NORTH AMERICAN FREE TRADE AGREEMENT ARBITRAL PANEL
ESTABLISHED PURSUANT TO CHAPTER TWENTY

1. The Dispute
   
   
   1. The Panel in this proceeding must decide whether the United States is 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.¹ Similarly, the Panel must decide whether the United States breached Articles 1102 (national treatment) and/or 1103 (most-favored-nation treatment) by refusing to permit Mexican investment in companies in the United States that provide transportation of international cargo. Given the expiration on December 17, 1995 of the Annex I reservation that the United States took to allowing cross-border trucking services and investment, the maintenance of the moratorium must be justified either under the language of Articles 1202 or 1203, or by some other provision of NAFTA, such as those found in Chapter Nine (standards) or by Article 2101 (general exceptions).²
      
      The Parties' views are summarized as follows:
      
      
   2. Mexico contends that the United States has violated NAFTA by failing to phase out U.S. restrictions on cross-border trucking services and on Mexican investment in the U.S. trucking industry, as is required by the U.S. commitments in Annex I, despite affording Canada national treatment.³ Mexico believes such failure is a violation of the national treatment and most-favored-nation provisions found in Articles 1202 and 1203 (cross-border services) and Articles 1102 and 1103 (investment).⁴
      
      
   3. Mexico also contests the U.S. interpretation of Articles 1202 and 1203, without arguing that the Mexican regulatory system is equivalent to those of the United States and Canada.⁵ According to Mexico, Mexican trucking firms are entitled to the same rights as U.S. carriers under U.S. law, that is "(i) consideration on their individual merits and (ii) a full opportunity to contest the denial of operating authority.⁶" Any other approach is a violation of Articles 1202 and 1203. During the NAFTA negotiations, both governments understood that "motor carriers would have to comply fully with the standards of the country in which they were providing service.⁷" However, the obligations of the Parties were "not made contingent upon completion of the standards-capability work program" or the adoption of an identical regulatory system in Mexico.⁸
      
      
   4. Mexico asserts that the U.S. conduct must be reviewed in light of Article 102(2) of NAFTA, which requires that the "Parties shall interpret and apply the provisions of the [NAFTA] Agreement in the light of its objectives set out in paragraph 1." Among others, the objectives include eliminating barriers to trade in services and increasing investment opportunities "in accordance with applicable rules of international law.⁹" Mexico contends that the U.S. conduct does not further these objectives.
      
      
   5. According to Mexico, "There are no exceptions to the relevant NAFTA provisions that could even potentially be applicable.¹⁰" Mexico contends that the U.S. failure to implement its cross-border trucking services and investment obligations is not justified by the standards provisions contained in Chapter Nine (standards) nor by Article 2101 (general exceptions), particularly in light of the fact that when NAFTA was negotiated the United States was well aware that Mexico's regulatory system was significantly different from those operating in the United States and Canada.¹¹
      
      
   6. Mexico charges that the U.S. inaction is motivated not by safety concerns but by political considerations relating to opposition by organized labor in the United States to the implementation of NAFTA's cross-border trucking obligations.¹²
      
      
   7. The United States argues that because Mexico does not maintain the same rigorous standards as the regulatory systems in the United States and Canada, "the in like circumstances" language in Article 1202 means that service providers [from Mexico] may be treated differently in order to address a legitimate regulatory objective.¹³ Further, since the Canadian regulatory system is "equivalent" to that of the United States, it is not a violation of the most-favored-nation treatment under Article 1203 for the United States to treat Canadian trucking firms which are "in like circumstances" vis-a-vis U.S. trucking firms in a more favorable manner than Mexican trucking firms.¹⁴
      
      
   8. According to the United States, the inclusion in NAFTA Articles 1202 and 1203 of the phrase "in like circumstances" limits the national treatment and most-favored-nation obligations to circumstances with regard to trucking operations which are like, and that because "adequate procedures are not yet in place [in Mexico] to ensure U.S. highway safety," NAFTA permits AParties to accord differential, and even less favorable, treatment where appropriate to meet legitimate regulatory objectives.¹⁵"
      
      
   9. The United States believes its interpretation is confirmed by Article 2101, which provides that:
      
      

      nothing in . . . Chapter Twelve (Cross-Border Trade in Services) . . . shall be construed to prevent the adoption or enforcement by any Party of measures necessary to secure compliance with laws or regulations that are not inconsistent with the provisions of this Agreement, including those relating to health and safety and consumer protection.¹⁶
      

   10. The United States also rejects Mexico's contention that the U.S. failure to implement Annex I with regard to cross-border trucking services and investment was politically motivated. At best, the United States contends, political motivation is "only of marginal relevance" to this case in the sense that highway safety has generated controversy in the United States.¹⁷ Moreover, the United States asserts that WTO practice is to avoid inquiring into the intent of parties accused of WTO violations.¹⁸ The issue, rather, is "whether Mexico has met its burden of proving a violation by the United States of its NAFTA obligations."¹⁹ 
       
       
   11. Canada, which exercised its right to participate in accordance with Article 2013, insists that the major issue in interpreting Article 1202 is a comparison between a foreign service provider providing services cross-border (here, from Mexico into the United States), and a service provider providing services domestically. Canada also contends that a "blanket" refusal by the United States to permit Mexican carriers to obtain operating authority to provide cross-border trucking services would necessarily be less favorable than the treatment accorded to United States' truck services in like circumstances.²⁰ Canada also asserts that the United States is precluded from relying on Chapter Nine because levels of protection established under Chapter Nine must still be consistent with the national treatment requirements of Article 1202 and other NAFTA provisions.²¹

    
   

2. Terms of Reference
   
   
   12. Since the Parties did not provide to the Panel an agreed Terms of Reference, under Article 2012:3, the terms of reference for this Panel are:
       
       

       To examine, in the light of the relevant provisions of the Agreement, the matter referred to the Commission (as set out in the request for a Commission meeting) and to make findings, determinations and recommendations as provided in Article 2016(2).
       

   13. Mexico requested a Commission meeting in a letter dated July 24, 1998 addressed to U.S. Trade Representative Charlene Barshefsky. The letter included the following language which, under Article 2012:3, serves as the terms of reference for this proceeding:
       
       

       The Government of Mexico considers that the refusal of the U.S. to grant a certain amount of access to the Mexican transporters, and permitting Mexican persons to establish with the intent to provide transport services, according to the provisions of NAFTA, constitutes a violation of the obligations of liberalizing trade in this sector, as the U.S. obligated itself by Annex I of NAFTA, in addition to breaching other provisions of the treaty, including Chapter Twelve and could cause nullification and impairment of the benefits that Mexico reasonably expects to receive from the treaty.

        

   14. The following abbreviations (in alphabetical order) are used herein:
        
       
       

       CS	Canada's Submission
       GAO	U.S. General Accounting Office
       FHWA	U.S. Federal Highway Administration
       FMCSA	U.S. Federal Motor Carrier Safety Administration
       FMSCR	U.S. Federal Motor Carrier Safety Regulations
       FTA	Tratado de Libre Comercio Estados Unidos-Canad� (siglas en ingl�s)
       GATT	General Agreement on Tariffs and Trade
       ICC	U.S. Interstate Commerce Commission
       MFN	Most-Favored-Nation
       MIS	Mexico's Initial Submission
       MPHS	Mexico's Post-Hearing Submission
       MRB	Mexico's Reply Brief
       MSRB	Mexico's Comments on the Request for a Scientific Review Board
       NAFTA	The North American Free Trade Agreement
       SECOFI	Mexico's Secretary of Commerce and Industry
       SRB	Scientific Review Board
       TLCAN	Tratado de Libre Comercio de Am�rica del Norte
       TR	Transcript of the Hearing
       USCS	United States' Counter-Submission
       USDOT	U.S. Department of Transportation
       USPHS	United States' Post-Hearing Submission
       USSS	United States' Second Submission
       USTR	United States' Trade Representative
       WTO	World Trade Organization

       
       

15. In a letter to then-United States Trade Representative ("USTR"), Michael Kantor, dated December 18, 1995, Mexico's Secretary of Commerce and Industry ("SECOFI"), Herminio Blanco, requested consultations pursuant to NAFTA Article 2006, regarding the refusal of the United States Government to allow Mexican trucking firms to provide cross-border trucking services into the border states.
    
    
16. Responding on December 20, 1995, Ambassador Kantor stated that Mexico and the United States had decided to seek agreement on further safety and security measures, and that the United States was not aware of any action or proposed action by the United States government which could give rise to a request for consultation under Chapter Twenty. This letter also stated that the initiation of Chapter Twenty proceedings could adversely affect the work currently being undertaken by both countries' transportation officials on such measures.
    
    
17. In a letter dated December 21, 1995, Secretary Blanco replied to Ambassador Kantor, re-affirming Mexico's request for consultations in light of the obligation of NAFTA to allow cross-border truck service. Secretary Blanco denied that there had been a decision to modify or postpone any of the Parties' NAFTA obligations.
    
    
18. On January 19, 1996, consultations were held between the United States and the Mexican governments under Article 2006 of NAFTA. The consultations failed to resolve the dispute.
    
    
19. In a letter to U.S. Trade Representative Barshefsky, dated July 24, 1998, Secretary Blanco, in accordance with NAFTA Article 2007, requested a meeting of the NAFTA Free Trade Commission "based on the refusal of the [United States] to permit (i) access to Mexican transporters [from Mexico] to the States of California, New Mexico, Arizona and Texas, and (ii) Mexican persons [to establish enterprises] with the intent to provide international trucking services between points in the territory of the [United States]."²²
    
    
20. On August 19, 1998, a meeting of NAFTA Free Trade Commission took place. However, the Commission was unable to resolve the dispute.
    
    
21. On September 22, 1998, the Government of Mexico requested the formation of an arbitral panel to hear the dispute pursuant to NAFTA Article 2008(1).²³
    
    
    
22. On December 10, 1999, the United States requested consultations with Mexico on Mexico's alleged reciprocal denial of access of United States trucking service providers to the Mexican domestic market. The United States also requested that the cross-border trucking services action brought by the United States against Mexico, if it proceeded to a panel, be combined with the present proceedings. The consultations between Mexico and the United States took place on January 7, 2000, but they failed to resolve the issue or to result in an agreement to combine the two matters before a single panel.
    
    
23. On February 2, 2000, the Panel was constituted in accordance with the relevant provisions of NAFTA by the appointments of Luis-Miguel Diaz, David A. Gantz, C. Michael Hathaway, J. Martin Hunter (Chair), and Alejandro Ogarrio as members.²⁴
    
    
24. Also on February 2, 2000, the United States requested a meeting of NAFTA Free Trade Commission to discuss Mexico's alleged reciprocal denial of access and again requested a consolidation of the two cases. The United States has never officially requested the formation of a panel on this issue. Mexico contends that Mexico did indeed amend its laws and regulations to implement NAFTA, and the United States did not respond to Mexico's request to provide information supporting the U.S. complaint.²⁵ Since that time, neither the United States nor Mexico have communicated further with the Panel regarding this issue nor discussed it in their submissions. Mexico has also initiated a NAFTA dispute settlement proceeding against the United States regarding its refusal to authorize Mexican carriers to provide cross-border scheduled bus service. However, there has been no further discussion on that issue before the Panel. Consequently, the Panel does not consider that either of these matters are before this Panel for decision.
    
    
25. On February 14, 2000, Mexico transmitted its initial submission to the NAFTA Secretariat, U.S. Section. On February 23, 2000, the United States transmitted its counter-submission to the NAFTA Secretariat, U.S. Section. 
    
    
26. In accordance with NAFTA Model Rules of Procedure for Chapter Twenty ("the Model Rules"), the Panel requested the Parties to comply with the following schedule for further proceedings:
    
    April 3, 2000 Mexico to file a second written submission
    
    April 24, 2000 United States to file a second written submission
    
    April 24, 2000 Canada to file a third party submission
    
    May 17, 2000 Hearing in Washington, D.C.
    
27. Canada filed its third party submission on February 22, 2000. On April 3, 2000, Mexico submitted its second written submission and on April 24, 2000, the United States submitted its second written submission.
    
    
28. In a letter dated May 16, 2000, the United States requested that the Panel establish a Scientific Review Board pursuant to Article 2015 of NAFTA.
    
    
29. The hearing was held, as scheduled, in Washington D.C. on May 17, 2000. The Parties, Canada and the Panel reviewed the issues presented in the written submissions, including the U.S. request for the appointment of a Scientific Review Board. After hearing the Parties, the Panel invited the United States to supplement its request by identifying with adequate specificity the proposed terms of reference of any Scientific Review Board.
    
    
30. At the hearing, the Panel also requested that the Parties file post-hearing submissions by June 1, 2000. By letter dated May 26, 2000, the Parties informed the Panel that they had mutually agreed to extend the time limit for the delivery of post-hearing submissions to each other and the Panel until June 9, 2000, due to the late receipt of the transcript of the proceedings. On June 9, 2000, the United States and Mexico filed their respective post-hearing submissions.
    
    
31. After reviewing the submissions of the Parties, the Panel issued an order on July 10, 2000 declining to request the establishment of a Scientific Review Board.
    
    
32. The Panel met on several occasions for deliberations before completing an Initial Report which was presented to the Parties on November 29, 2000.
    
    
33. On December 13, 2000, the Parties provided the members of the Panel with their comments on the Initial Report.
    
    
34. On January 5 and January 8, 2001, in response to a request from the Secretariat on behalf of the Panel, the Parties provided responses to the comments of December 13.