RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG4/W/1
28 September 2000
(00-3929)
Committee on Regional Trade Agreements
DRAFT REPORT ON THE EXAMINATION
OF THE NORTH AMERICAN FREE TRADE AGREEMENT
Note by the Chairman
Following extensive consultations among interested Members, I am submitting below a draft
report on the examination of the North American Free Trade Agreement, for consideration by the
Committee on Regional Trade Agreements and transm ission to the relevant Councils for approval.
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DRAFT REPORT ON THE EXAMINATION OF
THE NORTH AMERICAN FREE TRADE AGREEMENT
The Committee on Regional Trade Agreements (hereinafter the CRTA or the Committee), in
pursuance of item 1(a) of its Terms of Reference,1 presents its Report on the examination of the
North American Free Trade Agreement to the Coun cil for Trade in Goods and the Council for Trade
in Services, as agreed at the CRTA 2..th Session, on … 2000.
This Report does not affect the rights and obligations provided for in the WTO Agreements.
I. BACKGROUND
1. The North American Free Trade Agreement (hereinafter NAFTA or Agreement) was signed
by Canada, Mexico and the United States, on 12 December 1992, and entered into force on
1 January 1994.  The Agreement contains substantive rules governing trade in goods and in services,
as well as disciplines in other areas not governed by the scope of the examination process pursuant toArticle XXIV of GATT 1994 and Arti cle V of GATS, such as intellectual property, investment and
competition policy.  The NAFTA also contains institutional provisions providing for consultations,
dispute settlement and the creation of various working groups to facilitate the monitoring of its
implementation.  The NAFTA offers the possibility fo r additional countries to become Parties to the
Agreement through its accession clause.
2. As was the case prior to the Agreement's entry into force, for Canada and Mexico trade with
NAFTA partners is significantly higher than trade with the rest of the world; for the US, trade withNAFTA partners significantly exceeds trade with any other single trading partner.
                                                     
1 Document WT/L/127.WT/REG4/W/1
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II. EXAMINATION PROCESS
A. NOTIFICATION AND PROVISION OF WRITTEN INFORMATION
3. The NAFTA was notified as a free-trade area to the CONTRACTING PARTIES on
1 February 1993, under the provisions of paragraph 7(a) of Article XXIV of the GATT, and as an
economic integration agreement to the WTO on 1 March 1995, under the provisions of paragraph 7(a)of Article V of the GATS.
4. The following documentation was provided to the Committee:
L/7176 Notification of the Agreement (trade in goods)
L/7176/Add.1 Text of the Agreement
S/C/N/4 Notification of the Agreement (trade in services)
WT/REG4/1 & Corr.1-2 Questions and Replies
WT/REG4/1/Add.1 & Corr.1 Questions and Replies - GoodsWT/REG4/1/Add.2 Questions and Replies - Services
WT/REG4/4/Rev.1 Submissions of lists of services sub-federal reservations
WT/REG4/5 Updated trade statistics
WT/REG4/6 Additional Questions submitt ed by Norway and Switzerland
WT/REG4/6/Add.1 Replies to Additional Questions
B. E
XAMINATION
5. To examine the Agreement in light of the relevant provisions of the GATT 1947, the GATT
Council established a Working Party at its meeting on 23 March 1994.  Subsequent to the WTO's
entry into force on 1 January 1995, the following terms of reference for the examination were adoptedby the General Council on 11 July 1995 (document WT/REG4/2):
"To examine, in light of the relevant provisions of the GATT 1994, the North
American Free Trade Agreement, and submit a report to the Council for Trade in
Goods."
6. At that same meeting, the Chairman of the Council for Trade in Goods read out the following
Understanding regarding the examination:
"It is understood that the statement read out by the Chairman of the Council for Trade
in Goods under item 7 of the Agenda of its meeting on 20 February 1995, as
contained in document WT/REG3/1, applies mutatis mutandis  to this examination.  It
is also understood that, during the examination, due account will be taken of the
intrinsic differences between customs unions and free-trade areas."
7. At its meeting of 30 May 1995, the WTO Council on Trade in Services established a Working
Party with the following terms of reference (document S/C/M/3):
"To examine the North American Free Trade Agreement and to report to the Council
for Trade in Services on its consistency with Article V of the General Agreement on
Trade in Services."
8. The two Working Parties held a single meeting on 20-21 July 1995.  The examinations were
subsequently transmitted to the CRTA, where the work begun by the Working Parties continued.
While the goods and services examinations are legally separate, the Committee conducted themWT/REG4/W/1
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simultaneously to bring greater efficiency to the process.  The proceedings of the four meetings
devoted to the examinations (20-21 July 1995, 30 July 1996, 10 October 1996 and 24 February 1997),
contained in documents WT/REG4/M/1-4, are to be considered as an integral part of this Report.
III. FACTUAL RECORD OF THE EXAMINATION IN ACCORDANCE WITH THE
TERMS OF REFERENCE
A. EXAMINATION UNDER THE GATT 1994
9. Article XXIV:7(a) states that "Any contracting party deciding to enter into a ... free-trade area
... shall promptly notify the CONTRACTING PART IES and shall make available to them such
information regarding the proposed ... area as will enable them to make such reports and
recommendations to contracting parties as they may deem appropriate".
10. The Committee noted that the Agreement was notified to the GATT shortly after signature
and before its entry into force.  The Parties provided Members with information of a general nature, as
well as with detailed information  on specific aspects of the Agreement in response to the written and
oral questions made.
11. Article XXIV:8(b) states that a free trade area is "a group of two or more customs territories
in which the duties and other restrictive regulations of commerce (except, where necessary, thosepermitted under Articles XI, XII, XIII, XIV and XX) are eliminated on substantially all the trade
between the constituent territories in pr oducts originating in such territories".
12. Views diverged regarding the meaning of the te rm "substantially all the trade" and the scope
of the term "other restrictive regulations of commerce", which are subjects of debate in the
Committee's on-going work on systemic issues.
13. The Committee considered whether the existence of bilateral market access commitments
among the NAFTA Parties in the area of agriculture could mean that the agricultural sector was not
fully covered by the Agreement.  In this context, the Committee noted that the agricultural
commitments (contained in Chapter 7 of the Agreem ent) were an integral part of the NAFTA.  The
Committee also noted that a few agriculture products, representing less than one percent of totalintra-trade by volume, were excluded from full elimination of tariffs under the NAFTA.
14. With respect to the elimination of duties on intra-NAFTA trade, the Committee was provided
by the Parties with figures indicating that more than 97 per cent of the Parties' tariff lines (at the
8-digit level) were subject to full tariff elimination, representing more than 99 per cent of intra-trade
by volume.
15. With respect to the elimination of other restrictive regulations of commerce on intra-NAFTA
trade, it was noted that the principles of national treatment, transparency and other market access rulescontained in Chapter 3 of the Agreement applied to all goods.
16. Attention was given to the NAFTA provisions pertaining to the application of a global
safeguard measure to products imported from other NAFTA Parties.  The Agreement provides that
imports from a NAFTA Party are to be excluded unless they account for a substantial share of total
imports and contribute importantly to the serious injury, or threat thereof, caused by imports. Viewsdiffered on the relationship between the GATT Article XXIV:8 requirement concerning the
elimination of duties and other restrictive regulations of commerce with respect to intra-trade and the
requirement contained in GATT Article XIX and the Agreement on Safeguards, that measures shouldWT/REG4/W/1
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be applied to all imports, irrespective of their so urce.  This issue is under consideration in the
Committee's systemic debate.
17. Article XXIV:5(b) provides that "the duties and other regulations of commerce maintained in
each of the constituent territories and applicable at the formation of such free-trade area ... to the trade
of contracting parties not included in such area" ar e not to "be higher or more restrictive than the
corresponding duties and other regulations of commerce existing in the same constituent territories
prior to the formation of the free-trade area".
18. With respect to duties, the Committee noted that, upon formation of the free-trade area,
Canada and the United States had not increased tariffs in their trade with non-NAFTA Members.  The
Committee also noted that Mexico re-established its previous MFN duties at or below bound levels on
three products before NAFTA's entry into force.
19. With respect to "other regulations of comme rce", the Committee recognized that there was
not yet a common understanding on the scope of that term, in particular whether preferential rules of
origin under an FTA fell within the meaning of the term.  This is a subject of the Committee's work
on systemic issues.
20. The Committee was informed by the Parties that the NAFTA did not contain provisions
requiring the Parties to introduce restrictions on third-parties' trade as a result of the formation of thefree-trade area.  Divergent views were registered  in relation to the relevance, with respect to
Article XXIV:5(b), of the fact that, from 30 December 1993, Mexico adopted the c.i.f. value as the
basis for determining the customs value of MFN imports while maintaining the f.o.b. basis for goods
originating in its NAFTA partners.
21. The Committee discussed extensively the NAFTA provisions on rules of origin. The
Committee observed that the NAFTA approach to preferential rules of origin, primarily based on
tariff classification changes, provided stability, transparency and predictability to third-country
suppliers.  Attention was paid to the rules pertaining to textiles, where production process
requirements of the use of NAFTA-originating yarn or  fibre were in certain cases added to tariff shift
criteria, as well as to the rules for automobiles, particularly the use in the NAFTA of a differentcalculation methodology and higher regional content value levels than those that prevailed under the
bilateral Canada-United States Free Trade Agreement.  Divergent views were expressed regarding
whether the changes in these rules of origin adversely affected third-country suppliers and whether a
comparison with a previous agreement involving different partners was relevant, in the context of
GATT Article XXIV:5(b).
22. In considering the transitional provisions for the elimination of duties contained in the
NAFTA, the Committee recalled that paragraph 3 of the Understanding on the Interpretation ofArticle XXIV of the GATT 1994 defined the "reaso nable length of time" requirement contained in
Article XXIV:5(c) as a period which "should exceed ten years only in exceptional cases" and that, in
these cases, the parties should "provide a full explanation ... of the need for a longer period".  The
Committee noted that, for the most part, the NAFTA provided for the elimination of duties among the
Parties within ten years but that a longer period was foreseen in the case of 15 products which onlyaccounted for a small volume of trade.
B. E
XAMINATION UNDER THE GATS
23. Article V:7(a) requires that Members which are parties to economic integration agreements
"shall promptly notify any such agreement ... to th e Council for Trade in Services. They shall also
make available to the Council such relevant information as may be requested by it".  The Committeenoted that the Parties to the NAFTA notified  their previously concluded Agreement withinWT/REG4/W/1
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two months of the entry into force of the GATS.  The Committee also noted that the Parties provided
Members with information of a general nature, and supplemented it with detailed information on
specific aspects of the Agreement in response to the written and oral questions made, including the
complete list of reservations entered into by each of them at the federal/provincial/state level.
24. Article V:1(a) requires that agreements liberalizing trade in services within the meaning of
Article V of the GATS have "substantial sectoral coverage".  Footnote 1 to this Article indicates that
"this condition is understood in terms of number of sectors, volume of trade affected and modes of
supply" and that "[i]n order to meet this condition, agreements should not provide for the a priori
exclusion of any mode of supply".
25. In considering the extent of sectoral coverage, the Committee first noted the different legal
framework used by the NAFTA and the GATS.  In this regard, it was observed that the NAFTA used
a "negative list" approach, whereby the disciplines would apply to all sectors and activities unlessspecifically excluded or subjected to reservations.  The NAFTA also contained both sector-specific
and modes of delivery disciplines.  No modes of delivery were a priori  excluded by the NAFTA
agreement.
26. The Committee observed that the NAFTA specifically did not cover most air transport
services.  A bilateral "open skies" agreement provided disciplines in this sector for the United Statesand Canada.  In the NAFTA, the Parties also maintained annexes of activities that were unbound.  Of
these items, the Committee focused on maritime transport services and basic telecommunications
services, where liberalization was left to multilateral negotiations (which subsequently were
concluded for basic telecommunications services).  The Committee also noted that social services
were unbound, to the extent they were social services established or maintained for a public purpose,and that there were some unbound country-specific services activities.  The NAFTA had additional
country-specific annexes of bound sectors, in whic h non-conforming measures were listed, which
were either grandfathered or, in some cases, subject to specific liberalization requirements within
specific timeframes.  Differing views were registered on the extent to which activity reservations
could result in a de facto  sectoral exclusion.  In response to a Member's request for information on the
economic value of the "unbound" sectors, the Parties registered the difficulty in deriving meaningful
statistical information for trade in services .
27. Article V:1(b) requires that an agreement libera lizing trade in services within the meaning of
Article V "provides for the elimination of substantially all discrimination, in the sense of
Article XVII,  ... in the sectors covered ..., through:  (i) elimination of existing discriminatory
measures, and/or (ii) prohibition of new or more discriminatory measures, either at the entry into force
of that agreement or on the basis of a reasonable timeframe ...".
28. The Committee observed that the Agreement contained a prohibition on new or more
discriminatory measures as well as a mechanism to lock in any liberalization of measures, known as
the "ratchet clause", which applied to all bound sectors covered and all levels of government.
Concerns were expressed regarding the absence of  a precise timetable for the elimination of some
reservations that were grandfathered, including all those maintained at sub-federal levels, pertainingto existing discriminatory measures referred to in Article V:1(b).  The Committee noted, however, the
existence of a mechanism to pursue consultations in this regard and of a time table for liberalization of
some specific discriminatory measures at federal level.  Concerns were also expressed regarding the
general absence of subsidies treatment in the NAFTA.
29. In the evaluation of Article V:1(b), Article V:2 provides that consideration "may be given to
the relationship of the agreement to a wider process of economic integration or trade liberalization
among the countries concerned".  The Committee noted, in the light of Article V:2, that the NAFTAWT/REG4/W/1
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contained disciplines on areas other than services, such as merchandise trade, competition policy,
intellectual property, and investment.
30. It was recalled that Article V:3(a) provided flexibility for developing country parties to an
agreement of the type referred to in Article V:1.
31. Article V:4 states that the agreement "shall be designed to facilitate trade between the parties
... and shall not in respect to any member outside the agreement raise the overall level of barriers to
trade in services within the respective sectors or s ub-sectors compared to the level applicable prior to
such an agreement".  The Committee acknowledged that NAFTA disciplines did not require any
change to the treatment accorded by any of the Parties to its trade in services with non-NAFTA
Members, and took note of the Parties' confir mation that no such modification had taken place.
32. Article V:6 requires that "a service supplier of any other Member that is a juridical person
constituted under the laws of a party to ... [the] agreement shall be entitled to treatment granted undersuch agreement, provided that it engages in subs tantive business operations in the territory of the
parties to such agreement".
33. In examining the NAFTA provisions on denial of benefits, the Committee observed that the
terminology used in the NAFTA differed from the one adopted in the GATS.  While Article V:6
refers to "substantive business operations in the territory of the parties to such agreement", theNAFTA refers to "substantial business activities".  This difference in wording gave rise to questions,
but the Committee took note of the explanations provided by the NAFTA Parties confirming that
service suppliers constituted under the law of a NAFTA Party, irrespective of whether they were
owned or controlled by nationals of a NAFTA Pa rty or non-NAFTA Member, were entitled to the
preferential treatment provided for in Article V:6 in accordance with the NAFTA.
IV. CONCLUSIONS
34. In the light of the discussions reflected in Part C.1 of this Report, the Committee found the
NAFTA in compliance with the relevant provisions of the GATT 1994.  The Committee took note
however of the different opinions expressed on the interpretation of some provisions of theGATT 1994, which could not be reconciled in the context of this examination, and it referred to its
work under item 1(d) of its Terms of Reference.
35. With respect to the consistency of the NAFTA  with Article V of the GATS, the Committee
took note of the views expressed, which are presented in part C.2 of this Report.
36. In concluding its review of the NAFTA, the Committee underlined the importance of the
provisions of (i) paragraph 11 of the Understanding on the Interpretation of Article XXIV of
GATT 1994 for periodic reporting to the Council for Trade in Goods on the operation of anyagreement and on significant changes and/or modification in the agreement as they occur, as well as
(ii) Article V:7 of the GATS for the prompt notification to the Council for Trade in Services of any
enlargement or significant modification of an agreement.
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