The End of the Road for the NAFTA Trucking Dispute?

July 7, 2011 1:30 PM

This week marked (hopefully) the beginning of the end of one of the longest-running cases in NAFTA history. A Memorandum of Understanding (MOU) signed by the United States Department of Transportation and Mexico's Secretaries of Transportation and Communication, will bring the United States closer to completing its obligations under the North American Free Trade Agreement (NAFTA) — 15 years, 6 months, and 20-some days later than originally intended.

Under the NAFTA, liberalization of the North American trucking sector was to begin within three years of signature (the agreement was signed on December 17, 1992). The dispute originated on December 18, 1995, when the United States, under pressure from the Teamsters Union, announced that it would delay its compliance with its commitment to open US border to Mexican trucks. Mexico waited until 1998 to bring this case to the NAFTA dispute settlement mechanism.

In 2001 a NAFTA panel found in favor of Mexico, allowing Mexico to retaliate in the amount of lost trade. Mexico again waited for nearly a decade for the United States to respond, reluctantly imposing retaliatory tariffs only as it became evident that the United States remained unable or unwilling to comply with its obligations. Finally, in March 2009, Mexico imposed retaliatory tariffs on 89 manufactured and agricultural export goods worth $2.4 billion. These tariffs were very cleverly crafted, designed to hurt exporters of goods with strong markets in Mexico in key political districts while not hurting poor Mexican consumers or stimulating inflation. Goods affected ranged from Christmas trees to various types of fruits, potatoes and uncooked pasta. In August of last year a new list of goods was published, rotating some goods, with the possibility of a new rotation in 2011.

The retaliation and threats of continued rotation seem to have worked.

Under the terms of the MOU, carriers originating in Mexico and in the United States will each — upon enrolling in a new program that requires proof of compliance with the safety procedures of each country — be able to operate permanently in both countries.. As a result of the signing of the MOU, Mexico will suspend 50 percent of the tariffs applied to the 99 U.S. products subject to the current retaliatory measures. The other 50 percent is to be suspended as soon as the first Mexican carrier is granted operating authority in the United States. Mexico reserves its rights under the NAFTA to reinstall the retaliatory measures in the case of non-compliance.

The risk of non-compliance is not insignificant. Past pilot programs, starting in 2002, have been implemented and derailed. Several members of Congress have already vowed to defund this program. Two main objections to the program include safety and environmental concerns.

With regard to the issue of safety, some critics fear that Mexican trucks and truckers will be a hazard to American roads and motorists. The statistics do not bear this fear out: the most recent out of service (OOS) statistics from the US Department of Transportation show that last year only 1.3 percent of Mexican inspections resulted in the driver being taken out of service, compared to 5.7 percent for US drivers and 4.8 percent for Canadians. Vehicle inspections showed violations that resulted in the vehicle being taken out of service in 19.8 percent of US inspections; only 16.5 percent of Mexican vehicles (10.9 percent for Canada). US vehicles were involved in 72,801 crashes in 2010, of which 1910 were fatal; Mexican trucks were involved in only 33 crashes in the US. None resulted in fatalities.

In addition, Mexican truckers are bound to comply with all US safety standards (federal, state and local). In fact, Mexican trucks are subject to more rigorous inspections than either Canadian or American trucks. Trucks that participate in the pilot program must demonstrate to US inspectors that they comply with US driving rules and with federal and state safety standards. Mexican trucks are required to carry US insurance similar to that held by US trucks – in addition to the insurance they must hold to operate in Mexico. If anything, NAFTA compliance seems to have increased safety.

Another oft-cited concern is for the environment. Safeguarding the environment from the impact of additional economic activity is certainly essential, particularly along the border, already suffering severe environmental damage. But this concern also does not seem to be a rational reason for limiting Mexican trucks' entry into the United States. The current system, under which Mexican trucks are only allowed to carry cargo within a designated "commercial zone," requires at least three trucks: a Mexican truck to transport the goods to the border; a drayage middleman; and the US truck that transports the goods to their final destination. This system in fact imposes additional environmental burdens – as well as economic costs. A recent US Chamber of Commerce study estimates that 25,000 US jobs may be at risk if the trucking dispute is not resolved.

The resolution of this dispute is a victory for which Mexico battled long and hard, and waited patiently for its main trading partner to get its act together. The agreement is also a victory for the United States. In his State of the Union address earlier this year, President Obama pledged to "double our exports over the next five years, an increase that will support two million jobs in America." His National Export Initiative, which aims to "help farmers and small businesses increase their exports," will require ramping up US competitiveness and increasing the attractiveness of US goods in US trade partners' markets.

One small but significant step towards this, signaling US commitment to international trade, is the resolution of this long-standing dispute. It is also economically beneficial to eliminate any barriers to this longstanding and significant US market. Mexico is the United States' third largest trading partner and US exports to Mexico are twice the value of exports to China and three times US exports to Japan, our fourth main export market. Last year Mexico, the US's third ranked trading partner in agricultural goods, bought $14.5 billion from US farmers. Mexico is a main market for US commodities, absorbing 17 percent of US corn; 14 percent of US poultry meat; 10 percent of US soybeans, cotton and wheat. Over the last decade, Mexican consumers have purchased, on average, 13 percent of US firms' exports.

Hopefully the trucking dispute will in fact be put to rest – and this holiday season Mexican consumers will again be free to buy their Christmas trees from US producers.

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Barbara Kotschwar Former Research Staff

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