Trade and Environment: GATT and NAFTA

Order Code 94-165 ENR

Report for Congress

Received through the CRS Web

Trade and Environment: GATT and NAFTA

Updated April 4, 1994

-name redactedSpecialist in International Environmental Policy

Environment and Natural Resources Policy Division

-name redactedSpecialist in Environmental Policy

Environment and Natural Resources Policy Division

Congressional Research Service ˜ The Library of Congress

Trade and Environment: GATT and NAFTA

Summary

Environmental concerns in trade negotiations have received extensive attention

by policymakers both with regard to the General Agreement on Tariffs and Trade

(GATT) and to the North American Free Trade Agreement (NAFTA). At the

conclusion of the NAFTA, environmental concerns were addressed both within the

agreement and in side agreements that were critical to passage of NAFTA

implementing legislation in the United States. Similarly, although not initially

expected to address environment, the GATT Uruguay Round agreement contains a

number of provisions advocated by environmental groups. Following completion of

the Uruguay Round agreement in December 1993, negotiations continued on

formulation of an environmental work program for GATT. Negotiators decided in

March that a Committee on Trade and Environment is to be established in the newly

established World Trade Organization (WTO).

A number of basic concerns have been raised during the debates on trade and

the environment, spanning a wide range of issues. These include concerns that

differences in environmental regulations may affect competitiveness, raising the

question of whether and how to ``harmonize,'' or achieve some internationally

accepted convergence of, environmental standards; concern that if countries are not

allowed to control or restrict exports, they may lose a major tool for conserving

resources that are overharvested for trade markets; the use of trade measures in

international agreements; concerns about unilateral use of trade measures. An

important underlying issue is the extent to which environmental issues can or should

be negotiated and resolved within the context of trade agreements.

In the final agreement of the Uruguay Round of GATT in December, some

environmental issues were addressed directly, while others were deferred by the

recommendation that a work program for environmental issues be formulated for

approval at the April 15 Ministerial meeting in Marrakech, Morocco, where the

Uruguay Round agreement will be signed. Modifications were made in key language

on technical barriers to trade (TBTs), sanitary and phyto-sanitary standards (SPS),

and dispute settlement, and language on protection of the environment and

sustainable development was added to the priorities in the preamble. The December

agreement also approved some limited environmental subsidies. Following up on the

December decision to formulate a work program on environmental issues to address

major environmental concerns in the post-Uruguay period, GATT negotiators

decided in March 1994 that a Trade and Environment Committee is to be established

within the WTO, and a broad work plan was outlined.

Negotiation of the NAFTA, signed December 17, 1992, involved unprecedented

consideration of environmental issues in the context of a trade agreement. In the

final text, negotiators included several environment-related provisions, including

language to generally preserve participating countries' laws and regulations on

environment, health and safety. These are briefly described in this report.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Environment in the GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Committee on Trade and Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

OECD Trade and Environment Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Current U.S. Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Environment in NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Side Agreement on Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Commission on Environmental Cooperation . . . . . . . . . . . . . . . . . . . . 10

Enforcement of Domestic Environmental Laws . . . . . . . . . . . . . . . . . 10

U.S.-Mexico Agreement on Environmental Funding . . . . . . . . . . . . . . . . . 11

Trade and Environment: GATT and NAFTA

Introduction

Environmental concerns in trade negotiations have received extensive attention

by policymakers both with regard to the General Agreement on Tariffs and Trade

(GATT) and to the North American Free Trade Agreement (NAFTA). During 1990,

as the multilateral trade negotiations in the Uruguay round of the GATT entered what

was expected to be their final year, environmental concerns were increasingly raised.

Environmental issues were brought up in connection with bilateral and other trade

discussions, as well.

At the conclusion of the NAFTA, environmental concerns were addressed both

within the agreement and in side agreements that were critical to passage of NAFTA

implementing legislation in the United States. Similarly, although not initially

expected to address environment, the GATT Uruguay Round agreement contains a

number of provisions addressing concerns of environmental groups, and a decision

was taken by GATT negotiators to establish a Committee on Trade and Environment

within the newly established World Trade Organization (WTO), and to outline an

environmental work program to examine major trade-environment issues.

Background

A number of basic concerns have been raised during the debates on trade and

the environment:

--

Differences in environmental regulations may affect competitiveness,

raising the question of whether and how to ``harmonize,'' or achieve some

internationally accepted convergence of, environmental standards; in the

absence of similar environmental regulations, lower standards in exporting

countries may be considered to be a hidden subsidy by importing countries

whose competing industries have to comply with stronger environmental

regulations;

--

If countries are not allowed to control or restrict exports, they may lose a

major tool for conserving resources that are overharvested for trade

markets (a concern, for example, with tropical timber);

--

Trade measures or sanctions have been increasingly invoked as

enforcement mechanisms in environmental agreements (e.g., the Montreal

Protocol, fisheries treaties); the individual and cumulative impacts of the

use of such measures need to be studied and understood, as well as how to

make them compatible with trade rules;

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--

If a country acts unilaterally to impose trade measures (e.g., an import ban,

in order to enforce its own laws against certain practices affecting the

global commons) this may be interpreted by current trade regulations as a

restriction on fair and free trade, as happened in the U.S.-Mexico dispute

over the use of trade measures by the United States to protest Mexican tuna

fishing practices that killed excessive numbers of dolphins.

--

Environmental regulations, especially those that impose requirements on

imported goods, in some cases may be considered restraints on trade.

An important underlying issue is the extent to which environmental issues can

or should be negotiated and resolved within the context of trade agreements.

Environmental groups have argued that environmental issues are directly affected by

trade, and that some environmental concerns need to be addressed in trade

agreements. However, trade officials express concern that trade agreements are not

the appropriate place to address most environmental problems, and that these should

be resolved through multilateral environmental agreements, with trade agreements

incorporating ways to accommodate such treaties.

Environment in the GATT

Environmental issues were raised repeatedly during the last three years of the

Uruguay Round. In the final agreement, modifications were made in key language

on technical barriers to trade (TBTs), sanitary and phyto-sanitary standards (SPS),

and dispute settlement, and by inserting protection of the environment and

sustainable development to the priorities in the preamble and by allowing limited

environmental subsidies. To address major environmental concerns, GATT

negotiators agreed that an environmental work program was needed, and the

December 15, 1993, decision required that it be formulated by April 15, 1994, for

implementation in the post-Uruguay period. On March 23, 1994, negotiators issued

a decision that a Trade and Environment Committee should be established in the

WTO, with a broad work program as its mandate. However, debate continued over

whether the language modifications and the future work program will satisfy

demands of environmental interests that the international trading system should

accommodate appropriate environmental protection, while not violating the goals of

GATT to protect and promote free and open trade.

Historically, within the GATT structure, working parties (ad hoc committees)

have customarily been established to study the issues on which members may wish

to make decisions in the future. In 1971, the GATT parties established a Working

Group on Environmental Measures and International Trade. It was noted at the time

that environmental policies vary among countries, and trade disputes may result from

these differences.

However, this working group did not meet until 1991, when increasing concerns

raised by environmental groups put pressure on the GATT to respond. The group was

activated in October, 1991, and had its first meeting in November of that year. It held

six substantive meetings in 1992. Its agenda included three items:

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-- Trade provisions of existing multilateral environmental agreements

(such as the Montreal Protocol on ozone depletion, or the Basel Convention on

waste trade);

--

The transparency of trade-related environmental measures;

--

Possible trade effects of packaging and labelling requirements.

A major environmental/resource management issue was hotly debated in GATT

in mid-1991, and further raised environmental sensitivities. Pursuant to provisions

of the Marine Mammal Protection Act, the United States banned tuna imports from

Mexico to protest fishing methods that killed substantial numbers of dolphins. In

February 1991, Mexico requested a GATT ruling against the United States for

restraint of trade, and in August the dispute panel concluded that GATT prohibits its

members from imposing import restrictions based on extraterritorial concerns, or

from taking action to dictate how other nations produce their export goods. The

implications of this report would be significant if adopted by GATT (a

recommendation to the full GATT was made by the dispute panel), limiting trade

measures that might be deployed for other environmental goals, and representing an

example of the concerns expressed by U.S. environmental groups that GATT

procedures and decisions could undermine U.S. laws aimed at protecting the global

environment. Following extensive reaction to these implications, Mexico indicated

that it would not seek a final GATT ruling on its complaint. (For more information,

see CRS report 91-666 ENR: Tuna and the GATT)

Environmental protection objectives were not originally identified as U.S.

negotiating objectives for the Uruguay Round in the Omnibus Trade and

Competitiveness Act of 1988, which spelled out U.S. goals. However, a sense of the

Congress resolution was passed in the 102nd Congress that stated the President in

trade negotiations "should seek, inter alia, to address environmental issues related to

the negotiations and to modify GATT articles to take into consideration the national

environmental laws of the GATT Contracting Parties and international environmental

treaties."

Until the last phase of the negotiations, it had appeared that environmental

issues would not be taken up directly in the Uruguay Round, but would be deferred

as one of the high priority issues to be taken up by GATT after conclusion of the

Uruguay Round talks. In the last days of the negotiations, however, led by U.S.

positions in some cases, environmental provisions were included in the agreement

or in related decisions by the negotiators.

Provisions of the Multinational Trade Negotiations Final Act (MTN/FA) of the

Uruguay Round, signed by negotiators on December 15, 1993, addressing

environmental concerns include the following:

--

The preamble to the agreement establishing the World Trade Organization

(WTO) recognizes, among other things, the objective of sustainable

development, including seeking to protect and preserve the environment

(MTN/FA II).

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--

A subsidy to industries to promote adaptation of existing facilities to new

environmental requirements would, under limited and specified

circumstances, be "non-actionable" (couldn't be challenged)(MTN/FA II13, Section 8.2 (c)). This provision is one of several "non-actionable"

subsidies that are regarded as problematic by some U.S. industry

representatives, who feel this may provide a general opening to countries

that wish to subsidize exporting industries, thereby providing a competitive

advantage to their firms. U.S. business interests are urging that the United

States seek ways to assure that unwarranted subsidies are not allowed to

their competitors.

--

Language was adopted to protect national standards from being lowered

in the areas of both sanitary and phyto-sanitary standards (SPS), e.g.,food

safety standards, and technical barriers to trade (TBT), e.g.,domestic

legislation such as fuel efficiency or clean air standards that would require

imports to meet such standards. Adjustments were made in these areas to

meet concerns over whether environmental standards of one country could

be lowered through "harmonization" and how disputes over

environmentally related trade conflicts might be handled.

In both cases, environmental groups welcomed the language that

seeks to ensure a country's standards will not be lowered by trade

requirements, but they see continued problems in that challenges to a

country's environmental rulings could be allowed through the requirement

that environmental objectives be met through "least trade restrictive"

methods. Conversely, business interests fear that this language is

sufficiently ambiguous that more trade restrictive practices might not be

challenged. Both environmental and business interests are seeking

clarifications of the language in the SPS and TBT sections.

--

The MTN/FA recommends the establishment of a Working Party on Trade

in Services and the Environment (MTN/FA III-7 (c), to examine whether

additional changes are needed in the General Agreement on Trade and

Services (GATS).

Other language of concern to environmental groups in the Final Act of the

Uruguay Round agreement is that on dispute resolution. They raise concerns about

"transparency" in terms of inadequate public participation and availability of GATT

documents; they argue that although some changes to allow expert testimony before

GATT panels on scientific and technical issues in trade disputes are beneficial, the

GATT system still allows for challenges to U.S. laws that could result in pressure to

lower environmental standards because they have been ruled barriers to trade.

Committee on Trade and Environment

At the conclusion of the December 15 Uruguay Round Agreement, the

negotiating committee reached a separate decision to establish a future work program

on environment, to deal with unresolved environment and trade issues. The

December decision noted that there should be no contradiction between

environmental protection and an open trading system. It spelled out the need for

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rules to enhance positive interaction between trade and environmental measures for

promotion of sustainable development, noting the need for special consideration to

needs of developing countries. The decision also responded to trade-related concerns

by stating the need to avoid protectionist trade measures and to adhere to multilateral

disciplines to ensure responsiveness of the trading system to environmental

objectives.

A major objective of environmental interests, and one advocated by the Clinton

Administration, had been a commitment to environmental negotiations in a "green

round" following the Uruguay agreement, and the establishment of a environment

committee in the newly created World Trade Organization. In the end, the GATT

negotiators declined to include a WTO Environment Committee in the December

agreement and related decisions; instead, they agreed that a program of work on

environment should be drawn up in time for endorsement by the Ministerial

Conference on April 15, 1994. This work program, negotiators agreed, was to spell

out the issues to be taken up by GATT related to environment. In effect, this deferred

decisions on some of the most difficult trade/environment issues until the postUruguay work program could deal with them.

Some environmental groups accepted this objective, and focused their efforts

on assuring that what they considered to be appropriate elements were incorporated

in the work plan. Other groups opposed the December 15 decisions; they felt that a

work plan and/or environment committee would lead to a drawn-out and inadequate

response. They argued that a full "green" round of negotiations is needed, and they

urged a forcing mechanism such as a moratorium on all environmental challenges

until completion of the round. Over 75 Members of Congress have written to

President Clinton, urging imposition of such a moratorium on challenges to

environmental measures, such as those taken in the tuna-dolphin case, until

negotiations are undertaken and completed within GATT to address the "full

complexity" of these issues. Such a moratorium would require agreement from all

GATT parties that if trade restrictions were imposed by a country in order to enforce

environmental goals and objectives, no challenges to these trade restrictions would

be posed in the GATT system. However, some observers argue that such a

moratorium could not obtain approval from GATT participants unless a reciprocal

moratorium on the imposition of trade restrictions for environmental purposes were

also put into effect.

On March 23, 1994, GATT negotiators announced a Decision on Trade and

Environment that directs the first meeting of the General Council of the WTO to

establish a Committee on Trade and Environment, open to all members of the WTO.

The Committee is to report to the first biennial meeting of the Ministerial Conference

after the WTO enters into force, when the work and terms of reference of the

Committee will be reviewed, along with the Committee's recommendations.

The March decision document reiterates the elements of the work plan outlined

in the December 15 decision as the Committee's terms of reference. The program of

work will include identification of the relationship between trade measures and

environmental measures in order to promote sustainable development, and would

cover the issue of how GATT will respond to environmental agreements and treaties.

It will also make appropriate recommendations on whether modifications of the

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provisions of the Multilateral Trading System are required--compatible with open,

equitable, and non-discriminatory trade. The negotiators left open the option that the

Committee could address "any relevant issues" in relation to several broad concerns,

including, among others:

--

the relationship between the provisions of the multilateral trading system

and trade measures for environmental purposes;

--

the relationships between environmental policies relevant to trade or with

significant trade effects, and the provisions of the multilateral trading

system;

--

the relationship between the multilateral trading system and charges and

taxes for environmental purposes and other requirements for

environmental purposes, such as those for standards, packaging, or

labelling;

--

relationships between dispute settlement mechanisms in the trading system

and those in environmental agreements;

Pending the first meeting of the WTO, which is expected in 1995 at the earliest,

the work of the Committee on Trade and Environment is to begin under a SubCommittee of the Preparatory Committee of the World Trade Organization.

Among the most difficult and key issues the Committee's environmental work

program is likely address include the question of the unilateral use of trade measures

to "enforce" a country's environmental priorities or laws. A closely linked issue is

that of "processes and production methods (PPMs),"--the extent to which it is

legitimate for an importing country to refuse to accept imports that involve what it

considers unacceptable environmental consequences in their production processes,

even though the product may not cause environmental damage to the importing

country itself. GATT rules to date generally do not permit a country to impose trade

restrictions unilaterally in response to policy choices of other countries. This was

at issue, for example, in the "tuna-dolphin" dispute between Mexico and the United

States, in which the United States refused to import tuna caught with methods that

killed or harmed excessive numbers of dolphins. Another example could be concerns

over global deforestation that have led to calls for reducing or refusing imports of

wood harvested by "unsustainable" methods.

Given the difficulty and complexity of many of the trade-related environmental

issues, it is unclear exactly what the Committee's final work program will contain.

Environmental interests have expressed the need for a full examination of

environmental priorities in the work program in order to assure that strong

environmental protection is not jeopardized by free trade objectives--through a

"downward harmonization" of environmental standards, for example.

However, there have also been strong opponents to various aspects of a possible

environmental agenda. Among these opponents are some from developing countries

who fear threats to their sovereignty and the possibility that environmental standards

may be used to justify trade restrictions that will damage their economies. Another

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concern is that environmental trade restrictions might be used by countries to

disguise protectionist policies or practices.

OECD Trade and Environment Agenda

The Organization for Economic Cooperation and Development (OECD) has

work underway on an extensive agenda of trade and environment issues, which may

reflect an agenda that includes many of the issues considered for a GATT

environmental work program. The OECD, consisting of the major industrialized

nations, plays an active role on a variety of issues, allowing regional debates of

international issues. Included in the very extensive OECD work program are the

following:

--

Effects of trade liberalization on the environment, including sector studies

in such areas as forestry, fisheries, etc.;

--

Processes and production methods (PPMs), including identification of the

domestic, transboundary and global environmental and trade implications

of various processes and production methods;

--

Use of trade measures for environmental purposes, both within the context

of international agreements and outside them;

--

Packaging and eco-labelling, including attention to life-cycle analysis of

environmental implications of all stages of a product's development.

--

Harmonization of national environmental standards, including a review of

procedures for establishing international standards;

--

Development of trade and environmental principles and concepts;

--

Dispute settlement, including comparison of compliance and dispute

settlement provisions and procedures in existing environmental and trade

agreements.

Current U.S. Objectives

On February 3, 1994, State Department Counselor Timothy Wirth outlined

current thinking behind development of U.S. positions on trade and environment in

testimony before a subcommittee of the Senate Committee on Commerce, Science

and Transportation. He indicated environmental objectives include "protecting

biodiversity and endangered or threatened species; protecting the oceans and their

resources; protecting the atmosphere and addressing climate change; and protecting

the environment and resources that are within or partially within U.S. jurisdiction."

Counselor Wirth indicated that U.S. trade policy objectives include, among

others, "constructing a market-oriented, rules-based system for international trade in

goods, services, and investments; increasing market access for U.S. goods and

services; and building confidence in the international trading system by promoting

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policies that conform to obligations under the GATT and other international trade

agreements."

The U.S. framework to be used in developing a position on when consideration

of the use of trade measures might be appropriate to protect the environment include:

--

when trade measures are required by an international environmental

agreement to which the United States is a party, assuming nondiscriminatory treatment of non-parties;

--

when the environmental effect of an activity is partially within U.S.

jurisdiction, and there is reasonable scientific basis for concern;

--

when a plant or animal species, wherever located, is endangered or

threatened, or where a particular practice would likely cause a species to

become threatened, assuming there is reasonable scientific basis for

concern;

--

where the effectiveness of a scientifically based international

environmental or conservation standard is being diminished, provided that

the standard is specific enough that the judgment as to whether it has been

"diminished" can be made objectively.

Environment in NAFTA

Negotiation of the North American Free Trade Agreement (NAFTA), signed

December 17, 1992, involved unprecedented consideration of environmental issues

in the context of a trade agreement. In the final text, negotiators included several

environment-related provisions, including language to generally preserve

participating countries' laws and regulations on environment, health and safety.

Upon assuming office, President Clinton pledged he would not send NAFTA

and its implementing legislation to Congress until he had negotiated side agreements

addressing additional environmental and labor issues. Trade officials from Canada,

Mexico, and the United States began negotiations in March 1993. On September 14,

1993, the three countries concluded negotiations on environmental and labor side

accords that include provisions to address problems with enforcement of

environmental and labor laws.

In separate negotiations, the United States and Mexico agreed to establish a

Border Environmental Cooperation Commission (BECC) and a North American

Development Bank (NADBank) to provide financing for environmental investments.

NAFTA implementing legislation passed Congress in November, 1993, and the

agreement entered into force on January 1, 1994.

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Background

Environmental issues emerged early in NAFTA negotiations, particularly in the

context of liberalizing trade and investment rules between the United States and

Mexico. One question concerned how NAFTA might affect one country's more

stringent environmental standards, and whether these standards could be challenged

successfully as nontariff trade barriers. Could U.S. health, safety, and environmental

product standards, if stricter than other Parties' standards, be weakened if NAFTA

obliged Parties to harmonize and adopt international standards? Conversely, the

question asked was whether one country's weaker environmental protection measures

or their ineffective enforcement constituted an implicit subsidy, thus providing an

added incentive for businesses to relocate production to the less regulated country.

Many in Congress have expressed concern that, while Mexican environmental

regulations are becoming more like U.S. regulations, Mexico currently has many

fewer requirements and historically has had lax enforcement.

NAFTA proponents and opponents generally have agreed that further economic

development in Mexico could, in the long run, enable that country to increase

investments in environmental protection. Although many agree that liberalizing trade

and investment with Mexico would require that some environmental precautions be

taken, they disagree as to whether the trade negotiations were the appropriate forum.

Trade officials argued that

environment is not a traditional trade issue, and that NAFTA talks were not the

appropriate mode for resolving substantive environmental issues. They contended

that environmental concerns would be more appropriately addressed in multilateral

agreements on specific issues. However, the level of concern raised by Congress

during NAFTA negotiations required that the Bush Administration respond to those

concerns with some specificity.

The final NAFTA text includes a number of environment-related provisions,

including several that are unprecedented for trade agreements. Briefly, NAFTA

contains provisions that conditionally protect stricter environmental laws and

standards (provided that, among other things, such measures are scientifically based),

encourage upward harmonization of standards; place the burden of proof that an

environmental measure is inconsistent with NAFTA on the Party challenging the

measure in a NAFTA dispute proceeding; and take some steps toward integrating

environmental protection and sustainable development into economic decisionmaking. The Agreement does not directly affect a country's ability to determine its

own levels of protection for process standards, e.g., emission controls and waste

management rules.

NAFTA also identifies three trade-related international environmental

agreements that would generally take precedence over NAFTA, and provides that the

Parties can agree to add other agreements. [The specified agreements are the

Montreal Protocol on Substances that Deplete the Ozone Layer; the Basel

Convention on the Control of Transboundary Movements of Hazardous Wastes and

their Disposal; and the Convention on International Trade in Endangered Species

(CITES). The U.S.-Mexico and U.S.-Canada bilateral agreements on waste trade are

also included.]

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Notwithstanding the inclusion of these and other environmental provisions in

NAFTA, some remain concerned that NAFTA's ultimate effect on specific

standards-related measures may not be predictable. NAFTA comprises a mix of

rights, obligations, and disciplines, and to the extent that the language may be

ambiguous or conflicting, there is room for debate and uncertainty as to which

provisions would prevail in particular instances. Administration officials, however,

have stated that U.S. environmental measures generally should withstand any

challenges under NAFTA.

Side Agreement on Environment

Many in Congress concurred with the President on the need for an

environmental side agreement. A key concern was that NAFTA contained no

provisions to address lax enforcement of domestic environmental laws, and that if

NAFTA were implemented, border pollution could worsen. A second unresolved

issue involved identifying ways to finance environmental infrastructure and cleanup

in the U.S.-Mexico border area. Some Members also expressed concern about

specific environment-related provisions contained in NAFTA; however, the President

stated he would not reopen the text in supplemental negotiations. The three NAFTA

governments completed the North American Agreement on Environmental

Cooperation (NAAEC) on September 14, 1993. Following is a synopsis of this

agreement.

Commission on Environmental Cooperation. The side agreement, or

NAAEC, creates a Commission on Environmental Cooperation (CEC) to be headed

by a Council comprised of each country's top environmental official. The CEC also

includes an independent Secretariat under the direction of an executive director and

a Joint Advisory Committee comprised of nongovernmental organizations from the

three countries to advise the Council. The Commission's major goal is to broaden

cooperation among the Parties. It will also serve as a point of inquiry for public

concerns about NAFTA's environmental effects and as an avenue for dispute

settlement panels to obtain environmental expertise. The Council is given key

responsibilities regarding the side accord's dispute settlement provisions involving

persistent patterns of non-enforcement of environmental laws.

Enforcement of Domestic Environmental Laws. The most contentious

environmental issue throughout negotiations involved whether or how to address a

Party's persistent lax enforcement of domestic environmental laws. The United

States proposed authorizing the use of trade sanctions to address patterns of

nonenforcement of environmental laws. This concept met considerable resistance

from Canada and Mexico. Ultimately, the NAFTA countries agreed to a dispute

settlement process that includes sanctions as a last resort.

Briefly, dispute resolution in these cases would involve a multi-step process,

beginning with consultation, moving to a recommendation of an action plan to

correct nonenforcement, and, if necessary, proceeding to the imposition of a

"monetary enforcement assessment." If a Party failed to pay the assessment, or

continued to fail to enforce its laws, the Party would be liable to ongoing

enforcement actions. In the case of Canada, the Commission would collect the

assessment and would enforce an action plan in summary proceedings before a

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Canadian court. In the case of Mexico or the United States, the complaining

Party(ies) could suspend NAFTA benefits based on the amount of the assessment.

To invoke the dispute settlement process under the side agreement, a complaint

must concern the failure of a Party to effectively enforce its environmental laws, and

the alleged failure must be trade-related or involve competing goods or services. The

NAAEC authorizes the Secretariat to consider a submission from any

nongovernmental organization or person asserting that a Party is failing to effectively

enforce its environmental law. However, only NAFTA Parties--the United States,

Canada or Mexico--could initiate a dispute settlement proceeding under the side

agreement.

U.S.-Mexico Agreement on Environmental Funding

The need for funding to finance environmental improvements in the border area

was a theme voiced throughout the NAFTA debate by those concerned about

environmental impacts of the agreement. The Administration estimated that

approximately $8 billion over the next decade would be required just to address

needs for drinking water, sewage treatment, and solid waste infrastructure projects

along the border.

The United States and Mexico entered into separate negotiations on this issue

and, in October 1993, the two governments reached agreement on a new institutional

structure to provide financing. A North American Development Bank (NADBank)

is being established to fund infrastructure projects, initially in three areas: clean

water, wastewater treatment, and solid waste. The NADBank will work in concert

with the newly established Border Environmental Cooperation Commission (BECC)

which will assist border States and local communities to plan and finance

environmental infrastructure projects with cross-border impact. The NADBank will

function as a purely financial institution, and the BECC will play the major

substantive role with regard to site approval, design, and environmental impact

assessment. All projects funded by the NADBank must be approved and certified by

the BECC. Also, ten percent of the resources of the NADBank may be made

available for community adjustment and investment, which need not be in the border

area. The BECC will have 10 commissioners, five each from Mexico and the United

States. Each country will contribute $225 million over four years, leveraging a $3

billion loan capitalization. Projects funded by the NADBank will be on both sides

of the border, and will be selected using an ecosystems approach.

The negotiation of this border infrastructure financing strategy was separate

from NAFTA and NAFTA side agreement negotiations; however, it was considered

fundamental to the Administration's effort to garner congressional support for

NAFTA. The President included provisions authorizing the establishment of the

BECC and the NADBank in the NAFTA implementing package submitted to

Congress for approval.

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