The Free Trade Agreement of the Americas and Legal Harmonization

Issue:

Volume:

By:

Craig L. Jackson

Date:

June 14, 1996

With the ink barely dry on the signatures to the North American Free Trade Agreement (NAFTA), plans to pursue regional economic integration on an hemispheric-wide basis were announced, with the formal declaration in Miami in December 1994 to create a Free Trade Area of the Americans (FTAA) by the year 2005. Since the Miami declaration, meetings at various governmental levels have taken place in Denver and Cartagena, Columbia, to further solidify plans prior to negotiation. Due to the enormity of the undertaking and the strict time-line for bringing the undertaking to fruition, current work has been carried out by various working groups charged with studying and gathering data on various areas of economic integration spelled out in the "Plan of Action" agreed upon at Miami.

The complexity of the work to be undertaken is apparent when one considers the sheer number of states that would be affected, the variety of governance models within the hemisphere, and the proliferation of smaller regional trading arrangements through North, Central, and South America.

Though what is envisioned for this hemisphere has yet to take full shape, the likely outcome of the preliminary work and negotiations will be a free trade area as defined under Article XXIV of the General Agreement on Tariffs and Trade 1994, the governing document of world trade. That provision defines a free trade area as "a group of two or more customs territories in which the duties and other restrictive regulations of commerce ... are eliminated on substantially all the trade between the constituent territories in products originating in such territories." As such, the FTAA will not be as ambitious a project as the European Union which is a far more comprehensive effort at economic regional integration. The European Union is basically a common market under which members agree not only to free trade among themselves, but to a common external tariff. The Union has become over several decades a semi-federal system where sovereignty in various areas of economic policy is exchanged for common or harmonized approaches

The FTAA, on the other hand, is likely to follow the structure and integration philosophy of the North American Free Trade Agreement. The NAFTA is a free trade area whose member states are obligated at minimum to open trade arrangements among themselves. NAFTA does, however, expand upon the free trade model somewhat in that it is an arrangement involving various areas of economic cooperation in addition to free trade in goods.

If the FTAA follows the NAFTA model, it will result in a grouping of several Caribbean, Central and South American states, many of whom are currently participants in regional trading arrangements. Several of the arrangements exist in a different form from NAFTA. Thus the key to a successful completion of the FTAA project will be integrating the various forms and economic philosophies of the likely constituent units.

A crucial aspect of planning, adding to the complexity of the effort, will be the degree and method of harmonization of laws that will be necessary to the success of the Free Trade Area of the Americas. Harmonization has been defined as the process by which national laws of several states are made similar to accomplish a specific purpose. In the case of economic integration, that purpose on the whole is the efficient facilitation of economic activity between constituent units.

The need for some level of harmonization is apparent when one considers the purpose behind economic integration. Countries agreeing to regional economic integration in fact agree to give up certain economic advantages associated with protected markets in exchange for access to other markets. Larger market access increases the general welfare by opening up economic opportunities, and by placing competitive pressures on firms to become more efficient in their production, thus lowering prices to consumers, and, conceivably, improving quality. Economic integration thus is an attempt to achieve the economic efficiencies, transparencies and predictability to produce the economic gains envisioned. Harmonization is a process by which these gains may be realized.

If an individual entrepreneur desires to sell a product in another country with which his/her home state had a free trade agreement, his/her products in that country will likely be cheaper than comparable products from a third state that did not have a free trade agreement with the state of sale, in large part because the goods from the third state would be charged a tariff for the privilege of selling in that market, while the goods of our entrepreneur will be allowed to enter tariff free. The tariff on the goods from the third state will be passed along to the consumer in the form of higher prices, while our entrepreneur will not have to raise his/her prices at all. Therefore, our entrepreneur's goods should enjoy an advantage over the goods from the third state.

However, there are other considerations important for exporting merchandise. The importing state may have regulations on quality, or technical standards that might restrict the trade in the tariff-free imported goods, or make them less attractive to local consumers than had been anticipated to be a result of the free trade regime between the two countries. As a result, whatever advantage gained by our entrepreneur because of the tariff-free entry of his/her products is lost because of the standards that might be peculiar to the importing state. Laws regulating securities and capital flows in some countries might be incompatible with similar laws in other states, dampening the flow of financial resources between parties to an economic integration. The idea behind harmonization is for the states to develop common rules and laws in these and other areas so that economic activity can flourish without artificial strictures.

Another major problem involves manufacturing operations and the cost of labor. Goods produced in a territory of a free trade partner with lower labor costs may benefit from an additional advantage because the labor savings will be passed on to consumers in the free trade partner-state in addition to the savings passed on as a result of duty-free entry. Furthermore, entrepreneurs from one party may set up manufacturing within the party with the lower labor costs in an effort to sell their products in both markets while benefiting from the advantage caused by the labor savings. The result of both phenomena could be the dislocation of labor in the party with the higher labor costs. Where the fact of low-cost labor is the result of lower labor standards (as opposed to labor supply), many regard harmonization of laws in this area as an appropriate fair trade measure.

Hence the idea of harmonization is to remove the extra, or unanticipated, inefficiencies from the smooth functioning of a regime designed to spread economic advantages through the vehicle of free trade. However, harmonization may take a variety of forms, reflecting different levels of intrusion into state governance and policy-making, not to mention different philosophies of the propriety of supranational governance. How the various subjects of harmonization are handled will be a major part of the negotiations of the Free Trade Agreement of the Americas in the next few years.

The preliminary plans for the FTAA reflect a studied caution in the area of harmonization policy. This is understandable because the concept does require states to take certain action with regard to national policies and laws for the general good of the economic integration plan. This kind of obligation is often associated with loss of sovereignty and can become a source of controversy within states, as developments during the NAFTA debate in the U.S. indicated. The language that refers to integration policies in the Miami plan of action, and in the various declarations from the Denver and Cartagena ministerial summits, suggests the intention to study issues that might require harmonization, but no firm commitment to harmonization at this pre-negotiation stage. Many areas of economic activity will require some sort of harmonization, and non-committal language no doubt reflects the early stage of the negotiations. However, the cautious approach in the area of worker rights reflects a more difficult hurdle to free trade in this hemisphere.

The Plan of Action is divided into four sections: I. Preserving and Strengthening the Community of Democracies of the Americas; II. Promoting Prosperity Through Economic Integration and Free Trade; III. Eradicating Poverty and Discrimination in Our Hemisphere; and IV. Guaranteeing Sustainable Development and Conserving our Natural Environment for Future Generations.

Within these broad titles, various areas of cooperation and study were outlined in the Plan of Action agreed upon at the Miami Summit. Several of these areas will involve to some degree legal harmonization to achieve the efficiencies envisioned by free trade. As a general rule, the Plan of Action avoids direct reference to harmonization as a concept, and it deals with labor issues only in passing. However, it is apparent in many of the areas being examined that some degree of common approach will be required to accomplish the specified ends.

Under Section II on free trade, the plan of action calls upon governments to seek common guidelines on capital movements, if appropriate to accomplish the ends of liberalization of capital movements and capital market integration. Hemispheric infrastructure is also considered within the free trade context as governments are requested to develop mechanisms in the form of multilateral and bilateral commitments on regulatory and legal rules to encourage investment in domestic and foreign infrastructure projects. The reason for this focus is to ensure that each party is reasonably attractive, from an infrastructure standpoint, to foreign investment, and so that the benefits of free trade will be accessible to producers and manufacturers in each of the parties to the agreement.

Regarding telecommunications and information technology, the governments pledged to explore ways to promote common standards and consistent certification process for telecommunications equipment and to develop regional guidelines for the provision of international value-added network services.

Under the general heading dealing with environmental matters, the Plan calls for the strengthening of technical and institutional capacity to address environmental priorities such as pollution prevention, waste and sanitation issues, risk reduction, lead contamination, pesticides, urban environmental problems and access to safe drinking water at the governmental level. In addition, parties are expected to strengthen and/or develop enforcement and implementation of environmental protection laws with the goal of ensuring that economic integration occurs in an environmentally sustainable manner.

Other areas of pre-negotiation study noted at the subsequent ministerial meetings in Denver (June 1995) and Cartagena (March 1996) which are likely to require some harmonization effort include government procurement, intellectual property rights, trade in services, competition policy, and standards. Working groups have been charged with identifying areas of legal commonality and divergence in the national laws of the likely FTAA partners.

The issue of worker rights and labor standards is rather conspicuous in the way it has been treated thus far. Worker rights were mentioned as part of the preamble to the section of the Plan of Action dealing with free trade. The provision states: "[a]s economic integration in the Hemisphere proceeds, we will further secure the observance and promotion of worker rights, as defined by appropriate international conventions." At the Denver ministerial meeting, the trade ministers did not assign a working group to study worker rights. Nevertheless, under the heading of "Other Matters" the ministers "welcomed the contribution of the private sector and appropriate processes to address ... the further promotion of worker rights through our respective governments." At the recently concluded Cartagena meeting, the ministers recognized "the importance of further observance and promotion of worker rights and the need to consider appropriate processes in this area, through our respective governments."

The apparent subordination of worker rights as an area for harmonization is not surprising. Efforts at harmonization in the labor area within the context of other regional arrangements have been controversial in the past. The European Union Social Charter is regarded as one of the most, if not the most, comprehensive set of harmonized standards in the labor area. However, passage of those standards was fraught with controversy, with Great Britain opting out of the process. Worker rights harmonization in the context of free trade in North America was controversial when the labor side agreement was negotiated to address the need for some degree of harmonization of labor standards as a companion to the North American Free Trade Agreement. Indeed, the North American Agreement on Labor Cooperation (NAALC) was considered to be a necessity to passage of the NAFTA in the United States Congress in 1993.

It appears likely that a similar effort will be controversial within the context of the FTAA. Some members of Congress have made clear their opposition to an effort similar to the NAALC, while the Clinton Administration has indicated its desire to link free trade with progress in protecting worker rights. The impasse has lead many observers to claim that the FTAA may be stalled indefinitely while the United States works out its internal political problems. However, the preliminary work on the FTAA appears to be proceeding, though no date for the beginning of negotiations has been set as this article went to press.

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The Free Trade Agreement of the Americas and Legal Harmonization