NAFTA is not the whole – but we treat it like it is: Blank and Gattinger for Inside Policy



by Stephen Blank and Monica Gattinger

Macdonald-Laurier Institute
February 1, 2018

With NAFTA negotiations still underway, it is easy to forget that this agreement isn’t the sum total of the North American system, or even the most important issue in Canada-US relations, write Stephen Blank and Monica Gattinger.

President Trump has riveted all attention on NAFTA.  Yet that is kind of “fake news” in and of itself, because NAFTA isn’t the totality of the North American economic system – nor of Canada-US bilateral relations.  Indeed, it’s not even the most important issue in bilateral relations.

It is easy to forget that NAFTA wasn’t the beginning of North America’s integrated economic system. Rather, NAFTA was part of a deep restructuring of the North American economy underway since the mid-1980s. By the 1990s, deeply integrated supply chains linked production centres and distribution hubs across the continent. This was not just growth in trade in raw materials and finished goods among the three nations, but rather, a fundamental increase in cross-border movements of parts and components. The result is that we are not just trading partners - we make stuff together.

It is also easy to forget that our obsession with NAFTA did not begin with Trump. From the early NAFTA years, the fundamental problem has been the failure of the three governments to acknowledge that NAFTA – the trade agreement – was only one element of a North American reality, and only a first step toward achieving a stable foundation for continental collaboration and growth.

But Ottawa, Washington, and Mexico City continued to say that we were trading partners, nothing more, and little was accomplished (or even attempted) to create a wider vision of North America and build other institutions that would realize the vision.[1] Calls to renegotiate NAFTA after 9/11 led nowhere, and the collapse of efforts to enhance regulatory and security cooperation in 2009 revealed that leaders were not prepared to confront wild accusations that this was a step toward a “North American Union.”

With the exception of the weakly articulated and underfunded Labor and Environment Commissions, NAFTA has been basically the only on-going game in town.

So where are we today?

First, at time of writing, we are still not certain what the American side (or President Trump) will actually do: compromise, redraft, pull out? We are also not quite certain what President Trump can do: can the President simply opt out of NAFTA on his own, without any Congressional involvement? We also don’t know what might occur after whatever happens: revert to the Canada-US FTA? Do WTO rules kick in? Are we left with a zombie NAFTA?

Second, no matter what happens with the NAFTA negotiations, it is highly unlikely (admittedly not impossible) that moats and walls will be erected or that North America will break apart like a gigantic Antarctic ice crack. The most likely outcome will be that firms on both sides of the border with interests in the integrated North American economy will devise workarounds to deal with whatever cracks emerge.

No matter what happens with the NAFTA negotiations, it is highly unlikely (admittedly not impossible) that moats and walls will be erected.

Think of 9/11. We feared that the “thickened” border would lead firms to change their “just-in-time” strategies to “just-in-case,” piling up huge inventories and relying less on integrated supply lines. In fact, most firms worked out ways to deal with the border. While perhaps slower or more expensive, it is notable that volumes of goods crossing the border have only increased since 9/11 and North America’s integrated economies did not collapse.

Now, some firms may alter production and supply arrangements, and some may relocate altogether. But, barring the unlikely event of complete catastrophe, we can anticipate that – at least in the near and even middle term – life will go on pretty much as it has over the past several decades.

Third, and most importantly, Canada and the US face critical issues that are reshaping North America – and that were not part of NAFTA. These issues will dramatically alter the structure of North America’s economies and how they perform in the coming years.

That being said, we have long viewed NAFTA as the single most important bridge linking our nations. And, since we have failed to create institutions directed at other dimensions of the relationship, the collapse of NAFTA may have much more powerful consequences than might have been the case.

With rapidly increasing levels of digital and service trade, massive growth in cross border information flows, increasing application of AI and deep learning to everything from mobility to health, security and beyond, NAFTA has long been out of date – even as a trade agreement. It is a 20th century trade agreement (innovative for its time, to be sure) that could be a starting point for coping with 21st century demands.

Beyond trade, issues like energy must be viewed in continental terms. We all benefit from North America’s deeply integrated oil, gas, and electricity systems. In our energy-rich environment, governments at all levels must develop energy policies that optimize availability, cost, reliability and sustainability for generations to come. Will we collaborate on developing the energy technologies, policy frameworks and game-changing innovations needed to do so – or will we drift into pointless competition and policy chaos?

Canada and the US face critical issues that are reshaping North America – and that were not part of NAFTA.

Hanging over all of this is climate change. A changing climate does not stop at national borders. Both countries will need to determine how they reconcile the need to lower GHG emissions with their status as major oil and gas producers. Will they work together to develop oil and gas resources responsibly for domestic and global consumption while driving down GHG emissions and transitioning to lower carbon energy systems? Will they collaborate on adapting to climate change when it comes to severe weather events, changing sea levels and transformations in regional economies? We cannot discuss environmental threats as separate national issues. Yet we have given surprisingly little attention to building collaborative adaptation mechanisms for dealing with such issues.

Infrastructure also poses huge questions in both countries. Competitiveness requires efficient, safe, and sustainable road, rail, air, and water transport and logistics systems. Yet North Americans face a tremendous infrastructure crisis. Much of our production moves through what are single integrated systems – highways and railroads, pipelines and electric wires, the St Lawrence Seaway and the great Mississippi River system.

It is a crisis on two levels – the deterioration of the physical infrastructure and the failure to conceptualize what will be needed in coming years to ensure North American competitiveness in the 21st century. Both governments will have to decide whether to pump huge sums of money into existing infrastructure or to abandon threatened structures and build anew – or some combination of the two.

Last but not least, we face massive demographic changes – particularly aging populations – that will challenge economic growth and fiscal balance and will create political, economic, and social turmoil. We are also experiencing high levels of internal migration as people follow jobs – and, at the same time, decaying regions where people are unable to seek new work. We are set to face growing imbalances between supply and demand of medical and educational resources. Moreover, in a world in which migration crises are likely to worsen, we need to define some common baselines for dealing with these issues.

All told, the issues raised in this article are not trade or NAFTA issues. But NAFTA has become something like the Ambassador Bridge between Windsor and Detroit – aging and wobbly, but bearing a huge weight of Canada-US traffic. No doubt talented and dedicated Canadian and Mexican negotiators will continue to try to build some agreement with the Trumpist-tossed Americans. But attention, talent and ideas should not be focused exclusively on NAFTA. We need new ideas, new visions, and new bridges as we face – together whether we like it or not – the demands of the 21st century.

Stephen Blank is Senior Fellow at the University of Ottawa’s Institute for Science, Society and Policy (ISSP) and a Senior Fellow at the Macdonald-Laurier Institute. Monica Gattinger is Director of the ISSP at the University of Ottawa.

Image credit: THE CANADIAN PRESS/AP/Judi Bottoni

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