Toward A North American Common Market

Problems And Prospects For A New Economic Community

Charles F Bonser

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000009668
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This is an examination of both the advantages and the problems posed by the notion of a North American economic union. Scholars and government representatives from the United States, Canada and Mexico exchange views and explore not just the economic implications but also the likely social and political consequences of economic integration. A varie

1
Introduction

Charles F. Bonser

The United States, Canada, and Mexico clearly have complementary strengths that could benefit from closer economic ties. The idea of moving toward economic integration between the three countries is, therefore, not new, and has been raised, from time to time, by various individuals or organizations. Indeed, President Reagan proposed a "North American Common Market" during his first campaign for the Presidency. President Bush, in his 1988 campaign, also promised to work toward a North American free trade zone. Thus, in spite of the fact that there are very real political and economic problems associated with expanding the US-Canadian Free Trade Agreement to include Mexico, it is not surprising that current events have made such a prospect more than theoretical.

The agreement between the United States and Canada to establish a Free Trade Area to be fully effective by 1998 offers a major pillar for a North American Economic Community. Mexico, under new political leadership, has retreated from its previous pattern of economic protectionism, and has been undertaking reforms that have substantially improved its economic climate and its ability to contribute to and profit from a freer trading framework. In June 1990 the Mexican Senate approved a move to seek an FTA with the United States. President Salinas commented at that time, "Mexico will not be left out of the new world configuration. The speed of the changes requires decisive answers on all fronts, in all markets."

Factors external to North America are obviously affecting the timeliness of such a possibility. These include:

1. The European Community's efforts to finalize their own economic integration by 1992, and the uncertain nature of its future trade posture vis-à-vis non-European nations. The EC also has negotiations underway with the EFTA states (Austria, Finland, Norway, Sweden, Switzerland, Iceland) concerning future trade relations, and has undertaken preliminary discussions with several Eastern European countries about the future of their economic relations with the Community.
2. Australia and New Zealand have an established Free Trade Area, and have initiated discussions for an Asia-Pacific "regional cooperation organization." The Association of Southeast Asian Nations (ASEAN) officials (Thailand, Indonesia, Malaysia, the Philippines, and Brunei) have expressed concern about the EC 1992 changes, and the Europeans' past record of erecting trade barriers such as market sharing, quotas, and local content requirements. At their July 1990 meeting in Jakarta there was much discussion about trade cooperation, and indications that ASEAN would open treaty negotiations.
3. There has so far been a notable lack of accomplishment in the current Uruguay Round of Talks on the General Agreement on Trade and Tariffs (GATT). If the talks conclude in December 1990 without considerably more progress than has been indicated so far, it is likely that there will be more interest in the establishment of regional trading blocs in the world economy. As regrettable as some would view that development, the US, Canada, and Mexico would form a large, powerful market of its own—upwards of355 million people— which would be more potent in negotiations with other blocs than any of the three would be alone.

All of these factors combined led those of us associated with the Institute for Development Strategies to conclude that the US, Canada, and Mexico should at least now carefully consider the principal issues, and the benefits and costs of closer economic integration. The four papers that were commissioned by the Institute for the Wingspread Colloquium are published here in the order in which they were presented. Together they provided a foundation for wide-ranging discussions about the desirability, likelihood, format, and problems of a move toward a North American Economic Community.

The paper by Randall Baker and Joseph Miller, "An Advocacy Case for a North American Economic Community," was meant to set the "data base" stage for the debate. Lawrence R. Klein's paper," Global Markets in International Trade," focuses on the likely course of world trade into the next century, and the possibility of trading blocs developing. The paper by Peter Ludlow, "The European Community, EFTA, and the New Europe," provided to the Colloquium a European view of one of the most important external forces influencing the development of a North American Economic Community—the ascendancy of the EC, its likely future character, and its impact on the architecture of Europe and trading relationship implications with the rest of the world. Finally, the paper by Gary C. Hufbauer and Jeffrey Schott explores "The Realities of a North American Economic Alliance."

In the concluding chapter of this monograph I try to capture the essence of the discussions that took place at the colloquium. Key elements of the discussion are summarized, and main themes of the debate are categorized and presented. Finally, I draw conclusions—my own, not those of the colloquium—on where the issue seems to be heading, and what is the most desirable course of action for public policy in the region.

In order to provide an easy reference for the main themes of this monograph, the remainder of this Introductory chapter summarizes the primary points from the four papers that provided the basic source material for the discussion.

The Baker/Miller Advocacy Case

The Baker/Miller paper begins with a review of the economic relations between Canada and the US going back to about 1930. They make the point that, in spite of sometimes rocky political relations, and efforts by various Canadian governments over the years to pull closer to Europe, the share of Canadian exports to the United Kingdom dropped from 17.4% to about 3.8% between 1958 and 1978. During this same period, Canadian exports to the US grew from 55.9% to 70.3% of total exports. The importance of Canadian exports to the European Community dropped from 13.1% in 1980 to 6.5% in 1988. Today, Canada is the US's largest trading partner, receiving 21% of US exports. Canadian exports to the US constitute 75-80% of their total exports, and account for 20% of Canada's GNP.

The recognition by the Canadians of the importance of preserving this trading relationship, the movement of Britain into a continental Europe orbit, and the concern on the part of both Canada and the US that it was important to avoid trade disputes and protectionist measures that would disrupt trade, were major factors leading to the signing of the Free Trade Agreement on January 2, 1988.

Baker and Miller review the important provisions of the US-Canadian FTA, and report on some of the research on the economic impact of the agreement on several industries, and on the overall real output of the two countries. On balance, although there were some disappointments in the details of the FTA, they look for positive long-term results from the Agreement for both nations.

The authors also look to the history of the trade relationship between the US and Mexico. The primary pattern of industrial development in Mexico beginning about 1940 has been to "nurture and protect Mexican industry from foreign competition." In other words, their approach was to utilize import substitution, rather than an export-led model of development. The US approach to Mexico has varied from benign neglect to activist involvement through such programs as the World War II "Braceros" (worker importation) program, and later involvement in its replacement, the "maquiladora" program of tariff and trade concessions to manufacturers (initially) located on Mexico's northern border with the US.

The huge expansion of the Mexican oil industry, in concert with the OPEC oil embargoes of the 1970s, accelerated Mexican protectionism, and exacerbated its productivity problems. In 1982, with the oil industry in recession, Mexico announced it could not service its foreign debt. Drastic actions by the Mexican government followed. These included import restrictions, large cuts in public expenditures, and an 80% devaluation of the peso. Capital flowed out of the country, and unemployment soared. While progress was made in getting a runaway situation under control, in 1986 Mexico still "registered a 4% decline in growth, a 10.7% reduction in gross fixed investment, a 3.8% decline in manufacturing activity, and the loss of 1.5 million jobs."

Miller and Baker comment on how remarkable it is, given this situation as recently as four years ago, that the economic reforms introduced by the De La Madrid and Salinas governments have been able to turn the Mexican economy around. The inflation rate was cut from 224% at the end of 1987, to 15% at year-end in 1988. Mexico shifted from an import substitution model to an export-led model of development during this period. Its manufacturing exports grew 10% per year from 1986 through 1988. By the end of 1988, Mexico had replaced West Germany as the United States' third ranked trading partner, after Canada and Japan. The US accounted for 70% of its total exports.

Given this Mexican transformation, the authors direct their attention to the future. "How feasible is it to go much further with the present liberalization arrangements?" They conclude, in agreement with the Bilateral Commission, that, "Without a positive, shared vision of the future, bilateral economic relations will increasingly become occasions for conflict, instead of cooperation and growth. ... Furthermore, the high degree of connectivity in trade between Mexico and the US is unlikely to change significantly. ...This sense of the inevitable may well have been a major factor in the ultimately successful passage of the Canadian Free Trade legislation. The establishment of a legislated framework of guaranteed access to the United States, at truly competitive terms, would provide Mexico with the climate of confidence necessary to keep its momentum going." As they later note in their paper, they would also "be locked into a system that would eliminate most of the threats of being closed out of a northern club."

Canada has much less trade and interaction with Mexico than does the United States. But Baker and Miller point out that the Canadian Senate Standing Committee on Foreign Affairs has expressed sympathy for an expansion of the Free Trade Area to include a "third party." However, in Baker and Miller's opinion, the problems of integrating Mexico "into a trade community would be potentially much more disruptive (than Canada), since the country's economy is more protected and more underdeveloped .... there would be a need for a realistic period of transition to allow Mexico to adjust." While not easy, they point out that the European Community has beenable to handle equally difficult integration problems with less developed nations such as Portugal and Greece.

There have as yet been no detailed econometric studies that would offer estimates about the economic impact of an expanded Free Trade Area to include the Mexicans. (This is an important research need that the Institute for Development Strategies hopes to begin meeting in 1991.) The authors do provide analyses that support a favorable economic impact for both Mexico and the US based on improvements in efficiency and "industry dynamism."

In the final sections of their paper the authors ask, and answer the question, "What next?" They explore the steps necessary to the eventual establishment of an economic community; and they look at the foreign policy alternatives facing the United States in relation to a North American Economic Community. They see positive benefits for the United States in such a development, and basically no alternative for the Mexicans in their drive to obtain growth and stability. They also predict that the first step, a free trade agreement between the US and Mexico, will be reached "in the relatively near future." (It looks like the subsequent announcement by Presidents Bush and Salinas of the opening of negotiations for an FTA will result in their forecast being overtaken by events.) This must inevitably be followed by opening the flow of both capital and labor between the countries.

Lawrence Klein: Global Markets and Trading Blocs

Lawrence Klein's paper provides a detailed look at the way in which world trade patterns have evolved since the end of World War II. He suggests that with the development of more open multilateral trading relationships, "there was a flowering of economic performance that was clearly associated with the expansion of world trade." While there was a lessening of trade growth in the 1970s and early 1980s, he believes that some of the developments now underway in Europe, as well as other parts of the world, will lead to an expansion of global trade in the years ahead.

While obviously preferring a multilateral trading system, Klein sees "a world moving in the direction of the establishment of trading zones held together by bilateral agreements or by a strong institutional framework, as in the case of the European Community." Within this pattern, he expects the evolution of three principal trading groups in the years ahead: Europe—for now the EC and EFTA, but later Eastern Europe and perhaps even the Soviet Union; North America—where he sees the "real possibility of fashioning a North American Common Market"; and Asia-Pacific—where there is "an excellent fit among the economies of South East Asia and the Pacific."

His paper then provides current statistics on the flow on world trade in the key components of these regions, and later provides projections of world trade for the next five years. He sees a "world economy that gets reasonably soon to a 3% growth path for output, nurtured by a trade expansion that is between 5 and 6%, after a slowdown in 1990." He also believes this forecast could be conservative, given the developments in Eastern Europe and the end of the Cold War.

Peter Ludlow and the New Europe

For those readers who have been exposed to the range of opinion in the debate now underway about the future character and architecture of the European continent, Peter Ludlow's paper might best be described as a quintessential Europeanist view of the "new Europe." Given the fact that current developments in Europe will play a fundamental role (25% of world trade goes on in the EC and EFTA) in the nature of the global trading system into the next century, his analysis of the particulars of the evolution of the European Community—where it is heading, and its relationship to other European regions—provides important insights for the question of North American economic policy.

Ludlow makes a convincing argument that the European Community, essentially as now constituted, plus the European Free Trade Area (or as he puts it, the "EC-EFTA bloc," or, "The European Economic Space") are the relevant models for a North American Economic Community, rather the EC as such. He sees the EC of the future as being more directly comparable to the United States. In other words, a de facto "United States of Europe."

In the first section of his paper he walks us through the development of the EC, and discusses how the institutional structure of the Community came into its own. In his words:

The European Community is about the promotion of greater wealth through the liberalization of trade and the development of other common policies. It is an economic community. It has always, however, been still more a political venture; a sustained effort, first to modify the natural inclinations and unruly behavior of member states which had led to several disastrous wars, and secondly to mould the same states into a new political entity, variously defined in Community documents as a Federation or, more commonly, a Union.

Recent decisive steps taken toward this goal began in 1985 when Commission Secretary General, Jacques Delors, convinced "even the most reluctant Europeans" that if they really wanted a single market to be established, they would have to eliminate the veto system of governance that had prevailed until then in important Community matters. The result is known as the "qualified majority" voting system—essentially a weighted system of voting favoring the larger States. With that accomplished, "he initiated a process in which the inherent strengths of the institutions were unleashed in many areas of Community policy." These have included the 1992 goal of a "single market," and agreements to proceed toward Economic and Monetary Union.

In his exploration of the EC-EFTA relationship, Ludlow raises, and deals with, the question of whether a "Free Trade Area strategy is viable over time for the neighbors of a Union as large and powerful as the European Community." In 1984 a decision was taken by the EC and EFTA to "transform the largest system of trade in the world . . . into a dynamic European economic space." They agreed to work together on a number of fronts, the most important of which were trade policy questions such as standards, technical barriers, border facilities, rules of origin, unfair trade practices, state aids and access to government procurement Particularly important in our context is that they also agreed to work together on such multilateral issues as the OECD, GATT, IMF, and the World Bank—in other words, to act as a bloc on world trading issues.

The period between 1985 and 1989 was less than conclusive in terms of whether this cooperative goal was going to be reached. Then Delors, in a speech in January 1989, proposed a new "two pillar" relationship in which EFTA would be a privileged partner of the EC, jointly responsible for the administration of the "European Economic Space." This led to negotiations in 1990, with a goal of completing the process by 1991.

Ludlow sees the outcome of these negotiations as resulting in the EFTA role becoming one of participating in Community decision "shaping," rather than as an equal partner in decision "making." The eventual form of the EC-EFT A relationship has implications beyond the two groups of nations. In light of the developments in Eastern Europe, the nature of the trading relationship will be an indicator of how the EC is likely to deal with the newly emerging democracies in the East. The nature of these relationships will eventually go beyond economic issues and include security matters as well.

Ludlow sees the emergence of an "EC hegemon" that will "create challenges for the global economy as a whole. It goes without saying that structural changes will have to be made in groups such as the G-7." He also believes we are heading toward a "world order based on trading blocs or zones." In his view, however, while there will be a need for skillful negotiation in order to achieve an orderly transition, this development "provides grounds for hope rather than despair."

Hufbauer and Schott on the Realities of the Proposition

The Hufbauer/Schott paper looks at the politics as well as the economics of a possible North American Common Market, and examines the benefits and costs to each of the three countries. While they argue that a "North American economic alliance cannot be the centerpiece of commercial diplomacy in any of the three nations," there are sufficient political and economic benefits to each...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface
• Chapter 1—Introduction
• Chapter 2—Canada, the United States, and Mexico: An Advocacy Case for a North American Community
• Chapter 3—Global Markets in International Trade
• Chapter 4—The European Community, EFTA, and the New Europe
• Chapter 5—The Realities of a North American Economic Alliance
• Chapter 6—Assessing the Prospects for North American Economic Integration
• About the Contributors
• Participants