Parliamentary Research Branch

MR-116E

TABLE OF CONTENTS

CANADIAN ENVIRONMENTAL REVIEW OF NAFTA

THE NORTH AMERICAN AGREEMENT ON ENVIRONMENTAL CO-OPERATION

   A. Overview of the Agreement

   B. Dispute Procedure

   C. Enforcement

   D. Considerations

The North American Free Trade Agreement (NAFTA), details of which are given in Library of Parliament BP-237E, enters into force on 1 January 1994. Conceptually, NAFTA is one of the "greenest" trade documents ever negotiated. According to one of the conclusions of the 1992 Canadian Environmental Review of NAFTA:

The NAFTA establishes a new benchmark for environmentally sensitive international trade and economic relations. The environmental provisions of the NAFTA would go well beyond those of any previous free trade agreement.

The Free Trade Agreement between Canada and the United States does not embrace the same degree of commitment to environmental protection. NAFTA opponents, however, point out that Canada and the United States are highly developed industrial nations that enjoy similar levels of environmental protection, standard of living, civil rights, labour standards, health care and education. Mexico, as a developing nation, stands in contrast to them. On the other hand, it should be noted that in 1988 Mexico enacted the Federal Law on Ecological Equilibrium and Environmental Contamination. This comprehensive law provides strict rules for protecting the Mexican environment and is considered to be every bit as stringent as Canadian or American legislation. Unfortunately, Mexico lacks the financial resources to fully enforce these regulations.

NAFTA critics maintained that, without mechanisms or provisions to enforce the environmental ideals outlined in the agreement, there would be migration of industry and jobs from Canada to pollution havens in Mexico, accelerated deterioration of the Mexican environment, and a race by all three countries to the lowest common denominator of environmental protection. This paper examines the 1992 Canadian Environmental Review of NAFTA, and The North American Agreement on Environmental Co-operation, the environmental "side deal" designed to help enforce the environmental objectives of NAFTA.

Responsibility for conducting the environmental review was assigned to a working group made up of representatives from nine federal departments, some of which had acted as lead departments in Canadian NAFTA negotiations. NAFTA critics claim that the review therefore lacks objectivity.

The review contends that it is a generally accepted principle that expanding trade is a source of increased wealth and diffusion of technology, which will enhance a country's ability to protect and upgrade its environment. The review states: "As openness of foreign trade and investment increases, there is a corresponding decrease in the amount of pollution per unit of output."

NAFTA critics point out, however, that ten years of industrial investment in the maquiladora region of Northern Mexico has had the very opposite effect. Multinational companies freely pollute the Mexican environment, while suppression of the labour movement and human rights has prevented Mexican workers from achieving the benefits of industrialization. Workers in the maquiladora region receive the lowest manufacturing wages in Mexico and are subjected to poor air quality and to some of the most environmentally degraded land and water in the country.

Environmentalists contend that, given Mexico's lower costs and much cheaper labour force, a multinational company could build a non-polluting plant in Chihuahua at less cost than in Toronto. Thus, they claim that the weak economic situation of Mexico could facilitate, rather than hinder, the ability of a foreign company to conduct itself in an environmentally responsible manner. The environmental review describes a number of international studies that indicate "there is likely to be minimal, or no, relocation of Canadian industry due to the projected differences in pollution abatement costs."

Lacking in the review, however, are environmental data pertaining to companies that have relocated from Canada to the maquiladora region of Mexico since 1982. It has been suggested, that, in lieu of recounting less applicable international studies, the environmental review might have more usefully investigated the waste management activities of industries that have moved from Canada to Mexico. Specifically, are these companies in full compliance with Mexican law? If not, do these companies financially benefit from the poor enforcement of Mexico's environmental regulations?

The environmental review also argues that the costs of environmental compliance for industries with high pollution abatement requirements, seldom exceed 2% of value added. NAFTA opponents agree that it is unlikely that an established company would incur new capital expenses if the sole purpose of relocation was avoidance of pollution abatement costs; however, the dual incentives of avoiding these costs and gaining access to a labour force paid, in many cases, one-tenth the hourly wage of Canadian factory workers are together indeed strong inducements for the migration of capital investment to Mexico.

In defence of NAFTA, it should be noted that economic development in the maquiladora region might have been faster and dirtier had NAFTA been rejected. The existence of maquiladoras is due to a partial exemption of tariffs on goods produced in the Mexican border region. The elimination of tariffs by NAFTA will theoretically make maquiladoras obsolete. Failure to include maquiladora arguments in the Canadian Environmental Review of NAFTA has, however, undermined the force of the document.

   A. Overview of the Agreement

The environmental side agreement (1) establishes the Commission for Environmental Co-operation, (2) details the obligations of Canada, the United States and Mexico to ensure compliance with domestic environmental laws and policies, (3) provides a mechanism for consultation and the resolution of disputes, and (4) promotes a broad cooperative work plan for the environment. Initially, the work plan will focus on establishing limits for specific air and marine pollutants, conducting environmental assessments of projects with transboundary implications, and developing reciprocal court access for damage or injury resulting from transboundary pollution.

The Commission for Environmental Co-operation will consist of three sections: a Council, comprising a cabinet-level representative from each country; a central Secretariat, to be located in Canada; and a Joint Public Advisory Committee. The Council will be responsible for the work plan, and it may consider and develop recommendations on such environmental issues as scientific research and technology, eco-labelling, pollution prevention techniques and strategies, and public awareness of the environment. In addition, the Council will address environmental questions and disputes, work to improve environmental laws and regulations in all three countries, and cooperate with the NAFTA Free Trade Commission on environment-related matters.

The Secretariat will act as the support group for the Council and will receive complaints from any person or non-governmental organization that alleges the non-enforcement of domestic environmental laws. The Secretariat will develop factual records and prepare reports for consideration by the Council.

The Joint Public Advisory Committee, which is to comprise five representatives from each country, will assist the Secretariat by providing technical and scientific advice. The Committee is also expected to assist in the preparation of the Secretariat's annual work program and budget.

   B. Dispute Procedure

Any country may request consultations with any other country to discuss perceived failures to enforce domestic environmental laws. Should the problem not be resolved, or if a country demonstrates a persistent pattern of non-enforcement, the Council will take action. The Council may create working groups or committees to study the problem, attempt dispute resolution procedures and/or make recommendations. If the problem persists, the Council, by a two-thirds vote, may convene an arbitration panel whose investigation will be open to public scrutiny; it is hoped that publicity and moral pressure will induce the offending country to comply.

   C. Enforcement

If the arbitration panel concludes that a country has shown a persistent pattern of failure to enforce its domestic environmental law effectively, and if the country does not correct the problem, the panel may impose a fine of up to $20 million (U.S.), for the first year. In subsequent years, the fines are to be no greater than 0.007% of the total tri-national trade of goods. Under the agreement, Canada is to be subject to a fining mechanism distinct from that used for Mexico and the United States. A fine imposed upon Canada would be ultimately enforceable by domestic courts. In contrast, failure by Mexico or the United States to pay a fine would result in suspension of NAFTA benefits and the imposition of a duty, based on the amount of the fine. Accordingly, the United States and Mexico potentially face trade sanctions, while Canada does not.

   D. Considerations

It appears that the Commission for Environmental Co-operation will be an effective body, empowered with the strength necessary to safeguard the environmental objectives of the world's greenest trade agreement. Not only will the Commission work to ensure that each country complies with its own environmental laws, it will also attempt to raise environmental standards and cooperation across North America. The benefits of the environmental side agreement, however, come at the price of potential infringement on national sovereignty. In August 1993, the Quebec Minister of International Affairs pointed out that an individual or group in Canada not satisfied with a particular ruling of the Canadian judicial system could now go to an international commission for recourse. Accordingly, there is the possibility that federal and provincial laws could be subjugated by the actions of the Commission for Environmental Co-operation.