North America's Second Decade

Robert A. Pastor

From Foreign Affairs, January/February 2004

Summary:  In just ten years, NAFTA has created the world's most formidable free trade area. But in the absence of true partnerships and multilateral institutions, movement toward further regional integration has slowed. The United States, Mexico, and Canada have many common interests; they need to pursue them in common ways.

Robert A. Pastor is Professor of International Relations and Director of the Center for North American Studies at American University. He is the author of Toward a North American Community: Lessons from the Old World for the New.

Few of these prophecies have been borne out. The United States experienced the largest job expansion in its history in the 1990s. Although both Mexico and Canada attracted considerable new U.S. investment (since NAFTA gave them privileged access to the U.S. market), the percentage of U.S.-owned companies in each country did not increase. (In fact, Canadian investment in the United States grew even faster than did U.S. investment in Canada.) In Mexico, income disparity did worsen, but only because those regions that do not trade with the United States grew much more slowly than those that do; the problem was not NAFTA, but its absence. Environmental standards in Mexico have actually improved faster than those in Canada and the United States, and Mexico's 2000 election was universally hailed as free and fair. And although Mexico and Canada became more dependent on the U.S. market, as opponents of integration warned, the reverse also happened: U.S. trade with its neighbors grew roughly twice as fast as did its trade with the rest of the world. By 2000, in fact, the United States imported 36 percent of its energy from its most important trading partners -- Canada and Mexico -- and exports to its neighbors were 350 percent greater than exports to Japan and China and 75 percent greater than exports to the EU.

So much has been attributed to NAFTA that it is easy to forget that it was simply an agreement to dismantle most restrictions on trade and investment over the course of ten years. With a few notable exceptions -- such as trucking, softwood, lumber, and sugar -- where U.S. economic interests have prevented compliance, the agreement largely succeeded in what it was intended to do: barriers were eliminated, and trade and investment soared.

In the 1990s, U.S. exports to Mexico grew fourfold, from $28 billion to $111 billion, and exports to Canada more than doubled, increasing from $84 billion to $179 billion. Annual flows of U.S. direct investment to Mexico, meanwhile, went from $1.3 billion in 1992 to $15 billion in 2001. U.S. investment in Canada increased from $2 billion in 1994 to $16 billion in 2000; Canadian investment flows to the United States grew from $4.6 billion to $27 billion over the same period. Travel and immigration among the three countries also increased dramatically. In 2000 alone, people crossed the two borders 500 million times. The most profound impact came from those people who crossed and stayed. The 2000 census estimated that there were 22 million people of Mexican origin in the United States, about 5 million of whom were undocumented workers. Nearly two-thirds of these have arrived in the last two decades.

North America is larger than Europe in population and territory, and its gross product of $11.4 trillion not only eclipses that of the EU (and will even after the EU expands to 25 nations in May 2004) but also represents one-third of the world's economic output. Intraregional exports as a percentage of total exports climbed from around 30 percent in 1982 to 56 percent in 2001 (compared to 61 percent for the EU). As in the auto industry -- which makes up nearly 40 percent of North American trade -- much of this exchange is either intraindustry or intrafirm. Both industries and companies have become truly North American.

But although NAFTA has successfully increased trade and investment, it has failed to confront some of the major challenges of integration. This failure has not only harmed the three countries, it has also seriously undermined support for the agreement, thus preventing North America from seizing opportunities for further progress.

First, NAFTA was silent on the development gap between Mexico and its two northern neighbors, and that gap has widened. Second, NAFTA did not plan for success: inadequate roads and infrastructure cannot cope with increased traffic. The resulting delays have raised the transaction costs of regional trade more than the elimination of tariffs has lowered them. Third, NAFTA did not address immigration, and the number of undocumented workers in the United States jumped in the 1990s from 3 million to 9 million (55 percent of whom came from Mexico). Fourth, NAFTA did not address energy issues, a failure highlighted by the catastrophic blackout that Canada and the northeastern United States suffered last August. Fifth, NAFTA made no attempt to coordinate macroeconomic policy, leaving North American governments with no way to prevent market catastrophes such as the Mexican peso crisis. Finally, NAFTA did nothing to address security -- and as a result, the fallout from September 11 threatens to cripple North American integration.

OLD LESSONS FROM NEW EUROPE

The thread that connects these failures is the lack of true trilateral cooperation. Integration has usually taken the form of dual bilateralism -- U.S.-Mexican and U.S.-Canadian -- rather than a continental partnership. The recent negotiation of "smart" border agreements after September 11 is a good example: instead of creating a uniform North American standard, Washington signed separate but almost identical treaties with its neighbors. The failure to construct multilateral institutions has been largely deliberate. Canada often thinks that it can extract a better deal from the United States when acting alone (a claim for which there is no evidence). And because Washington is not in a multilateral mood these days, Mexico has been the lone advocate of trilateral cooperation. Successful integration, however, requires a new mode of governance in North America, based on rules and reciprocity.

The European experience with integration has much to teach North American policymakers, provided one understands the clear differences between the European and North American models. European unity grew out of two cataclysmic wars, and its principal members are comparable in terms of both population and power. The per capita GDP of the EU's wealthiest nation (Germany) is roughly twice that of its poorest (Greece), while the per capita GDP of the United States is nearly six times that of Mexico. North America's model has a single dominant state and has always been more market-driven, more resistant to bureaucracy, and more deferential to national autonomy than Europe's; these elements will always distinguish the two. But despite these differences, 50 years of European integration should teach North American policymakers that they must address the failures and externalities of an integrating market -- whether currency crises, environmental degradation, terrorist threats, infrastructural impediments, or development gaps.