NAFTA and the Legalization of World Politics: A Case Study
29 Pages Posted: 29 Aug 2011
Date Written: January 1, 2000
This article analyzes the North American Free Trade Agreement (NAFTA) in the context of a broader project examining the causes and consequences of the legalization of world politics. Governments are continuously engaged in the process of negotiating international trade agreements, and in each case negotiators are confronted with choices regarding the best mode of legalization to accomplish their agreed upon objectives. By closely analyzing the choices made by governments over time and correlating those choices with the results achieved (in the context of stated objectives), political scientists and lawyers may aid in directing government negotiators to preferred legalization options.
The form of legalization represented in NAFTA is characteristic of a trend toward higher levels of precision, obligation, and delegation in international trade regulation that has been ongoing since the adoption of the General Agreement on Tariffs and Trade (GATT) in 1947. The specific institutional and juridical framework of NAFTA reflects particularized objectives of Canadian, Mexican, and U.S. trade negotiators, pursued under constraints imposed by their political negotiating environment. NAFTA embodies a high degree of precision and obligation and a moderate degree of delegation of decision-making authority. The legalization formula of the World Trade Organization (WTO) agreement is substantially similar. The charter of the European Union (EU), in contrast, embodies a high degree of obligation and delegation and a moderate level of precision. Though the negotiators of the NAFTA, WTO, and EU agreements adopted somewhat different institutional and juridical models, they each preferred "hard" law to "soft" law.
This article analyzes NAFTA and explains the preference for using hard law in international economic arrangements. It suggests that hard law reduces intergovernmental transaction costs associated with trade and investment, reduces private risk premiums associated with trade and investment, promotes transparency and provides corollary participation benefits, tends to restrain strategic political behaviors, and may increase the range of integration effects by encouraging private actions to enforce intergovernmental obligations.
NAFTA was designed to promote market liberalization and to encourage capital flows, not to create a political union. Precise rules were adopted along with regional institutions that lack the power to adopt supplementary legislation. The agreement manifests a high level of obligation by way of terms that import binding commitment; these terms are not offset by exceptional opt-out provisions. However, a moderate level of authority is delegated to dispute-settlement mechanisms. There was no political support for a strong regional judicial body that would significantly restrict the autonomy of the parties. The creation of such a judicial body would have raised serious constitutional issues within the parties and may have precluded the conclusion of an agreement. The European Community (EC) treaty-the charter of the EU-employs a different legalization formula than employed by NAFTA or the WTO agreement. Hard legalization in the EU trade context is achieved by a relatively imprecise charter coupled with a high degree of delegation to institutions that may promulgate secondary legislation with more precise content. The objective of providing rules that more adequately address second- and third-generation trade barriers is achieved, but only through a continuing legislative and judicial process. The EU contemplates achieving substantially broader social objectives than NAFTA or the WTOY Neither the parties to NAFTA nor the members of the WTO had the political option of establishing the high level of delegation represented in the EU institutions, and neither arrangement sought to broadly address social issues. Determining whether the legalization formula in NAFTA or in the EU is better suited to achieving its objectives is not feasible at this stage. The objectives of the arrangements are not the same, which argues against directly comparing the formulas.
A counter-example to the NAFTA/WTO formula is represented by the Asia Pacific Economic Cooperation (APEC) forum. APEC is characterized by low levels of precision, delegation, and obligation. I I The APEC formula was adopted in the context of historically nonlegalized cultures and by governments that had not agreed on particular objectives. APEC is not a successful model of regional economic integration. It may be viewed as a failed experiment in alternative legalization or as a transitional model serving as a predicate to harder legalization.
NAFTA has so far been implemented largely in accordance with its terms, despite the period of economic turbulence generated by the Mexican peso crisis of 1994-95. The period of NAFTA implementation has witnessed substantial increases in cross border trade among its parties and significantly heightened transborder capital flows. On their face, these developments might suggest that NAFTA has aided in achieving the economic objectives of its parties; however, the parties have maintained political policies supportive of NAFTA's objectives throughout this period. The period of
NAFTA implementation has coincided with sustained economic expansion in the United States, the dominant economic actor in the arrangement. It may plausibly be argued that the parties would have achieved the same objectives, with comparable results, without NAFTA. NAFTA has yet to face sustained circumstances in which legal norms and political policies diverge, and the durability of its legalization effects are thus relatively indeterminate.
The implementation of NAFTA has yielded certain unanticipated results. The transnational
(investor-to-state) investment-related dispute settlement mechanism has been invoked by private investors in circumstances that were not contemplated by NAFTA negotiators. This lends support to the postulate that transnational dispute settlement may broaden the scope of subject matter affected by an international trade agreement. The record of NAFTA implementation to date supports the use of hard law instruments in international economic relations.
Keywords: NAFTA, legalization, dispute settlement, regional integration, hard law
JEL Classification: F02, F15, G28, K33, N46, O51, O54
Suggested Citation: Suggested Citation
By Luigi Carafa