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Can New Border Deal Fix Broken NAFTA?

12/26/2011 06:23 EST | Updated 02/21/2012 05:12 EST
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What is NAFTA really about?

That might seem a silly question. NAFTA is about trade, right? It is the North American Free Trade Agreement after all.

But what if it is not mainly about trade at all? Thinking chiefly in terms of trade might actually obscure the real point.

Unfortunately when many people think about trade, they think of it in old-fashioned terms. Each country has its own self-contained economy and in each economy, that country's workers make goods and services. Those finished products are then sold to other countries, which make different goods and services in their own little self-contained economy. Japan makes cars. France makes wine. They trade wine for cars.

That is emphatically not what happens for the most part in North America. What we have is not three countries and three economies trading finished products with each other. We have a single economy shared by two countries, Canada and the U.S. (and increasingly a third, Mexico). We have a single economy awkwardly cross-cut by inefficient and obstructive national borders.

The implication of this one-economy-but-three-countries view is that NAFTA is not (despite its name) chiefly about trading finished goods between separate national economies. It is about managing a highly integrated continental economy in which Canadians and Americans work together to make things. NAFTA should really be called the North American Integrated Production Agreement (NAIPA).

Canadians and Americans do not trade with each other as the French and the Japanese do. We make things together and then sell them to each other and the rest of the world. That is why, for example, about two-fifths of the vast "trade" between our two countries takes place within individual companies. They move goods from one plant to another at different stages of production, and those plants are spread about in both Canada and the U.S.

Let me make this eminently practical. I have in my hand a drawing of a rear wheel assembly used in North American auto production. In this drawing every part contained in the assembly has been flagged to show the country in which it was produced. Roughly half the parts were made in Canada, the other half in the U.S.

Take one look at that drawing (which is quite typical -- it could have been made of any other assembly that goes into cars made in North America) and you realize there is no American or Canadian auto industry. There is a North American auto industry. And dig into each one of those individual parts and you will find chemicals, metals, castings, coatings and other products from plants in jurisdictions throughout the continent. It is not just the auto industry but the entire continental production process that is increasingly integrated.

The business community got this long ago. NAFTA did not create economic integration in North America. The business community did that over many decades, in response to strategic and economic imperatives. NAFTA was a crude and belated effort to create a legal and institutional framework for an economic relationship that had outgrown national institutions.

If you want to see what North America looks like from the point of view of business, have a look at a map of the continent depicting, say, oil production, pipelines, the rail network or truck traffic. In each case I defy you to spot the border in the business decisions that have shaped these maps. The economic energy of North America surges in all directions, and is increasingly unconstrained by considerations of political jurisdiction -- unless, of course, jurisdictions forcefully intrude, as in the case of the Keystone XL pipeline or Buy America.

There's the rub. Politicians respond only to national voters, and therefore live in a closed political system. Alas, that closed polity is superimposed on an open economy. Government policies that result cannot truly encompass the interests of North Americans, but only of Americans and Canadians separately. Hence we get border thickening in the post-9/11 world and post-recession protectionism in the U.S. Canadians' vulnerability is that we live in another country, but not another economy.

National policy mismatches inevitably show up at the border. An inefficient border is an annoyance in a trading bloc. But in a production bloc, it is disastrous.

To understand why, think again about the rear-wheel assembly. It required that parts be brought across the border in different directions and at different stages of production. The car industry says a North American car crosses the border five or six times in the course of its production -- likely an underestimate.

A thick border causes our integrated production process to stumble every time the border must be crossed. We lose time and efficiency.

By contrast, a foreign car exported to North America enters our territory only once. Since the car is already made, our border controls don't disrupt production. Our own production crosses the border innumerable times. Every inefficient or obstructive contact is in effect a tax that our international competitors do not pay.

North Americans are in this together, building a relationship that is virtually without precedent for its breadth and depth. In thinking about what comes "after NAFTA" we must be capable of the effort of imagination to create institutions that can overcome the political divisions that scar our economic efforts while preserving our national sovereignty.

On December 7th Stephen Harper and Barack Obama announced their "Beyond the Border" initiative to respond to exactly these practical realities at the border. The intentions are good, but the language is vague and tentative and a U.S. election year is not a propitious moment to advance the idea of more economic openness.

At least the Americans are now committed to an agreement in principle that points in the right direction. It is now our responsibility to make sure we move from pretty words to a workable border regime. Our continental competitiveness and prosperity depend on it.

Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute. This article appeared in the Financial Post and is drawn from a talk he gave on "After NAFTA" at the Council of State Governments annual conference in Seattle, Washington.