrict the trade of goods and services to Mexico. Among these conditions eliminated are the requirements that foreign investors:

export a given level/percentage of goods or services;
use domestic goods or services;
transfer technology to competitors; or
limit imports to a certain percentage of exports.

This means that companies in Mexico have more freedom to buy U.S. parts and less incentive to export to the U.S.

NAFTA Provides Fairness for Investors

NAFTA ensures that U.S. investors in Canada and Mexico are treated the same as domestic firms. It provides key rights that facilitate business, such as:

the right to repatriate profits and capital;
the right to fair compensation in the event of expropriation; and
the right to international arbitration in disputes between investors and governments that involve monetary damages.

NAFTA Removes Investment Barriers

Prior to NAFTA implementation, Mexico could review all investment proposals to determine if they were in the national interest. Under NAFTA, Mexico may review acquisitions above an initial threshold of $25 million, phased-up to $150 million over nine years (adjusted for inflation and economic growth). Mexico will continue to prohibit foreign investment in certain "Constitutional" activities (e.g., energy, railroads).

NAFTA gives U.S. companies the right to establish firms in Mexico and Canada or acquire existing firms, but it does not encourage U.S. firms to go abroad.

NAFTA provides, at the option of the investor, for binding international arbitration of disputes between host governments and foreign investors that involve monetary damages or restitution of property that may arise if NAFTA rights are denied. This is an important development in U.S. trade relations with Latin America, as certain countries in that region have denied foreign investors such protection.

NAFTA improves upon the earlier U.S.-Canada Free Trade Agreement. NAFTA expands the CFTA definition of investor to cover firms established in a partner country; and NAFTA broadens CFTA coverage to include real estate, stocks, bonds, certain contracts, and intangible property. Further, the NAFTA, unlike the CFTA, has an investor-state dispute settlement provision.

NAFTA investment provisions do not cover maritime, basic telecommunications, government – sponsored technology consortia and R&D programs, and exiting state and local measures. However, investment provisions will cover state measures two years after NAFTA is implemented unless the U.S. notifies Mexico and Canada otherwise, in accordance with NAFTA procedures. NAFTA does not prohibit a government from taking investment-related measure to protect national security.

NAFTA Encourages Environmentally Sound Investments

NAFTA permits the imposition of stringent environmental standards on investments and discourages the lowering of environmental standards to induce investment. NAFTA also permits governments to require environmental impact statements on new investments. Under Mexican law, these are currently required for new investments.

Services

The U.S.-Canada Free Trade Agreement established the first comprehensive set of principles governing services trade. NAFTA broadens these protections and extends them to Mexico. Virtually all services are covered by NAFTA with the exception of aviation transport, maritime, and basic telecommunications.

Key covered sectors include:

Accounting
Architecture
Land Transport
Publishing
Consulting
Commercial Education
Environmental Services
Enhanced Telecommunications
Advertising
Broadcasting
Construction
Tourism
Engineering
Health Care Management
Legal Services

Separate Chapters cover specific rights and obligations for financial services and telecommunications (discussed in a separate NAFTA FACTS document covering key sectors).

Each country has also excluded certain sensitive sectors from coverage. For example, Mexico will not liberalize services, such as public notaries, that are specifically reserved to Mexicans by the Mexican Constitution. Canada has retained its cultural exclusion from the CFTA, which affects the entertainment and publishing industries, among others. The NAFTA does not apply to domestic shipping.

NAFTA does not remove or weaken U.S. licensing and certification requirements, but consistent with the NAFTA principle of non-discrimination, licensing of professionals, such as lawyers, doctors, and accountants, should be based on objective criteria aimed at ensuring competence, not on nationality. Citizenship requirements for licensing of professional will be eliminated within two years.

NAFTA does not permit Mexican or Canadian professionals to practice in the United States unless they have undergone the same licensing and certification procedures as a U.S. professional. A Mexican architect, for example, may be eligible to enter the United States under NAFTA provisions for temporary entry of business persons, but may not practice in the United States unless licensed in the United States.

Intellectual Property Rights

The NAFTA promotes export-driven growth in some of America's most competitive sectors, such as U.S. high technology and entertainment products, by providing the highest standards of protection for intellectual property available in any bilateral or international agreement. The NAFTA covers patents, trademarks, copyrights and related rights, trade secrets, semiconductor integrated circuits (mask works), plant breeder rights, geographical indications and industrial designs. NAFTA "locks in" and extends the protection contained in the world class intellectual property rights (IPR) laws adopted by Mexico in June and July 1991.

Increased Protection and Enforcement

NAFTA protects U.S. industry by reducing the risk that products of U.S. creativity and innovation could be unfairly exploited in Canada or Mexico.

Specifically, the NAFTA:

requires each country to provide for the enforcement of the rights of authors, artists and inventors against infringement and piracy;
ensures protection for North American producers of computer programs, sound recordings, motion pictures, encrypted satellite signals and other creations, including rental rights for computer programs and sound recordings;
locks in the availability of patent protection for most technologies in Mexico, allowing U.S. firms to patent a broad range of inventions in Mexico.
resolves longstanding trade irritants for U.S. pharmaceutical and agricultural chemical companies by expanding the coverage of product and process patents and limiting compulsory licensing of patents.

Government Procurement

U.S. suppliers of oil and gas field equipment and services, heavy electrical equipment, communications and computer systems, electronic, steel and pharmaceutical products and medical equipment and construction services particularly benefit from the NAFTA's government procurement provisions.

Mexico Opens PEMEX and CFE Procurement

NAFTA gives U.S. suppliers immediate and growing access to the Mexican government procurement market, including government-controlled enterprises (parastatals) such as PEMEX (national oil company) and CFE (National electric company). Coverage of the parastatals is extremely valuable since they purchase more than do the federal departments in Mexico.

Coverage of Construction and other Services

The government procurement provisions of the NAFTA apply not only to goods, but to contracts for services and construction as well. NAFTA substantially increases opportunities for U.S. exports to Canada and Mexico in such services as construction, environmental and computer software and design services. This is particularly important because continued growth in Mexico will result in infrastructure upgrading and many new opportunities for U.S. companies to participate in modernization efforts.

Commitment to Fair and Open Procurement Competition

NAFTA guarantees U.S. business fair and open competition for procurement in North America through transparent and predictable procurement procedures. A bid challenge mechanism guarantees suppliers the right to an independent review of the bidding process and contract award. U.S. suppliers gain access to information and training programs provided by Mexico on the operation of its procurement system to improve their prospects in securing contracts.

For covered procurement, NAFTA prohibits the use of offsets in contracts. U.S. suppliers are able to bid on Canadian and Mexican government contracts without discriminatory provisions that require the use of local purchases/suppliers. NAFTA does allow for the continuation of U.S. small business and minority set-aside programs.

Standards-Related Measures

Standards-related measures cover both voluntary and mandatory technical specifications that lay out the characteristics of a product, such as quality, performance, labeling, etc. NAFTA prohibits the use of standards and technical regulations as obstacles to trade. NAFTA enhances the ability of U.S. firms to effectively develop and market new products in Mexico and Canada, and ensures that the implementation of new regulations does not adversely affect the sale of existing products.

Equal Treatment and Transparency Aid U.S. Competitiveness

NAFTA requires that standards-related measures be applied in a nondiscriminatory manner to both domestically produced and imported products. It ensures the standards development process in all three countries is open and transparent.

NAFTA goes further than any existing trade agreement by allowing U.S. companies and other interested parties to participate directly in the development of new standards in Canada and Mexico on the same basis as domestic firms in those countries. It also requires adequate notice be given before new Mexican or Canadian regulations go into effect. Ample time is provided for affected industries in the United States to make comments. This ensures that U.S. industry is not surprised by any new requirements in Mexico and Canada and that standards are not tailored to domestic products effectively shutting imports out of the market.

Under NAFTA, U.S. testing laboratories will be able to apply for accreditation in Mexico and Canada on the same terms as domestic laboratories in those countries. This will enable U.S. laboratories to perform testing for products for sale in all three countries.

NAFTA continues efforts to make products standards more compatible. It establishes various working groups, which may include private sector representatives, to facilitate work in specific product areas. Compatible standards, accreditation of U.S. labs in Mexico and Canada an access to the standards development process may enable U.S. exporters to more effectively compete in Mexican and Canadian markets by lowering costs:

compatible standards means that companies would not be faced with the burden of adapting a product to comply with three different standards in three different countries;
companies might only have to pay one accredited laboratory to certify the safety and health standards of a product, rather than a laboratory in each country; and
companies would face less paperwork and red tape when attempting to export a product. NAFTA does not require the United States to change any of its existing standards, nor does it prohibit states from setting standards that are more stringent than federal law. Products that fail to meet U.S. standards, including health and safety standards, may be denied entry to the U.S. market.

Temporary Entry for Business Persons

Expanded trade and the economic alliances developed with Mexican business as a result of the NAFTA will result in more business persons traveling to Mexico. The U.S. and Mexican governments have developed uniform and transparent procedures to facilitate temporary entry of business persons who conduct trade in goods and services as well as investment activities. U.S.-Canada provisions are essentially unchanged from CFTA.

Key Beneficiaries

After-Sales Service Providers: A wide variety of individuals involved in after-sales service are eligible for temporary entry: installers, repair and maintenance personnel, and managerial personnel performing services — or training workers to perform such services. These services must be provided pursuant to a warranty or their service contract incidental to the sale of equipment or machinery (including computer software) purchased from the United States in order for the temporary entry provisions to apply. U.S. manufactures should find their exports more attractive in Mexico because they can offer rapid service and warranty repair.

Sales Representatives/Agents, Buyers, Market Researchers, and Financial Service Personnel involved in commercial transactions on behalf of companies located in the U.S.

Professionals: Sixty-three occupations, such as engineers, biologists, and pharmacists, are eligible to use NAFTA temporary entry provisions. These individuals must still obtain any applicable license required to provide their services.

Company Executives and Managerial Personnel: A chairman of the board attending meetings in Mexico, a manager engaging in a commercial transaction for a U.S. company, or the intra-company transferee working in Mexico for an extended period of time may use the temporary entry provisions.

Dispute Resolution

NAFTA has several procedures to settle disputes involving the application or interpretation of the NAFTA.

Rapid and Effective Dispute Settlement

NAFTA creates a trilateral Free Trade Commission which will regularly review trade relations among the three countries and discuss specific problems. The Free Trade Commission may create bilateral or trilateral panels, as appropriate, of private sector experts to hear disputes involving interpretations or application of the NAFTA. Dispute resolution will normally be completed in less than one year.

The panels will rule on whether or not an action taken by a NAFTA country is consistent with its NAFTA obligations. If the panel finds an action inconsistent, the panel will make a recommendation. If a country decides not to comply with a panel's recommendations, it must offer acceptable compensation. If not, the affected country can retaliate by withdrawing "equivalent trade concessions."

Special Provisions

Environmental and Health Issues: In disputes regarding environmental, safety, health-related or other scientific matters, panels may call upon experts for advice. Scientific review boards may be convened to provide written reports on factual issues to assist panels.

Investment: NAFTA permits investors to take the host government directly to international arbitration or settlement of disputes involving monetary damages arising from violations of the NAFTA's investment provisions.

Antidumping (AD) and Countervailing Duty (CVD) Investigations: Disputes involving AD or CVD cases generally will be addressed by binational panels. The panels' mandate is limited to whether decisions rendered by Mexico, the U.S. or Canada are consistent with their domestic law.

Commercial Disputes: NAFTA encourages and facilitates the use of alternative dispute settlement, including arbitration, for commercial disputes between private parties. Each country must have in place legal mechanisms to enforce arbitration contracts and awards.

NAFTA FACTS document #3002 contains more information on NAFTA provisions affecting the following key sectors: Automotive, Energy, Agriculture, Land Transportation, Financial Services, Telecommunications, and Textiles and Apparel.