Toward a North American community : lessons from the old world for the new /
Robert A. Pastor.
Washington, D.C. : Institute for International Economics, 2001.
xiii, 207 p. : ill.
0881323284, 9780881323283 (pbk.)
More Details
Washington, D.C. : Institute for International Economics, 2001.
9780881323283 (pbk.)
catalogue key
Includes bibliographical references and index.
A Look Inside
First Chapter

Chapter One

Redesigning NAFTA for the 21st Century

For the first time in history, all three countries of North America--Canada, Mexico, and the United States--held democratic national elections in the same year, 2000. Perhaps this was an omen that their political trajectories had begun to converge after two centuries in which their differences seemed far more important. The leading candidates for the highest office in each land debated issues intensely, but in all three countries, the agendas were almost exclusively domestic. The North American Free Trade Agreement (NAFTA), which had been so controversial a decade before, was barely mentioned, if at all, in any country. NAFTA's advocates did not take credit for it, although trade, investment, and social and economic integration had accelerated. Nor did the opponents of NAFTA bemoan its negative effects--the peso crisis in Mexico; the bailout organized and substantially funded by the United States; or the weak Canadian dollar. NAFTA, as politicians in all three countries informed me, was "not an issue anymore."

    It should have been. And it should be. NAFTA has been a scapegoat for disgruntled or uncompetitive groups in each country, but it has been a success for what it was designed to do. By reducing and eventually eliminating trade barriers among the three countries, NAFTA has generated spectacular growth in trade and investment while improving national productivity and competitiveness. And the soaring traffic has not been just in goods. In the last year of the 20th century, people legally crossed the US-Canadian border 200 million times and the US-Mexican one 300 million times. This amounts to nearly 1.4 million crossings a day. The integration that preceded NAFTA and was accelerated by it created striking opportunities for North America--but also dangerous vulnerabilities. The purpose of this book is to offer ideas on how the three governments can take advantage of the opportunities and take steps to reduce the vulnerabilities due to integration.

    What's wrong with NAFTA is not what it did, but what it omitted . The agreement did not envisage any unified approach to extract NAFTA's promise, nor did it contemplate any common response to new threats. NAFTA simply assumed that the peoples of North America would benefit from the magic of a free marketplace, and that the three governments would resolve old or new problems. But in the absence of a compelling vision to define a modern regional entity, and lacking institutions to translate that vision into policies, the old patterns of behavior among the three governments remained. This meant that the US penchant for unilateralism and the Canadian and Mexican preference for bilateralism have trumped NAFTA's promise of a novel trilateral partnership.

    Evaluations of NAFTA--both positive and negative--have tended to focus on the balance of trade and capital flows and the creation and loss of jobs. These are important issues, but they are hardly sufficient to take the pulse of such a complex, dynamic phenomenon. These fail, for example, to take into account the reorganization of large corporations with plants in all three countries, or the way in which environmental groups have reached across borders to press for higher standards, or the new alliances between labor unions in the United States and the Mexican government to assure the rights of migrants.

    Few analysts of NAFTA have sought to learn from the experience of the longest-running, most successful regional trading scheme, the European Union (EU). Few leaders have proffered a vision of a future relationship among the North American countries. The exception is the new president of Mexico, Vicente Fox Quesada. His inauguration on 1 December 2000 represented a historic change for Mexico--the first peaceful, democratic transfer of power in the country's history. Fox has studied the European Union's experience in integrating poorer countries on its periphery, and he boldly proposed replacing the Free Trade Area with a common market. George W. Bush, the new president of the United States, and Jean Chrétien, the reelected prime minister of Canada, both acknowledged the importance of the three-sided relationship and affirmed their interest in improving it. But neither defined the path to amelioration, nor did they signal any interest in establishing a common market.

    Fox was persistent, however. He invited Bush to his ranch in Guanajuato on 16 February 2001, and persuaded the new US president to endorse a joint communiqué entitled the Guanajuato Proposal, a fulsome statement of common goals and principles. "Among our highest priorities," the two presidents promised, "is unfettering the economic potential of every citizen, so each may contribute fully to narrowing the economic gaps between and within our societies." Fox and Bush went further, pledging to consult with the Canadian prime minister, and then "we will strive to consolidate a North American economic community whose benefits reach the lesser-developed areas of the region and extend to the most vulnerable social groups in our countries." Fox proposed that labor be permitted to move freely in North America, though he recognized that this might not be possible for 20 years or more, given the wide divergence in incomes. He suggested a compensation fund to assist the development of the poor regions of Mexico. He and his foreign minister, Jorge G. Castañeda, modeled their proposals on Europe's experience. Bush and Chrétien promised to study these ideas.

    This book aims to take the skeleton of Fox's idea and graft a body onto it. I will analyze NAFTA's successes and shortcomings, seek to draw some lessons from the European Union, and propose ways for NAFTA to incorporate and adapt those lessons.

The Crisis of 1994 and NAFTA's Flaw

On 1 December 1994, at the end of the first year of NAFTA, a new Mexican administration under President Ernesto Zedillo took office. Three weeks later, after allowing a 15 percent depreciation, his government let the Mexican peso float, and it sank like a stone, losing about 40 percent of its value. The first reaction by Robert Rubin, the director of the National Economic Council in the US administration of Bill Clinton--who had just been named Secretary of Treasury--was "to let the market sort it out." Soon after that, both governments began a long stumble that lasted more than a month before they could assemble a rescue package of $53 billion that would include $20 billion from the US Exchange Stabilization Fund. By the time the two governments reached an agreement, the initial damage had been compounded. Mexico's economy was in a shambles; its hopes of using NAFTA as a highway to the industrial world were dashed; 1 million jobs had been lost; and most of its major banks had failed.

    Moreover, NAFTA was so discredited that President Clinton, who had heralded it as a model for the hemisphere just weeks before the crash, barely uttered the phrase again in that or in his next term. The issue and the agreement seemed to disappear from the policy debate, not just in the United States but in all three countries. And the ripple effects of the peso crash extended far beyond North America. One week before, 9-11 December 1994, 34 democratically elected presidents in the Americas met at a summit in Miami and promised to negotiate by 2005 a Free Trade Area of the Americas (FTAA). The decade ended with that promise unfulfilled. Indeed, President Clinton could not even extract the authority from the US Congress to negotiate any trade agreements.

    This pivotal peso crisis had multiple causes. Mexico had suffered severe political setbacks during 1994, including the assassinations of the presidential candidate and secretary general of the governing Institutional Revolutionary Party (PRI). These events struck fear in the public and in the financial markets. Foreign capital began to flee. To reattract foreign investment, the Mexican government lifted interest rates and denominated its short-term bonds in dollars. By the end of the year, foreign investors had stopped buying the bonds and had begun to redeem them, causing a crisis of solvency that led to a wholesale exit of capital, much of it by Mexicans, and the resulting devaluation.

    In retrospect, some analysts believed the crisis was due to the lack of transparency in Mexico's financial system. No doubt Mexico's weaknesses played a role in the crash, but one also needs to look more closely at the flow of international capital. In 1993, large amounts of money moved to emerging markets like Mexico's, but the next year, when the economies of the industrial countries recovered, the capital returned.

    Some economists rang alarm bells in the fall of 1994 that Mexico's finances were overextended and its currency was overvalued, but the awkward truth is that policymakers in the three countries did not anticipate or plan for a financial crisis in the weakest member. NAFTA did not contemplate regular, high-level consultations, let alone any coordination among the three central banks or three treasury departments. The three leaders did not consult with each other. When Zedillo and his designee for finance minister traveled to Washington to meet with Clinton and his aides in November 1994, they were ready to request help from the United States, but they found Clinton utterly preoccupied by his party's loss of Congress in elections that month. Clinton's advisors had been in contact with their counterparts, but neither side proposed ways to preempt the catastrophe that some saw coming.

    The peso crisis has been analyzed in great detail elsewhere. It was due to an unfortunate collision between a political crisis and an overvalued peso. The premise of this book is that the peso crisis was also a metaphor for both the success and the inadequacy of NAFTA . The success was reflected in the expansion of trade and capital flows; the inadequacy was manifest in the lack of institutional capacity among the three governments to monitor, anticipate, plan for, or even respond to such a serious problem. NAFTA, in brief, was defined too narrowly, and the three governments paid a price for that myopia, albeit a price that varied among the three countries. Even worse, the three governments have not learned the lesson of 1994; they still apparently fail to understand the many dimensions of the phenomenon of North American integration.

    The inescapable conclusion is that similar collective problems will emerge in the future, although in different guises, and that there is no institutional capacity to address them. New leaders, lacking a historical memory, may well repeat the old mistakes. After decades of trying to resist the multiple pressures toward integration with the United States, the governments of Canada and Mexico recognized that their efforts were worse than fruitless; they had become counterproductive. They reversed course and negotiated an agreement that accelerated a process of social and economic integration among natural but very unequal trading partners. The agreement eliminates trade and investment barriers, but it assumes that the social, economic, and political consequences of dismantling those walls will be trivial. NAFTA's charter (with the partial exception of the side agreements on labor and the environment) overlooked the concept of "externalities"--that markets generate unintended but costly social, environmental, and political consequences.

    The "dark side" of integration also was ignored. As barriers to legitimate trade declined, the opportunities for illegitimate trade naturally increased. Governments cannot erase impediments to trade and travel between them without also facilitating drug trafficking, illegal migration, money laundering, and illicit arms sales. Indeed, this is both the supreme paradox and the most intractable problem associated with free trade areas: how can nation-states facilitate integration without widening opportunities for crime? Or conversely, how can governments retard or stop such crimes without unduly restricting legal trade?

    NAFTA's authors had incorporated a provision to allow each country to leave NAFTA if it failed, but there were no provisions to handle the "success" of freeing capital movements by institutionalizing consultation and, to the extent possible, coordination among the central banks. The three governments dealt routinely and usually bilaterally with such issues as drugs, immigration, debts, trucking, and taxes, but there were few if any mechanisms to relate these issues to each other or to NAFTA. As a result, one country's drug policies sometimes make it more difficult to address shared concerns on immigration, and policies on Mexico's repayment of its debt have the unintended effect of encouraging immigration. Because NAFTA is bereft of institutions, the three countries rarely see--let alone address--the connections between the problems or how implementing different policies may lead to their acting at cross-purposes.

    An extraordinarily complex process of integration is under way, but the three countries still tend to focus on one problem or one commodity, two countries at a time. The issues are drugs and immigration; the commodities are softwood lumber, sugar, fruit, and vegetables. We continue to bilateralize and compartmentalize, though these problems only fester when we do so. We have not allowed our imaginations to recognize and seize the opportunities presented by the emergence of a formidable new region.

    More than 400 million people live in the three countries of North America, which cover 21.3 million square kilometers of territory (see table 1.1). Their combined gross product in 1999 was nearly $10 trillion. In territory, population, and product, NAFTA is larger than the 15-nation European Union. There is a convergence among the countries on the rate of population growth, because Mexico's annual growth rate has declined sharply since the mid-1970s--from 3.4 to 1.9 in 1999. This growth rate still exceeds that of its northern neighbors, but Canada and the United States are virtually the only two industrial countries with net population growth--largely because of immigration--and of course, Mexico's population growth is diminished by emigration. The population profiles, however, are complementary, with Mexico's average population being much younger than its two northern neighbors. The life expectancy of Mexicans is also increasing faster than that of Americans and Canadians, but it is still 5-7 years behind. The level of education of its students remains quite low by Canadian and US standards.

    Of the many bonds of economic integration among the three countries, trade is growing fastest, and NAFTA has accelerated a trend that began in the mid-1980s (see table 1.2). In the past two decades, Mexico's total trade increased seven times; Canada's and the United States', more than three times. More significantly, all three countries' trade with each other increased at a far more rapid rate than world trade (see table 1.3). Canada and Mexico rely on the United States to purchase more than 80 percent of their exports, and the United States now sells more than a third of all its exports to its two neighbors. A thick web of commerce, finance, and interdependence has been spun across the continent of North America. But the challenge of integrating three such disparate economies is clearly beyond the capacity of NAFTA, as it is currently constituted.

Lessons from the Old World

Even as Canadians and Mexicans struggled to shore up their distinct currency crises, Europe was trying to combine 12 or more currencies into 1--a feat of heroic proportions in a world in which islands of 10,000 people demanded sovereignty. Across the ocean sat the longest-lasting, most successful experiment in integration among sovereign states--the European Union--and yet only a few considered drawing any lessons from its experience. This is partly because the origin, purpose, and composition of the European Union were quite different from those of NAFTA. The European Union was born of two cataclysmic wars and a fervent desire for peace; its purpose and model was to build a community; and its members were more equal in size and power than was true of NAFTA. In addition, many Americans were skeptical as to whether the experiment with a unified currency would succeed, and they also viewed the thick EU "social safety net" as a cause of Europe's higher unemployment and therefore as hardly a model worth replicating.

    There are two other reasons why the EU "model" was viewed as having limited relevance. First, the income disparity between Mexico and its two wealthy northern neighbors is much wider than that between poor and rich European countries, and therefore the prospect of reducing it seemed remote. Second, NAFTA is just a free trade area, whereas the European Union passed that threshold decades ago, on its way to becoming a customs union (with a common external tariff), a common market (with free movement of labor and capital), and finally an economic and monetary union.

    Nonetheless, having identified the differences, one could still profit from analyzing the EU experience. The European Union reduced the volatility that disproportionately harmed its weak economies. And, during 40 years of trial and error, the Union significantly narrowed the disparities in income between its rich and poor members. The question, therefore, is not whether the Union developed the ideal model, but whether there are elements of its experience that NAFTA could learn from, adapt, and adopt. We will examine Europe's policies to see which ones worked best to narrow the gap between rich and poor countries and which policies were least effective.

    The virtual disappearance of the issue of NAFTA from the politics of the three countries suggests that NAFTA may have descended to the peculiar resting place that controversial issues, like the Panama Canal treaties, go after terrible predictions about their impact are proven wrong or forgotten. It simply left the public's radar screen.

    Scholars, however, have continued to examine NAFTA, and several have looked at the European Union's experience for lessons. Let us review some of the literature. In The New American Community , Rosenberg views NAFTA as just one small step toward an entity that encompasses all the nations of the Americas and is almost indistinguishable from the European Union. His experience has been in Europe--not in the Americas--and thus it is not surprising that he borrows extensively from Europe's treaties and institutions and does little to adapt them. Indeed, his proposal verges on being almost a literal translation of the European Union into American, with an occasional modest change in language. For example, he suggests that an alternative name for a unifying Commission could be the "Executive Branch," but its role would be the same as that of the European Commission. It would initiate legislation, ensure the compliance of the three governments, administer common policies, and negotiate trade agreements with countries in other regions. The "Executive Branch" would be organized like the European Commission, with directorate-generals and cabinets. As in Europe, the Council of Ministers would be the principal decision-making body, deciding on legislation, coordinating members' economic policies, and so on.


Excerpted from TOWARD A NORTH AMERICAN COMMUNITY by Robert A. Pastor. Copyright © 2001 by Institute for International Economics. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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