I . The effect of NAFTA on the balance of trade in the United States

(All information in this section is based on data obtained from the U.S. Census Bureau at their following Internet locations:

http://www.census.gov/foreign-trade/balance/c1220.html
http://www.census.gov/foreign-trade/balance/c2010.html
http://landview.census.gov/foreign-trade/balance/c0006.html
http://landview.census.gov/foreign-trade/balance/c0005.html .)

A. A comparison of the U.S. balance of trade with Mexico during pre-NAFTA years (1985-1993) and during the NAFTA years, to date (1994-2001)

CHART A: “Comparison of U.S. Trade Balance with Mexico during pre-NAFTA and NAFTA periods” (below) shows that during the 9 years before NAFTA was implemented, the aggregate value of all goods that the U.S. imported from Mexico was 6% greater than the aggregate value of all goods that the U.S. exported to Mexico. In 1985 and 1986, the U.S. trade deficit with Mexico was 40%. Since then, the deficit lessened each year. During the years 1991 through 1993, the U.S. actually had a trade surplus with Mexico.

During the 8 years since NAFTA has been implemented, the aggregate value of all goods that the U.S. imported from Mexico was 23% greater than the aggregate value of all goods that the U.S. exported to Mexico. In 1994, the first full year that NAFTA was in effect, the U.S. still had a trade surplus with Mexico, down slightly from 1993. However, in every year since then, the U.S. has had a trade deficit with Mexico of at least 20%, going as high as 34%.

CHART C: “U.S. - Mexico Trade Balance 1994-2001” (below) provides additional detail regarding the trade deficits during this 8-year period.

A comparison of the U.S. balance of trade with Canada during pre-NAFTA years (1985-1993) and during the NAFTA years, to date (1994-2001)

CHART B: “Comparison of U.S. Trade Balance with Canada during pre-NAFTA and NAFTA periods” (below) shows that during the 9 years before NAFTA was implemented, the aggregate value of all goods that the U.S. imported from Canada was 16% greater than the aggregate value of all goods that the U.S. exported to Canada. During the 11-year period from 1988 through 1998, the trade deficit hovered between 7% and 16%. Since then, however, the deficit has risen sharply, from 19% in 1999 to 29% in 2000 to 33% in 2001. The 37% deficit in January of 2002 is indicative of a continuing trend toward higher trade deficits with Canada under NAFTA.

CHART D: “U.S. - Canada Trade Balance 1994-2001” (below) provides additional detail regarding the trade deficits with Canada during this 8-year period.

B. U.S. balance of trade with Mexico, 1994-2001

Chart C illustrates the U.S. trade balance with Mexico in terms of aggregate U.S. dollars. In 1994, the first full year that NAFTA was in effect, the U.S. actually had a trade surplus with Mexico of more than $1 billion. However, in 1995 the trade balance reversed dramatically as U.S. imports from Mexico exceeded exports to Mexico by $15.8 billion. Since then, the trade deficit has worsened every year with the exception of one (1997). The trade deficit with Mexico grew to $29.9 billion in 2001; in January of 2002, that figure increased to more than $32 billion.

(Chart D, which illustrates the aggregate U.S. trade balance with Canada, includes the subsets of non-NAFTA and NAFTA transactions. Chart C, however, does not include such subsets because the U.S. and Mexican governments do not exchange data regarding U.S. exports into Mexico or Mexican imports from the U.S.)

C. U.S. balance of trade with Canada, 1994-2001

Chart D illustrates the U.S. trade balance with Canada using three measurements: non-NAFTA trade, NAFTA-specific trade and aggregate trade. This chart illustrates most dramatically the counterproductive effect that NAFTA has had on the U.S. trade balance with Canada.

NAFTA-specific transactions have run consistent trade deficits for the U.S., from $4.4 billion in 1994 to $67.9 billion in 1999, averaging $40.6 billion annually over the period.

Non-NAFTA transactions, in contrast, provided the basis for an annual average surplus over the period of more than $12.8 billion. (Industries and producers often elect not to choose preferential treatment on their transactions within NAFTA countries because valuation and classification processes can be quite complex, and compliance with the rules in many cases forces companies to set up expensive internal procedures that add to the cost of their sales. Many would rather pay the tariff. Another factor is the imposition of penalties when Certificates of Origin are not completed correctly. It is significant to note that when companies do not elect to choose preferential treatment on their transactions within NAFTA countries, for whatever reason, that they are not under NAFTA drawback restrictions, but instead can receive full drawback (assuming eligibility, of course)).

The conclusion is inescapable: NAFTA-specific transactions and non-NAFTA transactions have produced markedly different results. NAFTA-specific transactions have resulted in significant trade deficits for the U.S. year after year. Non-NAFTA transactions (in which there is potential eligibility for full drawback), in contrast, have tended to result in strong trade surpluses. The reason why U.S. imports from Canada have dominated exports to Canada in a NAFTA environment or why U.S. exports to Canada have dominated imports from Canada in a non-NAFTA environment cannot be conclusively deduced from the data. Keep in mind, however, that products for which full drawback is refunded are more profitable than products on which duty drawback is restricted.

II. The effect of NAFTA on labor in the United States

(Most of the information in this section is based on data obtained from the Employment and Training Administration of the U.S. Department of Labor. Their web page http://wdsc.doleta.gov/trade_act/taa/ntaa/asp/nafta.asp is the starting point for accessing the data.)

The NAFTA-Transitional Adjustment Assistance (NAFTA-TAA) Program was established under the North American Free Trade Agreement Implementation Act of 1993. The NAFTA-TAA Program combines aspects of two laws that have been in effect for many years: Title I of the Workforce Investment Act (WIA) and the Trade Adjustment Assistance (TAA) Program, under the Trade Act of 1974.

The NAFTA-TAA Program assists workers who lose their jobs or whose hours of work and wages are reduced as a result of trade with, or a shift in production to, Canada or Mexico.

The NAFTA-TAA Program offers help to workers whose companies have been directly or indirectly impacted as a result of trade with or a shift in production to Canada or Mexico, known as primary and secondary firms, respectively. Primary firms are those adversely affected by trade with Canada or Mexico, or who shift production to Mexico or Canada. Secondary firms are those which supply materials to primary firms and/or assemble or finish products of a primary firm.

In order for the U.S. Department of Labor to issue a Certification Regarding Eligibility, the following requirements must be met:

(1) that workers have been totally or partially laid off, and

(2) that sales or productions have declined, and

(3)

A)  that increased imports from Canada or Mexico have contributed importantly to worker layoffs, or
B)  that there has been a shift in production to Canada or Mexico.

There have been almost 400,000 U.S. workers who have met the certification requirements listed above (398,089 have been certified as of April 4,2002) with new petitions being submitted and new certifications being issued on an ongoing basis. This figure represents only workers involved in manufacturing jobs. It does not represent all manufacturing workers whose jobs have been affected or lost because of NAFTA, but only those who have applied for assistance specifically through the NAFTA-TAA program. Nor does it represent the total number of jobs affected or lost because of NAFTA, because it does not include any service sector jobs. However, the fact that it documents an actual number (albeit only partial) of jobs affected or lost in the manufacturing sector as a result of NAFTA is very significant.

The average manufacturing job in the U.S. generates 4.5 times as many secondary service jobs as does the average retail job, and 2.9 times as many secondary jobs as a job in the personal and business service sector (Economic Policy Institute working paper entitled “Employment Multipliers in the U.S. Economy”). In other words, jobs in the manufacturing sector are significantly more valuable to the long-term economic health of the U.S. economy than are other types of jobs. However, as shown above and in the attached tables, it is jobs in the manufacturing sector that are being eroded by NAFTA. Therefore, we must pursue any change in trade policy that serves, at a minimum, to maintain or protect these all-important manufacturing jobs and even to restore, if possible, some of the hundreds of thousands that have been lost as a direct result of NAFTA.

(Companies in every state have been affected adversely by NAFTA. Note that the eligibility requirements for assistance under the NAFTA-TAA Program, shown above, mandate that not only must workers have been totally or partially laid off, as detrimental as that is, but also that their company’s sales or productions have declined.)

III. The Intent and the Result of Restrictions on Duty Drawback in NAFTA

A. The Intent of Restrictions on Duty Drawback in NAFTA

The legislative history of the NAFTA Implementation Act states the following about the intention of restricting duty drawback in NAFTA:

“Section 203, when fully implemented, serves to remove the trade distorting provisions of the drawback laws by placing restrictions on duty drawback on trade between NAFTA countries. This is critical to ensure that none of the NAFTA countries can become an "export platform" for materials produced in other regions of the world.” [emphasis added]

Economists such as David Gantz at the National Law Center for Inter-American Free Trade stated that is was “evident that the lack of duty drawback treatment could be a powerful incentive for [Mexico] to seek alternative sources of parts in the future from North American rather than third country sources…This could result in a significant diversion of trade from third countries (e.g., Korea, Taiwan, Japan, India) to regional suppliers”. Furthermore, “the parties wanted Mexico to be more than an export platform for assembly industries. Increased sourcing of North American parts and components was to be encouraged not only by rules of origin…but also by elimination of duty waivers after a suitable grace period of seven years. This grace period was designed to give Mexican factories sufficient time to arrange for regional supplies to replace those from non-NAFTA members. The combination of measures was designed to stimulate foreign investment, create jobs, encourage technology transfer and give U.S. firms facing prohibitive wage and other costs at home an alternative to Asia.” (He also stated, however, that for some products, the initial seven years under the agreement could be highly profitable, since duty drawbacks would continue during that time.) [emphasis added]

J. Ernesto Lopez-Cordova (“NAFTA and the Mexican Economy: Analytical Issues and Lessons for the FTAA”) in discussing how NAFTA could influence the location of production in Mexico, theorized that the eventual elimination of duty drawback mechanisms (on January 1, 2001) would increase the incentives to move intermediate good production to Mexico and North America. [emphasis added]

B. Some dissenting opinions before the implementation of NAFTA

Others foresaw different results, however. The pending restrictions on duty drawback prompted major industry and government concerns in Mexico that investment in the maquila sector of the Mexican economy by non-NAFTA countries would fade away as a result of the restrictions on duty drawback and duty deferral.

[The maquila sector of the Mexican economy is largely focused on hereafter in this paper because it is “probably the most important sector of the Mexican economy” (editor, maquilaportal.com) and because of its unique situation of having operated under the NAFTA statute both with unrestricted drawback privileges (from 1994 through 2000) and with restricted drawback (beginning on January 1, 2001).]

Likewise, many maquilas believed that Article 303 of NAFTA, which would restrict duty deferral and duty drawback programs, would cause them to lose their comparative advantage because duty drawbacks would be phased out. They felt that the maquilas would be integrated into the mainstream Mexican manufacturing industry.

C. Concern about the effect of NAFTA Article 303 as January 1, 2001 approached

“The Impact of the 2001 NAFTA Changes: Report to the U.S. Customs Service”, a report prepared for the U.S. Customs Service under a contract with the National Center for Inter-American Free Trade, made the following assertions:

“Developments which encourage the maquiladoras to shift manufacturing operations to Asia have potentially devastating impacts for the United States as well as for Mexico. 75-80 percent of the content of maquiladora production destined for the United States represents U.S. manufactured parts and components. Should such factories be moved to Asia, it is reasonable to assume that the U.S. content will drop substantially or disappear entirely.”

“The duty waiver provisions that were in place until January 1, 2001 have been a key feature of the growth of the maquiladora program since the mid-1960s, and their elimination will have enormous direct and indirect impact on these firms and on the United States and Mexico.”

D. The Actual Results of Restrictions on Duty Drawback in NAFTA

Diane Lindquist, a staff writer for the San Diego Union-Tribune, writes the following in an article entitled “Maquiladora Free Fall”, dated March 27, 2002:

“The year 2001 was by far the worst in the 35-year history of Mexico’s maquiladora industry…”

“More than 238,000 positions [20% of the total work force] were eliminated in Mexico’s maquiladora sector as a whole.”

“As a result, some of the maquiladora operators have shifted production to even lower-wage countries such as China, Malaysia, Thailand, Ecuador, Guatemala and Honduras.”

“And foreign investment - a total of $2.17 billion - was off by almost $1 billion from the previous year. In the last quarter of 2001, foreign investment in maquiladora activities barely reached $500 million.”

“The industry experienced one of its most significant growth spurts after the North American Free Trade Agreement went into effect in 1994. But in 2001, as a result of NAFTA provisions, Mexico eliminated the special tariff exemptions for maquiladoras.”

“Economists estimate half the maquiladora contraction is because of the U.S. economic downturn, a third is related to the strong peso, and the rest is because of tax and tariff revisions.”

On November 1, 2001 Dr. Luis Ernesto Derbez, Mexico’s Secretary of Economy, discussed the state of the maquiladora industry. He stated that in 2001 the maquiladora industry would contract for the first time in fifteen years. He went on to identify several factors that had contributed to the contraction of the maquila industry. One of those was the changes to customs laws in accordance with rule 303 of NAFTA. [“Foreign Desk Alert”, Ernst & Young, 11/15/2001]

In a news bulletin dated 04/29/2002 (maquilaportal.com) Javier Prieto de la Fuente, the president of The Confederation of Industrial Councils (CONCAMIN), reported that 70 percent of the Mexican workers who lost their jobs in 2001 were from the export manufacturing industry, and that it will take several years before those jobs are replaced. He later stated that in spite of the federal government’s efforts to strengthen export manufacturing, the fruits of their work would not come for years. [emphasis added]

It is evident from the above facts that the results of the duty drawback restrictions in NAFTA have had a dramatically negative effect, totally the opposite of what the NAFTA ministers had intended when they wrote the agreement and when the respective countries signed it. Jobs have been lost, foreign investment has dwindled, and production has moved out of the NAFTA countries and into countries whose export platforms are more attractive because of lower wages and the profitability of duty drawback.

IV. The remedial effect of duty drawback

In Customs Headquarters Ruling 216658, the U.S. Customs Service states:

“In administratively prescribing a method of identification for drawback, effect should be given to the general purpose underlying the drawback law. This purpose is to assist American business and labor to compete more effectively in foreign markets by assuring that whatever enters into the cost of doing business in such markets is free from the additional cost of U.S. Customs duties. As a result,

• U.S. export trade is facilitated;

• the balance of trade is improved;

• jobs are created; and consequently

• the general economy thereby benefits

(see e.g., United States v. International Paint Co., 35 C.C.P.A. 87, at 90 (1948)).

To this end, the drawback law is remedial in character and should be construed to accomplish the purpose intended (see Fenton Co. v. United States, 14 CCA 277, at 280 (1926))”. [emphases added]

The Court of Appeals for the Federal Circuit, in Slip. Op. 99-1032, dated October 25, 1999, also refers to “the remedial nature of the drawback statute”.

In Customs HQ Ruling 101421, the U.S. Customs Service states in pertinent part:

“remedial statutes are those which are designed to correct an existing law, redress an existing grievance, or introduce regulations conducive to the public good”.

Although the NAFTA Implementation Act was not in existence when the first duty drawback statute was passed in 1789, the nature of the duty drawback statute as a remedial law is very much applicable today again:

• “to correct an existing law” (e.g., NAFTA, or by implication to prevent proposed laws such as the Free Trade Area of the Americas from including language, such as restrictions to drawback, that would be counterproductive to the U.S. balance of trade and to U.S. labor);

• to “redress an existing grievance” (e.g., the injurious effect that NAFTA has had on the U.S. balance of trade and on the loss of manufacturing jobs in the U.S.); and

• to “introduce regulations conducive to the public good”.

The statute and regulations that would be conducive to the public good already exist in the form of the drawback statute (19 U.S.C. 1313) and the drawback regulations (19 CFR Part 191). What is needed is for this statute and these regulations to have their full effect in order to accomplish what they were intended to accomplish. In order for them to have their full, remedial effect, free trade agreements must not include provisions that restrict drawback. The existing duty drawback statute and regulations must be allowed to stand on their own. Language that puts restraints on drawback is not necessary in a free trade agreement, nor is it beneficial to the balance of trade or the strength of labor, especially in the manufacturing sector.

Although this paper contains information which could be deemed sufficient to question the very basis of NAFTA itself and other future trade agreements that might be modeled after it, nevertheless the scope of this paper is limited to the subject of duty drawback and its potential remedial effect on the U.S. trade deficit and the decline of manufacturing jobs in the U.S. labor market. As stated in Customs Headquarters Ruling 216658 above, the duty drawback statute is intended to remedy the disadvantageous effects of existing laws and to redress existing grievances. This paper has demonstrated the direct correlation between NAFTA and both the increase in the U.S. trade deficit with Canada and Mexico and the decrease in manufacturing jobs and wages in the U.S. It has also demonstrated that the intent of NAFTA to ensure, by restricting duty drawback, that none of the NAFTA countries could become an export platform for materials produced in other regions of the world has not only not been realized, but has been a significant factor in the sharp decline of the maquila industry in Mexico. By removing the provisions for drawback from NAFTA, all of which are restrictive of drawback, so that the drawback statute as it exists independently from NAFTA is allowed to have its full remedial effect, the following beneficial effects can be expected:

• U.S. export trade will be facilitated;

• the balance of trade will be improved;

• jobs will be created; and consequently

• the general economy will thereby benefit.

It is understood, of course, that duty drawback in and of itself does not have sufficient power to turn the large trade deficit with Canada and Mexico into a trade surplus, nor does it have, in and of itself, the ability to completely reverse the erosion of manufacturing jobs such that all the manufacturing jobs that have been lost or partially lost will be restored. However, removing the drawback restrictions from NAFTA, and not including them in the FTAA, thereby allowing the independent duty drawback statute to have its full effect, will have some positive effect, to whatever degree, on the balance of trade and the labor situation, especially in the manufacturing sector.

In 1995 and 1996, several versions of the NAFTA Accountability Act were introduced in Congress, an act that would have applied a “do no further harm” test to NAFTA. Because that act did not become law, it is imperative that we now take any possible actions that would at least slow down the damaging effects that NAFTA has had on the trade balance and labor for more than 8 years to date. One of those actions would be the removal of the drawback provisions from NAFTA. Another would be to make sure that the FTAA does not include language that would restrict drawback and its positive effects, effects that have been attested for more than 200 years by the U.S. Congress, U.S. courts, and recently even the World Trade Organization (WTO). (The WTO has described some of the effects of drawback programs in countries around the world as follows: “exports benefited”; “exporters benefit”; “export incentive”; “counteracts the negative effects of high import tariffs”; “a strong magnet for export-oriented foreign direct investment”; “exports encouraged”; “manufactured goods benefit”; and “removes a bottleneck to private sector development”.)

V. Conclusions