On a recent visit to Canada to promote trade and investment, Mexican President Vicente Fox talked about transforming North America into a “region of co-operation and integration.” The now 10-year old North American Free Trade Agreement (NAFTA) was the formal government response to a process of integration that began 300 years ago as European settlers brought increased economic activity to the North American continent. Going beyond the current NAFTA structure will require a change in strategic thinking and a melding of disparate economic policies.
That the three countries in NAFTA are already partially integrated is evident. In terms of overall trade, both Canada and Mexico are major trading partners of the United States. Total U.S. exports to Canada in 2003 were $169.5 billion dollars, and total imports from Canada were $224.2 billion dollars. On a per capita basis, Canadians imported $5,264 of products from the United States, while citizens of the U.S. imported $773 per capita from Canada. Total exports from the United States to Mexico were $97.5 billion in 2003, while imports were $138.1 billion. Mexicans imported $940 per capita from the United States, while U.S. citizens imported $476 per capita from Mexico.
Agricultural trade is no less important for the three countries. In 2003 Canadians bought $9.3 billion of U.S. agricultural products, while agricultural imports from Canada totaled $10.3 billion. On a per capita basis, Canadians bought $289 of U.S. agricultural products, while residents of the U.S. purchased $36 per capita of Canadian products. U.S. agricultural products exported to Mexico totaled $7.6 billion, while imports to the United States from Mexico were $6.3 billion. As with Canada, on a per capita basis Mexican imports where higher than U.S. imports, with Mexicans buying $73 per capita and U.S. residents buying $22 per capita from Mexico.
As impressive as the trade numbers are, just increasing trade is not the heart of economic integration. President Fox talked about broadening the agreement into “NAFTA plus” to “help protect the economies of all three countries.” Despite the fact that the U.S. economy is the largest in the world, we are not able to do everything. Fox noted that Mexico and Canada are major petroleum producers and the United States is a major importer. Mexico has a large supply of low skilled labor that needs capital and access to technology to compete with low priced labor in countries like China. The goal of NAFTA plus would be “to make it easier for a company to have its financial operations in one member country, its research and development in a second, and its manufacturing in a third, whichever was most economically advantageous.”
While the ideas of President Fox are well worth considering, the reality is that after 10 years of NAFTA these ideas are little more than a pipedream. While many hurdles have to be overcome to achieve this type of integration, a few major ones quickly come to mind.
Many agricultural producers remember the 50 percent devaluation of the Mexico peso that occurred less than a year after NAFTA began. U.S. fruit and vegetable producers were immediately put at a disadvantage they could not overcome through other means. While the Canadian and U.S. dollars have not faced such a sudden change in relative values, there has been enough variation to favor one country over the other. Further integration of the three economies can only occur if monetary policies are more closely aligned.
Regulatory policy is a second area where better coordination has to occur. The North American beef industry was becoming integrated along the ideas espoused by President Fox until cases of BSE, first in Canada and then in the United States, brought it to a halt. Now Canadian cattle producers consider the industry too integrated and talk of going it alone in both domestic and international markets.
A third area of concern is domestic subsidy and support programs. The long-simmering dispute with Mexico over sugar and high fructose corn syrup is a good example of the problems. The recent ruling that Canadian pork is being subsidized is another. Disputes about the Canadian Wheat Board and imports of wheat into the United States are other examples of challenges.
Pointing up areas of policy disputes is not meant to throw cold water on the idea of further integration. The key point is that further integration will involve much more than just resolving trade issues. If politicians of the three countries are going to overcome the natural resistance to dealing with difficult policy issues, they will need to recognize that each country has much to gain economically by working together.
The good news is that interest groups are beginning to realize that NAFTA by itself is not enough. In mid-October the Council on Foreign Relations announced the formation of an independent task force “to examine regional integration since the implementation of the North American Free Trade Agreement ten years ago.” Policy issues to be addressed include deepening economic integration, harmonizing regulatory policy and devising better institutions to manage conflicts that inevitably arise from integration and exploit opportunities for collaboration.
NAFTA was an appropriate trade policy response to the economic conditions of the early 1990s. The world has changed radically in the last 15 years. If the North American economy is to keep up with the fast paced changes in the rest of the world, sharp minds need to study how NAFTA plus can help the three countries achieve economic efficiencies through further integration.