President Felipe Calderón’s visit to Washington last month carried high expectations for those who hoped for a resolution of the cross-border trade dispute between the United States and Mexico. The Mexican president was expected to address the U.S.’ failure to comply with NAFTA regulations providing for an open border policy regarding ground transportation of goods across the U.S.-Mexican border.
Mexico’s dissatisfaction with U.S. border policy, as it relates to NAFTA, is not unfounded. In part attributable to the free trade agreement (FTA), Mexico has moved in to be the second largest U.S. export market, and is the U.S.’ most important trading partner, with a trade flow of approximately $1 billion a day. But in the sixteen years since the FTA went into effect, the U.S. continuously has failed to comply with the open border provision, denying full access to Mexican trucks on the claims of safety concerns on the part of U.S. trucking officials and government authorities. Last March, after over a decade of patient negotiation, Mexico slapped the U.S. agricultural and manufacturing industries with $2.4 billion worth of retaliatory tariffs on eighty-nine U.S. products. Despite the Obama Administration’s repeated pledge to resolve the trade dispute and heavy lobbying efforts on both sides, the U.S. still remains closed to Mexican trucks.
The History of the Dispute
NAFTA was intended to eliminate trade barriers between the U.S., Canada, and Mexico and to streamline cross-border movement of goods and services. To accomplish this, the agreement explicitly requires each signatory to accord foreign service providers, like truck drivers, “treatment no less favorable” than that which it accords to its own nationals. In theory at least, this means that the U.S. should hold Mexican and Canadian truck drivers to the same safety, financial, and inspection standards that apply to its own drivers, thereby facilitating cross-border ground transportation.
With 85% of pre-NAFTA U.S.-Mexican trade conducted overland, opening up the countries’ shared border to regional trucking was intended to expand a critical component of the North American trade relationship. The Clinton Administration repeatedly delayed the open border provision’s implementation, originally planned to occur on December 18, 1995. The U.S. government alluded to inadequate safety standardization between the two countries, despite the Mexican government’s extensive efforts to upgrade domestic safety standards and ensure a regularizing of the inspection process.
The U.S.’ initial unilateral violation of NAFTA was undoubtedly a response to major political opposition from groups like the International Brotherhood of Teamsters (hereafter Teamsters) and Citizens for Reliable and Safe Highways (CRASH), who loudly voiced fears about the safety records of Mexican drivers and trucks. Additionally, the Teamsters, noting that Mexican truck drivers are typically paid less than half the prevailing U.S. wage, were particularly apprehensive about the effect the open border provision would have on U.S. truck drivers’ employment.
Arbitration Panel Ruling
Mexico’s reaction to U.S. noncompliance was swift: President Ernesto Zedillo immediately opened negotiations with President Clinton. However, despite its right to do so under NAFTA, Mexico did not initially pursue retaliatory measures against the U.S. Instead, the Mexican government waited until 2000, five years after the U.S.’ initial breach, to submit the dispute to a formal resolution panel.
Canada voluntarily intervened in the dispute on the side of Mexico, arguing that NAFTA required the equal treatment of foreign and domestic service providers. The U.S. maintained its position on insufficient safety and investigation standardization. In a non-binding opinion, the panel unanimously found that the U.S. was categorically in breach of its NAFTA obligations to Mexico and dismissed Washington’s preoccupation with highway safety as a ruse to deflect attention from its inaction.
The Bush Administration (2001- 2008)
Following the arbitral panel’s 2001 ruling, President Bush pledged a reversal of the Clinton Administration’s policy, promising to fulfill the Washington’s NAFTA obligations. In June 2001, the U.S. began to allow Mexican investment in U.S. trucking fleets, but it was not until 2007 that Congress partially opened the border to Mexican truck drivers.
In the interim, the U.S. and Mexican governments collectively spent tens of millions of dollars to ensure highway safety in both countries. The U.S. increased border patrol and inspection points, while Mexico did everything possible to demonstrate the safety of its fleets, including accepting safety and English language requirements that neither Canadian nor U.S. trucks are required to meet under NAFTA.
Officially, the excessive delay in complying with the 2001 ruling was caused by a Congress that was resistant to recognizing the improved safety of Mexican trucks. But there was also growing protectionism of U.S. interests as drug-related violence in Mexico intensified and the border area transformed into a war zone. Anxieties about the escalating drug war and the increasingly common phenomenon of human smuggling along the U.S.-Mexico border, unlike concerns regarding highway safety, were not unfounded.
The Mexican government repeatedly threatened sanctions in retaliation for the Bush Administration’s prolonged inaction; President Vicente Fox even went so far as to threaten to close the border to American trucks altogether. Nevertheless, Mexico relied on the as yet unfulfilled promises of its northern neighbor and chose not to pursue such a draconian measure. In the meantime, Mexican trucks were confined to a 25-mile commercial zone in U.S. border states, with a similar program in place for U.S. trucks in Mexico. Trucks crossing the border from Mexico were forced to stop just inside the U.S. and unload their cargo onto U.S.-owned and operated trucks for delivery throughout the rest of the country.
The Cross-Border Demonstration Project
Then, in September 2007, the U.S. launched a pilot program that allowed up to 100 Mexican trucks to travel beyond the 25-mile border commercial zone and requested reciprocal access for U.S. trucks in Mexico. Mexico agreed to this partial compliance with NAFTA in order to finally and effectively demonstrate the safety and security of its fleets. The Cross Border Demonstration Project was widely considered a step in the right direction, and it remains the most liberal U.S.-Mexico trucking policy to date.
The pilot program was surprising in several respects. First, it showed that the widely cited fears regarding highway safety were largely unfounded. A 2009 Congressional Research Service report declared that “the safety of Mexican trucks … is now comparable with U.S. trucks,” thereby derailing the highway safety argument. The U.S. Department of Transportation Inspector General’s 2009 report on the program also found that Mexican trucks were just as safe as U.S. vehicles; in fact, Mexican truck drivers actually had better safety records than their U.S. counterparts. Furthermore, Mexican fleets were subjected to excessive scrutiny. Each Mexican truck and driver was inspected an average of fifty-one times during the duration of the program, while U.S. trucks and drivers were inspected, on average, only eight times throughout the year.
Additionally, there was no evidence to suggest that human smuggling or drug trafficking activities increased during the Demonstration Project. Considering the thorough inspection and vetting procedures for Mexican trucks and drivers crossing the border, the likelihood of successful cross-border criminal activity was minimal. Under the program, trucks and their drivers were required to pass pre-trip inspections that included drug and alcohol testing and immigration screening. Mexican trucks were equipped with GPS tracking devices registered with both U.S. and Mexican authorities, which recorded the running time and location of the vehicles.
At the border, trucks were passed through four stages of rigorous inspection, including U.S. Customs gamma ray screening and a full U.S.D.A. food product examination. In fact, border inspections were so thorough that there was actually a danger of constricted trade flows due to the increased time and effort it took to conduct them. Even with only a relatively small number of trucks passing across the border daily under the pilot program, inspection sites witnessed bottlenecks, as trucks drivers, and cargo were methodically searched and investigated.
Driving a truck across the border under the demonstration program involved a very large investment for Mexican companies, since fleets were required to carry expensive U.S. auto insurance. The other costs to Mexican truck owners included updating the trucks, training drivers, and satisfying the extensive safety and security standards. These additional burdens would most likely make turning such a venture into a criminal enterprise all the more risky.
Finally, the project’s potential threat to U.S. truck driving jobs was not nearly as catastrophic as the Teamsters had prophetized. Mexican truck drivers, under the terms of both NAFTA and the demonstration program, have access to U.S. roads only for the purpose of carrying international cargo. Such a limitation poses little risk to average U.S. truck drivers, who still have sole access to the domestic market. Meanwhile, thanks to tariff-free trade under NAFTA, U.S. agriculture and manufacturing industries enjoyed unprecedented access to export markets in Mexico. In 2008 alone, the U.S. sold more than $63 billion worth of manufactured goods, including paper products, machinery, and autos to its southern neighbor.
The Obama Administration
Despite the success of the demonstration program, Congress voted to eliminate funding for the open-border trucking scheme in February 2009, effectively ending inspections and other activities necessary for its operation and reconfining all Mexican trucks to the 25-mile commercial zone at the border. Given the safety statistics produced by the demonstration program, it is clear that this unilateral move was more politically motivated than safety-minded.
Shortly after the cancellation of the demonstration program, Teamsters spokesman Bret Caldwell told the Los Angeles Times, in reference to the developing trade war, that “there is nothing more that Mexico could do to us that is worse than what they’ve already done.” But Mr. Caldwell’s lack of appreciation for Mexico’s potential leverage soon proved to be naïve. In March 2009, Mexico finally struck back, hitting the U.S. with the aforementioned $2.4 billion worth of tariffs on eighty-nine agricultural and manufactured products. These tariffs range from 10% to a staggering 45%, and affect products as diverse as pears (20% tariff) and carbonless paper (10% tariff).
Cross-border trade in these goods has essentially been reduced to pre-NAFTA terms. Mexico’s retaliation is entirely legal under international trade law and is a right that was reaffirmed by the arbitral panel that ruled in favor of Mexico on the trucking issue in 2001. Mexico may place retaliatory tariffs on whatever products it chooses, so long as it restricts the tariffs to the dollar amount equivalent to its losses caused by the U.S. breach.
The White House immediately responded with a request to negotiate concessions with Mexico, but over a year later, and in the midst of a worldwide recession, no such compromise has been reached. The longer the dispute goes on, the more likely it is that Mexico will shift the tariffs to apply to U.S. agricultural mega-crops like rice and corn, representing a blow for which a still rebounding U.S. economy may be unprepared.
The Current Status of the Dispute
On several occasions since the February 2009 cancellation of the Demonstration Project, the Obama Administration has alluded to the possibility of an amicable resolution between the U.S. and Mexico. Perhaps the most promising sign of progress came in February of this year, when Congress excluded from the 2010 appropriations bill the prohibitory language used to ban funding for the project in 2009. U.S. Trade Representative Ron Kirk traveled to Mexico shortly thereafter and claimed that President Obama had given him “a green light to engage Congress again more thoughtfully” on the issue. The Economy Minister of Mexico, Gerardo Ruiz Mateos, also said that a solution “will surely occur this year.”
President Calderón’s Washington visit in May was expected to reopen the debate, but the only public mention of the dispute came when Calderón told reporters that he and President Obama had “talked about the different obstacles that there are for complying with transportation obligations that have been established” under NAFTA, and expressed his confidence that progress would soon be made. Nevertheless, the Mexican government seems to have taken the position that this is an internal issue for the U.S. to sort out, and it appears that bilateral negotiations have stalled. No further public consideration has been given to the matter, and whatever discussions have taken place behind closed doors have thus far failed to yield a resolution.
Dire Economic Consequences of the Trade Dispute in the U.S.
In a March 1, 2010 letter to Secretary of Transportation Ray LaHood, Congressmen Dennis Cardoza (D – CA) and Rick Larsen (D – WA) called the current status of the trade dispute “unsustainable and untenable.” U.S. farmers and food processors have been among the hardest hit by Mexico’s retaliation. At one time, one seventh of all U.S. agricultural products were destined for the Mexican market, yet this could no longer be so as U.S. products are becoming less and less competitive in Mexico. As companies struggle to meet the high tariffs, foreign producers are beginning to encroach on the U.S. share of the Mexican market.
According to Patrick Kilbride of the U.S. Chamber of Commerce, many of the targeted commodities carry modest profit margins and depend heavily on the Mexican export market. Therefore, the tariffs have the ability to squeeze U.S. companies out of Mexico entirely in the not-so-long term, resulting in an export vacuum which will be filled by Canadian, Latin American, and Asian producers. As U.S. exporters cut back on expenses and raise prices to comply with the tariffs, U.S. jobs in these industries may be permanently lost.
Mexico is Missing Out on NAFTA Benefits
The unresolved trucking dispute also negatively affects Mexican exporters, who have had to raise prices to cover the added expense of the commercial zone unloading-reloading process. The cost associated with transferring cargo to U.S. trucks will be an estimated $739 million a year, a price born primarily by U.S. consumers. These additional costs are making it increasingly difficult for Mexican exports to remain competitive in the U.S. market.
It is as yet unclear whether NAFTA’s present terms really have the ability to develop the Mexican economy and improve its workers’ standard of living. Professor Arnulfo R. Gomez of Anahuac and Iberoamerican Universities in Mexico City notes that although NAFTA was intended to improve Mexican export competitiveness, “there has been no advance in our competitiveness, no increase in the value added of our exports, and no generation of wealth” since Mexico joined NAFTA.
What is certain is that the cross-border trucking provision has the power to give Mexican products a competitive edge in one of the world’s most cutthroat markets. Professor Gomez believes that one way to strengthen Mexico’s free trade benefit is to consolidate its “competitive position with the U.S.” But without implementation of the open-border trucking provision, competing in the U.S. market is becoming cost prohibitive for Mexican producers. Whatever one may think of NAFTA—and there are good reasons to decry its purported benefits—a free trade agreement between neighbors which does not effectively secure open border ground transportation is hardly a free trade agreement at all.
The Next Step in Mexico’s Retaliation
In part, the Mexican government’s rationale in placing tariffs on products like fruit and cosmetics lies in the fact that Mexican consumers are not particularly dependent on these items. As a result, the burden of the tariff falls largely on U.S. exporters, rather than Mexican consumers. But a continuation of the trade dispute will inevitably result in the implementation of tariffs on some of the most important U.S. agricultural exports, like rice, corn, and beans, which make up much of the average Mexican’s diet.
When Mexico retaliated last March, a spokesman for the Mexican Economy Ministry told Reuters that the tariffs avoided these products because “Mexicans are sensitive to them.” While a reversal of this policy may be the big wakeup call the U.S. apparently needs to finally comply with the cross-border provision, it is a dangerously double-edged sword. As U.S. producers are forced to raise prices, shrink profits, and eventually reduce production volume, tariffs on these exports risk unjustly hurting Mexican consumers.
The Mexican government may be understandably baffled by the U.S.’ protectionist stance in the midst of a struggling global economy. Last March, Ricardo Alday of the Mexican Embassy in the U.S. told the Los Angeles Times:
Mexico would expect that at a time of global recession and economic distress, the U.S. would play by the rules, fulfill its international treaty obligations and ensure that bilateral trade is a level playing field, rather than erect trade barriers that undermine much-needed incentives to foster growth.
At the present time, neither country is winning this trade war. As the North American economies struggle to recover from the recent economic recession, it seems stubbornly nonsensical for Congress and the Obama Administration to put off resolving this dispute any longer.
Potential Diplomatic Damage
Mr. Kilbride of the U.S. Chamber of Commerce believes that the U.S.’ noncompliance with the cross-border trucking provision may seriously undermine President Obama’s ability to negotiate and enforce FTAs in the future, particularly in Latin America. As the Obama Administration begins work on drafting its first FTA with Asia, it must consider the impression the U.S.’ NAFTA breach gives the rest of the world.
Throughout the long history of the trade dispute, the U.S. has erroneously behaved as though fulfilling its trade obligations to Mexico were not a priority, because, as Thomas Friedman noted in a recent New York Times op-ed, “[w]e take the Mexican-American relationship for granted.” Yet Washington has swiftly acceded to the trade demands of other states, like Canada and Brazil.
Notably, an open border trucking policy has long existed between the U.S. and Canada, and has continued uninterrupted by NAFTA. But last year, protectionist “Buy America” provisions included in the U.S. stimulus legislation threatened important cross-border commerce with Canada. Rather than ignore Canadian demands, U.S. negotiators worked quickly to prevent damage to the U.S.-Canadian trade relationship. “This whole issue is much more wrapped up in immigration and anti-Mexican sentiment that you see across the board,” U.S. Chamber of Commerce lobbyist and leader of Americans for Transportation Mobility, Janet Kavinoky, has said. “This is not really a foreign truck issue. We’ve had cross-border programs under NAFTA with Canadian trucks for years.”
Likewise, in a dispute with Brazil over subsidies to U.S. cotton farmers, the U.S. promptly moved to avoid threatened retaliation against U.S. imports. The discriminatory treatment shown towards Mexico in the current situation should be considered suspect. It thus has been shown that mindless protectionism is no less destructive than mindless anti-protectionism, and that there are winners and losers from both.
Obama’s Export Initiative: Forgetting Mexico?
In March of this year, President Obama unveiled his plan to double U.S. exports over the next five years, saying that, “in a time when millions of Americans are out of work, boosting our exports is a short-term imperative.” In his speech announcing the plan, the President went on to state that “[t]here is no question that as we compete in [the] global marketplace, we’ve got to look out for our workers. But to look out for our workers, we’ve got to be able to compete in the global marketplace.” It would seem that one of the most obvious places to begin achieving this ambitious goal is along the U.S.’ southern border, where the U.S. already has generally friendly, cooperative relations with Mexico, and a functioning FTA encompassing the U.S.’ second largest export market. The first step toward boosting U.S. exports worldwide and creating jobs at home should be to comply with NAFTA’s cross-border trucking provision.
Trading Raw Protectionism for International Cooperation
The Teamsters, and other long-time opponents of open borders, endorsed President Obama early in the 2008 Democratic primaries and were determined to have the demonstration program shut down, regardless of the consequences to other U.S. industries or potential retaliation by Mexico. It is evident that, although the U.S. is clearly in the wrong, Obama is reluctant to cross the Teamsters.
Whatever may be President Obama’s private feelings on the matter, Secretary of State Hillary Clinton is a voracious advocate of free trade, even in the face of the Teamsters’ continued opposition to the trucking provision. Despite Ambassador Kirk’s recognition that “there is a sense of urgency” among U.S. farmers, ranchers, and other exporters, it appears that the current anti-Mexican trucking policy is supported largely by groups who remain unconcerned about the negative impact of that policy on sectors of the U.S.-Mexican economy and its workers.
According to Laura Baugham, president of Trade Partnership Worldwide, a pro-free trade bloc, union leaders and consumer groups resisting resolution of the trucking issue “are only looking at it from their perspective,” as if the same wasn’t true of the business sector. Ms. Baugham continues, “their win is the other side’s loss. There are more losers than winners.” On one hand, the opposition groups’ claims regarding safety concerns and job loss play like a broken record and remain unsupported by the facts. At the same time, one might ask what the Obama Administration has accomplished on behalf of U.S. labor, as free trade continues to cost hundreds of thousands of jobs yearly.
When it comes to the alleged human rights credibility of such abusive nations, like Colombia and Guatemala, the White House may be more inclined to see economic justifications for inaction as more of a motivation than the promotion of issues of democracy and social justice. Yet in the past, the White House has had few problems permitting prime Latin American human rights abusers to obtain a U.S. residential visa. In fulfilling its NAFTA obligations, the administration must be willing to confront the social ills caused by free trade in Latin America, as well as acts of sheer protectionism.
The Future of U.S.-Mexican Trade Relations
At a time when the world economy is slowly rebounding from a global recession and the U.S. and Mexico are fighting a costly bi-national “War on Drugs,” in which the end is uncertain, the U.S.-Mexico trade relationship is more important than ever. Washington must find a way to overcome political opposition to the open borders provision before that relationship is fouled beyond repair. Each country’s export dependence on the other, combined with their geographic proximity, makes their close ties a vital economic resource. In the last two decades, the U.S. has done everything in its power to constrict the southern border through heightened immigration control and increased security. Opening the border to Mexican trucks carrying Mexican goods would go a long way toward strengthening economic, political, and cultural ties between the two countries.
It has been suggested that the trade dispute may go unresolved in the near future unless Obama attempts to renegotiate NAFTA, as he promised during his 2008 presidential campaign. However, a complete renegotiation of the trade agreement is neither realistic in today’s political climate, nor necessarily a satisfactory means of resolving a situation that requires immediate attention. Moreover, given that the U.S. has yet to meet all of its current NAFTA obligations, it is unlikely that the Mexican government would be open to any attempt at renegotiation in the foreseeable future.
A major revision of the FTA’s labor rights and environmental codes would be in order, and Washington should cooperate with Mexico and Canada to review NAFTA in its entirety, since some of its basic provisions are far more flawed than those relating to open borders. However, before a complete overhaul of NAFTA is even a possibility, the U.S. must observe how the agreement operates when its terms (including those regarding social concerns) are carried out in full.
Although full compliance with NAFTA’s present terms should be the ultimate goal in resolving the cross-border trucking dispute, there may be a potential short-term compromise while both the U.S. and Mexico work to mend the damage done by U.S. non-compliance. Reinstatement of the cross-border demonstration program is not a long-term solution. Mexico has been forced to compromise its trade interests for far too long, and deserves full compliance with NAFTA, even while entertaining the need for a major revision of the trade pact. The demonstration program should be restored for only so long as is necessary to re-standardize safety norms and streamline inspection procedures in order to meet the needs of the open-border provision.
Full compliance with open-border trucking should remain the ultimate goal for both countries. When President Obama met with President Calderón in Washington prior to his 2009 inauguration, he said that he believed the U.S.-Mexico relationship could be “even stronger, and that’s going to be the commitment of my administration.” The cross-border trucking provision is what the U.S. bargained for and agreed to in 1994. It is time for the U.S. to fulfill its obligations to Mexico.