The tilt towards Asia that has long been heralded in the foreign policy of the United States of America carries with it important implications for its North American Free Trade Agreement (NAFTA) partners. On the economic front, it means the negotiation of the Trans-Pacific Partnership (TPP), and the exploration of new trading, investment and migration arrangements with the countries of the Asia-Pacific region. Canada and Mexico are part of this process of re-orientation, and their governments have been anxious to keep pace with the U.S. as it diversifies its economic relations. The participation of all three NAFTA partners in the TPP negotiations signifies recognition of the need for a common, and perhaps united, approach to the economic future.
Yet there remains so much to be done in the North American economic space if the potential of this future is to be maximized. NAFTA celebrates its 20th birthday and it is becoming increasingly clear that a free trade agreement designed for the 1990s world is inadequate in the face of 21st century economics. Since 1994, the economies of the region and of the world have been fundamentally altered. At the global level, there has been the rise of China as the world’s second-largest economy, the development of the internet economy, the arrival of the smart phone and the most important economic downturn since the 1930s.
During the same period, there have been impressive changes in the regional economies of North America. In Mexico, we have seen the emergence of a manufactured goods export powerhouse (exporting more manufactured goods than the rest of Latin America combined), the rise of a middle class that presents significant opportunities and, over the past year, an impressive set of economic reforms that promises to move the national economy forward. Canada and the United States have experienced a significant de-industrialization of their economies, an energy revolution that has brought the lowest energy prices in the world, and an important shift towards the digital economy.
NAFTA prepared the region for none of these changes. As a first-generation free trade agreement, it focused on increasing trade by reducing barriers. It is true that as a consequence, we have witnessed intensive cross-border investment and the progressive integration of production systems across North America, led by the auto-industry but including sectors as diverse as aerospace, renewable energy and baked goods. In total, North America’s economy now has a combined GDP of over US$15.7 trillion, despite the lingering effects of the Great Recession.
However, the agreement did not include issue areas as fundamentally important to the economic health of the region as energy, human capital, services, or infrastructure. The governments of the three countries have, at various times, attempted to incorporate some of these into the regional dialogue, but have failed to establish enduring institutional mechanisms for discussion and implementation. In short, we can say that there has been a lack of vision and of commitment to a deeper level of integration between the three nations.
Serious obstacles therefore remain in the way of making North America a competitive economic region in today’s globalized economy. Four major challenges stand out. First, there has been insufficient attention to the question of the infrastructure that binds the three national economies together, including border crossings, highways, railways, bridges, pipelines, electricity transmission lines and ports. Billions of dollars are lost each year through unnecessary border delays, and through the time taken to move goods and people across the region.
Second, North America must address its fundamental shortcomings in the education sector and vocational training that have left it with a dangerously weak human capital base. A recent study by Hays recruitment services showed that all three countries face a significant squeeze in their labour markets, as skilled and educated workers are in short supply.
Third on the list of challenges is the question of energy cooperation. The history of North American integration has been missing this vital component since the beginning, due largely to Mexico’s reluctance to include this issue in the NAFTA negotiations. However, for an intriguing period in the early 2000s, during the presidency of George W. Bush, the three governments formed the North American Energy Working Group (NAEWG), in which energy officials collaborated to produce research outlining infrastructure needs, predicting demand and supply curves, and offering a vision of the future for regional energy markets.
Although it did not make joint energy policy, the NAEWG fed into the Security and Prosperity Partnership (SPP) and provided insights on issues as diverse as the oil sands, natural gas, nuclear energy, regulatory cooperation and energy efficiency. When the SPP initiative came to an end with the Obama administration, the NAEWG also disappeared, stripped of its funding and political support. Although energy markets have prospered in spite of the absence of any trilateral coordinating mechanism, there are a number of pressing challenges ahead that require a coordinated approach, including pipeline and transmission line construction, crude oil and natural gas exports, and energy efficiency standards.
The fourth major area that requires urgent attention is the trade in services. Whereas the NAFTA focused on traditional aspects of trade in manufactured goods, modern FTAs include discussions of services trade as a matter of course, and it is a notable space in the regional conversation that urgently needs to be filled. To emphasize this point we need only look at the proportion of the national economies that is dedicated to the services sector. In 2011, services made up 63.5 per cent of the Mexican economy, 69.5 per cent of the Canadian economy and a colossal 80 per cent of the U.S. economy. The potential gains from integration in the services sector should be obvious to even the casual observer of the regional economy, although it should also be clear that there would be winners and losers from such integration, as in other sectors.
In response to these four main challenges, the leaders of the NAFTA partners recently committed themselves to new modes of cooperation that may produce a path forward. In Toluca, Mexico, the leaders agreed to develop a North American Transportation Plan to ease the movement of freight across the region, and to improve border infrastructure. They also came to an agreement to harmonize their respective trusted traveler programs to form the North American Trusted Traveler Program, a move that will facilitate the movement of those who frequently cross the region’s borders.
The leaders also agreed to create a Trilateral Research, Development and Innovation Council. Although lacking in details at the time of writing, the idea of focusing on developing networks of researchers, entrepreneurs, universities and local development authorities is an intriguing one, particularly when viewed alongside existing research cooperation and innovation initiatives at the bilateral level between Mexico and the United States.
In the energy policy area, the three leaders called for a trilateral meeting of their respective Energy Ministers later in 2014 to “define areas for strong trilateral cooperation on energy.” Although the exact list of issues to be discussed will not be defined for a while, the question of energy infrastructure will surely feature high on the agenda, with Keystone XL and cross-border pipelines and electricity transmission of multi-billion dollar significance.
There has been little discussion so far of moving the services agenda forward, but the participation of all three partners in the TPP negotiations offers an opportunity to advance on this agenda without having to open up the NAFTA itself for renegotiation or deepening. The future of the TPP, of course, depends on President Obama’s ability to secure Trade Promotion Authority (TPA) from the U.S. Congress, which is looking highly unlikely until at least after the mid-term elections in November 2014, and may take much longer still. However, the TPP’s wide-ranging trade agenda promises to raise awareness among policy-makers and legislators of the huge potential gains from liberalization of North American, as well as trans-Pacific, services trade.
The North American agenda is still far from complete, and hundreds of billions of dollars continue to be sacrificed each year in missed opportunities for trade and the extra costs imposed by inefficient and insufficient transportation, energy and border infrastructure. The initiatives announced in Toluca in February 2014 are a step in the right direction, but the three governments must remain committed to resolving these and future challenges in a coordinated fashion. The history of trilateral cooperation over the past 20 years does little to encourage us on this front, which is why business leaders and think tanks must remain vigilant and continue to pressure all three governments.