January 2004

NORTH America's TRANSPORTATION NETWORK TO FACE FEWER OBSTACLES

The North American Free Trade Agreement (NAFTA) was signed on December 17, 1992. It is a trilateral economic agreement among Canada, Mexico, and the United States. The objective of NAFTA is to phase out barriers to trade in goods and services in North America, eliminate barriers to investment, and strengthen the protection of intellectual property rights. NAFTA also includes a number of Transportation provisions that establishes a schedule for liberalizing certain restrictions on the provision of bus and truck services.

Prior to NAFTA, some of the transportation restrictions were:

1. Mexican trucks were limited to operations in the commercial zones along the border with the United States;
2. Mexico did not permit foreign investment in transportation companies based in Mexico;
3. United State trucks were not permitted to operate in Mexico; and
4. Although the United States permits foreign investment, it limits Mexicans to a non-controlling interest in truck and bus companies based in the United States.

The Mexican restrictions were the result of a nationalistic, protection of Mexico. The U.S. restrictions were the result of a moratorium imposed by the U.S. Congress in 1982. This moratorium prohibited Mexican and Canadian motor carriers from operating in the United States beyond a limited zone along the U.S.-Mexico border. (Bus Regulatory Reform Act of 1982 Public Law 97-261, 96 Stat. 1103). However, the moratorium with respect to Canada was lifted shortly after implementation on the basis of a bilateral agreement that gave U.S. carriers access to Canadian markets and vice versa.

The moratorium had the effect of restricting the transportation between Mexico and the U.S. However, with the implementation of NAFTA, the United States agreed to modify the moratorium by ratifying NAFTA Annex 1, which provided deadlines in regards to trucking access and investment on truck companies such as:

A) ACCESS

* Mexican and U.S. trucking companies would have full access to and from each country's border by December 18, 1995.

* Mexican companies would be permitted to provide cross-border scheduled bus services by January 1, 1997; and

* Mexican and U.S. truckers would have full access to each other's countries by January 1, 2000,

B) INVESTMENT

* In December 1995, Mexico was to allow Canadian and U.S. investment, of up to 49 percent, in Mexican carriers that transport cargo internationally. In 2001, investment of up to 51 percent will be permitted and in 2004, Mexico will permit 100 percent foreign investment in truck and bus companies.

* By December 1995, the U.S. was to allow Mexican carriers to establish Mexican-owned or controlled subsidiaries in the U.S. to transport cargo internationally.

In 1995, the U.S. decided not to abide by the implementation of the investment and access provisions to permit Mexican trucks to operate in the U.S. border states, which were scheduled to become effective on December 18, 1995. Because the implementation was postponed, Mexico sought to find a solution to the trucking issues by formal consultations with the U.S. government.

These consultations did not resolve the issues between Mexico and the U.S. As such, the Mexican government requested the establishment of an arbitration panel, as provided by the NAFTA dispute resolution mechanism.

This panel was to decide whether the U.S. was in breach of Articles 1202 (national treatment for cross-border services) and/or 1203 (most-favored-nation treatment for cross-border services) of NAFTA by failing to lift its moratorium on the processing of applications by Mexican-owned trucking firms for authority to operate in the U.S. border states.

Similarly, the Panel was to decide whether the U.S. breached Articles 1102 (national treatment) and/or 1103 (most-favored-nation treatment) by refusing to permit Mexican investment in companies in the U.S. that provide transportation of international cargo.

The panel was finally convened on January 4, 2000. This five-member arbitration panel comprised of two U.S. and two Mexican panelists, and was chaired by a British jurist. The panel unanimously found on February 6, 2001 that the U.S. decision to avoid implementation of NAFTA provisions was a violation of its national treatment and most favored nation treatment obligations for services and investment.

The 2000 Presidential campaign of President Bush stated that the United States should honor its NAFTA commitments. The preliminary ruling of the Panel was issued on November of 2000, days before U.S. President Bush meeting with Mexico's President Vicente Fox. During his visit, President Bush guaranteed to President Fox that the United States would fulfill the opening of the border to international trucking and cross-border regular route bus services.

On February 6, 2001, the panel set up under the North American Free Trade Agreement on the land transportation case issued its final report in favor of Mexico. Mexico was pleased with the panel's ruling, because it calls for the U.S. to take steps to bring its practices with respect to cross-border trucking services and investment into compliance with its obligations under NAFTA.

President Bush's decision to implement NAFTA trucking provisions and his willingness to comply with the panel's ruling, showed that the U.S. Government was willing to fully comply with the final report of the panel. Based on that decision, on June 5, 2001, the U.S. President allowed the motor carriers domiciled in the United States that were owned or controlled by persons of Mexico, to obtain operating authority to provide cross-border truck services. However, at that time, the moratorium on the issuance of certificates or permits to Mexican-domiciled motor carriers for the provision of truck or bus services between points in the United States remained in place.

It was not until November 27, 2002, in an effort to fully comply with the panel decision and to revert the moratorium imposed in 1982., when the U.S. President authorized the Department of Transportation to act on applications submitted by motor carriers domiciled in Mexico to obtain operating authority to provide cross-border scheduled bus services and cross-border truck services.

The delay in opening the border to transportation services has deprived the entire North America region of important benefits and has imposed higher costs for businesses and consumers alike. The current Mexican border trucking system is inefficient. It requires transfers of loads from long-haul trucks to older drayage vehicles for short hauls in the 20-mile commercial zones on both sides of the border and then back to long-haul trucks again instead of having a modern long-haul fleet continuously on the road.

An open border to land transportation will increase the efficiency of North America's transportation network as it will be possible to directly deliver cargo from one point to another, making the North America region more competitive vis-à-vis other markets. Opening the U.S. border to Mexican trucking companies not only represents an opportunity to Mexico, it also means that the U.S. and Canada will be able to reap the benefits of that geographical vicinity.

Adrian F. Dominguez

This newsletter is published to keep our clients and friends informed of new and important legal developments. The articles are not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.