As a result of the attention focused on the proposed North American Free Trade Agreement (NAFTA) establishing a free trade area among Canada, Mexico and the United States, many companies are exploring the possibilities of investing in and even locating operations in Mexico.
Historically perceived as a "pollution haven" where compliance costs could be avoided, Mexico's environmental climate appears to be changing. What should the practitioner know about the environmental aspects of NAFTA and conducting business in Mexico in order to properly advise clients about opportunities there?
There is certainly no lack of evidence to support the perception of Mexico as a "pollution haven." For years, American companies wishing to avoid strict U.S. environmental compliance laws have been attracted by Mexico's liberal regulations and lax enforcement policies. The most notorious offenders are the Maquiladora industries, located primarily along the U.S. -Mexican border, where assembly plants process raw materials from the U.S. into finished products for re-export to the U.S.
According to Ralph Nader's Public Citizen's Congress Watch, these facilities have been dumping dangerous toxic chemicals into the air and the waterways of Mexico at levels thousands of times greater than that which is allowed in the U.S. Birth defects, cancer rates and other illnesses on both sides of the border exceed the national average.
The burden of the cleanup cost, projected to be at least $5 billion, will be borne largely by taxpayers, not by industry. Additionally, a random survey conducted by the General Accounting Office in August 1992 revealed that out of 12 companies recently relocating to Mexico, not one had complied with the Mexican requirement to file an Environmental Impact Assessment.
'Greener' Future
Nonetheless, there is reason to believe that Mexico's future will be "greener." President Carlos Salinas de Gortari has said is committed to increasing funding and manpower to protect the environment. The General Law of Ecological Equilibrium and Environmental Protection, enacted in 1988, provides the legal foundation for environmental protection in Mexico. Largely as a result of the General Law, Mexico is now said to have laws and regulations comparable to those of the U.S. and other industrialized nations. SEDESOL, the Secretariat of Social Development, was established in May 1992 to oversee environmental policy formulation and enforcement.
Since taking office in 1988, President Salinas has increased the environmental enforcement budget from $6.6 million to $77 million and the number of border inspectors from 50 to 200. The government has conducted over 7,700 environmental inspections during the past six years, resulting in the temporary closure of nearly 2,000 facilities for noncompliance and the permanent closure of more than 100 businesses. In recognition of his efforts, the United Nations and the Nobel Family awarded the 1992 Earth Prize for outstanding environmental statesmanship to Salinas.
In February 1992, Mexico and the U.S. committed to a comprehensive, integrated environmental plan to clean up their 2,000 mile common border over the next decade. A combined total of over $700 million has been pledged over the next three years for initiatives in pollution control, hazardous waste disposal, stronger enforcement and increased effort in planning, training and education. Mexico also intends to negotiate a World Bank loan to expand and upgrade its enforcement capability.
In advising clients with regard to relocation, it should be kept in mind that even in a climate of strict environmental protection and enforcement, the cost of environmental compliance is a relatively minor portion of total operating expenditures for most industries. According to the office of the U.S. Trade Representative, 86 per cent of U.S. industries have abatement costs amounting to two per cent or less of their total production costs.
Environmental 'Trickle Down'
What effect will NAFTA have on efforts to promote a cleaner environment in Mexico and elsewhere? Proponents of the treaty espouse the environmental "trickle down theory." They contend that the free trade agreement will lead to increased economic growth and prosperity, providing the resources necessary for environmental protection and enforcement. Supporting this position, the World Bank's World Development Report, 1992, indicates that emissions levels generally decrease as national income levels increase.
In a statement released on Aug. 12, 1992, William K. Reilly. EPA Administrator under former President Bush. called NAFTA the "greenest" trade agreement ever negotiated. This statement is correct in that, historically, most trade agreements have virtually ignored environmental issues, while this accord contains several environmental provisions. The preamble to the document affirms the parties' commitment to "the expansion of trade and investment opportunities ... in a manner that protects the environment," and NAFTA's advocates maintain that its key environmental provisions further demonstrate this philosophy.
Under the terms of NAFTA, no country is to lower its environmental standards for the purpose of attracting investment. Each party may maintain and adopt standards at its own chosen level of protection, and the agreement encourages the harmonization of standards upward to strengthen environmental and health protection.
The parties maintain the right to enforce international environmental treaty obligations such as the Montreal Protocol (1987), limiting trade in ozone-depleting substances, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (1973), the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal (1989) and any other environmental or conservation agreement which all three NAFTA countries agree to include.
The countries may impose stringent environmental standards on new investments and may require potential public and private investors to submit Environmental Impact Statements as long as the requirements apply equally to domestic and foreign investors.
In the dispute settlement process, the complaining country bears the burden of proof that another country's environmental measure is an unfair restraint of trade in violation of NAFTA. Further, scientific experts may be called upon for environmental information on factual issues. However, participation of scientific review boards may take place only at the consent of both disputing parties.
Dispute Resolution Process
It is on this dispute resolution process that some of the strongest criticism and concern about NAFTA is concentrated. Despite assurances that each country is free to adopt and maintain its own standards, it is feared that strict standards relative to pesticides, food additives, consumer health and safety and production methods may not prevail if challenged. In order to survive, these sanitary and phytosanitary standards must be demonstrated to be based on risk assessment and science, consistent in their level of protection with other national standards, "necessary" to achieving a NAFTA-allowed goal, and the "least trade-restrictive measure possible."
Additionally, prior to adopting or modifying such a measure, a country must first give notice to the other parties and provide them with an opportunity to comment. Additionally, NAFTA permits countries to establish standards that could have the effect of limiting trade only if those laws do not extend beyond their geographic borders.
There is well-founded concern that, given these limitations, many of the United States' current standards would be struck down before a pro-trade, resolution dispute panel. Frequently cited is the fate of the U.S. embargo of tuna imports from Mexico, enacted in accordance with the U.S. Marine Mammal Protection Act of 1972, barring the sale of tuna caught in dolphin-killing nets. In September 1991, the embargo was successfully challenged under the dispute resolution process of the General Agreement on Tariffs and Trade (GATT).
In one of its major arguments against the tuna embargo, Mexico contended successfully that the maximum kill-ratio was not based on scientific evidence but on a political compromise reached during comprehensive negotiations of the act. Mexico also successfully advanced the argument that the act was "extra-territorial." While NAFTA is purported to be more pro-environmental than GATT, opponents fear similar results under NAFTA's dispute resolution procedures.
The requirement for consistency in levels of protection would be utilized to attack standards such as that of the Delaney Clause of the Federal Food and Drug Act, prohibiting placement of carcinogenic additives in foods and carcinogenic pesticide residues in processed foods. This standard is inconsistently high when compared to that for fresh foods.
Allowing only the least trade-restrictive measures possible rules out political or other factors, as noted above, which a nation might take into consideration in establishing standards. For example, the political compromise between loggers and environmentalists in the Pacific Northwest, enacted to avoid either a total logging ban or unrestricted destruction of old growth forests, is a measure that conceivably may not survive a NAFTA challenge. Critics also object to the highly secretive nature of the dispute resolution process, contending there should be provisions for public comment and citizen oversight. Under the terms of NAFTA, dispute settlement proceedings take place in private and their results may be made known only to the disputing parties.
The issue of states' rights has also been raised by detractors of NAFTA. Although supporters maintain there is no limitation of states' rights to enact and enforce environmental laws and regulations even stricter than those of the federal government. In the United States, single states have often enacted standards more stringent than those of the federal governments. As in the case of California's fuel emissions standards, state initiatives frequently pave the way for subsequent adoption of similar measures by other states and the federal government. Yet, if a state law does not rest on scientific principles or conform to all other NAFTA requirements, it could be challenged by the federal government or by Mexico or Canada.
Opponents of NAFTA feel that a major opportunity to link trade and environmental issues has been missed. They consider the environmental provisions as drafted to be no more than vague assurances, lacking necessary enforcement and funding components, and would like the U.S. to be able to impose countervailing tariffs on goods manufactured in countries with weaker anti-pollution regulations or lax enforcement policies. Other suggestions have included a cross-border tax to pay for cleanup and access to the courts of the country of investors to sue for environmental damages. Environmentalists also express fear that accelerated investment in Mexico, along with concomitant increased industrialization, population growth and the absence of necessary infrastructure to handle the growing demands for services, will result in further damage to the environment. There is no "polluter pays" or other funding provision in the agreement to provide for cleanup, oversight, enforcement and other environmental programs.
Trilateral Commission
Partly as a result of these concerns and at the urging of numerous environmental and consumer organizations, the three NAFTA nations have agreed to the formation of a Trilateral Environmental Commission, consisting of the USEPA administrator and her Canadian and Mexican counterparts. One of its major functions will be to address any environmental problems arising as a result of NAFTA, while promoting and establishing a process for long-term environmental cooperation. The Trilateral Commission is currently the only entity charged with the responsibility of tracking NAFTA's impact on the environment, although it lacks any enforcement authority in its proposed form.
Some of the commission's additional functions include the dissemination of information on the environmental protection activities of the three countries, the establishment of rules of procedure and provision of environmental expertise to NAFTA dispute settlement panels upon request, and the sharing of technical expertise to address common environmental concerns. Annual meetings, including sessions open to the public, are to be held and channels of public input will be established. Any of the three parties can request additional meetings to address a particular environmental issue.
On Dec. 17, 1992, former President Bush and his Canadian and Mexican counterparts signed NAFTA. It now must go before the legislatures of each of the signatory nations. As negotiated, the agreement is to take effect on ian. 1, 1994, but ratification of the treaty may face obsta des in the United States Congress. Organized labor, in particular, as well as health and environmental groups, are expected to lobby against passage of NAFTA in its current form. House Majority Leader Richard Gebhardt, D-Mo., has stated "... we must reject the current agreement as not good enough."
President Clinton has endorsed the accord, but has indicated he wants the United States and Mexico to negotiate additional measures to safeguard the environment and American workforce before sending NAFTA to Congress for approval. These supplemental provisions could be incorporated in side agreements, in supplemental NAFTA text or in the implementation legislation. Under the fast-track process, Congress is required to approve or disapprove of implementation legislation without amending the NAFTA itself. The implementation legislation could contain provisions, however, which would have the effect of modifying the original agreement. Last month in Washington, officials from the three party nations began discussing parallel agreements, a process that is expected to go on for several months.
Outcome Uncertain
Since NAFTA has yet to complete the ratification process, it is far too early to attempt to determine the effects of its implementation. It is also premature to assess the effectiveness of Mexico's new enforcement policies.
Should President Salinas' pro-environmental efforts prevail, there will be increased opportunity for U.S. environmental firms able to fill the demand in Mexico for environmental technology, services and expertise. Although U.S. attorneys may not "practice" before Mexican courts, they are permitted to register as "legal consultants" and to establish offices there for the purpose of advising clients.
To the extent that Mexican environmental laws are now or will become similar to U.S. laws, opportunity exists for American environmental counsel to provide expertise, both to Mexican and American companies, based on their significant experience with regard to environmental compliance issues. NAFTA's dispute resolution process also undoubtedly will present another area of practice for environmental counsel. Practitioners would be well advised to prepare for the possibilities NAFTA will present.
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Dennis Krumholz gratefully acknowledges the assistance of Hedy Bernard, paralegal at the firm, in the preparation of this article.
