Mexico and NAFTA dispute resolution--Canada and United State

Alvarez, Guillermo Aguilar

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The Mexican View on the Operation of NAFTA for the Resolution of Canada-U.S.-Mexico Disputes

Case Western Reserve University School of Law

Canada-United States Law JournalVolume 26 | Issue Article 37January 2000The Mexican View on the Operation of NAFTA forthe Resolution of Canada-U.S.-Mexico DisputesGuillermo Aguilar AlvarezFollow this and additional works at: https://scholarlycommons.law.case.edu/cusljThis Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons.It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School ofLaw Scholarly Commons.Recommended CitationGuillermo Aguilar Alvarez, The Mexican View on the Operation of NAFTA for the Resolution of Canada-U.S.-Mexico Disputes, 26 Can.-U.S. L.J. 219 (2000)Available at: https://scholarlycommons.law.case.edu/cuslj/vol26/iss/37THE MEXICAN VIEW ON THE OPERATION OF NAFTA FORTHE RESOLUTION OF CANADA-U.S.-MEXICO DISPUTESGuillermo Aguilar Alvarez*I am very glad to be here, and I am very grateful for being allowed tointrude in what would have otherwise been a very bilateral meeting. I havebeen asked to address the operation of the NAFTA from the Mexicanperspective. To do that, I would like to avoid merely speaking of theinstitutional framework in dispute settlement. For Mexico, the importance ofNAFTA cannot be understood unless you take a look at its economic impact.NAFTA has been the engine for growth in Mexico from the date of itsimplementation. If you look at 1995, which was a year of economic crisisand recession during that period, Mexican exports to the NAFTA regiongrew considerably. If you look at the figures after 1996, and you comparetotal Gross Domestic Product (GDP) and the contribution of exports to thatgrowth, you will realize the growth of the Mexican economy depends heavilyon exports. In 1998, almost ninety-four percent of Mexican exports were tothe NAFTA region: 87.5% to the United States and 6.3% to Canada.If you look at the rate of growth of Mexican regional exports, Mexico hasexperienced double digit growth since the NAFrA was implemented and insome of the years prior. One relevant year was 1986, because that is the yearMexico started implementing its trade-liberalizing measures. BilateralMexico-U.S. trade was 120 billion dollars a year in 1998. It will probably besomething like 130 to 140 billion dollars for 1999. That figure, even fromthat considerable base, has continued to grow at two digits in the first quarterof 2000.So when you think of Mexico-U.S. disputes, you have to think of them inthe context of a 140 billion dollar relationship. Increase in total trade is122.3% since the NAFTA was implemented and Mexican exports to theUnited States have increased 140% since the implementation of the NAFTA.Mexican imports from the United States have also grown at the considerablerate of 105.5%. Peaks in trade in the case of Mexico and Canada ascompared to the rest of the world can be explained primarily as a result of theNAFTA. If you look at trade figures after 1994, and you look at Mexico'sshares in total U.S. purchases, it is a direct result of the NAFTA. If youcompare Mexico's exports to the United States with the exports of all of* Alvarez bio.1Alvarez: The Mexican View on the Operation of NAFTA for the Resolution ofPublished by Case Western Reserve University School of Law Scholarly Commons, 2000CANADA-UNITED STATES LAW JOURNAL [Vol. 26:219 2000]Latin America, the figures are quite impressive. The trade figure for all ofLatin America put together, including Brazil, whose economy is four timeslarger than Mexico's, their trade figure is 53.7 billion dollars. If you look atMexico alone, it was 100.2 billion dollars in 1998. As I said, it will probablybe 120 to 130 billion dollars in 1999 and 2000.If you look at exports to the United States by selected country groups andyou compare pre-NAFTA and post-NAFTA data, pre-NAFTA Mexico wasin last place, except for Latin America. It still exported more than the rest ofLatin America, but all of the other country groups exported more to theUnited States than Mexico in 1993. If you look at figures for 1997, 1998, and1999, Mexico ranked second, and in 1999 it ranked first, exporting more tothe United States than China and Singapore combined, more than Korea,Taiwan, and Hong Kong, more than the United Kingdom and France, andalmost twice as much as the rest of Latin America. If you look at the Mexico-Canada figures, the increases in total trade, although from a lower base, havealso been pretty impressive. There was an 83.2% increase in total trade.If you look at the composition of exports to the United States, the figuresexceed any expectation. Manufactured goods are 88.6%, 6% in agriculturalgoods (still protected, even under the NAFTA). Oil is only 5.4%. If you lookat figures for 1985, or for 1986, for 70% of Mexican exports to the U.S. wereaccounted for by oil. That situation has since been reversed. If you look atCanada, the composition of our exports are very similar, primarilymanufactured goods.There is a lot of talk about low wages being an unfair competitiveadvantage for some exporting countries. The truth is that more than half ofthe 1.7 million jobs that have been created in Mexico since August 1995have been export related. Firms that exported 80% or more of their productpaid wages that were 44% higher than the rest of the economy. If you look atcompensation during the third quarter, the Maquiladora industry paid wagesthat were significantly higher than the rest of the economy.Clearly, the enactment of the NAFTA has had a tremendous impact onMexico's ability to capture foreign direct investment. Prior to the NAFTA,the highest yearly figure was less than five billion dollars. Immediately afterenactment of the NAFTA, that number doubled to ten billion. In 1997, thefigure was almost fourteen billion dollars, and it was almost eleven billiondollars for both 1998 and 1999. This is something that you have to bear inmind when we have these heated discussions about Chapter 11 of theNAFTA and how it protects investment. It makes a great topic for law reviewarticles, but when you look at the impact of that protection on the investor'slevel of comfort, I would submit that the cost benefit analysis is clearlyfavorable.2Canada-United States Law Journal, Vol. 26 [2000], Iss. , Art. 37https://scholarlycommons.law.case.edu/cuslj/vol26/iss/37Alvarez-MEXICAN VIEWBetween 1994 and 1998, Mexico received 57.2 billion dollars of FDI.Almost 60% of that came from the United States and 4.2% came fromCanada. Over 60% of foreign direct investment went to the manufacturingsector. By April 1998, one of every five workers registered in the SocialSecurity system had a job with a company that had foreign direct investmentin Mexico. Moreover, companies with foreign direct investment paid wagesthat were almost 50% higher than the rest of the economy. Foreign directinvestment is a limited pool. Capital exporting countries only have so manyresources to invest in countries different than their own. China has been byfar the most successful country in capturing foreign direct investment,prifarily as a result of the size of its economy. Mexico is in second placewith 32.2 billion dollars. Other countries, Malaysia, for example, have half ofthe dollars that Mexico captured in the 1994 to 1996 period.Where did foreign direct investment go in the Mexican economy 62%went to the manufacturing sector; 1% went to the construction industry; otherindustries received 1.1%; services received 6.9% and the growingtransportation and telecommunications industries received 6.6%. That figurewould certainly be larger if we did not have the foreign investmentrestrictions in the telecommunications industry that we still have in place.The banking industry got 10%, and commerce got 12%.Between 1993 and 1997, Mexico's automotive exports increased 134%.In 1997, sales of automotive goods represented 19% of Mexico's totalexports, and 22% of our exports of manufactured goods. That is a figure ofover twenty billion dollars. Mexico is the tenth most important exporter inthe world of automobiles and automobile parts. Mexico is the third largestU.S. provider, and its second largest market for automotive goods. U.S.exports to Mexico account for 16% of its foreign sales. Trade in automotivegoods grew by 15% between 1993 and 1997 after the entry into force ofNAFTA. Job creation has increased 3%. Labor productivity has alsoincreased. The industry has accumulated a significant amount of foreigncurrency - 9.9 billion dollars during that same period.The trade balance is still favorable to the United States in the agriculturaland agro-industry in bilateral trade. But this is still a sector where tariffs areyet to be eliminated. Mexican exports to the United States increased 67%,which is at a significantly lower rate than the rest of the economy's exportsto the United States. Imports from the United States increased 60%. If youlook at Mexico-Canada agriculture and the agro-industry trade balance,Mexico's trade balance is in a deficit almost from the outset. But rates ofgrowth are more important. Mexican exports to Canada have increased102%, and imports from Canada have increased 82%. That is more in linewith the general statistics for growth in trade between the two countries.3Alvarez: The Mexican View on the Operation of NAFTA for the Resolution ofPublished by Case Western Reserve University School of Law Scholarly Commons, 2000CANADA-UNITED STATES LAW JOURNAL [Vol. 26:219 2000]Mexico is the second largest provider of agricultural goods to the UnitedStates after Canada. In five years, Mexico went from sixth place to thirdplace as the U.S. provider of agro-industrial goods, after Canada and France.Mexican exports of fruits and vegetables are expected to grow as tariffprotection is eliminated.Textiles are another success story for Mexico. Exports of Mexicanapparel to the United States grew 167%. That is almost three times thegrowth of agricultural exports. Mexican apparel exports to Canada grew133%. U.S. sales of apparel to Mexico increased almost 140%, and toCanada, 70%. If you look at the post-NAFTA trade balance for textile goods,there was a surplus for Mexico of almost two billion dollars in 1997. 80,000new jobs were created after the NAFTA went into effect. Mexico became thesixth most important exporter of textiles and apparel in the world, and itbecame the largest exporter of apparel to the United States, more importantthan China.So when you talk about dispute settlement, you have to bear these figuresin mind. You have to realize that every expectation that Mexico had when itdecided to negotiate with the United States and Canada has been realizedwith the entry into force of the NAFTA. We also expected the number oftrade and investment disputes to increase and that is why we have disputesettlement mechanisms. But even if you look at the statistics for the use ofthe dispute settlement systems in the NAFTA, there has been considerablerestraint and interest in managing rather than prolonging disputes.There have been sixteen cases under Chapter 20 disputes. There havebeen eleven cases between Mexico and the United States, nine where Mexicowas the claimant and two where the United States was the claimant. Therehas been one case between Mexico and Canada against the United States: theHelms-Burton case. I think Canada was the claimant in that one. There havebeen four cases between Canada and the United States, three where Canadawas the claimant, and one where the United States was the claimant. By andlarge, the largest category in this pie is disputes between Mexico and theUnited States.How have those disputes progressed in the Chapter 20 stages of theprocedure? Chapter 20, as you know, has three stages. The first stage isconsultations. Then, the Free Trade Commission is convened. If the FreeTrade Commission cannot resolve the dispute, a panel is appointed. So youstart out with sixteen disputes that made it to consultations. Many moredisputes were discussed between the parties even before the consultationsstage in the different committees and working groups that are created underthe NAFTA, serving as a buffer for disputes that do not necessarily have topercolate to the consultations stage. Out of sixteen disputes that reached the4Canada-United States Law Journal, Vol. 26 [2000], Iss. , Art. 37https://scholarlycommons.law.case.edu/cuslj/vol26/iss/37Alvarez-MEXICAN VIEWstage, six were settled and two were suspended. So only half of the disputesthat entered the Chapter 20 procedure actually proceeded to the commissionstage, where two were settled, two were suspended, and two remain unsettledbut did not go to a panel. Four of the sixteen that were initiated underChapter 20 eventually got to the panel stage. Two of them were settled andtwo remain in effect, with a decision expected.After five years we may have two NAFTA disputes that actually willresult in a panel decision. If you compare this with the bilateral Free TradeAgreement (FTA) between the United States and Canada, there has been a lotmore restraint here. You had decisions in the Salmon's Herring case, 1 forexample, in the bilateral FTA before the five-year deadline.If you look at Chapter 19, as soon as you have private party involvementin the dispute settlement process, the numbers tend to grow. But still, fifty-two cases are reasonable when compared to the volume of trade. The patternunder the bilateral U.S.-Canada FTA, I would say, is repeated here in termsof the defending investigating authority. In 54% of the cases, it was the U.S.Department of Commerce. In 17% of the cases, it was the Mexican Ministryof Foreign Trade. In 29% of the cases, it was the Deputy Minister of NationalRevenue or the Canadian International Trade Tribunal.If you look at Chapter 11, you have a total of fourteen cases. Damagessought by private parties average 211 million dollars. So parties tend to useChapter 11 only for very significant cases. We have had clients at the firmthat had very clear textbook examples of Chapter 11 violations by theMexican government and decided not to sue because they value a good on-going relationship with the administration. As you can see, the amounts indispute here are quite significant: 750 million dollars in the Loewen case,2900 million dollars in one of the other cases. But, in general, they average outto 211 million dollars.There were two ways to write Chapter XI. By including a precisedefimition of every concept and situation that is likely to jeopardize aninvestor's rights, or by including broad terms and principles, leaving the caseby case application to the ebb and flow of arbitral wisdom. It was this secondmodel that was adopted. It will be up to arbitrators to decide on a case-by-case basis.What are the major challenges in the years to come? For Mexico,certainly a sustained flow of foreign direct investments, and that would meanI Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, (1998) 35SB.I.S.D. 98 (Panel Report adopted Mar. 22, 1998).2See Lowen Group, Inc. v. United States, Notice of Claim, Oct. 31, 1998. See alsoHarmonization Project, Briefing Paper, Loewen Group, Inc. v. United States (visited July 28,2000) <http://www.harmonizationalert.org/NAFTA/loewen.htm>.5Alvarez: The Mexican View on the Operation of NAFTA for the Resolution ofPublished by Case Western Reserve University School of Law Scholarly Commons, 2000224 CANADA-UNITED STATES LAW JOURNAL [Vol. 26:219 2000]opening up sectors that remained closed under the NAFTA. There aresignificant opportunities in the energy, telecommunications and financialsectors.There is a need for transparency in Mexico. There are still instanceswhere the processes for developing regulations is not as transparent as itshould be; a chance for private industry to have some input into the wayregulations are designed and put in place. There are efficiency gains that areto be captured if NAFIA firms use the market-making capability of theInternet to source materials and to export finished goods within the region.There is a discussion, at least in academia, as to whether a free trade marketshould evolve into a common market.For the time being, it does not seem like the NAFTA can evolve into acommon market, but there are at least some common institutions.Competition will be one of the tough topics that the three countries will haveto tackle in the years to come.6Canada-United States Law Journal, Vol. 26 [2000], Iss. , Art. 37https://scholarlycommons.law.case.edu/cuslj/vol26/iss/37

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The Mexican View on the Operation of NAFTA for the Resolution of Canada-U.S.-Mexico Disputes

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