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Amid Global Disorder, North America Should Tighten Bonds

Interviewee: Robert B. Zoellick, Chairman of Goldman Sachs's International Advisors
Interviewer: Jonathan Masters, Deputy Editor
October 1, 2014

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A more closely integrated North American continent could become a new growth market, combining the best of U.S. and Canadian innovation with the fruits of ongoing structural reforms in Mexico, says Robert Zoellick, co-chair of a new CFR Independent Task Force Report. The three countries should build on the foundation of the North American Free Trade Agreement (NAFTA), expanding coordination on areas like trade, energy, and security policy, the report says. That means including Canada and Mexico in transatlantic trade talks and approving the XL Pipeline between Canada and the United States, says Zoellick, a former U.S. trade representative and president of the World Bank.

This Task Force Report seems to call for greater regional integration at a time when centrifugal forces in many parts of the world are quite powerful. For instance, there was a close call with Scottish independence in the UK; Ukraine may be coming apart; the EU has had some fundamental problems. How do you view the report in this context?

This report places North America in the context of U.S. global policy. In particular, it recognizes how a stronger North America could assist the United States, as well as Mexico and Canada, with their interests around the world. North America can provide a model of deeper integration, while respecting national sovereignty and independence, which is very important to all three countries. That "integration and sovereignty" approach would be distinguished, for example, from the European Union's notion of shared sovereignty.

In addition, North America provides a model of deep integration between two developed countries and an emerging market, so it offers a constructive, practical perspective on the North-South relationship. The report stresses the economic competitiveness of our continent: it makes the case that North America can be a new growth market, combining the best of developed economy innovation with the best of developing economy structural reforms, and healthy demographics.

Mexico Tomato FarmerA worker harvests tomatoes at the "Las Gemelas" ranch in Zacoalco de Torres in Jalisco state February 2013. (Photo: Alejandro Acosta/Courtesy Reuters)

This report advocates a doubling down on NAFTA, whose costs and benefits are still being debated by economists. How have the successes or failures of NAFTA informed this task force?

The report explains the economic benefits of NAFTA, but also what still needs to be done to prosper together. However, I have always believed that the importance of NAFTA extends far beyond trade. NAFTA came at a moment when the old [Institutional Revolutionary Party] political monopoly in Mexico was breaking down. The PRI of the 1980s was the inheritor of a corporatist state, which had held power since the 1920s and 1930s. That state was breaking down in part because of the forces that led to the end of the Cold War and globalization. NAFTA helped support Mexico's moves to multiparty democracy and development of civil society by encouraging a North American vantage point and stronger connections between Mexico and the U.S. and Canada. It worked.

The task force also recognizes that NAFTA, after twenty years, offers a foundation that needs to be built upon. We have an opportunity to develop a new type of growth market—combining the strength that the U.S., a developed economy at the technological frontier, continues to innovate in energy, robotics, biotech, software, and big data, while Mexico has distinguished itself through ambitious structural reforms, and Canada has been one of the best performers throughout the Great Recession.

We can integrate the best of developed economy innovation and developing country structural reform. The idea is drawing the attention of investors—including from East Asia—who are bullish on Mexico and North America.

The report recommends elevating continental integration to the highest levels—the creation of North America offices at the National Security Council (NSC), and the designation of what you characterize as a North America's "champion" within the administration. Could you describe these roles a bit?

A champion is not just a high-level convener; he or she needs to be a strong internal advocate pushing through bureaucratic paralysis and focusing on results, which will build confidence with Canada and Mexico about the seriousness of the U.S. commitment. We have enough talk; the U.S. government needs to get things done. The champion needs to look ahead, across topics, to recognize how the federal government can advance the North American agenda in the broader context of U.S. global policy. The exact post is less important than the outlook and interest of the person. So this person could be the Secretary of State, Secretary of the Treasury, perhaps the NSC Adviser, [or] Vice President—but one needs a home in a relatively high-level department that could push work across other agencies, particularly on the economic side. In President George H.W. Bush's administration, when I was an undersecretary of state, I could call upon three Texans: the President, Secretary of State, and Secretary of Commerce. That helped break through policy logjams!

The U.S. negotiations with the European Union on the Transatlantic Trade Investment Partnership still don't include Canada and Mexico, which we find is a mistake.

The structural recommendations for the NSC and State Department have a slightly different purpose. Their role is to make sure that there is an institutional North American perspective included in U.S. global policy making. So, for example, when the United States entered the Trans-Pacific Partnership negotiations, the TPP, it was slow in adding Canada and Mexico. If you had offices at [the] NSC and State [Department] that would have argued for the North American interest, the U.S. might have included Mexico and Canada from the start.

The U.S. negotiations today with the European Union on the Transatlantic Trade Investment Partnership still don't include Canada and Mexico, which is a mistake. Those negotiations need to recognize and encourage the development of an integrated North American market, the roles of logistics and supply chains for example in the auto industry.

In addition, the North American offices will help push the political economy agenda. For example, the Peña Nieto administration's energy reforms are path breaking and historic, but they are also a political challenge. The report recommends expanding the [U.S.] electricity grid with Mexico, which could provide lower cost electricity because of lower cost natural gas. This support would show the Mexican public the benefits of reform. The U.S. government won't take such initiatives unless there's a strong advocate to represent the interests of North America.

Furthermore, North American policy depends on many state and local governments and transnational actors. The new offices need to encourage the coordinated development of "foreign" policy by groups outside of Washington.

One of the big concerns with greater regional economic integration is the potential for increasing social and economic inequities. How does the report address that issue?

The challenge is to offer equal opportunity and inclusive growth. To do so, you have to focus on people. In part, development requires basic security, which the report discusses, but, importantly, inclusive growth depends on human capital development. The report recognizes that the North American workforce could be a demographic plus for the United States, especially compared to Europe and Japan, but also China and Russia; yet all our countries need to improve the school-to-skills-to-work transition. I suspect that educational sectors are ripe for a transformation, including both the private and public sectors, drawing on technology, competition and choice, new skill certifications, more efficient use of facilities, and connections to workforce needs. There is a demand for new jobs but a structural gap in preparing the supply across all three countries.

So the focus on people goes beyond the immigration issue to developing workforce policies and trying to capture the demographic advantage. There are also examples of inclusive growth policies, begun in North America, that are having worldwide effects. For example, Mexico was the innovator of conditional cash transfer programs, through the Oportunidades program. These have been very effective at trying to improve the livelihood and opportunities of the bottom 10 to 20 percent. Brazil followed the example through the Bolsa Familia program.

And how does this work?

Conditional cash transfers give cash to the poorest families on the conditions that children have to go to school and people have to get health checkups—this has probably done more for women's health than anything in the history of Mexico. The money is usually given to the women head of households. When I was at the World Bank, we helped expand this idea to about forty countries. In the case of Mexico, my recollection is that this social safety net cost about a half of one percent of GDP, which is highly efficient. Mexico has been an innovator in policies of inclusion and opportunity.

What does a smart regional energy policy look like for North America, particularly given, as you mention, the historic reforms in Mexico and the fracking boom in the U.S.?

The full implications of the energy advantage are just beginning to be recognized in North America. U.S. production of natural gas and tight oil has increased quickly, and so has Canadian development. Mexico still needs to reap the benefits of its constitutional and legal changes [with regard to energy policy]. To do so, Mexico is working by creating good conditions for both foreign and domestic investment.

Energy policy is an area where all three countries can be more competitive. We recommend, in particular, that the XL Pipeline should be approved.

The United States can also do more to capture the full benefits of energy innovation. For example, the report recommends removing legal restrictions on exports of oil and liquid natural gas, which is important if the U.S. expects to draw continued energy investment, because investors need to receive a competitive world price for their products. The report identifies problems with infrastructure, such as the electricity grid or pipelines. In the case of pipelines, we note that Central America, a nearby region of fragility, has very high energy prices, and the eventual extension of natural gas pipelines and supplies to the region could support Central American democracy and growth.

The report notes that many of the gains of energy so far have been at the exploration and production stages. To truly capture the second stage—dependent on the use of lower priced energy—the three countries need to create the regulatory conditions for greater capital investment. When companies have to make a big capital investment, they need regulatory clarity with regard to topics such as safety, conservation, methane capture, and plans to deal with carbon. All three countries can be more competitive with better and more integrated energy policies. Also, we recommend, in particular, that the XL Pipeline should be approved.

Security is obviously another focus, particularly the need to weigh effective border control measures with the goal of a seamless flow of commerce. Where does this report come down on that balance?

The report recommends the long-term goal of a unified security strategy for the three countries. To achieve this goal, the U.S. and Canada should do more to support Mexico's development of the rule of law. This challenge includes all dimensions of security: courts, police—particularly now at the state and local level—citizen security, dealing with organized crime and narcotics networks. The report discusses the progress made through the Merida Initiative, and how that should be built upon.

We also note that there are U.S. problems, such as illegal gun-trafficking to Mexico and the U.S. demand for narcotics. We also need to counter other common threats: cyber, terrorism, disease, and natural disasters. And the Task Force explores how the North America countries could cooperate on other security issues, for example in Central America or the Arctic. Twenty years from now, I hope the three countries can be partners on issues of global security. They are already closely aligned on international economic policies—and that is a big change from thirty years ago.

What are your expectations for this report given the current political climate?

I hope that this report will provide an agenda for both [U.S. political] parties in the presidential elections in 2016. As candidates across the spectrum start to think about their foreign policies, they should start with our home continent. We want them to realize that a stronger continental base in North America will be good for the U.S. economy and society, and will also extend U.S. power and influence globally. If the current administration can act on some of these items, that would be great, but I believe that the prime purpose of this report is to highlight the interest in North America for those who will come next. We need to pay more attention to our own neighborhood.

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