The Trojan Horse Issue in a North American Free Trade Area
Weekly, James K., Multinational Business Review
The prospect of establishing a North American Free Trade Area (NAFTA) has raised serious concerns regarding the so-called "Trojan Horse" issue. With regard to NAFTA, the fear is that foreign companies--particularly companies from Japan and the Asian NICs (Newly Industrialized Countries)--will utilize Mexico as an assembly site or distribution center from which their products will be "sneaked" into the U.S. market. Rules of origin have constituted the major defense against such incursions. However, there are many difficulties in applying and enforcing those rules, and those difficulties may be compounded by differing interests among the countries participating in a free trade agreement. This paper explores the Trojan Horse issue as it pertains to the North American Free Trade Agreement.
The current movement to form a North American Free Trade Area (NAFTA) made up of Canada, Mexico, and the United States has generated a great deal of anxiety in the U.S. over the so-called "Trojan Horse" issue. This refers to the possibility that nonmember countries will take undue advantage of a preferential trade arrangement in order to circumvent import barriers and gain easier access to the market of one or more member countries.
In the case of NAFTA, the crux of this issue is the possibility that Mexico might become a gigantic "export platform" or entrepot, via which products from other countries (notably Japan and the Asian NICs) will be "sneaked" into the American market. Simply stated, the fear is that companies headquartered in those countries will set up screwdriver-type assembly plants or distribution centers in Mexico, from which products will be shipped to the U.S. on an unrestricted, duty-free basis.
The principal defense that the U.S. and other countries have relied upon to counteract the Trojan Horse threat is to specify that concessions and benefits established in free or preferential trade agreements are available only to products originating the countries participating and/or designated in those agreements. The enforcement of these decrees requires the application of rules of origin, which are described as "laws, regulations, and administrative practices that ascribe a country of origin to products in international trade" (U.S. International Trade Commission, 1985).
Although this means of preventing nonparticipating countries from exploiting preferential trade agreements appears simple and straightforward, its application has been fraught with problems. Notwithstanding repeated efforts to develop uniform, objective tests or criteria for determining the actual origin of products, these criteria continue to be highly subjective and to vary widely from country to country. Moreover, establishing origin has become increasingly complicated in recent years, due to the proliferation of products traded internationally and the expansion of worldwide sourcing of materials and components by globally-integrated business firms (Banco Nacional de Mexico, 1991).
In addition to the many administrative problems associated with their interpretation and application, the use of rules of origin in preferential trade arrangements may be prone to an even more serious difficulty. This has to do with the possibility that the interests and motives of the countries participating in such arrangements will diverge significantly with respect to the Trojan Horse issue. Whereas some of the participants may be deeply concerned with preventing nonmember countries from "invading" their markets in this way, other participants may be willing or even eager to countenance such activities.
The Trojan Horse threat is inherent in free or preferential trade arrangements in which the participating countries maintain different external tariffs or other controls pertaining to imports from nonmember countries. The U.S. has become involved in several arrangements of this type in recent years, such as the Generalized System of Preferences (GSP), the Caribbean Basin Initiative (CBI), and bilateral free trade agreements with Israel and Canada. …