U.S. DEPARTMENT OF COMMERCE/Office of Consumer Affairs/Washington, D.C. 20230

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INTERNATIONAL TRADE AGREEMENTS: GATT AND NAFTA

WHY ARE THEY IMPORTANT?

Much has been written about two important international trade agreements, the General Agreement on Tariffs and Trade, commonly known as GATT, and the North American Free Trade Agreement (NAFTA). Yet consumers remain in need of more education about these agreements and the effects they can have on us everyday. What is free trade and why are these agreements important to the everyday consumer?

What is Free Trade?

Many of us participate in international trade every day as we purchase goods and services that have crossed international borders to reach us. Such trade is considered "free" or "open" when goods and services can move into markets without restrictions and prices are determined by supply and demand. Nations sometimes erect barriers to this free movements of goods. Quotas may limit the quantity of products imported, and tariffs raise the price through import taxes. Non-tariff barriers create obstacles to selling foreign goods by establishing special requirements such as registration or labeling.

Why is free trade good for consumers?

The United States' government seeks to increase free trade by entering into agreements with other nations for a number of reasons. One objective is to promote economic growth in the U.S. and other countries by eliminating barriers to trade and investment. Decreasing trade barriers can lead to increased exports and the creation of jobs to support expanded trade. It's estimated that each additional $1 billion in U.S. exports creates more that 19,000 jobs. For example, in the first three years of the U.S.-Canadian Free Trade Agreement more than 264,000 jobs were created in the U.S. due to increased exports to Canada.

Consumers and producers also benefit from an increased variety of goods and services, lower prices and better quality. Greater competition provides us with choice, value, and jobs.

GATT and NAFTA

In a comedy sketch, Jay Leno, host of the "Tonight Show," told passersby that NAFTA was an opening act at a rock concert. No one corrected him. We hope the following fact sheets on GATT and NAFTA will help you understand what they are and why they are important to all consumers.

GENERAL AGREEMENT ON TARIFFS AND TRADE

FACT SHEET⁽¹⁾

• In 1947, the General Agreement on Tariffs and Trade (GATT) was created to liberalize and regulate the international trading system.

• The original 23 GATT countries, or contracting parties as they are called, has increased to more than 100 countries in 1993. Developing countries comprise about two-thirds of the membership.

• A number of basic principles form the foundation of the GATT including:

--"trade without discrimination" is embodied in the famous phrase "most- favored-nation," meaning that each GATT country must be treated equally by all contracting parties;

--"protection through tariffs" as opposed to other measures such as quotas where protection of domestic industries is necessary;

--"a stable basis for trade" through tariff schedules which list the level of tariffs on particular items;

--settlement of disputes through consultation, conciliation and, as a last resort, dispute settlement procedures.

• Since GATT was created, there have been eight "rounds", or series of negotiations, of trade talks. The current Uruguay Round was begun in 1986. Although it was originally hoped that the round would be completed by 1990, that deadline was not met. It was extended because of problems with rules concerning agricultural reform. The planned deadline is December 15, 1993 with the agreement to be signed in April 1994.¹

• The Uruguay Round negotiations fall into four broad categories:

--agriculture;

--market access (tariffs and non-tariff measures);

--"new" areas of services, trade-related intellectual property rights (patents and copyrights), and trade-related investment measures;

--GATT rules necessary to protect and guarantee market access and concessions negotiated such as dispute settlement and safeguards for import relief.

• The goal of the Uruguay Round is to cut import duties by one third, reduce protection for agriculture and textiles, and ease restrictions on international trade in services like banking and insurance. These reforms should expand the world economy by an estimated $200 billion annually.

NORTH AMERICAN FREE TRADE AGREEMENT

FACT SHEET

• In 1992 negotiations for a North American Free Trade Agreement (NAFTA) were completed. This historic agreement builds on the U.S.-Canadian Free Trade Agreement, implemented in 1989, and creates a North American free trade area consisting of Mexico, Canada, and the United States. It was implemented in January 1994.

• NAFTA will create a $6.5 trillion market of 370 million people. It unites the U.S. with its first- and third-largest trading partners. Canada is our largest market. Mexico is our fastest growing export market: our second-largest market for manufactured exports and our third-largest for agricultural products.

• NAFTA eliminates tariffs and other barriers to trade between the U.S., Mexico, and Canada. It removes barriers to investment, strengthens the protection of intellectual property, and allows most services to be freely provided, even across borders.

• Tariffs: Over a 15-year period, all tariffs will be eliminated on North American products traded between the three countries. All trade between the U.S. and Canada will be duty free by 1998. Mexican tariffs will be eliminated on all U.S. exports of industrial products within 10 years. Tariffs on a few remaining agricultural items, such as corn and beans, will be phased out over 15 years.

• Rules of Origin: Goods traded duty-free under NAFTA must contain substantial North American content (parts and labor).

• Safeguards: NAFTA provides relief to American workers and firms needing time to adjust to imports from Mexico. Tariff rates can be temporarily raised to pre-NAFTA levels if imports threaten to injure, or actually injure, U.S. producers, workers or farmers.

• Services: NAFTA opens Mexico's $146 billion services market to U.S. and Canadian firms. It allows U.S. firms to provide services in Mexico without relocating their operations and employees.

• Government Procurement: NAFTA gives U.S. suppliers immediate and growing access to the $19 billion Mexican government procurement market including state-controlled enterprises (parastatals) such as PEMEX, Mexico's oil company and CFE, Mexico's electricity company.

• Standards: NAFTA allows each country and each state or province to establish whatever health, safety or environmental standards they deem necessary. No U.S. standard will have to be lowered as a result of NAFTA.

• Land Transportation: NAFTA opens the international market in Mexico for U.S. motor carriers. U.S. truck and bus companies have, for the first time, the right to use their own drivers and equipment in Mexico, increasing efficiency and reliability and reducing costs to the consumer. NAFTA does not change U.S. safety and highway standards. Mexican and Canadian operators will continue to be subject to all federal and state safety and operating requirements, including size and weight limits and driver qualifications.

• Side Agreements: Side agreements were concluded on import surges, environment and labor. The supplemental agreements create North American Commissions on the Environment and on Labor to strengthen domestic enforcement of laws in these two areas.

• Benefits: NAFTA will help expand U.S. exports, generating U.S. jobs. It will promote better environmental and labor laws. It will ensure that American consumers get the best quality and safest products at the best price.

FOR MORE INFORMATION:

About the Office of Consumer Affairs' Consumer Bulletins and other publications, contact OCA by:

• e-mail at CAffairs@doc.gov

• fax at (202) 482-6007

• telephone at (202) 482-5001

• mail to the Office of Consumer Affairs, U.S. Department of Commerce, Room H5718, Washington, DC 20230.

To receive faxed printed material about NAFTA, free of charge, call "FLASH FACTS," (202) 482-4464

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1. GATT has been superceded by the World Trade Organization (WTO). A new bulletin on the WTO will be issued in 1996.