INTERNATIONAL TRADE AGREEMENTS are not simply about tariffs anymore. Although they do seek to eliminate tariffs and quantitative trade restrictions, they also prohibit what are called nontariff trade barriers.
Under this concept, trade challenges have been mounted in recent years against domestic health and environmental laws that had previously been thought to be the province of domestic law. Regulations designed to reduce tobacco use, to promote fuel economy, to inspect milk production for health reasons and to institute effective recycling programs have been challenged as unfair trade barriers. Trade concerns have also been raised in connection with domestic standard setting, such as the U.S. nutritional labeling program, policies with respect to carcinogenic residues to be permitted in foods, the establishment of tolerances for particular pesticide residues and a phaseout of asbestos. Some of these challenges have led to weaker health and environmental measures, resulting in more cigarette exports to, and consumption in, several Asian countries, the invalidation of reusable bottle requirements of Denmark's recycling program, and a regulation permitting residues of a suspected carcinogenic pesticide in imported wine.
The North American Free Trade Agreement (NAFTA) furthers this trend in two principle ways. First, it requires the United States, Mexico and Canada to "harmonize" (make equivalent) their food safety and technical standards in accordance with certain processes set forth in the Agreement. Second, it prescribes rules that such measures must meet in order not to be considered unfair trade barriers. If disputes arise under these provisions, NAFTA establishes a secret dispute settlement process in which unelected trade bureaucrats will determine the viability of the challenged measures with no input from domestic proponents of the measures and little, if any, input from scientific or technical experts.
NAFTA furthers a recent trend toward harmonization of domestic health and environmental standards. It would require the United States, Mexico and Canada to use international standards as a basis for their own standards. Since the international standards are generally developed in secret with extensive industry input but no public oversight or participation, they are often weaker than U.S. standards.
By mandating that domestic standards be based on international ones, NAFTA may curb innovative responses to health, safety and environmental problems. After all, its purpose is to create uniformity in such standards. But uniformity prevents a country from being a leader in devising new, more hard-hitting solutions.
NAFTA creates additional, strong incentives for countries to adopt international standards. Any domestic standards that provide greater public health protection than pertinent international standards must comply with several pages of NAFTA rules. To avoid the need to justify a stronger standard, and possibly defend it against a trade challenge, a country may follow the path of least resistance and simply adopt the international standard.
Not only does NAFTA require the use of international standards as a basis for domestic ones, it requires the signatory countries to make their standards "compatible" to the greatest extent practicable, and to make their food safety standards "equivalent" or, where appropriate, identical. Some types of standards, such as truck drivers' medical standards, truck and bus brake standards, automobile emissions requirements and rules pertaining to the transportation of hazardous cargo, must be harmonized within a specified number of years (between one and six) of NAFTA's adoption.
Because the United States has stronger standards than other countries, particularly in the areas of truck safety, automobile emissions and exposure to cancer-causing pesticides in food, the only way for the United States to harmonize such standards is downward. Even if a standard still seeks to guard against the same risk, it can be significantly weakened by using less effective means to get there. For example, a pesticide ban may be replaced by a rule permitting small residues of the pesticide, or mandatory labeling may be supplanted by a voluntary labeling requirement, or a ban on a harmful product may give way to precautionary measures.
Downward harmonization is made all the more likely because of the way that harmonized standards will be developed under NAFTA. Committees, composed of representatives of each country, will establish harmonized standards. However, these committees need not involve the public in their proceedings. There is no open meeting requirement, no right of access to their records, no requirement that the public be afforded an opportunity to comment on proposed standards. In this respect, these committees diverge sharply from U.S. lawmaking or rulemaking processes.
When a harmonized standard is agreed upon by these committees, there will be enormous pressure for the United States to adopt the standard. And, if the U.S. federal government does so, the states will also be expected to fall in line. Indeed, NAFTA requires the U.S. federal government to take all necessary measures to ensure state and local government compliance with NAFTA's food safety provisions, and to seek to do the same for other nonfood standards. Many U.S. national health and environmental laws permit states to adopt more stringent regulatory requirements. For example, states may ban harmful pesticide residues or the use of dangerous pesticides that are permitted under federal law. Under NAFTA, stronger state standards are vulnerable to attack as nontariff trade barriers.
The attack on health, safety and environmental measures: targeting aspirations
NAFTA constrains domestic standard setting in three principal ways. First, it imposes some limitations on the goals that the countries can legitimately pursue. Second, it limits the means that may be used to achieve those goals. Third, it requires countries to permit some imports that do not comply with domestic standards.
In contrast to the standards and food safety provisions developed in the Uruguay Round of negotiations under the General Agreement on Tariffs and Trade, NAFTA generally permits the United States, Mexico and Canada to establish the levels of protection afforded by their food safety and technical standards. However, this general guarantee is subject to the condition that there may not be unjustifiable distinctions in the levels of protection afforded in different circumstances that result in discrimination against imports or a disguised trade restriction.
There is little consistency in the levels of protection provided by U.S. standards dealing with various exposures to pesticides, let alone those dealing with pesticides on the one hand, and food additives, microbiological contamination, and food irradiation on the other, particularly when state standards are part of the calculus. The same is true with technical standards addressing such diverse matters as recycling, air bags, heart valves, prescription drugs, products containing ozone-depleting chemicals, hazardous shipments and toxic chemical bans. These distinctions may result more from the laws' different historical or political origins than from rational policymaking. Some of these distinctions may well have a disproportionate impact on imports, which the exporters will surely claim is unjustifiable. If such arguments are successful, the latitude that NAFTA gives countries in setting their levels of protection will be seriously constrained.
In addition, food safety standards must be based on scientific principles, may not be maintained where there is no longer a scientific basis for them and must be based on risk assessments. Here are two examples of what this "scientific" standard may mean in practice:
o The Delaney Clause of the U.S. Federal Food, Drug and Cosmetic Act, which prohibits the use of carcinogenic food additives in certain foods and carcinogenic color additives in all foods, is the result of a congressional determination made more than 30 years ago that carcinogens should not be introduced into the food supply in the face of their uncertain effects on human health. Industry groups have criticized the scientific basis for the Delaney Clause as outmoded, and other countries have attacked it as an unfair trade barrier. Under NAFTA, a trade panel (composed of trade experts more sympathetic to industry's desire to have free access to international markets than to public health protections) will decide whether the Delaney Clause has a sufficient scientific basis to pass muster under the terms of the trade agreement.
o In 1986, California voters adopted Proposition 65, a referendum that prohibits knowingly and intentionally exposing anyone to chemicals that are listed by the State of California as causing cancer or reproductive toxic effects, without providing a clear and reasonable warning. As a popular referendum, Proposition 65 may be vulnerable to claims that it was not "based on scientific principles" or a risk assessment.
These examples illustrate the effects NAFTA's scientific basis requirements may have on cutting-edge food safety regulation, such as food irradiation, biotechnology and the use of growth hormones in beef production. Where the scientific evidence is not yet in, a country may choose to follow the precautionary principle and protect its citizens from possible, but uncertain, harm. NAFTA imposes limits on the extent to which countries can take action in the face of such scientific uncertainties.
The attack on health, safety and environmental measures: targeting the tools
Often, the domestic laws that provide the greatest health, safety and environmental protection impose more restrictions on trade than less effective alternatives. As a result, the most effective domestic protections are the most apt to be challenged as unfair trade barriers.
If trade agreements permit such challenges, they erect another obstacle to overcome in instituting strong domestic health, safety and environmental regulations. Such challenges put trade dispute resolution panels in the position of second-guessing the judgments made by domestic lawmakers and regulators. Recognizing that trade panels are more likely to be receptive to their economic objections, opponents of health, safety and environmental measures will gladly bring their arguments to a trade panel.
NAFTA invites such challenges. Several of its provisions enable challengers to question whether a particular trade restriction is necessary to promote legitimate domestic objectives. For example, food safety measures may be "applied only to the extent necessary to achieve [the country's] appropriate level of protection, taking into account technical and economic feasibility." Under this provision, a pesticide ban could be challenged on the ground that permitting trace residues would provide the same level of protection as a ban. The bill that would establish the U.S. Circle of Poisons Prevention Act, which would ban the export of certain hazardous pesticides, might be challenged on the ground that prohibiting and monitoring for residues of the pesticides on imported foods would achieve the desired public health protection. Or, mandatory nutritional labeling to provide consumers information about potentially harmful food additives, such as salt, MSG, sulfites or nitrites, could be attacked on theory that voluntary labeling would suffice or that not all foods need to be covered by mandatory requirements.
Similarly, under NAFTA, nonfood health, safety and environmental measures may not create unnecessary obstacles to trade. More specifically, if a standard operates to exclude an imported product, NAFTA requires that the import be permitted if the product satisfies the standard's legitimate objective.
The impact of this provision is illustrated by the trade-based arguments presented by the Government of Canada in an amicus brief filed in a court challenge to the U.S. Environmental Protection Agency's phaseout of asbestos. Canada contended that a less restrictive alternative would involve banning the most harmful type of asbestos, while still permitting the use with restrictions of less harmful types of asbestos, which are produced principally in Canada. The court decided the case on domestic law grounds without reaching the trade issues. Under NAFTA, however, Canada would succeed in such a trade challenge, if it could show that banning imports of the Canadian type of asbestos is not necessary to achieve the legitimate public health objective of the phaseout.
Many recycling programs might also be considered "unnecessary obstacles to trade." Recently, the United States objected to an Ontario taxing scheme that imposes higher taxes on recyclable beer cans than on reusable ones because it results in higher overall taxes on U.S. beer, much of which is exported to Canada in cans, than on Canadian beer, most of which is sold in bottles, in part, it is argued, because the Canadian manufacturers have already made the transition to less wasteful containers. Because these measures may have the effect of excluding noncomplying imports, they could be attacked as restricting trade more than is necessary to achieve their legitimate goals.
In addition, although NAFTA specifies that obligations under certain international environmental agreements prevail in the event of a conflict with NAFTA, it requires the United States, Mexico and Canada to use the means of complying with such obligations that are the least inconsistent with other NAFTA provisions. The United States has gone beyond its mandatory obligations under both the Montreal Protocol on Substances that Deplete the Ozone Layer and the Convention on International Trade in Endangered Species of Wild Fauna and Flora in ways that severely restrict trade, e.g., bans on certain CFC chemicals and trade in endangered species. These bans would be vulnerable under the least-inconsistent-with-NAFTA test.
A final way that NAFTA affects the means available to achieve legitimate goals is in its distinction between product standards and regulation of the method of producing the product. Trade may be restricted as part of regulation of the processing methods only to the extent that the methods relate to characteristics of the product, as in the case of sanitation standards for food processing. NAFTA does not permit import restrictions because of adverse effects of the production process on health or the environment.
A recent trade challenge under the General Agreement on Tariffs and Trade (GATT) illustrates the types of laws that may be undermined by this trade rule. Mexico challenged a U.S. tuna embargo imposed because the method of catching the tuna resulted in the incidental killing of dolphins in excess of the amount permitted under U.S. law. The panel found the embargo inconsistent with GATT because it restricted trade in a product (tuna) because of a process (the method of catching the tuna) that was unrelated to the quality of the end product. It also considered the embargo contrary to GATT because it sought to protect animal life and a resource outside the territorial jurisdiction of the United States. NAFTA does nothing to prevent trade rules from undermining U.S. extraterritorial or process regulations, which could be devastating to U.S. attempts to protect the global commons and endangered species.
The attack on health, safety and environmental measures: targeting import restrictions
NAFTA requires the United States, Canada and Mexico to permit imports from other NAFTA signatory countries that have different, but equivalent, standards or processes. This requirement invites wholesale circumvention of domestic law. The U.S. Congress may establish a standard or an agency may promulgate regulations prescribing the conformity assessment procedures that will be used, yet an agency may nonetheless permit imports that do not comply with those laws. This would be done under the amorphous concept of equivalency, which calls for a subjective comparison of different standards without any clear guidelines for the process to undertake or the factors that must be considered.
For example, under the U.S.-Canada Free Trade Agreement, the U.S. Department of Agriculture (USDA) decided that Canadian meat inspection procedures were equivalent to those of the United States, even though the U.S. tests end products for listeria contamination, while Canada regulates the work environment in which the food is processed, and the equivalency study did not assess the Canadian system's control or testing for drugs approved for use in Canada but not in the United States. Pursuant to its equivalency determination, the U.S. ceased inspecting all Canadian meat imports in 1989, and instead instituted a cursory reinspection system designed not to ensure that the meat imports met U.S. standards, but rather to ensure that Canada maintained its equivalent inspection system. The General Accounting Office criticized the relaxed border inspections, contending that USDA documentation did not support the conclusion that the Canadian meat inspection was equivalent to the U.S. system. Meat inspectors complained that Canadian producers were taking advantage of the cursory reinspections and shipping contaminated meat. Under this system, the rejection rate dropped by half.
Equivalency determinations made under NAFTA may have serious health implications. Thus, since 1982, as the number of steers imported from Mexico into the United States has increased nearly fourfold, the incidence of tuberculosis has increased substantially, with most traced cases being linked to Mexican cattle. In addition, from 1984 to 1988, imports of Mexican meat to the United States were prohibited because they had not met U.S. standards. Since 1989, USDA has certified several plants, and meat exports to the United States have grown. Given past problems with Mexican meat exports, an equivalency determination could raise serious health issues.
Equivalency is an inexact concept that can mean different things to different decisionmakers. As the Canadian meat inspection example illustrates, controversial public health determinations underlie equivalency determinations, yet NAFTA, like the U.S.-Canada Free Trade Agreement, entitles countries to such a determination, even on an expeditious basis, without requiring the assessment of every potentially significant public health issue or every inspection process.
NAFTA also requires that the United States, Mexico and Canada make each other subject to the same food safety inspection procedures. This is so even if there has been a legitimate reason for treating the country differently. For example, the United States has established special inspection procedures for Mexican produce because it has higher DDT residues than domestic produce and than permitted under U.S. law. Under NAFTA, the U.S. may be required to discontinue these inspections, which would allow more foods with DDT residues onto U.S. dinner tables.
Stacking the deck
Not only do NAFTA's terms threaten the standards adopted by federal or state governments to achieve health, safety and environmental goals, but when disputes arise, they will be resolved through a dispute settlement process that is stacked against consumer and environmental interests. The decisionmakers are trade experts, who are unlikely to be schooled in or sympathetic to health, safety and environmental regulations. Moreover, NAFTA mandates that dispute settlement proceedings take place entirely in secret; it even bars countries from making their own submissions available to the public under freedom of information laws. There is also no mechanism for domestic proponents of the measure to defend it by filing friend-of-the-court briefs or even by scrutinizing and highlighting flaws in the defense mounted by their government, since those submissions are required by NAFTA to be kept secret. Therefore, if NAFTA is approved, its effect on domestic standards will be in the hands of politically unaccountable panels operating behind closed doors.
These panels would wield significant power. If a NAFTA panel finds that a domestic measure violates NAFTA, and the country does not change its measure within 30 days, the challenging country would be entitled to retaliate against the defending country's imports. No prior authorization is required for retaliatory trade sanctions, as is the case under GATT. Thus, if Mexico had brought its challenge to the U.S. tuna embargo under NAFTA, it could have refused U.S. imports equivalent in amount to the embargoed tuna until such time as the United States removed the tuna embargo. In other words, NAFTA may force countries literally to pay a penalty for having effective health, safety and environmental standards, and thereby make strong protections too costly to afford.
Raising drug prices
Canada's 1969 Patent Act allowed Canadian companies to sell less expensive, generic versions of patented medicines. The system, known as compulsory licensing, compels pharmaceutical companies to license competitors to copy their inventions in return for payment of a royalty. It has long been used in Britain, Canada and throughout the developing world to serve the public good while still acknowledging private rights. From 1991 to 1992 alone, Canadians saved between $413 and $426 million in drug costs thanks to the availability of compulsory licensed drugs and off-patent generic medicines.
Mexico used to permit national firms to copy chemical and pharmaceutical products patented abroad. But the United States put pressure on Mexico to change its law by withdrawing preferential tariff treatment from Mexican exports of chemical products. In 1991, Mexico changed its law to give multinational corporations 20 years of patent rights.
Although the Canada-U.S. Free Trade Agreement contains no chapter on intellectual property, a commitment to pass Bill C-22, weakening Canada's system of compulsory licensing of pharmaceuticals, was clearly part of the deal. Bill C-22 established a period of exclusive protection for pharmaceutical patents of seven to 10 years measured from the date the drug receives clearance for public sale.
In February 1993, the Canadian parliament passed Bill C-91 as an accompaniment to NAFTA and as a replacement for Bill C-22. Bill C-91 applies a 20- year period of exclusive monopoly protection to pharmaceutical patents. C-91 will abolish Canada's compulsory licensing system and could cost Canadians as much as $7 billion over the period 1993 to 2010.
The Pharmaceutical Manufacturers Association of Canada maintains that its member firms will invest substantially in new research and development (R& D) and manufacturing in Canada because of the improved investment climate created by the passage of Bill C-91. In 1992, PMAC member companies' R& D spending represented 10.5 percent of sales, an improvement on the 1988 R& D-to-sales ratio of 6.5 percent, but a ratio that still fell short of the international standard of 16 percent. But while promising an improvement in R& D investment, PMAC chairperson Judy Erola has stated that Bill C-91 only brought Canada up to the minimum standard set by other countries and still did not provide sufficient incentive to bring Canadian pharmaceutical R& D up to the international standard of 16 percent.
One of the most controversial applications of intellectual property rights involves the patenting of plants, animals, genetic material and even inventions derived from the human body. The ethical and social issues of patenting genetically engineered life forms has been debated much more extensively in Europe and the Third World than in North America. But while many of the issues concerning the consequences of patenting life forms have yet to be resolved, the biotechnology industry is pressing hard for immediate recognition of patents on genetic discoveries, plants, animals and even inventions derived from human beings.
The NAFTA negotiations presented an opportunity for the biotechnology industry to set new precedents covering protection for genetic engineering processes and products. The U.S. Industrial Biotechnology Association, representing more than 80 percent of U.S. companies investing in biotechnology R& D, successfully lobbied the Office of the U.S. Trade Representative to use the NAFTA talks to win changes to a section of Mexico's 1991 industrial property law excluding life forms from patent protection.
The Bush and Clinton administrations have made it clear that in order to be eligible for entrance into trade treaties with the United States such as NAFTA, governments must first sign bilateral investment and intellectual property treaties with the United States. The draft intellectual property treaty clearly states that "all inventions, whether products or processes, in all fields of technology" must be considered as patentable subject matter.n
- Based on Intellectual Property Rights in NAFTA: Implications for Health Care and Industrial Policy in Ontario, a report by the Ecumenical Coalition for Economic Justice, October 1993.
NUMBER OF PESTICIDES THAT HAVE BEEN BANNED IN THE UNITED STATES BUT ARE STILL LEGAL FOR USE IN MEXICO: 17 (INCLUDING DDT)
PERCENTAGE OF CROSS BORDER FOOD SHIPMENTS THAT ARE INSPECTED FOR PESTICIDE RESIDUES BY THE US CUSTOMS SERVICE: 1 PERCENT
PERCENTAGE OF FOOD IMPORTS WHICH FAIL TO MEET THE FOOD AND DRUG ADMINISTRATION'S TESTS: 40 PERCENT
Source: the Institute for Agriculture and Trade Policy