University of Washington, Geog 349, Regional Economic Integration

University of Washington
Geography 349
Regional Economic Integration: NAFTA as an example

Refer to Peter Hakim & Robert Litan, eds. 2002. The Future of North American Integration: Beyond NAFTA. Washington DC: Brookings.

NAFTA took effect 1/1/94, to be phased in (especially the tariff reductions) over 0, 1, 5, or 10 years, depending on the provision and the product.

• Sectors likely to see the greatest adjustment were to have tariffs reduced more slowly.
• (Why would you expect the amount of adjustment to vary across sectors?)

Given the pre-existing C-US FTA, tariffs were already very low or nonexistent between the US and Canada – so the big adjustments were between US and Mexico and Canada and Mexico.

NAFTA focused pretty specifically on trade, with environmental and labor “side agreements.”

NAFTA also included services, and the right of establishment (note the most obvious relationship among the two; explain the principle of “national treatment”).

•   Mexican trucks were to receive national treatment within the other two countries, but have not – this has been one of many points of friction.
•   However, “national treatment” is basically about the free movement of capital investment – but trade agreements (as opposed to full integration) do not allow labor movement. In either case, or even without capital mobility, we’d expect factor-price equalization, over a long time, across a trading bloc.
•   And of course, even without special formal agreements for labor movement beyond pre-existing immigration regulations, “about 21 million persons of Mexican origin now reside in the United States” [p. 5].

In the case of regional integration, rules of origin are very important: how do you determine whether a good is made in one of the signatory countries?

• Generally, the proportion of an import’s value that originated within the bloc is used as the measure.
• In the case of a large economic region like N.Am. the goal was to encourage inward FDI to serve the market, allowing some imported components.

Trade creation: increased trade flows between two countries (or among the countries in a trading bloc), based on increased specialization according comparative advantage as trade barriers fall.

• Given the labor-skill, labor-wage, resource, and climate complementarities among the three countries, one might expect that removing trade barriers would substantially increase trade – you’d expect that Canada and Mexico would have dramatically different factor mixes and thus would generate a lot of new trade; and that the US and Mexico would have almost as different a set of factor mixes.
• What do Hakim and Litan say about the increase in Canada-Mexico trade from 1991-2001? (up 5 times) US-Canada trade? (up 2.5 times)

Just how integrated are Canada and the US?

• 70% of Canadian imports are from the US; imports account for 34% of the Canadian economy (compared to 18% of the US economy); thus, US imports are worth 24% -- nearly a quarter – of the Canadian economy.
• 85% of Canadian exports are to the US; exports account for 38% of the Canadian economy (compared to 13% of the US economy); thus, 32% -- essentially a third – of the Canadian economy is directly exported to the US. Implications?

o The Canadian economy is strongly tied to demand in the US, but Canadians have no ability to affect US macroeconomic policy (or US regulatory policy, the lack of which is one key reason for the current economic mess).

• Two-thirds of FDI-C is from the US. Implications?

o   Much more K investment – and thus L productivity – than without USFDI-C
o   Much corporate control outside the country.
o   Truncated organizational structures: executives must leave Canada to have a shot at the top spots; the very highest-order corporate services tend to be purchased in NYC.

Trade diversion: increased trade between countries within a bloc, upon reduction of trade barriers, that replaces trade that had been occurring with countries outside the bloc – because trade barriers are higher outside the bloc than within.

• Given the labor-skill, labor-wage, resource, and climate complementarities among Canada, Mexico, and the US, one might expect that eliminating barriers to trade among them might yield some intra-continental trade that otherwise would occur between each country and some countries outside the bloc.

Effects of NAFTA:
Substantial increase in economic integration, over a short period: from one-third of the countries’ trade within the bloc to on-half.

Economic effects –
• On bilateral trade balances – likely outweighed by fluctuations in exchange rates.
• On industrial outmigration from the US – substantial investment and importing from Mexico, perhaps mitigating investment in and imports from, say, China – but note what large increases with China.

Effects of September 11, 2001?
• Massive restrictions on the logistics of cross-border flows.
• Loss of US attention for immigration or further integration.

What sorts of deeper integration are possible? (These are listed on p. 12)

•   Customs union (common external tariffs)
•   Pastor (Ch. 4) notes the option of a common market (few or no restrictions on movement of L as well as K)
•   Formal agreements on cross-border externalities (in this case, defined as actions on one side of a border that have implications on the other side – what one might call geographic externalities): migration (among and into the countries of the bloc); energy; water; security
•   Relying not only on international agreements, but on supranational institutions with delegated authority to regulate some of these cross-border externalities – moving toward full integration among still-sovereign countries.