NAFTA at five years: Uneven progress

Although we've seen great progress in some areas affecting freight transportation, NAFTA has yet to fulfill its promise in others.

By Toby B Gooley -- Logistics Management, 12/1/1998

It seems like only yesterday that organized labor's campaign against the North American Free Trade Agreement (NAFTA) was in full swing and Ross Perot made his now-famous prediction that NAFTA would generate a "giant sucking sound" as it pulled U.S. and Canadian jobs south to Mexico.

In fact, it has been five years since NAFTA took effect on Jan. 1, 1994. Much has changed in that time; the most obvious impact has been on trade volumes. According to U.S. government statistics, from 1993 to 1997, trade between the United States and Canada increased by more than 50 percent. Trade between Canada and Mexico climbed by more than 80 percent, and U.S.-Mexico trade exploded by more than 90 percent.

Whether NAFTA has had a positive or negative impact still is subject to debate. Much depends on the observers' points of view, their countries of origin, and the industries in which they work. For logistics managers in all three NAFTA countries, the five years since implementation have brought a whirlwind of change to documentation, record keeping, customs procedures, and transportation services. And there's more to come.

NAFTA Report Card

So, where do things stand after five years? How far have we come--or not come, as the case may be? Attorney Arcie Izquierdo Jordan of Strasburger & Price LLP in Austin, Texas, a NAFTA legal specialist, says a report card on how well NAFTA is achieving its six primary objectives would be a mixed bag indeed. Here's how she would grade progress toward the agreement's original goals:

* Eliminate barriers to cross-border trade in goods and services: "This has been less than exemplary, a D-," Jordan says. Although trade is flowing more freely than ever at the U.S.-Canada border, it's a different story at the U.S.-Mexico border, where inefficient border-crossing procedures, drug interdiction programs, and Mexico's restrictive "NOM" product standards continue to slow trade liberalization, she says.

* Promote fair competition and equal treatment between competitors in all three countries: Jordan gives NAFTA a B+ in this area. The United States and Canada had a head start because they already had antitrust and competition laws; Mexico had to create a similar legal infrastructure, which went into effect early this year.

* Increase cross-border investments: Jordan gives NAFTA a C- on this one, although some industries have taken better advantage of cross-border investment opportunities than others, she notes. In the case of transportation services, existing agreements between the United States and Canada were liberalized before NAFTA was implemented. But in Mexico, investment opportunities are being phased in over 10 years.

* Develop legal frameworks that protect cross-border investments: "NAFTA deserves very high marks in this area, an A," Jordan says. Not only does the treaty specifically protect copyrights, satellite transmissions, sound recordings, product design, trade secrets, and other intellectual property, but it also details specific enforcement provisions. Yet those provisions will be difficult to implement in Mexico because the existing legal system there makes it very difficult to pursue intellectual-property protection suits, Jordan notes.

* Create procedures for implementing and administering NAFTA, and for resolving related disputes: NAFTA created a Free Trade Commission that is supposed to oversee the agreement's implementation, as well as supervise committees and working groups that are charged with pursuing regulatory harmonization. Jordan gives them a C+, while acknowledging that some have made more progress than others.

* Establish means for continuing trilateral cooperation in areas covered by NAFTA: NAFTA deserves an A- for requiring the establishment of trilateral organizations like the Transportation Consultative Group, a public-private body that addresses transportation issues that aren't specifically assigned to the NAFTA Land Transportation Standards Subcommittee (TLTSS), Jordan explains. Subjects the TCG and its committees are tackling right now include developing a uniform insurance regime for motor carriers, border facilitation issues, and automated exchange of truck driver information.

Impact on Daily Business

Jordan's "report card" makes it clear that NAFTA's progress with respect to freight transportation has been uneven. Even so, the agreement clearly is having a big impact on how shippers, carriers, government agencies, and third parties manage the daily business of freight transportation.

For customs authorities in the three NAFTA countries, the agreement has led to two important changes. First, since NAFTA was implemented, those agencies have had to monitor compliance with an entirely new and complicated set of regulations governing duty preference--in addition to previously existing responsibilities.

It also triggered the creation of the "NAFTA Audit," says Jack Rafferty, director of consulting services for PBB Global Logistics, an international logistics company based in Buffalo, N.Y. Because both buyer and seller are involved in claiming duty preference under NAFTA, the agreement allows customs authorities to audit both parties. That means Mexican, Canadian, and U.S. customs audit teams may conduct compliance assessments in any other NAFTA country, explains Peggy Chaplin, a customs attorney with Sandler, Travis, and Rosenberg in Baltimore. "We're seeing more and more site visits and questionnaire verifications by foreign customs authorities of U.S. exporters and producers," she says.

Soaring trade volumes, meanwhile, have increased the need for customs agencies to manage information electronically. This, together with NAFTA's mandate that the three countries harmonize customs data collection and use, has spawned a series of information projects designed to make information sharing faster and more efficient.

The North American Trade Automation Prototype (NATAP), a demonstration project that automatically transferred shipment, driver, and vehicle data via transponders to customs authorities at each border, was a great success in terms of technology, reports James Giermanski, Regents Professor at Texas A&M International University in Laredo, Texas. Giermanski believes the benefits of NATAP were significant enough that it should be continued and expanded beyond its six test sites. The project's authorization has expired, but NATAP's technology is being adapted for use in other U.S. Customs Service projects.

For freight forwarders and customs brokers, NAFTA has brought many changes, says John Ferguson, corporate manager of marketing for PBB and a licensed customs broker. Because the agreement has generated a whole new set of rules, documents, and audit regimes, forwarders and brokers have had to devote considerable resources just to handling NAFTA business, he says. Double-digit annual increases in cross-border traffic, moreover, are leading brokers and forwarders to develop new services like NAFTA compliance consulting, Ferguson says.

Transportation providers have increased the services they offer between NAFTA countries. They essentially are following their customers' lead. Because more shippers are sourcing, transporting, manufacturing, and selling goods in all three countries, demand for carriers to serve all of North America is growing.

Thanks in large part to NAFTA, railroads have made creation of North American service networks a top priority. Canadian National and Canadian Pacific, for example, both own U.S. railroads that connect to their domestic networks. Looking southward, marketing agreements between U.S., Canadian, and Mexican railroads are shaving transit times and improving service for freight that moves between those three countries.

Trucking: Unresolved Issues

For motor carriers, NAFTA has opened many new business opportunities. U.S. trucks are a familiar sight in Canada, and Canadian vehicles are a common sight on roads in northern U.S. states. The number of trucking companies that offer service to and from Mexico has climbed.

Trucking operations also are changing under NAFTA. The agreement requires the three countries to harmonize safety, equipment, licensing, and insurance practices so that carriers from any one country may operate safely in another. A trilateral driver-record database, for example, will be ready for law-enforcement officials to use next month.

The push to harmonize liability regimes between the three countries has been less successful. The North American Committee on Surface Transportation Law and Practice, which includes shippers, motor carriers, insurers, and legal experts from all three countries, has been working on a uniform NAFTA bill of lading.

Although all parties have agreed on a standard North American bill of lading, adoption is being held up because of a dispute over liability issues, says Logistics columnist William J. Augello, head of the Transportation Consumer Protection Council and co-chair of the non-governmental committee. The first problem is the wide differences between standard liability in each country. That ranges from full liability unless otherwise specified in the United States, to $2 per pound in Canada, to just three cents per pound in Mexico. The other problem is that carriers oppose applying a "willful misconduct" clause to cross-border shipments. Such a clause makes them liable for the full value of a shipment if the shipper can prove negligence on the part of the carrier. "Shippers are very firm that we can't adopt a uniform liability limit without a willful misconduct clause," Augello says.

In many ways, motor carriers have so far been unable to realize some of NAFTA's potential benefits. In January 1996, U.S. and Mexican carriers would have gained the right to pick up and deliver international shipments in states adjacent to the border. That would have streamlined the border-crossing process and reduced costs for shippers and carriers. Just days before the border opening, however, the United States unilaterally halted the process on the grounds of safety concerns. Industry insiders, though, are convinced that organized labor's opposition to NAFTA was responsible for the delay.

Three years later, the border states remain closed to foreign trucks, cross-border investment in motor carriers essentially has come to a halt, and both countries are working feverishly to harmonize safety standards. "NAFTA doesn't exist for trucking at this point," says Martín Rojas, director of international affairs for the American Trucking Associations. "We have a modern agreement, but we are working through an archaic transportation system."

The Mexican government has filed a formal complaint against the United States for failure to comply with NAFTA's provisions on truck access. Because initial discussions failed to reach an agreement, the issue now has gone to arbitration. Rojas expects that process will take about six months, and he is not optimistic about the outcome. "I don't think the arbitration panels' decision will be very binding," he says, "because as long as [parallel] technical safety discussions are going on, the border won't open."

Although Rojas' pessimism appears to be justified, there are some signs of movement south of the border. A joint venture between LTL carrier Consolidated Freightways and Mexico's Alfri-Loder Group, known as CF Mexico, claims to be the first seamless, single-party service between the United States and Mexico. "To our knowledge, we are the first international trucking company that is set up just the way NAFTA is designed to work," says CF Alfri-Loder General Manager Brian Hickert. Where similar efforts by truckload carriers ran afoul of Mexico's investment and domestic transportation laws, CF Mexico has been careful to structure itself in such a way that it takes advantage of NAFTA's freedoms while still complying with Mexico's domestic regulations, Hickert says.

The intrusion of Mexico's domestic transportation laws into international business also has been a problem for small-package carrier United Parcel Service. Because UPS was bringing in trailerloads of parcels from the United States and then breaking them up for distribution within Mexico, the Mexican government considered that second leg to be a domestic LTL move and prohibited UPS from operating what it said was a domestic trucking service. It also restricted the size and weight of packages as well as the size and type of truck UPS could use to ensure that the carrier only handled small packages.

UPS has filed a formal complaint against the restrictions under NAFTA. Negotiations are at an impasse, and the issue is likely to move to arbitration soon , says Tad Segal, director of public relations in UPS's Washington office. Meanwhile, CF Mexico's success at running an international trucking service under both NAFTA and Mexican domestic law may shed some light on how to resolve UPS's situation, says Texas A&M's Giermanski. "This may open up the UPS question again. What is the difference really between an LTL operation and UPS? UPS [handles] small packages and LTL freight is larger, but conceptually, it's the same thing."