A Friendly North American Initiative
by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Jeffrey J. Schott, Peterson Institute for International Economics
Op-ed in the National Post (Canada)
January 29, 2004
© 2004, National Post
North American economic integration faces an immediate challenge. After Sept. 11, 2001, the United States imposed new security measures that made it costly and cumbersome to move goods and people across borders. They created a zone of uncertainty around investment in Canada and Mexico. The threat of another terrorist attack risks a new round of onerous controls on cross-border flows. Clearly, joint action by the three NAFTA partners is essential to minimize that danger.
Still, by most standards, NAFTA has been a great success for all three countries, contributing to unprecedented growth in regional trade and investment. During its first decade, trade among the NAFTA partners doubled to about $600 billion, and direct investment in Mexico soared four-fold. However, not all trade problems were resolved and not all companies and workers have benefited. Better efforts must be made to address adjustment problems in each country; otherwise, NAFTA will not receive the political support needed to inspire fresh initiatives in its second decade.
The NAFTA partners have already worked closely to address the security imperatives of the post-Sept. 11 world. Renewed attention to the NAFTA agenda could help pre-empt another unilateral U.S. response to future terrorist attacks. The challenge is to find the right combination of economic and security initiatives that will spur political leaders of all three countries to put NAFTA at the top of their priorities. That means addressing U.S. concerns about security and energy, Mexican concerns about its overall economic development and the plight of its migrants, and Canadian worries about disincentives to trade and investment. While Canadians might argue that many of these issues could be handled bilaterally with the United States, the requisite U.S. political support requires simultaneous attention to U.S.-Mexican problems.
On trade, the three countries should move towards a common external tariff. While some farm products likely would have to be excluded, harmonizing tariffs on third country imports would remove significant distortions in the North American markets. The task is complicated because each NAFTA partner has free trade agreements with different third countries, but this is a technical hurdle, not an insurmountable obstacle.
For the United States, faster Mexican economic growth is critical to strengthening security on its southern border, while deeper co-operation with Canada on border-security initiatives is essential to ensure the efficient flow of goods and people. Mexico's economic prospects depend first and foremost on Mexican energy reforms. Foreign investment in that sector has been practically barred for the past seven decades. This should be a stand-alone priority for Mexico, but political realities require U.S. attention to the plight of Mexican migrants in the United States as an unstated quid pro quo. On migrant issues, U.S. President George Bush made a bold start with his call to regularize the status of illegal immigrants residing and working in the United States. Mexican leaders now need to show equivalent leadership on energy issues.
In that regard, the August 2003 blackout rekindled concerns over the adequacy of the regional electric grids and U.S. reliance on foreign sources of oil and gas. The U.S.-Canada energy infrastructure is reasonably integrated, but distribution of electricity and natural gas still faces obstacles. Working together in this area seems like a no-brainer, but the proposed projects are big and expensive, and politicians are vying for the spoils. Pure market forces, without the breath of government intervention, are seldom allowed unfettered play when it comes to major energy projects--neither in the United States nor Canada.
On migration, Ottawa, Washington and Mexico City can forge common visa standards for most non-NAFTA visitors and immigrants. This goal is highly significant from a security standpoint. For people arriving from outside the NAFTA region, the North American countries need a shared system for excluding non-NAFTA nationals who pose a security threat. NAFTA partners should create a special force to handle all third-country immigration controls at the first airport of entry into NAFTA space, and apply common document and biometric identification standards.
As with NAFTA, initiatives will have to come from Canada and Mexico—though not right away. The Bush administration will remain preoccupied with domestic politics, Iraq, and the war on terrorism through the U.S. election in November 2004. The window for NAFTA initiatives should open early in 2005. The U.S. president inaugurated in January 2005 could prove highly receptive to a friendly North American initiative—especially if trade-liberalization talks at the World Trade Organization and negotiations on a Free Trade of the Americas Accord stall, if the Middle East looks like a long and difficult slog, and if, by contrast, NAFTA promises concrete payoffs in terms of border and energy security.