North American Integration and NAFTA's Future

NAFTA was a huge step in the direction of North American Integration.  For proponents of the idea, North American Integration is a far from finished project.  I would like to spend some time examining the outlines of this project.  My text for this discussion of the North American idea is North America: Time for a New Focus, an Independent Task Force Report for the Council on Foreign Relations, written in 2014 and chaired David Patreaus (former commander of U.S. forces in Iraq and Afghanistan) and Robert Zoellick, former U.S. Trade Representative.         

I would preface this discussion with recent news from U.S. trade policy under Donald Trump.  Trump is turning away from multilateralism in U.S. foreign economic policy in favor of bilateral relations.  He has recently decided to impose steel and aluminum tariffs on Mexico and the Canada.  Mexico has announced the imposition of counter-tariffs on U.S. goods.  Canada is still considering its response.  Larry Kudlow, Trump’s top economic adviser, appeared on Fox and Friends (June 5) and announced that Trump would like to negotiate bilateral trade deals with both Mexico and Canada, but added that he does not want to withdraw from NAFTA. This is another blow to NAFTA.  The previous Trump positions were to increase domestic content rules for U.S. automobiles to 60%, which would drive many Mexican based producers out of automotive supply chains, and a five year sunset provision for the trade agreement as a whole, which would diminish investor confidence in the long term nature of the agreement.  Trump thinks that the U.S. can get more from bilateral negotiations.  He even wants to extend this approach to the Europe and negotiate bilateral trade treaties with each of the U.S.’s European trading partners.  Of course, this reflects a zero sum view of trade in which the United States, as largest economic player, is able to “win” each of its bilateral negotiations. 

This flies in the face of economic common sense.  Whether this economic common sense is good sense or not is another matter.  For now, we might focus on Adam Smith’s discussion of the division of labor.  The more the division of labor is developed, the more productivity of labor increases.  The development of the division of labor takes place across space, so the more spatially extensive the division of labor, the more the division of labor can develop, opening up new pathways of mutually advantageous growth.  Smith’s division of labor logically leads toward the integration of national markets into a global economy.  In the world of international relations, the path to globalization leads through regionalism.  This was the hopeful prognosis of the post-Cold War world.  The Western hemisphere, Europe and East Asia would organize themselves as economic regions that operate along similar lines so the global economy would be anchored in a strategic triad of core regions.

The point of all this would be to open up spaces for transnational capital to productively circulate and generate economic growth and improved well-being as a result.  Through policy coordination and regulatory harmonization – which lies at the heart of regionalism – growth-inducing transnational economic flows of capital, goods, and people (at least, high value people) would become embedded within de-nationalized territorial spaces.  The term de-nationalized refers to the idea that the nation is no longer the primary referent of the state.  Governments at all different levels are concerned with securing the most advantageous insertion of their jurisdictions into the world market.  As events like Brexit or the election of Donald Trump remind us, this project has hit some snagss.  Trump’s bilateralism is antithetical to this conception of economic progress which in the expansion of the division of labor and a corresponding expansion of market society.

With these points in mind, let’s look more carefully at the North American idea.  Our goal here is to understand how Mexico could be linked to this progressive project.   This is a project that has been the basis of U.S. – Mexican relationships since the 1980s.  It may be a project that experiences renewal in some post-Trump era, but at the moment, it is crisis. 

In their report, the Council on Foreign Relations identifies NAFTA as foundation for a deepening of North American cooperation, which should aim to “achieve the free and unimpeded movement of goods and services across North America’s internal borders.”   An integrated North America would establish “a continental base” for the United States – “a starting point for its geo-economic and geopolitical perspectives.” (9)  The time for such an initiative (2014) is propitious as a result of rising energy, transportation, and labor costs in China as well as endemic concerns about Chinese violations of intellectual property rights.  The focus of integration can be shifted from East Asia to North America.  Mexico can accommodate economic integration because its politics is rooted in competitive democracy and its society is “increasingly shaped by a solid middle class with expanded links around the world” (10).  New energy sources developed in North America provide opportunities for region wide growth if they can be harnessed to the creation of integrated energy infrastructures which can move energy both within North America and into global markets.

The extent of current North American integration often goes unnoticed.  Within the automotive industry, for example, three out of every four export dollars stays within the region (31).  Other key sectors are also deeply intertwined within North America:  “81 percent of the region’s personal and household goods were absorbed back into North America along with 73% of iron and 72% of clothing.  In all, intra-regional exports accounted for 48% of North America’s total exports in 2012” (31).  Services and investment were also vectors of regional integration.  These flows “have enabled the United States, Mexico and Canada to become more efficient and competitive together” (32). 

Immigration represents another area in which shared growth between the United States and Mexico is possible.  The era of massive immigration of Mexicans to the United States is over – and has been over since the onset of the Great Recession in the United States in 2008.  Much of these immigration flows were driven by a combination of Mexico’s population growth, the impact of neoliberal reforms, which dislocated millions of Mexican farmers and workers, and a relatively porous U.S. – Mexican border.  

These circumstances have changed:  the U.S. border is how heavily militarized and difficult to cross and Mexican population growth is now much lower.  Mexican poverty is still high, however:  around 50% of Mexico’s 125 million people live in poverty.  Contrary to the way in which NAFTA was sold to Mexican and American publics, economic integration has not alleviated Mexican poverty or economic inequality.  But, contends the Report, the wealth enhancing possibilities of economic integration are far from exhausted. Mexico can improve its public education and attract investment that will employ more highly skilled and better remunerated labor.   The United State can enact immigration reform:  part of this reform should consist of creating legal channels for Mexican workers to emigrate to the United States – as guest workers – and part should focus on legalizing the status of the millions on undocumented Mexicans that are now living and working in the United States.  These policies would enhance the comparative demographic advantage that North America enjoys in relationship to other core regions with the global economy – 22% of North America is under thirty years old compared to only 16% in Europe and China (46).                    

The promises of North American integration are more and more becoming a lost opportunity.  This is not only because of the Trump administration’s hostility to Mexico and multilateralism.  The roots of lost opportunities extend back to 2001, the year when North American integration slowed due to the entry of China into the WTO and the attacks of 9/11.  China attracted more investment after 2001 and the United States slowed down North American integration due to post-9/11 security concerns.  As a result, many of the limitations on economic integration that NAFTA did not resolve remained in place.  These included cumbersome regulatory procedures to demonstrate and satisfy NAFTA’s rules of origins (these stipulate that a certain percentage of a commodity must be produced in North America in order to qualify for duty free treatment).  Multiple U.S. agencies deal with customs clearances.  Regulatory redundancies between Canada, the United States and Mexico also increase the transactions costs of regional integration.  Limitations on trucking throughout the North American region require Mexican goods to be repacked into the U.S. trucks driven by U.S. drivers at the U.S. border.  At the border itself, the lack of new land bridges linking Mexico and the United States combined with increased in the total volume of commerce passing through these ports means increased wait times for goods and people.  In all of these respects, failures to streamline the economic integration achieves under NAFTA has increased the the transaction costs of NAFTA and thereby discouraged deeper economic integration.  By some indicators, U.S. – Mexican integration has declined:  for example, the number of cars passing through U.S. ports declined from 129 million in 2000 to 95 million in 2012 while total passengers fell from 329 million to 177 million (46).         

There is no security related justification for these costs because security and efficiency are not mutually exclusive goods.  It is possible and indeed necessary to have both:  more security means more integration, whereas the lack of security impedes integration.  Fortunately, the United States has been successful providing Mexico with foreign aid to support to combat narco-trafficking cartels and to maintain the rule of law within Mexico’s national territory.  The Merida Initiative represents successful security cooperation between Mexico and the United States, which is modeled on Plan Colombia.  Notable in both cases is how the provision of security through the strengthening of state law enforcement capacity creates a framework for economic expansion driven by the expansion of foreign investment.  In Mexico, a reformed law enforcement system is shifting the quasi-judicial powers of public prosecutors to determine the guilt criminal suspects to a more autonomous and independent judiciary – a constitutional reform supported by the Merida Initiative, which should diminish political corruption in law enforcement.                                           

The U.S., contends the authors of this report, is misallocating foreign aid assistance resources.  Mexico’s foreign aid allocations from the United States rose from $70 million in 2005 to $250 million between 2011 and 2014 – increases that correspond to the bulk of Plan Merida funding, but they will fall back to $130 million in 2015.  U.S. outlays in Afghanistan, by comparison, are $2 billion (47-48).  Arguably, the United States has more vital interests to pursue in Mexico and – in terms of shared economic growth – more benefits to the be realized.  To return to Adam Smith, the productivity enhancing benefits of regionally scaled divisions of labor do not manifest themselves spontaneously; they need to be brought into existence through a concerted program of reform.  The Trump administration is currently casting a dark shadow over North American integration, but this is temporary.  The arguments formulated by the Council on Foreign Policy in 2014 are still valid today and will remain so in the future.  Economic integration represents progress and anything else – like, for example, renewed economic nationalism – is just an historical dead end.

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What I have done here is use to a 2014 report from the Council on Foreign Policy to make the case for North American integration.  A critique can be formulated of this agenda and, indeed, must be formulated in order to respond to the upsurge of populism and nationalism across the world.  Singing the praises of globalization, as the CFP and other encoders of neo-liberalism are wont to do, no longer represents a pathway forward – if, in fact, it ever did.  The text that I would draw upon to formulate this critique is Joseph Stiglizt’s Globalization and Its New Discontents (Norton, 2017).  But this is for another post.