Consistent with NAFTA, Mexico has enacted a new Foreign Investment Law (FIL), effective December 28, 1993, which abolishes restrictions on foreign investment in most areas. FIL repeals several statutes which strictly regulated the participation of foreign investors in certain activities. The Foreign Investment Commission is the exclusive authority for the application of FIL.
The following are the major categories of limitations contained in FIL. Where applicable, NAFTA provisions relevant to each sector are noted as well.
a) oil production and oil refining;
b) basic petrochemical production;
c) sale of electricity to the public (see Section III.D.1.b);
d) nuclear power;
e) telegraph and radiotelegraph services;
f) local postal service;
g) bill issuance and coin minting; and
h) control, supervision and surveillance of ports, airports and heliports.
Consistent with FIL, Mexico has reserved these activities from NAFTA application.
a) domestic land transportation of passengers, tourists and cargo not including passenger, or package delivery services;
b) retail gasoline sale and distribution;
c) radio broadcasting and television services (except cable television, where foreign participation may reach up to 49%);
d) credit unions;
e) development banks;
f) professional and technical services expressly defined by the applicable legal provisions;
g) Transitory Article Sixth reserves to national investors activities of international land transportation of passengers, tourists and cargo between points in Mexican territory, and services of administration of central stations for passenger and auxiliary automotive service vehicles.
Foreign investment may participate in these activities as follows:
ii) beginning January 1, 2001 up to 51% in the capital stock of Mexican companies;
iii) beginning January 1, 2004, up to 100% in the capital stock of Mexican companies.
a) 10% in cooperative production companies;
b) 25% in domestic and specialized air transportation and air shuttle services;
c) 49% in holding companies of financial groups, commercial banks, brokerage houses and stock specialists, as per the Amendments to the Law for Financial Groups, Law of Credit Institutions and the Securities Market Law in effect as of February 16, 1995, which increased this percentage from 30% to 49% and automatically modified the provisions of FIL. NAFTA provides phasing for NAFTA parties. (See Section III.B.9. hereinafter).
d) 49%, which is the most extensive category, includes the following activities:
ii) manufacture and commercialization of explosives, firearms, cartridges, munitions and fireworks, excluding their acquisition and use for industrial or extractive activities, or the production of explosive mixtures for consumption in these activities;
iii) printing and publication of newspapers for circulation exclusively in Mexico;
iv) ownership of series "T" shares of companies which own agriculture, cattle raising and timberlands;
v) cable television, basic telephone services;
vi) video text and package changeover services. As of July 1, 1995 foreign investment may participate up to 100% in these activities without the favorable decision of the Foreign Investment Commission;
vii) fishing in fresh water, along the coast and in the exclusive economic zone, except aquaculture;
viii) integral port administration, piloting port services for interior navigation operations, shipping companies commercially exploiting vessels for interior and coastal navigation, except for tourist cruise ships and for exploitation of dredges and naval artifacts for port construction, conservation and operation;
ix) supply of fuel and lubricants for ships, aircraft and railway equipment; and
x) Transitory Article Seventh of FIL establishes that 49% foreign investment is allowed in the manufacture and assembly of auto parts for the automotive industry and beginning January 1, 1999, foreign investment may be up to 100% without the requirement of prior authorization.
a) port services such as piloting, dock services, mooring and lighterage;
b) naval companies engaged in exploitation of vessels used exclusively for high-seas traffic;
c) administration of air terminals;
d) private educational services;
e) legal services;
f) credit information companies;
g) institutions for categorization of securities;
h) insurance agencies;
i) cellular telephone services;
j) construction of pipelines for transportation of petroleum and derivatives thereof. As of May 11, 1995, 100% participation is permitted by special law without specific authorization;
k) oil and gas well drilling;
l) erection, construction and installation of public works. Beginning January 1, 1999, foreign investment may participate up to 100% in these activities without prior authorization. (Transitory Article Ninth of FIL).
FIL for the first time authorizes foreign participation in a Mexican company owning real estate within the restricted zone for non-residential purposes; if for residential purposes, title of the real estate must be held through a trust by a trustee which must be a Mexican bank. Approval of the Ministry of Foreign Affairs is required.
Long term leases of real estate are no longer prohibited.
Neutral investment may be done either in Mexican companies or in authorized trusts.
a) The Ministry of Commerce may authorize companies to issue special series of shares with limited or no voting rights.
b) Banks acting as trustees may be authorized by the Ministry of Commerce to issue instruments of neutral investment granting holders economic and limited voting rights, with the restriction that no voting rights may be granted for ordinary shareholders or partners meetings.
c) The Ministry of Commerce may also approve neutral investment in the acquisition of ordinary participation certificates issued by banks from series "B" shares of the capital of holding companies of financial groups, banks, or series "A" shares of brokerage houses.
d) The Foreign Investment Commission may authorize neutral investment in the capital stock of Mexican companies by development international financial companies.
a) Eliminates tariffs and non-tariff barriers to trade in, and the facilitation of cross-border movement of, goods and services among the three Parties. (NAFTA Chapters III and XII);
b) Creates strong "North-American-made" rules of origin to ensure that non-NAFTA countries do not also gain duty-free access to the free trade area. (NAFTA Chapter IV);
c) Opens Mexico's services market, including its financial services sectors, to U.S. and Canadian firms, as well as other foreign-owned firms that meet a North American residency test. (NAFTA Chapters XII, XIII and XIV and Annex VII sections A, B and C, Mexico);
d) Loosens Mexico's restrictions on foreign investment, including "performance requirements" that regulate the operations of foreign firms in Mexico. (NAFTA Chapter XI and Annex I, Mexico);
e) Strengthens North American protection of patented, trademarked and copyrighted goods. (NAFTA Chapter XVII); and
f) Establishes an expert-based panel system to resolve trade conflicts among the NAFTA parties. (NAFTA Chapters XIX and XX).
These obligations apply to the "establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments." These basic obligations ensure that, subject to agreed exceptions in the NAFTA Annexes, a Party may not subject enterprises to different, or more onerous operating conditions, simply because of foreign ownership. In addition to these general provisions, the Chapter expressly prohibits certain commonly encountered forms of discrimination such as requirements that a minimum level of equity be held by local nationals, or that certain senior management positions be reserved to local nationals. Finally, the foregoing comparative standards and explicit prohibitions are supplemented by the incorporation of customary international law principles obligating the host government to accord "fair and equitable treatment" and "full protection and security" to investments in its territory.
In a broad reservation clause contained in the trade agreement, Mexico maintains the right to review the acquisition of more than 49% foreign ownership in Mexican enterprises, but only if the gross assets of the entity exceeds a threshold level (US$25 million, increasing to US$150 million after the tenth year of the entry of NAFTA).
Regarding performance requirements, the parties obligate themselves not to condition the establishment, operation or expansion of an investment to the fulfillment of certain requirements of behavior or performance, such as commitments concerning export programs, degrees of national integration, foreign currency balance and transfer of technology. (Article 1106).
Currency convertibility at market rates is guaranteed. NAFTA prohibits expropriation, except for public purposes, on a non-discriminating basis, in accordance with due process of law and with compensation paid without delay and at a pre-expropriation fair market value with applicable interest. (Articles 1109 and 1110).
Depending on the import-sensitivity of each of the approximately 9,000 goods covered by NAFTA, specific categories were placed in one of four tariff transition lists:
B List: Phases out tariffs in equal cuts over five years,
C List: Phases out tariffs in equal cuts over ten years,
C+ List: Phases out tariffs in equal cuts over fifteen years.
Accordingly, Mexico amended its Regulatory Law of Article 5 of the Constitution relevant to the exercise of professions in effect as of January 1, 1994. Said modifications eliminate the requirement that only Mexican nationals may exercise a profession in the Federal District and grants the same right to foreigners, subject to what has been agreed to in international treaties to which Mexico is party, or in the absence of such treaties, subject to reciprocity and to compliance of other requirements established by Mexican laws. Also the amendments to the law provide that professional degrees or titles issued abroad may be registered at the Ministry of Education if the studies covered by such degree are equal or similar to those of institutions forming part of the National Education System.
With respect to urban, suburban and interurban passenger transportation services by bus, school bus, taxi, and other public transportation services, as well as cargo and tourism transportation services, foreign investment is not permitted. Therefore these activities are reserved to Mexican individuals and companies with an exclusion of foreigners clause.
a) business visitor,
b) traders - investors,
c) intra-company transferees, and
d) professionals.
Each one of these categories contemplates specific activities to be performed by persons going into another country. For example, business visitors are persons wishing to carry out activities related to research and design, cultivation, manufacturing and production, marketing, sales, distribution, after sales services and general services.
To facilitate the temporary entry of persons on a reciprocal basis, NAFTA creates the "FMN", a special immigration form issued by the Consular offices of Mexico in Canada and the U.S., to nationals of another Party crossing the border to develop an activity non-remunerated in Mexico for a maximum period of 30 days, after which if the visitor wishes to extend his stay in Mexico, he shall obtain from the Ministry of the Interior the normal business visa (FM-3), which is granted for a duration of one year, renewable four times, enabling multiple entries and exits. (See Section XXII. hereinafter).
Said thresholds are: for entities of the Federal Government (such as Ministries), US$50,000 for contracts concerning the acquisition and lease of goods and for the rendering of services, and US $6.5 million for contracts of public works; for governmental entities (such as PEMEX and the Federal Electricity Commission), US$250,000 for contracts concerning the acquisition and lease of goods and for the rendering of services, and US$8 million for contracts of public works.
For more information on government sales and contracting in Mexico, see Section XXI.
Section A of Annex VII contains existing federal measures that are reserved. Mexico has reserved the right to apply its current investment restrictions as mentioned in Section II.E. hereinabove. NAFTA section B contains a list of financial services sectors in which the Parties have reserved the right to maintain existing inconsistent federal measures or adopt new ones. Section C contains specific additional commitments that individual NAFTA Parties have undertaken.
Under Sections B and C, Mexico has committed to liberalize its investment requirements to foreign investors investing through foreign financial affiliates (See Section II.E.9 hereinabove). Foreign credit institutions, stock brokers, insurance companies and financial leasing companies are subject to limits on the aggregate percentage of capital in the Mexican market they are permitted to hold. Foreign credit institutions, stock brokers and insurance affiliates are also subject to individual capital limits. The percentages, aggregate and individual, increase during the transition to full liberalization of investment in this sector by January 1, 2000. (NAFTA Annex VII sections B and C).
It is important to mention that, as of February 15, 1995, the Law of Credit Institutions was amended in order to increase the percentage limit which a foreign bank affiliate may hold, to 6% of the aggregate capital of the banking system. Transitory Articles to the Amendments of the Law of Credit Institutions further impose a new aggregate limit on the total net capital of all affiliates, equal to 25% of the aggregate net capital of all Mexican banks.
Regarding bilateral actions, NAFTA Article 801 establishes that if a good originating in the territory of a NAFTA Party, as a result of the reduction or elimination of a duty provided for in NAFTA during the transition period (ten years commencing January 1, 1994), is being imported into the territory of another NAFTA Party in such increased quantities, in absolute terms, and under such conditions that the imports of the good from that NAFTA Party alone constitute a substantial cause of serious injury, or threat thereof, to a domestic industry producing a like or directly competitive good, the NAFTA Party into whose territory the good is being imported may remedy the injury as follows:
a) temporary suspend further reductions under NAFTA of the duty rate on the good;
b) increase the duty rate on the good to a level not to exceed the lesser of:
i) the most-favored-nation (MFN) duty rate in effect at the time the action is taken, or
ii) the MFN duty rate in effect prior to January 1, 1994.
The following conditions shall apply to an emergency action proceeding described above:
a) a NAFTA Party taking emergency action shall notify the other Party and request consultations thereon;
b) any safeguard measure shall be imposed no later than one year after initiating the proceeding; and
c) as a general rule, the duration of such emergency action shall not exceed three years, or extend beyond the transition period.
The NAFTA Party taking the emergency action shall provide the other Party, against whose good the action is taken, mutually agreed compensation in the form of concessions having substantially equivalent trade effects, or equivalent to the value of the duties expected to result from the action. If the NAFTA Parties concerned are unable to agree on compensation, the NAFTA Party against whose good the action is taken may take tariff action having trade effects substantially equivalent to the action.
These emergency actions do not apply to textile and apparel goods, which have special treatment under NAFTA.
Under NAFTA, irrespective of the safeguard provisions contained therein, each NAFTA Party retains its rights and obligations under Article XIX of GATT, or any safeguard agreement pursuant thereto, with few exceptions.
Its objectives will be achieved through:
The Parties agree to monitor the compliance and enforcement of their respective labor laws and to guarantee, in their respective countries, a free access to administrative and judicial courts, as provided by their own laws related to the application and enforcement of labor laws.
Furthermore, each Party shall guarantee that labor procedures be just, transparent and equitable.
The Parties create the Commission for Labor Cooperation in charge of supervising the application of the Agreement, preparing recommendations for its application and future development, and resolving controversies over the interpretation and application of the agreement.
Also the Commission is in charge of establishing cooperation measures consisting of programs of technical assistance such as seminars, conferences, preparation of joint investigations and training courses.
In case of controversy, the Parties will first seek solution through consultation; also they may submit such controversy to the Council of the Commission. If the controversy is not solved further procedures are established.
The Party refusing to comply with the resultant recommendations or with the plan of action agreed to, may be subject to the payment of monetary fines, which may not be higher than 0.007% of the total trade volume of the goods between the countries.
In this Agreement, the Commission for Environmental Cooperation is created, whose purpose is to formulate recommendations on environmental issues, promote the drafting of laws and cooperate in the fulfillment of the environmental objectives.
The Parties further agree to furnish any other Party any environmental information requested. The Agreement also includes a procedure for the consultation and resolution of environmental controversies based on a consistent pattern of non-enforcement by a Party of its environmental legislation regarding manufacture of goods or services traded, or manufacturing by one Party in the territory of the other.
Dispute resolution procedures are complex and provide for a series of steps, such as consultation, mediation, consulting with advisors and experts, creation of a panel, all of which ultimately lead to the formulation of action plans to remedy the alleged deficiencies of enforcement. The sanction of non-compliance of such action plan is that the NAFTA benefits to the accused Party may be suspended, and said Party may be forced to make monetary contributions in an amount not to exceed US$20 million.
The NAFTA Parties created two other institutions that should help to alleviate the environmental problems Mexico faces: the Border Environmental Commission and the North American Development Bank (NAD Bank). The former is to assist states, local communities and non-governmental organizations in finding solutions to environmental problems in the Northern border region and may arrange financing for environmental projects in and outside the region upon request from the United States or Mexico. The NAD Bank is a source of funding for the projects of the Commission.