The North American Free Trade Agreement (NAFTA): Structure, Dispute Settlement and Case Law

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This paper combines three entries regarding the North American Free Trade Agreement (NAFTA) prepared by the author for the Max Planck Encyclopedia of Public International Law. These papers were initially published in the online edition in 2009, and in 2012 appeared in the hard copy bound volumes. The first contribution describes the genesis of the NAFTA and the resulting treaty arrangement. The second contribution summarizes and analyzes the decisions of the various dispute settlement mechanisms under the NAFTA. The third contribution describes those various dispute settlement mechanisms.

The North American Free Trade Agreement (‘NAFTA’) establishes a free trade area comprised of the territories of Canada, Mexico, and the US (‘the Parties’). The NAFTA entered into force on 1 January 1994. Negotiation of the NAFTA was initiated during the US presidency of George HW Bush at the suggestion of President Carlos Salinas of Mexico. This was during a period in which Mexico was undergoing a transition from State ownership to private ownership of key industries, as well as more generally opening the economy to imports and foreign investment. From the standpoint of the Mexican government, the NAFTA was an important element in a broader transition from a closed to an open market economy. The US had long sought to establish more favorable investment and trading terms with Mexico, and the proposal for a free trade agreement was consistent with expressed US interests. Two-way trade between Canada and the US far exceeded trade between Canada and Mexico, and the CUSFTA already promised to liberalize trade between Canada and its major trading partner. Nonetheless, Canada's participation in the negotiations allowed it to revisit some important subject matter and to otherwise remain engaged in a broader US plan for an eventual hemispheric Free Trade Area of the Americas (FTAA).

The NAFTA follows the customary ‘free trade area’ agreement model described in Art. XXIV, General Agreement on Tariffs and Trade (1947 and 1994)). The NAFTA is structured to reduce or eliminate tariffs and quotas on trade in goods between the Parties. The NAFTA extends to liberalization of trade in services, as now covered by Art. V, General Agreement on Trade in Services (1994). In addition, the NAFTA provides for liberalization of restrictions on foreign direct investment (‘FDI’), and establishes protection against nationalization or expropriation. The NAFTA is thus broader in terms of regulating economic activity than the classical ‘free trade area’ agreement as described in the GATT 1947 and 1994.

The NAFTA incorporates three distinct dispute settlement mechanisms within the main text of the agreement, and several additional mechanisms in its supplementary agreements.