North America: Big Trade Gains Close to Home

There’s a striking number in Robert Pastor’s new Renewing America Policy Innovation Memorandum, “Shortcut to U.S. Economic Competitiveness: A Seamless North American Market.” Like many, I had assumed that, whatever one’s assessment of the overall impact of the North American Free Trade Agreement (NAFTA), that it had been largely successful in its primary goal of increasing trade and investment flows among the United States, Mexico, and Canada.

But in fact the story comes in two parts. From 1994 when NAFTA was launched up through 2000, trade in North America grew three-fold, and foreign investment increased five-fold. Since 2001, however, that explosive growth of trade and investment has stalled, with the pace of trade growth falling by two-thirds and investment growth by half. While Canada and Mexico are still the first and third largest trading partners for the United States, their relative importance has declined over the past decade. As Pastor lays out in greater detail in his book The North American Idea, U.S. exports to Canada and Mexico as a percentage of total U.S. exports rose from 30 percent when NAFTA was signed to more than 37 percent by 2000. But over the next decade that share dropped back to 32 percent.

What went wrong? The list is long. Post-9/11 border security measures, which added long wait times for border crossings with both Mexico and Canada, raised costs, particularly in industries like automobiles where production is closely integrated across the North American borders. China’s entry into the World Trade Organization in 2001 siphoned off U.S. investment, and imports of labor-intensive goods from China displaced imports of labor-intensive goods from Mexico. The continued  controversy over NAFTA -- which was the first big U.S. trade agreement with a developing nation and one that left some deep political wounds -- made all three countries reluctant to deal with new trade problems as they arose.

As both cause and consequence of this stagnation over the past decade, political leaders in the United States, Canada, and Mexico have largely stopped thinking about the North American market. The two big U.S. trade initiatives currently are the Trans-Pacific Partnership with Asia and the new Transatlantic Trade and Investment Partnership with the European Union. Canada and Mexico have similarly focused on new trade deals outside North America.

The focus overseas is odd. Even in a globalized world, location still matters, and proximity is still an advantage. As Pastor points out, the sheer volume of trade in North America far outweighs the trade involved in any of these initiatives. Small gains in increasing continental trade flows would pay big benefits in terms of economic growth.

Many of the measures that would be needed to capture these gains are in reality rather modest initiatives. Pastor proposes a common external tariff for North America, which would have been quite reasonably controversial two or three decades ago in an era of double-digit tariffs that greatly affected business location decisions. But today all three countries maintain mostly low, single-digit tariffs with the rest of the world. The primary result of the current separate tariff schedules is to add billions of dollars in paperwork costs and delays for products crossing borders within North America. Investment in transportation and infrastructure is an obvious need, and an inexpensive one in a time of record low government and private sector borrowing costs. Greater regulatory convergence is currently on the table in negotiations with Europe; North American convergence would in comparison be simpler.

The economic gains from creating a more seamless market would be measured in the hundreds of billions of dollars. As Pastor notes, U.S. imports from Canada and Mexico contain a much higher percentage of U.S. content than imports from Asia, offering outsized trade gains. Just as important, deeper ties with Mexico and Canada would strengthen U.S. competitiveness globally with companies based in Europe and Asia.

Too often over the past decade U.S. political and business leaders have taken the continent for granted, and failed to see the opportunities that are the closest and easiest to realize. With the United States again pursuing an ambitious trade agenda, it is time to take another look closer to home.