From: dale@dale.CAM.ORG (Dale Wharton)
Newsgroups: soc.culture.african.american
Subject: NAFTA analysis--rules of origin
Date: 22 Dec 92 02:25:20 GMT
Organization: private


         NAFTA analysis--rules of origin
Date:    15 Dec 92 15:10 PST
Source:  Kai Mander <kmander@igc.apc.org>
         Institute for Agriculture and Trade Policy

U.S. CITIZENS' ANALYSIS OF THE NORTH AMERICAN FREE TRADE AGREEMENT

R U L E S   O F   O R I G I N

by Pharis Harvey, International Labor Rights Education
                  and Research Fund

        The "rule of origin" is used to determine which goods are
eligible to be exported within the region of the free trade agreement
under lower or no tariffs or to receive other preferential treatment
on the grounds that they originate in Mexico, Canada, or the U.S.
        Determining the criteria for the rules of origin has been a
contentious issue for the negotiating parties of NAFTA.  The U.S., as
the largest and most diverse economy of the three NAFTA countries,
is in principle the least dependent on external sourcing.  However,
U.S.-based transnational companies are also the most integrated
outside the region and depend upon manufactures from throughout
the world.
        Thus the conflict over rules of origin, like many conflicts
in NAFTA, is essentially a clash between economic forces anchored
geographically in this country or region, such as labor, smaller
business, resource-based producers (e.g. agriculture and mining), and
communities on the one hand, and economic forces operating globally
and seeking to maximize their advantage by loose rules of origin that
allow them greater flexibility to produce anywhere under any
conditions and still claim the benefits of NAFTA.
        Identifying the "country of origin" of products has become
increasingly complicated, since international trade now frequently
involves products which are produced from components originating
in many countries and products which are assembled, processed, or
packaged in a country that did not produce the parts.  Furthermore,
calculating which costs should be included in determining regional
content involves determinations that depend increasingly on largely
hidden internal company cost assignments across subsidiaries and
contractors in many countries, only a small part of which is visible
outside the corporate boundaries.
        Since the purpose of a free trade agreement is to give
advantage to production within the countries making the agreement
in order to strengthen and increase the complementarity of the three
countries, it makes sense to require a high degree of regional content
for products to qualify for the specially lowered tariffs and other
advantages.
        A low percentage of regional content would lead to
distortions of trade by enticing other producers from outside the
region to locate low-wage assembly plants or environmentally
damaging processing plants in Mexico, where labor and
environmental law enforcement is lax and wages are among the
lowest in the industrialized world, while keeping parts production
and other higher-value or environmentally safe aspects of
production in other countries.  Anticipation of such loose rules has
already enticed Japanese and Korean firms to rapidly increase their
investment in Mexico and nearby countries of Central America.
        U.S. citizen groups support rules of origin which are
stringent, clear, and are not amenable to or based on highly
subjective interpretations of fact.  Rules of origin promote the
notion of channelling trade and investment benefits to serve the needs
of communities and jobs.  Well drafted rules of origin promote
industrialization where more value is added, research and
development are undertaken, and more and better jobs remain in
the region.
        One other particular concern is that loose rules of origin
make it impossible to condition the benefits of free trade on
production that is environmentally sound or responsible to worker
rights and workplace safety considerations.  Regardless what
conditionality is established internally in the region for these
standards, loose rules of origin allow producers to escape by
conducting the labor-repressive or environmentally damaging aspects
of production elsewhere.

MARKET ACCESS AND NATIONAL TREATMENT

        "National treatment" establishes the limit to which the
products of any of the three countries are given identical treatment
as domestic products.  A "liberal" definition of national treatment in
a free trade agreement creates difficulty for any economic policy that
gives preferences to local or national producers.  For example, it
makes it impossible for governments at local, state, or federal levels
to limit government procurement to goods produced in their own
territory.  Nor does it allow states or federal governments to place
restrictions on products on safety grounds based on the place of
origin.  For agricultural states, such rules have been an important
means to prevent the spread of diseases and blights affecting animal
or plant life.
        Also at issue in NAFTA are the different rates at which the
three countries allow products from the others to gain "national
treatment," and the differential rates at which import restrictions
and export requirements are lowered.  The NAFTA negotiations have
resulted in an agreement which keeps in place Mexican restrictions far
longer than U.S. restrictions and allows Canada to have a lower level
of regional content on certain exports to the U.S. than Mexico.  While
different development levels in the three countries might justify
differential treatment in order to allow each country to adapt to
changed conditions at a pace which is least disruptive, the net effect
of these differences in the present NAFTA draft represents nothing
more than differential yielding to the power of various industry
lobbies, rather than an overall approach to economic health in the
three countries.

ANALYSIS

        Within this general framework, we offer the following
comments and questions about the current NAFTA text:

A.  The US-preferred language of "substantial transformation" to
determine whether goods imported from outside the region have
been sufficiently processed or altered into a new article of commerce
to qualify for regional treatment was accepted over Canadian
objections that this language will be subject to arbitrary,
subjective, and political distortions in interpreting what
constitutes "substantial" transformation.  The formula that was
selected to meet these objections was to require a change in tariff
classification to qualify, in accordance with a lengthy schedule
attached to the agreement.
        While the determination of what effect various levels of
transformation will have on various industries can only be made by
the industries involved, we would note that the concept of
"substantial transformation" itself makes it possible for all the raw
materials for many goods to come from outside the region, with only
the value added by processing to be done inside the region, and yet
for the goods to be shipped within the region as though they were
wholly of regional origin.  The impact this may have on various
resource industries will have to be examined on a case-by-case basis,
but no agreement should be accepted by the U.S. Congress until this
analysis has been done.

B.  The Canadian-proposed "regional value content," as a measure of
origin, was accepted where substantial transformation in nonregional
goods has not taken place, or where goods are comprised of
a complex of parts and components from inside and outside the
region.  For most goods a 60% regional content was approved,
although for the automobile sector, it was raised to 62.5%.  This
methodology requires that this specified amount of the product's
value be added within the NAFTA region.

C.  This has resulted in a fourfold scheme by which goods are
divided into the following categories:  (a) those which are "wholly
obtained or produced" in North America; (b) goods that use imported
materials that undergo a change in tariff classification; (c) goods
that are processed or assembled in North America using North American
inputs; (d) goods that are processed and assembled in North America
but do not undergo a change in tariff classification but which have a
regional value content not less than a certain percentage.

D.  The major problems center on category (d), where for most goods
the allowable percentage of nonregional content is 40%  (In
automobiles it is 37.5%, and in textiles it is 20% or less.)  When 40
percent of products can be produced externally, a sizeable incentive
exists for non-North American companies to locate assembly plants
in Mexico, take advantage of cheap labor, while keeping research and
development, component production and other facets of manufacture
outside the region, in order to penetrate the U.S. and Canadian
markets on a tariff-free basis.  This also provides a strong incentive
for Mexico to lower its external tariffs for such goods in order to
entice such investment and imports at the lowest possible cost.

E.  On agricultural products, the substantial transformation
methodology has been accepted, whereby agricultural products sold
in the region are considered to be of regional origin if they have
undergone change from one category to another, e.g. from "live
animals"  (01.01-01.10) to "meat" (02.01-02.10)  U.S. agricultural
organizations worry that such a definition will open up Mexico as a
meat processor for beef originating in Guatemala and other Central
American countries without adequate inspection for disease.  The
same problem persists for other agricultural products.

F.  Other questions to raise about rules of origin and market access
in this agreement include:

1) Does it provide sufficient safeguards against the import of goods
through Mexico to the U.S. from countries currently under trade
embargoes, such as Haiti, or of goods produced by prison labor in
other countries barred by the Smoot-Hawley Tariff Act?  Much
depends on the adequacy of labeling of origin and the honesty of the
Mexican customs officials.  It must be clear that such goods are not
acceptable as components of trade, regardless of how "substantial" a
"transformation" has occurred in an interim phase of production.
While some specific exceptions are made to assure compliance with
certain international environmental protection agreements such as
the Montreal Protocols, it is not clear how the agreement affects
national barriers to goods produced in countries or under conditions
barred by national law.  Without assurances that NAFTA does not
supersede these laws by allowing regional origin to goods partially
consisting of products imported to Canada or Mexico from such
sources, the agreement should not be approved.

2)  U.S. law now allows for "unfair trading practice" complaints to be
filed against countries exporting goods to the U.S. produced under
conditions of persistent violation of  internationally-recognized
labor rights.  Does NAFTA as currently drafted allow these same
procedures against third-country producers of components of goods
made in Mexico or Canada and shipped into the United States as
"regional" goods?  At the very least, goods or component parts
originating in countries outside the region which have been produced
under labor or environmental conditions that have suppressed their
price below market value(1) must have the extraregional value
attributed to these goods set in terms of the price those goods would
be worth under conditions of environmentally and socially
responsible production, or allow for the revocation of tariff-free
entrance into the United States for that portion of such goods that
originates outside the region under conditions that are barred by the
U.S. GSP program for that country.

3)  While the NAFTA text allows each country to exclude goods under
the same terms as Article 20 of GATT, i.e.  on grounds that they are
produced under conditions that endanger human, animal, or plant life,
it is not clear that this ability pertains to goods that partially
originate outside the region and that otherwise qualify for regional
treatment.  This must be clarified in order for NAFTA not to become
an indirect conduit for products otherwise barred from import.

CONCLUSION

        The issue of rules of origin raises the most basic questions
about the attempt to build economic integration without a political or
judicial framework to harmonize standards upwards, to adjudicate
differences impartially or in the public interest, or to enforce
common standards of labeling, inspection, etc. in the customs services
of the three countries.  It is, like so many other areas of concern, a
troubling reminder that the attempt to shortcircuit the social,
political, and environmental implications of trade leaves all three
countries at the mercy of a handful of giant corporations and their
willing accomplices in the governments of the region.
__
NOTES
1  Section 301 of the U.S. Omnibus Trade and Commerce Act defines
"any act, policy, or practice or combination of these which
constitutes a persistent pattern of conduct that denies worker rights"
as an unfair trade practice, actionable if it burdens or restricts US
commerce.
__
Mark Anderson, AFL-CIO
815 16th Street NW
Washington, DC 20006
phone: (202) 637-5178

Steve Beckman, UAW
1757 N Street NW
Washington, DC 20036
phone: (202) 828-8500

Pharis Harvey, International Labor Rights Education and Research Fund
100 Maryland Avenue NE
Box 74
Washington, DC 20002
phone: (202) 544-7198
Newsgroups: soc.culture.african.american