While most of the trade policy activities are focused on the WTO negotiations, serious thinking is continuing on how to improve U.S. economic performance by enhancing trade relations in North America through upgrading the NAFTA relationship. Agricultural trade is an integral part of that thinking. The “Recommendations for North American Economic Integration” from a new book titled NAFTA Revisited: Achievements and Challenges by Gary Clyde Hufbauer and Jeffrey R. Schott of the Institute for International Economics provides solid direction for upgrading NAFTA.

The authors point out that NAFTA has helped to promote economic integration to the benefit of citizens of all three countries. Specialization has increased and direct investment expanded in all three countries. With a few major exceptions, trade disputes have been relatively well managed. Canada and Mexico account for about one third of U.S. trade, but for only 26 of the 351 anti-dumping and countervailing duty orders in place. U.S. agricultural exports to Mexico and Canada have doubled since 1993 and account for a larger share of total U.S. agricultural exports today than in 1993.

Economic policy integration as pursued by the European Union is not the direction the authors believe should be taken to upgrade NAFTA. Concerns about sovereignty, the relative size of the three countries and disparities in wealth preclude the EU model from being a logical option. Rather than reopen the agreement, they “target the reduction or elimination of specific barriers to the movement of goods, services, capital and people where the economic benefits to the NAFTA partners are certainly large.” The focus is on enlightened self interest rather than tackling intractable problems. Despite focusing on the doable, they recognize that changes have to fit the “Big Idea” mold that gets the attention of policy makers who want to invest time and effort in making major economic policy progress.

One area of vital interest to farmers and ranchers is increased energy production. While some farmers who have invested in ethanol and biodiesel plants may have some concerns about increased energy production, the issue is more of increasing North American production to offset increased demands in the rest of the world. The Mexican petroleum and natural gas industries were left out of economic integration under NAFTA. While the U.S. and Canada are much more integrated on energy, more can be done to coordinate regulations that would lower costs and increase supplies.

The authors see opportunities for mutual recognition and convergences on regulatory issues in agriculture. One step would be to allow senior representatives of regulatory agencies of the other two countries to sit in when regulations are being considered that would impact the NAFTA partners. Cooperation on food health and safety measures and joint inspection programs would spread best management practices across the three countries, reduce unnecessary barriers to trade and boost confidence in the regional food supply. A crisis center could be established for immediate consultation on issues like BSE. The growing concern about bird flu is a headline example of a regulatory issue that cuts across all three countries and is immensely important to agriculture in all three countries.

The authors suggest that the three NAFTA staffs from each country be consolidated into one group and housed together in one building and jointly funded by the three countries. The NAFTA dispute settlement process should be strengthened and simplified. They also suggest that the WTO dispute resolution process be used rather than the NAFTA resolution process for anti-dumping and countervailing duty cases.

A recommendation that is controversial for U.S. agriculture is the establishment of common external tariffs (CET) and streamlined NAFTA rules of origin. This would likely take a long period of transition. One suggested approach is to have the countries with the two highest tariffs on a product begin moving tariff rates toward the country with the lowest tariff. Mexico is the country with the highest tariffs, but it also has many free trade agreements that result in lower effective tariff rates. An opportunity to begin the process may arise if the current WTO negotiations result in some “zero-for-zero” agreements to eliminate tariffs on selected industries. Movement on these issues will occur one industry at a time and for selected products within some industries because of the sensitive nature of some items, including many in agriculture.

The relationship between the U.S. and Mexico on agriculture in NAFTA is unique. While the agreement between the U.S. and Canada includes many exceptions for agricultural products, the U.S. and Mexico are to have completely free trade beginning in 2008. This provides a great opportunity for economic integration, but also additional challenges because Mexico has not reached the same level of industrial development as the U.S. Economic research shows that a 1.0 percent increase in per capita income is associated with a 0.6 percent decrease in agriculture as a percent of GDP. The NAFTA relationship will likely be blamed for conditions in Mexican agriculture that are actually the natural result of economic development.

Upgrading NAFTA is not an optional public policy effort. With the long borders that the U.S. shares with Canada and Mexico and naturally complementary economies, economic integration serves the economic interests of the citizens of all three countries. As the authors suggest, the best option is to look for areas of the three economies where the self interests of all three countries are best served and begin working on those issues.