Analysis of Dispute Mechanisms in Side Agreements

NAFTA's Dispute Settlement Provisions: 
An Analysis

By Kristin Dawkins
Institute for Agriculture and Trade Policy
September 1993

The National Wildlife Federation says it would. Ralph Nader's Public 
Citizen says it wouldn't. The question is: would NAFTA establish new 
democratic rights in international dispute settlement  -- or not?

Back in 1990 when then President George Bush first proposed 
negotiating NAFTA, the North American Free Trade Agreement, 
environmentalists reacted with alarm. Experience with other trade 
agreements had shown them that international standard-setting and 
dispute settlement frequently resulted in weaker rules than those 
achieved through state and federal legislation. 

Bush promised that NAFTA would resolve these problems and 
appointed five environmental leaders to an advisory board. But the 
negotiations proceeded entirely in secret -- even the advisory board 
pledged confidentiality -- and when the nearly-completed text was 
leaked to the public in August 1992, most environmentalists felt 
their trust betrayed. By this time, organized labor, too, was 
concerned that NAFTA would threaten jobs, wage levels, and the 
right to organize and bargain collectively. Consumers feared that 
NAFTA would lower food and other product safety standards while 
eliminating border inspections. Family farmers found that NAFTA 
would lower prices, making it impossible for them to stay in 
business. Each of these groups discovered that many of their 
counterparts in Canada and Mexico were just as worried. 

In studying the NAFTA text, advocates for these organizations also 
saw that access to national democratic systems could be eroded by 
the international institutions that NAFTA would create. And, looking 
a little closer, they saw the dispute resolution mechanism as key to 
either weakening or strengthening public participation in 
international decisions affecting transnational conditions.

GATT Rules Form the Basis
It all goes back to the GATT, the General Agreement on Tariffs and 
Trade, which since 1948 has guided participating nations -- now 
numbering 111 -- in their trade policies and practices according to 
the principle of non-discrimination. Critics complain, however, that 
this principle has eroded over the years as powerful nations and 
powerful trading companies have sought commercial advantages. 
Furthermore, the GATT rules were written at a time when the 
environment was not a major issue; therefore, the rules prioritize 
increased commercial activity regardless of the environmental 
impact. As a result, GATT dispute panels have obliged Indonesia to 
lift its ban on the export of raw logs and obliged Thailand to lift its 
ban on the import of tobacco on grounds that these laws were 
"disguised" barriers to trade.

The NAFTA text explicitly states that its rules would be "consistent" 
with the GATT although there are various differences. The most 
significant, probably, is a reversal of the burden of proof in a dispute 
although, as Zen Makuch of the Canadian Environmental Law 
Foundation has pointed out, "the onus of proof only plays a 
determinative role in legal cases that are evenly balanced, and trade 
disputes have not, to date, demonstrated such a fine balancing of 
evidence and law." In the GATT, a nation is considered guilty unless 
proven innocent; that is, in a dispute it is the defendant which must 
prove that its trade practice does not discriminate or otherwise 
violate the rules. In NAFTA, the complainant must prove its case. 

Switching the burden of proof could give some protection to nations 
legislating environmental, health and other social regulations -- like 
those of Indonesia and Thailand -- that have trade effects. In the 
case of the controversial Marine Mammal Protection Act, for 
example, which says the U.S. will not import tunafish from countries 
using purse seine nets which also catch dolphins, a GATT dispute 
panel ruled that the U.S. law unfairly discriminates against the 
Mexican fishing industry. Under a NAFTA panel, Mexico would have 
to prove that this national law is not primarily a conservation 

However, this rule is convoluted with exceptions. Because the U.S., 
Mexico and Canada are all members of GATT, most of their disputes 
would also be eligible for resolution under the GATT. The NAFTA text 
affirms that, in such cases, the complainant may choose either set of 
rules; logic suggests most complainants would choose the GATT rules, 
thus switching the burden of proof back to the accused. Then again, 
NAFTA says that the defendant can insist upon a NAFTA dispute 
resolution panel if the case involves facts regarding certain 
environmental, health and safety standards and certain international 
environmental agreements. 

But what are "facts?" In order to defend a national, state or local 
environmental, health or safety law stonger than the international 
standard, the defendant must prove to a NAFTA dispute resolution 
panel that its domestic law is "necessary," "scientifically justifiable," 
and "the least trade-restrictive." A few years ago, Canada charged 
that a U.S. law banning asbestos imports was a barrier to trade on 
just these grounds. Currently, the Delaney Clause, a U.S. law 
prohibiting food additives known to cause cancer in laboratory mice, 
is subject to revocation for these reasons. Both U.S. and Canadian 
limits on pesticide residues in imported food could be overruled on 
this basis. Future bans on tropical timber imports or rainforest beef 
could fail this test. Law professor David Wirth of Washington and Lee 
University summarized this convolution with a warning, "what is 
given with one hand ... will be taken away with the other."

Otherwise, a NAFTA dispute settlement panel would consist of five 
members, not three as is traditional in the GATT. Also unlike GATT, a 
NAFTA panel "may" include experts specializing in fields other than 
trade; thus a nation may nominate environmentalists, lawyers, and 
"other" experts to the roster of potential panelists -- although 
consulting this expertise is not obligatory. If both of the disputing 
parties agree, NAFTA would allow special scientific review boards to 
advise a panel on questions of fact. Separate provisions govern 
disputes over financial matters, intellectual property, agriculture, 
anti-dumping cases, and all other cases brought to a NAFTA dispute 
proceeding. But just like GATT, NAFTA panels would be subject to 
strict confidentiality with no provision requiring public input. 

Clinton Acknowledges Concerns
Acknowledging the public's concern at a campaign rally on October 4, 
1992, presidential contender Bill Clinton nonetheless endorsed the 
NAFTA text negotiated by Bush. But the endorsement was 
conditional, dependent upon Clinton's ability to negotiate 
"supplemental agreements" with Mexico and Canada to fix a number 
of the problems pointed out by environmentalists, labor leaders, 
consumers and farmers. Among numerous other specific pledges, 
Clinton promised to negotiate trinational labor and environmental 
commissions that would "educate, train, develop minimum standards, 
and have [substantial] dispute resolution powers and remedies." He 
added, "I think the new Congress should pass legislation to provide 
for public participation in crafting our position in ongoing disputes, 
and to give citizens the right to challenge objectionable 
environmental practices by the Mexicans or the Canadians." 

On August 12, 1993, Clinton and his counterparts in Mexico and 
Canada, President Carlos Salinas and Prime Minister Kim Campbell, 
concluded their supplemental negotiations -- but chose not to publish 
the results. Instead, they released a "summary" for public review. 
And the reviews have not been good. The next day, House Majority 
Leader Richard Gephardt said they "fall short in important respects... 
I cannot support the agreement as it stands." House Speaker Thomas 
Foley estimated that "a significant majority" of congressional 
Democrats were leaning against approval. In early September, a 
newWall Street Journal/NBC poll found lower approval rates among 
the American population than ever: 36 percent of those surveyed 
opposed NAFTA while 25 percent approved. A similar lack of popular 
support plagues Salinas in Mexico and Campbell in Canada. 

Side Agreements Are Weak
Some critics point out that the supplemental agreements do not begin 
to fix major problems in the original text such as the emphasis on 
agricultural concentration or guarantees of undiminished energy 
exports. Others remember the shorter list of promises made by 
Clinton during his campaign such as financing to clean-up border 
pollution, adjustment for displaced workers, and protection for state 
laws setting higher standards than those of the federal government 
and NAFTA. Of all the Clinton promises, the three new agreements 
address only the creation of trinational labor and environmental 
commissions and reiterate the original NAFTA terms regarding 
sudden gluts of imports, called "surges." 

Still other critics would have been satisfied with the supplemental 
agreements if they were ensured a dispute settlement mechanism 
with "teeth." But the teeth are missing. Indeed, according to the 
Journal of Commerce, Mexico's chief NAFTA negotiator Jaime Serra 
Puche told the Mexican Senate not to worry about the threat of fines 
and trade sanctions resulting from the supplemental agreements. The 
trilateral commissions' powers are limited, he said on August 17, and 
the "exceedingly long" dispute resolution process "makes it very 
improbable that the stage of sanctions could be reached." 
Furthermore, the maximum penalty would be a fine or suspension of 
benefits worth $20 million -- peanuts to any of the three 
governments. And the Canadians resisted "teeth" altogether. For their 
part, the side agreements stipulate that any fines recommended by a 
NAFTA dispute panel would be enforced in the Canadian courts with 
no suspension of trade benefits. 

Not until September 14, did President Clinton actually release the 
final text of the supplemental agreements -- amid much fanfare and 
the support of prior Presidents Ford, Carter and Bush. And Serra 
Puche's dismissal of the supplemental agreements appears justified. 

In the environmental and labor supplemental agreements, the actual 
authority of the new trilateral commissions would be limited to cases 
in which a "persistent pattern of failure to effectively enforce" 
certain existing domestic laws can be found. The definitions of a 
"persistent" violation and "effective" enforcement give wide latitude 
for interpretation. First, at the stage of expert review, a complainant 
must show that a "pattern of practice of non-enforcement" has 
occurred starting after the date NAFTA and its side deals are 
implemented. Then, to convene a dispute resolution panel, the 
complainant must show a "persistent pattern of non-enforcement," 
defined in the text as  a "sustained or recurring pattern of practice." 
So, in effect, notes Scott Sinclair, a political economist working for the 
Canadian Center for Policy Alternatives, a complainant must prove 
that there is a "pattern of patterns -- something that is 
disconcertingly vague."

The text also carefully circumscribes which laws are subject to the 
jurisdiction of the trilateral commissions. Only those environmental 
laws affecting the production of tradeable goods and services are at 
stake; laws whose "primary purpose" is natural resource 
management are explicitly excluded. Likewise, labor laws 
guaranteeing the right to freely associate and organize, to bargain 
collectively, and to strike are excluded; only "mutually recognized" 
laws and regulations addressing workplace health and safety, a 
minimum wage, and child labor would be subject to expert review 
and dispute resolution. And neither commission would be able to 
refer complaints -- even those meeting all criteria -- to a dispute 
resolution panel unless two of the three countries' governments 

And there is unfinished business. The three governments' official 
summary of the environmental agreement states, "although 
negotiators have not yet begun work on the language of a text, basic 
agreement was reached on a new institutional structure to promote 
effective coordination of infrastructure projects." 

Transparency and Citizen Access
Surely, none of this represents "teeth." A careful reading shows that 
the three supplemental agreements altogether create ten new 
bureaucracies with responsibilities that are largely informational. 
Words like "consider," "consult," "report," "recommend," "promote," 
and "work towards" proliferate. And the entire supplemental 
agreement on surges is, according to the three governments' official 
summary, merely an "Understanding" that "confirms the ... effective 
use of Chapter Eight of the NAFTA" by establishing a Working Group 
on Emergency Action which "may make recommendations" to the 
governing bodies created by the NAFTA text itself.

On the other hand, an argument can be made that the side 
agreements enable a degree of greater transparency. Working 
groups, advisory boards and other channels of communication are 
established. Individual citizens may bring complaints to the 
environmental commission -- although not to the labor commission 
where only national governments have standing. If a dispute panel is 
convened, panelists may have expertise in fields other than trade 
policy and a panel may, if all parties agree, summon environmental, 
labor, and other expertise. 

But are these few changes enough? The supplemental agreements 
address only a small segment of the public's concern, are riddled 
with limitations, and some of the substance is yet to be negotiated. 
Next, Clinton must submit to Congress an anticipated 8,000 pages or 
so of proposed "enabling legislation" stipulating the many changes 
required in existing U.S. law to implement NAFTA; it is notable that 
the supplemental agreements do not require any changes to U.S. law. 
When Clinton does take this step, the Congress will have only 60 
days to review this massive document and decide whether to 
approve or disapprove the package as a whole. 

In the context of transparency, it is also noteable that the Clinton 
Administration chose to appeal a federal judge's ruling that the 
National Environmental Policy Act requires an Environmental Impact 
Statement to be conducted on NAFTA. Following this cue, a Mexican 
coalition of labor, peasant and environmental groups filed its own 
request for an evaluation of the environmental impact NAFTA on 
Mexico, citing their Constitutional guarantees to "the right to health, 
the conservation of productive resources and the care of ecosystems 
and natural resources" and other national law.

As of September 15, the environmental community in the U.S. was 
split on its overall verdict. Jay Hair, President of the National Wildlife 
Federation, announced the support of six major environmental 
organizations. "The benefits of the NAFTA package stand in stark 
contrast to the status quo, where environmental concerns are largely 
ignored in commerce between nations. NAFTA sets a precedent," he 
said. Ralph Nader disagrees. In a memo to the national grassroots 
coalition joined by the Sierra Club, Friends of the Earth and Green 
Peace, Public Citizen said the package "does not begin to remedy the 
fundamental flaws of the North American Free Trade Agreement 
concerning the environment, conservation and consumer health... 
Approval of this NAFTA [would be] a step backwards from the status 

Meanwhile, pro-NAFTA lobbyists are spending unprecedented 
amounts of money in Washington D.C. while a groundswell of 
opposition bubbles in congressional districts throughout the country. 
Backed into a corner by his earlier endorsement, President Clinton 
has been stuck with a very hot political potato.