NAFTA: Related Environmental Issues and Initiatives

NAFTA: Related Environmental Issues and Initiatives

Order Code 97-291 ENR
Updated September 28, 2004
CRS Report for Congress
Received through the CRS Web
NAFTA: Related Environmental Issues
and Initiatives
Mary Tiemann
Specialist in Environmental Policy
Resources, Science, and Industry Division
Summary
The North American Free Trade Agreement (NAFTA) includes several
environment-related provisions, that while limited, were unprecedented for their
inclusion in a trade agreement. However, further environmental (and labor) assurances
were needed to secure passage of NAFTA, and ultimately, the negotiating parties agreed
to a side accord that promotes cooperation on environmental matters and includes
provisions to address a party’s failure to enforce environmental laws. Additionally, the
United States and Mexico entered into the Border Environmental Cooperation
Agreement (BECA), which authorized the establishment of the Border Environment
Cooperation Commission (BECC) and the North American Development Bank (NADB)
to help border communities finance environmental infrastructure projects.
In the 108th Congress, NAFTA’s environmental provisions and related institutions
have continued to receive attention. A key issue has concerned the effectiveness of the
NADB and the BECC, and especially the Bank’s ability to finance projects. Enacted on
April 5, 2004, P.L. 108-215 (H.R. 254) authorizes several operational reforms to the
NADB. Other issues involve the environmental impact of NAFTA, and the effect that
NAFTA and its environmental side agreement have had on the negotiation of other U.S.
trade agreements, including the U.S.-Central America Free Trade Agreement (CAFTA)
and U.S.-Chile FTA. This report briefly reviews NAFTA’s environmental provisions,
associated agreements, and related issues and congressional actions. It will be updated.
NAFTA Environmental Issues and Provisions
Environmental issues emerged early in NAFTA negotiations, and linkages between
trade and environmental issues were reflected in the outcome of these negotiations more
so than in any previous trade talks. While not a new issue, the question of whether a
country’s stricter environmental measures could be found to pose non-tariff trade barriers
received an unprecedented level of attention during the NAFTA debate. Additionally, the
question was raised whether a country’s weaker environmental protection measures or
their ineffective enforcement would create a competitive advantage and provide an added
incentive for businesses to relocate production to the least regulated country. A related
Congressional Research Service ˜ The Library of Congress

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concern was that expected NAFTA-driven industrialization and population growth in the
U.S.-Mexico border region would worsen the severe pollution problems already present.
Although trade officials argued that environment was not a customary trade matter and
that NAFTA talks were not the best forum for resolving these issues, the level of concern
over environmental issues in Congress prompted NAFTA negotiators to respond to them.
Ultimately, the NAFTA parties included language to conditionally protect a party’s
stricter environmental, health, and safety standards for products and produce (provided
that, among other things, such measures are scientifically based). NAFTA also includes
hortatory language to discourage parties from lowering standards to encourage
investment. Other NAFTA provisions encourage upward harmonization of standards and
encourage parties to integrate environmental protection and sustainable development into
economic decision-making. NAFTA’s standards provisions do not affect a country’s
ability to determine its levels of environmental protection for manufacturing and other
process standards (such as water pollution controls and resource harvesting practices).
NAFTA set a precedent in addressing its relationship to multilateral environmental
agreements (MEAs). It identifies three trade-related MEAs that may take precedence over
NAFTA if implementation conflicts arise, provided that the MEA is implemented in the
least NAFTA-inconsistent manner. The listed agreements include the Montreal Protocol
on Substances that Deplete the Ozone Layer; the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes and their Disposal; and the Convention
on International Trade in Endangered Species. U.S.-Mexico and U.S.-Canada bilateral
waste-trade agreements also are included, and the parties may agree to add others.
Despite the inclusion of the above provisions, some in Congress remained concerned
that NAFTA’s effect on environmental laws could be unpredictable. For example, an
issue during the debate on renewing trade promotion authority concerned the effect that
NAFTA may have on state and federal environmental laws, because some investors have
challenged environmental measures as constituting a form of expropriation for purposes
of the NAFTA investment chapter. These provisions allow companies to challenge, and
potentially be compensated for, governmental measures that are viewed as harming their
investments. At least 20 cases have been filed, including 6 against the United States, one
of which involves California’s ban on methyl tertiary butyl ether (MTBE) in gasoline.
Environmental concerns persisted after completion of the NAFTA text. To facilitate
NAFTA passage, two related agreements were negotiated, which are discussed below.
North American Agreement on Environmental Cooperation
A matter not addressed in the NAFTA text was whether lax enforcement of environ-
mental laws in Mexico would provide an added incentive for U.S. industries to relocate,
and thus increase U.S. job losses, and increase border-area pollution. Many in Congress
called for side agreements that included an enforcement mechanism to address failures
to enforce environmental (and labor) laws. Opponents of a side agreement argued that
NAFTA-related economic growth would increase Mexico’s resources available for
environmental protection, and that NAFTA would increase environmental cooperation
in North America. Nonetheless, congressional support for NAFTA remained uncertain.

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In 1993, the three NAFTA governments adopted the North American Agreement on
Environmental Cooperation (NAAEC), which includes dispute settlement provisions to
address a party’s failure to enforce environmental laws. The side accord’s objectives
cover a range of goals, including avoiding the creation of trade distortions or new trade
barriers; enhancing compliance with, and enforcement of, environmental laws and
regulations; and fostering environmental protection and pollution prevention.
The side agreement created the North American Commission for Environmental
Cooperation (NACEC) which includes a Council, a Joint Advisory Committee, and an
independent Secretariat. The Council consists of cabinet-level representatives of the
parties and has key responsibilities regarding the side agreement’s dispute settlement
provisions. The Joint Advisory Committee advises the Council and is comprised of
nongovernmental groups. The Secretariat’s duties include preparing reports and serving
as a point of inquiry for public concerns about NAFTA’s possible environmental effects.
The NACEC’s major goal is to broaden environmental cooperation among the parties. It
provides a forum for the parties to consider ways to address environmental issues, and
provides an avenue for dispute settlement panels to obtain environmental expertise.
Perhaps most notable is the side agreement’s dispute settlement process that, as a last
resort, may impose monetary assessments and sanctions to address a party’s failure to
enforce its environmental laws. To invoke the dispute settlement process, a complaint
must concern a party’s persistent, systematic failure to enforce its laws, and the alleged
failure must be trade-related or involve competing goods or services. Only the NAFTA
parties can initiate a NAAEC dispute settlement proceeding, and none have done so.
However, the Secretariat may consider a submission from any person or nongovernmental
organization asserting that a party is failing to enforce its environmental law, and may
request that party to respond. The Secretariat may prepare a factual record and submit it
to the Council for its consideration. Since 1995, 47 citizen submissions have been filed,
and 9 factual records have been finalized and made publicly available.
U.S.-Mexico Border Environment Cooperation Agreement
Throughout the NAFTA debate, many proponents and opponents noted the need to
identify funding sources for financing environmental improvements in the border area.
Much of the pollution there had been attributed to the effects of unregulated industrial
development and related population growth associated with Mexico’s maquiladora
program, and both governments anticipated that NAFTA could further concentrate
economic activity in the border region, and that existing environmental conditions would
worsen without a binational effort to address infrastructure needs. The Administration
estimated that $8 billion would be required to address needs for sewage treatment,
drinking water, and municipal solid waste infrastructure projects along the border over
the next decade and that NAFTA-related industrialization would create additional needs.1
For many in Congress, support for NAFTA was partially contingent on the identification
of a mechanism for financing border environmental projects.
In October 1993, the United States and Mexico agreed to a new institutional
structure to promote border environmental cleanup. The Border Environmental
1 U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. United States-
Mexican Border Environment Agreement. Hearings, 103d Cong., 2d Sess. Oct. 27, 1993.

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Cooperation Agreement authorized the establishment of the North American Develop-
ment Bank (NADB) and the Border Environment Cooperation Commission (BECC) to
assist border communities in financing environmental infrastructure projects. The
agreement noted the need for environmental infrastructure, especially in the areas of water
pollution, wastewater treatment, and municipal solid waste.
The BECC is directed to help border states and communities coordinate, design, and
mobilize financing for environmental infrastructure projects, and to certify projects for
financing. The NADB evaluates the financial feasibility of BECC-certified projects and
provides financing as appropriate. Public involvement is fostered through representation
on the BECC Board of Directors and Advisory Council, and through a public comment
process on proposed projects.
The NADB was designed to generate between $2 billion and $3 billion in loans or
guarantees for financing environmental projects on either side of the border. (Ten percent
of the NADB’s resources may be used for NAFTA-related community adjustment and
investment projects.) To leverage financing, the United States and Mexico each
contributed $225 million over four years, for a total of $450 million in paid-in capital. The
NADB is authorized to make only market-rate loans, however, and this has been a major
obstacle to the Bank’s ability to finance projects in low-income border communities.

Despite the creation of the NADB to provide financing for border environmental
infrastructure projects, grants from the Environmental Protection Agency (EPA) have
accounted for the vast majority of funding provided through the Bank. In 1997, the
NADB entered into an agreement with EPA, under which EPA contributes much of its
annual border infrastructure appropriation to the Border Environment Infrastructure Fund
(BEIF). (Over the past decade, Congress regularly has provided EPA with $75 million or
$50 million each year for border water and wastewater projects.) The NADB established
the BEIF to use EPA grant resources for drinking water and wastewater projects to make
the projects affordable for border communities. The NADB develops financing packages
using its loan and guaranty programs, EPA grants, and other sources. EPA grant funds
may be used for BECC-approved projects on either side of the border.
As of June 30, 2004, the NADB had approved 22 loans worth a total of $97.1
million, and had fully disbursed 9 loans. Overall, the NADB had authorized $662.4
million in grants and/or loans to partially finance 80 infrastructure projects estimated to
cost a total of $2.26 billion. In addition to the 22 loans, this assistance included $490
million in EPA grants that had been committed for 52 water and wastewater projects.2

Because of the low activity level of the NADB, and because most infrastructure
funding for NADB projects has been provided through EPA grants rather than NADB
financing, considerable interest emerged in recent years for reforming the NADB. Both
federal governments, the border states, and other interested parties discussed possible
reforms for these institutions, including changes in institutional structure, types of
financial assistance provided, and types of projects eligible for assistance.
2 For more information on NADB and BECC functions and accomplishments, see BECC/NADB
Joint Status Report, June 30, 2004, at [http://www.cocef.org].

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In 2000, the NADB established a Low Interest Rate Lending Facility using part of
its paid-in capital to provide lower-than-market rate loans to communities. In 2001,
President Bush and President Fox directed a binational working group to develop
recommendations to strengthen the performance of the NADB and the BECC. In 2002,
both Presidents accepted the working group’s recommendations and directed their
respective administrations to work with their legislatures to effectuate them. The
recommendations include maintaining the focus on environmental infrastructure projects;
giving the NADB more flexibility to make grants and below-market-rate loans to finance
projects; and expanding the geographic scope of BECC/NADB operations to include the
area in Mexico within 300 kilometers of the border. In August 2002, the NADB Board
of Directors approved creation of a Water Conservation Investment Fund to finance water
conservation projects. As discussed below, H.R. 254 (P.L. 108-215), enacted in April
2004, authorizes several operational reforms to the NADB. Corresponding legislation was
approved by the Mexican legislature in 2003.
Assessing NAFTA’s Environmental Impacts
The NAFTA Implementation Act directed the President to report to Congress in
1997 on the effects of NAFTA and implementation of the side agreements. The resulting
study concluded that it was premature to assess any environmental effects of NAFTA and
difficult to determine whether further environmental degradation at the U.S.-Mexico
border was due to NAFTA or other economic development and events. More recent
studies have attributed increased border pollution and other environmental impacts to
NAFTA, although the studies generally identify a number of other contributing factors.
A March 2001 NAAEC study, North American Trade and Transportation Corridors:
Environmental Impacts and Mitigation, concluded that air pollution from increased
freight traffic in NAFTA transportation corridors is significant and could double or
quadruple by 2020.3 Relatedly, the number of assembly factories in Mexico near the
border grew from 2,114 in 1993 to 3,182 in 2003, while employment at these plants more
than doubled to 1.07 million.4 A report by EPA in 2000, Protecting the Environment of
the U.S.-Mexico Border Area, noted that the concentration of industry and people at the
border was exacerbating pollution and health problems, and that many border cities
expected to experience serious water constraints by 2005. A NAAEC committee recently
completed a ten-year review of the environmental side agreement, and concluded that the
NAAEC has facilitated trinational environmental cooperation and capacity building
overall, and specifically has fostered environmental progress in Mexico.
Congressional Activity and Issues
In the 107th Congress, the environment-related provisions of NAFTA and its side
accord received attention during consideration of trade promotion authority legislation
3 The NACEC has an ongoing program assessing the positive and negative environmental impacts
of NAFTA on specific sectors, as well as projects assessing various environment matters. These
studies and reports can be found at [http://www.cec.org/trio/index.cfm?varlan=english].
4 In 2001, the number of maquiladora plants reached 3,684 with 1,202 employees. The decline
of 502 plants by late 2003 has been attributed to a decline in the U.S. economy and movement
of plants to China and elsewhere for lower labor costs. (See, for example: Randall Sherman, “Has
Outsourcing to China Gone Too Far?” MexicoNow, v. 2 no. 7, Nov.-Dec. 2003. p. 42-45.)

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and the U.S.-Jordan Free Trade Agreement (FTA); both adapted environmental provisions
from the NAAEC and NAFTA.5 Some in Congress expressed particular concern regarding
the effect that NAFTA-like investment provisions may have on domestic environmental
protection efforts, because various investors have challenged environmental measures as
constituting a form of expropriation under the NAFTA investment chapter.6 Also in the
107th Congress, the House passed H.R. 5400 to authorize changes in NADB and BECC
operations, with a goal of increasing these institutions’ effectiveness.
In the 108th Congress, efforts to reform the BECC and NADB continued, and in
April 2004, the President signed into law P.L. 108-215 (H.R. 254, H.Rept. 108-17). This
law authorizes the President to agree to a change in the NADB’s charter to permit the
Bank to make below-market-rate loans and a limited amount of grants in order to increase
the number of projects these institutions support. It directs the U.S. members of the
NADB board of directors generally to oppose project proposals if grants account for more
than 50% of the project financing or if a project is not financed in part by loans. The law
also authorizes extending the operational area of the BECC/NADB on the Mexican side
of the border from 100 kilometers to 300 kilometers. It requires an annual report to
Congress, and includes a sense of the Congress relating to U.S. support for water
conservation projects. In other legislation, the conference report to H.R. 6, the Energy Bill
(Section 146) would amend NAFTA implementing legislation to direct U.S. NADB board
members to encourage the Bank to finance infrastructure projects related to clean energy
and energy conservation.
Interest in the 108th Congress also has continued regarding the implications of
NAFTA and the NAAEC for new trade agreements. The U.S.-Chile and U.S.-Singapore
FTAs both include an obligation for parties to enforce their environmental laws, and make
this obligation subject to dispute settlement procedures. Moreover, both agreements
include environmental cooperation and capacity-building provisions. The U.S.-Chile FTA
further calls for parties to negotiate a U.S.-Chile Environmental Cooperation Agreement.
The U.S.-Central America FTA (CAFTA), which the President has signed but which
requires implementing legislation, includes similar provisions and also adapts the
NAAEC provisions that allow citizens to file submissions concerning a party’s failure to
effectively enforce its environmental laws.
While welcoming the heightened consideration of environmental matters since the
NAFTA debate, some Members of Congress and environmental groups remain concerned
that the provisions in the current TPA law and in recently negotiated trade agreements
may not be sufficient to safeguard legitimate environmental measures from challenges,
particularly those involving investor-state disputes. Consequently, while the debate over
whether environmental matters should be a part of trade negotiations generally has been
settled, the debate over how to address such issues is likely to continue. The effect of the
environment-related provisions in recent U.S. bilateral trade agreements, and thus the
shape of the debate, may become clearer with the ongoing implementation of NAFTA and
subsequent agreements that have incorporated NAFTA and NAAEC-like provisions.
5 For more information, see CRS Report RS21326, Trade Promotion Authority: Environment
Related Provisions of P.L. 107-210, and CRS Report RS20999, U.S.-Jordan Free Trade
Agreement: Analysis of Environmental Provisions.)
6 For a discussion of this issue and pending cases, see CRS Report RL31638, Foreign Investor
Protection Under NAFTA Chapter 11, by Robert Meltz.