NORTH AMERICAN INTEGRATION ON TRIAL: CURRENT CHALLENGES AND OUTLOOK

ABSTRACT

This paper examines the evolution and prospects of economic integration in North America in a period of political volatility and uncertainty. Closer integration between Canada, the United States and Mexico can improve the competitiveness of businesses and regional supply chains, and contribute to the wellbeing of individuals. However, modernization of the trilateral architecture of the North American Free Trade Agreement (NAFTA) requires promotion and education of broad constituencies across the continent with respect to the benefits of open borders, regulatory cooperation, and production sharing. Complimentary economies, abundant natural resources, an enormous market, and younger demographics provide an optimistic outlook for the future of North America.

Keywords: regional economic integration, NAFTA, supply chains

INTRODUCTION

In times of slowing commerce, political tensions, and rising nationalism around the globe, the question of closer economic integration between nations has become as acute and current as ever. After a period of steady multilateralism manifested by the General Agreement on Tariffs and Trade (GATT), creation of the World Trade Organization (WTO), and seemingly unstoppable expansion of regional trading agreements at the end of the 20th century, there are signs of debilitation and retreat. The Doha Development Agenda, also known as The Doha Round of WTO negotiations, has been effectively stalled after twenty years of trying to reach consensus. Moreover, according to the WTO, trade-restrictive measures reached the highest level since the organization began its monitoring in 2009. The world’s twenty largest economies (the G20) including the European Union (EU), North America, Australia, Brazil, China, India, Indonesia, Korea, Japan, Mexico, Russia, Saudi Arabia, South Africa and Turkey have implemented a total of 1,583 trade restrictions in recent years, only a quarter of which were subsequently removed (WTO, 2016). Britain’s vote in June of 2016 to leave the EU (termed “Brexit” by the media) caused not just crisis in Europe, but also fueled nationalistic rhetoric in the United States.

In North America, the process of regional economic integration is affected by widespread protectionism in the U.S. and its preoccupation with border security and control. The North American Free Trade Agreement is underappreciated and in need of modernization. However, even the prospect of formally re-opening NAFTA negotiations in the recent past has sent US politicians running for cover (Dawson, 2015). Canada and Mexico’s commitment to deepening integration remains strong, but due to both countries’ dependence on the US market and very modest Canada-Mexico trade, the future of trilateral cooperation depends on American leadership. Canadians and Mexicans are frustrated that in the last two decades North America has become somewhat of an afterthought of U.S. policy. The Council on Foreign Relations (CFR), an influential independent think tank with headquarters in New York City and Washington, DC, has emphasized America’s critical role in a revitalized continental partnership. A CFR Task Force has concluded that “it is time for U.S. policy-makers to put North America at the forefront of a strategy that recognizes that it should be the “continental base” for U.S. global policy” (Council on Foreign Relations, 2014, pp. 4). Likewise, the North American Process Symposium (2016), a trilateral

forum of representatives from academia, government, and industry, has proposed deepening the economic integration of Canada, the United States and Mexico in order to compete more effectively worldwide.

Despite this growing awareness of the necessary of advancing North American integration in order to strengthen regional relations and competitiveness, government officials have preferred to negotiate new trade agreements with countries across the Pacific and Atlantic oceans. One of the main reasons for politicians to be hesitant to start NAFTA renegotiation is the risk of losing voter support. Free trade remains unpopular among working-class constituencies and their labor representatives due to continuing job losses in the manufacturing sector.

The recent Presidential campaign debates in the United States refocused attention on North American integration and its future. Presidential contenders including Donald Trump (now President-elect) and Senator Bernie Sanders blamed NAFTA for job losses and threatened to renegotiate it or break it completely by re-imposing tariffs (as cited in McBride & Sergie, 2016). Mr. Trump’s subsequent victory has made it necessary for politicians in all three member countries to address NAFTA’s future. The reaction of the Government of Canada has been swift and decisive. As the Canadian Broadcasting Corporation reported the day following the election, Canada’s officials have offered to renegotiate NAFTA as a gesture of goodwill to the incoming U.S. President. The initial reaction of the Government of Mexico was less decisive. Mexico’s Economy Minister Ildefonso Guajardo said NAFTA may be discussed, but not renegotiated (Euronews, 2016).

The fate of NAFTA can be considered in conjunction with the choice that the new U.S. administration will have to make, based on the following scenarios:

Renegotiating: Changing NAFTA. Withdrawal: The U.S. withdraws from the agreement by giving six months’ notice pursuant to Article 2205 of NAFTA. Status Quo: Keeping NAFTA as it is now, without any changes.

Any of these three scenarios will require acceptance of the chosen path by businesses and other stakeholders, including many constituencies across the continent. Business owners, their employees, and the general public should be well-informed about the benefits and costs of each scenario.

Having been involved in observing regional trade relations, teaching the course of “Business under NAFTA,” participating in various academic gatherings for a number of years, and studying the legal parameters of international trade, the authors of this paper are convinced in the catalyst role of academic institutions in bringing together stakeholders from business, government, and the public to discuss and address the most important challenges to North American integration.

With the foregoing in mind, this paper is based on a variety of multidisciplinary sources and organized around the following objectives:

1. Review the essentials of the evolution of economic integration in North America.2. Examine the current challenges to deepening trilateral relations between the NAFTA members.3. Discuss the outlook for the future of North American integration.

THE ESSENTIALS OF THE EVOLUTION OF ECONOMIC INTEGRATION IN NORTH AMERICA

The economic integration of Canada, the United States and Mexico did not begin with the execution of NAFTA, nor would it end with the agreement’s abandonment. The historic process linking national economies through initially bilateral negotiations to reduce barriers to trade, and gradually forming regional supply chains, took place over many decades prior to the leaders of all three countries signing NAFTA in December of 1992. The continental economies were already quite integrated before the agreement’s implementation.

North American integration has never occurred in a linear progression. It has always been a highly debatable, fragmented, and controversial process affected by “the United States size and hegemonic behavior, as well as the history of conflicts and a lack of trust that has characterized North American relations over the last two centuries” (Clement et al., 1999, pp.12). During the industrial revolution of the 19th century, American business looked at the two neighboring countries as sources of natural and human resources and later, in the 20th century, as large markets for exports and breeding grounds for American multinational corporations. World War II and the following “Cold War” period necessitated the creation of an integrated military economy legalized within the U.S. - the Canada Hyde Park Agreement and the U.S.-Canada Defence Production Sharing Agreement. The latter allowed Canadian firms to bid on American orders and become a part of supply chains in the defence industry.

The 1965 Canada–United States Automotive Products Agreement (the “Auto Pact”) marked the first major step towards radical tariff reduction between the two countries, and the creation of regional supply chains in the postwar period. It had a dramatic impact not only on the auto industry, but on the entire Canadian economy. “Prior to the Auto Pact only 7 percent of Canadian production was exported to the United States. Within four years that figure had reached 60 percent” (Clement et al., 1999, pp.171). By 1980, more than 100,000 jobs were attributed to the success of the agreement (Hart, 2002). Nonetheless, the seemingly obvious benefits of the Auto Pact failed to convince everyone in Canada. In the late 1970s, Pierre Elliot Trudeau and his Liberal government introduced policies which were supposed to reduce dependence on the U.S. through a “Canadianization” of the national economy, by imposing restrictions on foreign direct investment and encouraging domestic procurement. While accepting the Trudeau government’s assessment of a growing and irreversible dependence upon the U.S., Michael Hart (2002) has argued that its prescriptions to reduce such dependence simply ignored economic realities.

Soon after the Progressive Conservative Party won the federal election in 1984, it abolished these Canadianization policies and declared to the world that Canada was open for business once again. Geographic closeness and intertwined economic relations had forced Canadians to get along with the Americans. These developments cleared the way for the Canada-U.S. Free Trade Agreement (CUSFTA), which can be considered as a starting point in institutionalizing economic integration in North America. The U.S. decision to negotiate CUSFTA was based on expectations of potential gains from trade with America’s largest commercial partner, and the desire to add incentives for other nations struggling to complete the GATT negotiations going on at that time (Clement et al., 1999; Destler, 2016; Hart, 2002). While CUSFTA barely registered in either the mass media or the political debates in the United States, opposition to the deal became so strong in Canada that Prime Minister Brian Mulroney was forced to call a federal election to settle the controversy (Ayres, 2011). Opponents of the deal argued about the possibility of hundreds of thousands of Canadian jobs exiting to the U.S., reduction of social programs due to harmonization of tax systems, and the danger of losing Canada’s cultural identity. The Federal

elections of 1988 in Canada became almost exclusively a trial for trade liberalization. The outcome of the elections gave the Mulroney government decisive power in order to effect a quick implementation of CUSFTA in 1989.

In the first few years after implementation, Canadian businesses and individuals went through some painful adjustments. There were substantial short-run adjustment costs for workers who lost their jobs, and for stakeholders in plants that were closed because of new import competition or the opportunity to produce more cheaply in the U.S. Daniel Trefler (2001) has evaluated the impact of CUSFTA on a large number of performance indicators in the Canadian manufacturing sector from 1989 to 1996. For manufacturing as a whole, employment shrank by 5 percent, output fell by 3 percent, and the number of plants declined by 4 percent. Trefler concluded that most of the effects of CUSFTA were smaller than one would imagine, given the heat generated by the debate. Positive impacts were also felt. “The tariff cuts raised labor productivity by a compounded annual rate of 2.1 percent for the most impacted industries and by 0.6 percent for manufacturing as a whole” (Trefler, 2001, pp. 38). By the mid-1990s it was evident to businesses and the public that CUSFTA was beginning to pay off. The Royal Bank of Canada reported that, along with a boost in productivity, there was a substantial increase in bilateral trade, two-way foreign direct investment, and improvements in settling trade disputes (as cited in Hart, 2002, pp. 390). Given this successful track record, CUSFTA could play a crucial role for Canada once again in relation to potential U.S. withdrawal from NAFTA due to the position and views on free trade by Donald Trump (see next section).

The continental shift from bilateral to trilateral agreements took place when Mexico joined the GATT in 1986, and both the Canadian and Mexican leadership adopted a free trade agenda chaired by the United States. Louis Nevaer (2004) has summarized the three most cited reasons for NAFTA’s creation. “The first was to expand the success of the U.S.-Canada Free Trade Agreement that resulted in tremendous strides in integrating the economies of the United States and Canada. The second was to address the perceived threat of a united European trading bloc. The third was to integrate the Mexican economy into that of the United States and Canada in such a way that it would foster sustained growth in Mexico, implement fundamental capitalist reforms, and provide an engine to lift Mexico’s workers out of poverty” (Nevaer, 2004, pp .23).

In general, Canadians were less concerned with the inclusion of Mexico into the continental partnership than they had been about the initial bilateral negotiations with the United States (Clement et al., 1999). The opposition to NAFTA in the United States was unprecedented. Opponents argued that low-cost labour in Mexico would cause losses of millions of American jobs, reduced wages, and therefore further economic inequality in the U.S. While Ross Perot and Pat Choate predicted 5.9 million job losses, President Bill Clinton projected that NAFTA would create 200,000 American jobs in its first two years and a million jobs in its first five years (as cited in Hufbauer, Cimino, & Moran, 2014, pp. 1). Mexican President Carlos Salinas de Gortiari saw NAFTA as a vehicle to modernize the economy so that it would “export goods, not people” (as cited in Malkin, 2009, pp. B1).

NAFTA negotiations continued for three years and the agreement was signed on December 17, 1992. The first five years of NAFTA’s implementation were challenging for all three countries due to new regulations under the agreement itself, as well as external economic problems in Asia, Latin America, and Russia in the late 1990s. Both opponents and proponents of NAFTA emphasized the negative and positive results of implementation, respectively. However, most experts recognize that it was difficult, if not impossible, to measure the effects of NAFTA, especially on employment and compensation levels

(Clement et al., 1999; CBO, 2003; Villarreal & Fergusson, 2013). The U.S. Department of Commerce has reported that in the six months following approval, NAFTA was working as planned. American exports increased by 17 percent to Mexico and 10 percent to Canada (as cited in Dethloff, 1997, pp.150). A significant increase in exports of made-in-America components of electronics, auto parts, and jet engines can be attributed to expanding regional supply chains to Mexico. At the same time, NAFTA did not have the desired impact on correcting the U.S. trade balance deficit due to increased imports from Mexico and Canada (Ibid, 1997).

Twenty two years after enactment, NAFTA has been described as the most controversial of all US trade accords (Destler, 2016). Its legacy remains contentious in Canada and Mexico as well (Knowledge at Wharton, 2014). However, in an assessment of NAFTA at the age of twenty, the Congressional Research Service provided a more measured evaluation of its economic and trade effects. While admitting the difficulty of measuring the overall economic impact of NAFTA, the authors also recognized its significance (Villarreal & Fergusson, 2013). They also confirmed that the most dire predictions about NAFTA’s impact have not taken place and it has not caused huge job losses as predicted by opponents.

Many experts have credited NAFTA with contributing to North American competitiveness achieved via the development of supply chains. The joint production platforms based on regional integrated supply chains built over the last quarter century have made businesses in Canada, the United States, and Mexico more efficient and interconnected (Crowley, 2011a; Kergin, Sarukhan & Wayne, 2016; Villarreal & Fergusson, 2013; Wilson, 2014). Researchers from the U.S. National Bureau of Economic Research calculated that on average, 40 percent of the value of goods imported from Mexico and 25 percent of those from Canada in fact come from the United States (Koopman, Powers, Wang, & Wei, 2010).

Vast production integration in North America outgrew the institutional framework established twenty two years ago. There has been a strong informal consensus achieved among academics, government officials, and businesses that NAFTA no longer provides a framework sufficiently robust for the type of economic integration needed to ensure North American competitiveness for the next twenty years (Wilson, 2014).

Over the past few years the most reluctant party to start trilateral negotiations over NAFTA’s modernization has been the U.S. government. Political scientists explain it as a “no win” situation for politicians. Decision-makers in the U.S. government could lose voter support if they re-open NAFTA because of the long-standing hostility toward trade liberalization among organized labor, a key constituency for the Democratic Party (Yakabuski, 2015). At an extreme, NAFTA has been described as a “horrible trade agreement” by Joseph Nigro, the President of the International Association of Sheet Metal, Air Rail and Transportation Workers (as cited in Eidelson, 2014). NAFTA has been seen as anathema to the trade unions that influenced top decision-makers in President Obama’s administration (Crowley, 2014).

A modernization of NAFTA’s institutional architecture is important, but it is not the only challenge to North American integration. Businesses in Canada, the United States, and Mexico must also deal with aging border infrastructure, security concerns, and a lack of political leadership in addressing all these issues. Simultaneously, North America today faces the challenges of accelerating engagement with a rising Asia and forming free trade arrangements with Europe. The following part of this paper addresses some aspects of the tremendous challenges to maintaining and enhancing a continental partnership.

THE CURRENT CHALLENGES TO DEEPENING NORTH AMERICAN INTEGRATION

According to a recent publication in the Journal of International Business Studies, NAFTA has the highest level of institutional diversity among major regions of the world (Arregle, Miller, Hitt & Beamish, 2016). Multiformity of political democracy, regulatory control, capital availability, and market liquidity complicates the process of trilateral modernization of NAFTA. North America lacks a strong supranational governance mechanism, and improvements to NAFTA have tended to be marginal (Dawson, 2015). Since its ratification, a number of deficiencies have been discovered in the areas of dispute resolution, labor mobility, capital movements, subsidies, antidumping, and countervailing duties (Clement et al., 1999). Rules-of-origin provisions have proved cumbersome and outdated (Council on Foreign Relations, 2014). There is not even a consultative mechanism through which member nations can negotiate and eliminate such deficiencies. The range of suggestions from academics and policy-practitioners for how to upgrade NAFTA has varied in scale and scope. There are proposals for re-opening NAFTA negotiations with the purpose of creating NAFTA-2 (Paramonov, 2012; Yakabuski, 2015) or NAFTA-plus (Mintz, 2015), establishing a new North American economic and security community (Council on Foreign Relations, 2005), incremental renewal into a North American Union (as cited in Gabriel, 2015), and setting up a completely new agreement – a Custom Union (Pastor, 2011). Despite a variety of thoughtful suggestions, none of them have been officially accepted by the governments of Canada, the United States and Mexico.

With the election of Donald Trump as the next U.S. President, the status quo over NAFTA modernization maintained by Obama’s administration is at the discretion of a businessman turned top political decision-maker. Mr. Trump’s stand on NAFTA during the Presidential campaign reflected the view of a certain cross-section of the American electorate that blames NAFTA for the flight of manufacturing jobs to Mexico. NAFTA’s impact on American jobs and wages has been the subject of many recent studies (Baker, 2013; The Center for Economic and Policy Research, 2014; Hufbauer & Cimino, 2014; McBride & Sergie, 2016; Knowledge at Wharton, 2014; Villarreal & Fergusson, 2013). There is no consensus in the results of these studies, which is another confirmation of the earlier-made prediction that, “it can never be possible to sort out completely the effects of North American economic integration” (Clement et al., 1999, pp. 203). Some experts point to the negative impact of Asian low-cost labor on U.S. jobs. In a recent paper published in the Annual Review of Economics, three economists show that competition with China had greater job churning and reduced income effects on American manufacturing jobs than did NAFTA (Autor, Dorn & Hanson, 2016). Gordon Hanson credits NAFTA for helping the auto industry to compete with China (as cited in McBride & Sergie, 2016). By facilitating the development of cross-border supply chains, NAFTA lowered costs, raised productivity, and, ultimately, improved U.S. competitiveness.

In the second decade of the 21st century, cross-border supply chains in North America have been challenged with regulatory barriers, outdated border infrastructure and security concerns. Accumulated costs of complying with various regulatory requirements for labeling, testing, and shipping goods have caused this inefficiency. When parts cross the border several times at various stages of assembly, the accumulated costs defeat the efficiency of integrated supply chains in the manufacturing sector (Moens & Bartons, 2014). Mandatory customs paperwork poses another substantial challenge. Despite the acceptance of electronic documents, “there is not one unified portal for submissions or information sharing among the forty-seven U.S. agencies that deal directly with the existing import/export process” (Council on Foreign Relations, 2014, pp. 36).

Physical customs barriers hinder North American competitiveness as well. The combination of increasing demand and outdated border infrastructure has slowed the movement of cargo and people across borders. The average age of U.S. ports of entry exceeds forty years and chronic underinvestment has created a crossing environment with frequent backlogs and stress for drivers and customs authorities (Council on Foreign Relations, 2014). Long wait times have elevated costs for businesses and customers across the continent.

Following the shock of the September 11th attacks, the imposition of new border security measures made border crossings “thicker, stickier, and more costly” (The Economist, 2008). According to estimates done by Robert Pastor, since 2001 the United States government has spent $186 billion on border security, and only a small fraction of that amount has been spent on upgrading border infrastructure to make cargo flow more efficient (as cited in The Economist, 2014). The challenge here is to apply a reasonable approach to balancing security and prosperity to avoid the situation “when cops run the border, [and] legitimate users become entangled in ever more onerous enforcement and surveillance that impedes border efficiency” (Crowley, 2011b, pp. 8).

To allocate more resources towards streamlining flows of materials, parts, finished products and technology through continental supply chains, decision-makers in all three countries have to get approval from their constituencies. However, voters who are preoccupied with the idea of vulnerability of their borders to illegal immigrants, criminals, and unfair trade are unlikely to ask their politicians to increase spending on regulatory alignment and border infrastructure to expedite the flow of goods and people from neighboring countries. To achieve the goal, supply chain members have to team up with policy experts and academics from Canada, the United States and Mexico who realize and, more importantly, can prove the necessity of, further continental integration via removal of all kinds of barriers to trade, investment, and technological exchanges. A critical aspect is enlightening border communities and the general public about the danger of building walls in North America, which can be costly for all three nations while benefitting overseas competitors.

More than ten years ago, the Independent Task Force Report recommended expansion of a cross-border educational study within North America to reflect the degree of commercial exchanges (Council on Foreign Relations, 2005). This recommendation reflects the idea that economists, political scientists, businesses and public policy professors from universities across the continent can play a leading role in demystifying the economic impacts of NAFTA, promoting trilateral negotiations to remove regulatory and border barriers, and initiating debates about the benefits and costs of closer continental integration.

There is a good concrete example of such cross-border educational cooperation. The School of Public Policy at the University of Calgary, the School of Global Studies at the Universidad Anáhuac México Norte, the College of Public Service and Community Solutions and the Morrison Institute at Arizona State University have come together for an annual initiative called the Trilateral Border Issues Symposium. The goal of this symposium is to significantly advance the ongoing North American process of strengthening regional relations and competitiveness (North American Process Symposium, 2016). The three-way academic partnership plays a key role in the dialogue by bringing together a strong group of business and policy-focused expert participants from the three countries, including representatives from industry, academia and government, to revive the trilateral format of integration which has been abandoned and replaced with bilateral institutions. At several gatherings, including the symposia held in 2013 and 2014, participants discussed ways of bridging the gap between government and businesses to ensure that North American integration moves forward. Unique to the 2016 symposium, representatives

from a wide spectrum of private and public entities, including government agencies, export-focused trade groups, think tanks, and university professors moved from discussions to drafting realistic proposals. Through a series of working groups and plenary sessions, they developed specific recommendations for the energy sector, transportation infrastructure and supply chain security in order to be presented to the North American Leaders Summit (North American Process Symposium, 2016).

During one of the working group sessions, the symposium participants discussed a so-called ‘extra-regional agenda’ covering the Trans Pacific Partnership (TPP). On February 4, 2016, trade ministers from twelve of the Pacific Rim countries including all three NAFTA members signed the TPP Agreement in Auckland, New Zealand. The TPP is proclaimed as “a 21st century trade deal” and example of competitive liberalization which could lead to better rules for the Pacific Rim and global trade (Petri & Plummer, 2012). U.S. policymakers envision the TPP as an instrument for upgrading NAFTA as well. The Obama administration promoted it as a way of renegotiating North American relations in order to better address labor and environmental issues, and to substantially address NAFTA’s shortcomings (Executive Office of the President, no date).

In reality, the TPP Agreement does not include any mechanism through which NAFTA could be upgraded through the new provisions accepted by all members. According to explanations received by one of the authors of this paper from Canadian government representatives during The Trans-Pacific Partnership and Beyond Symposium (2015), NAFTA is not to be replaced by TPP; rather, both agreements are to co-exist side by side. Businesses in North America could then make a choice between relevant provisions when conducting cross-border transactions.

In the current situation, where approval of TPP by the U.S. Congress is uncertain and the President-elect has promised to walk away from it, NAFTA remains the backbone of North American economic integration. Any extra-regional agendas including TPP, the Transatlantic Trade and Investment Partnership (TTIP), and the Comprehensive Economic and Trade Agreement (CETA) divert limited negotiation resources from North American integration and, at least thus far, are not contributing to continental competitiveness.

NORTH AMERICAN INTEGRATION: FUTURE OUTLOOK

The future trajectory of economic integration in North America depends on the interaction of national, continental and global factors in a time of constant change and uncertainty. One of the most critical factors affecting the path and direction of integration is NAFTA. There is a sufficiently comprehensive body of evidence, including the above material, to suggest three possible scenarios for NAFTA’s evolution.

1. RenegotiatingPursuant to NAFTA’s Article 2202, the agreement can be modified, and any amendments agreed to by all members shall constitute an integral part of NAFTA (NAFTA Secretariat, no date). Renegotiation is a logical and justified scenario for a twenty two year old agreement which requires upgrading to maintain and enhance North American competitiveness in the 21st century. However, renegotiating of NAFTA could take years considering the complexity of economic relations and relevant labor, immigration, and environmental issues. The willingness of the negotiating politicians to reach a consensus will depend on approval by their multiple constituencies. To accept a new agreement, businesses and the public in

Canada, the United States, and Mexico have to be well-informed about the benefits of advanced regional economic integration. Therefore, the success of NAFTA’s reopening depends on promotion and education of broad constituencies in all three member nations about the urgency and necessity of removing numerous physical and regulatory border barriers and modernizing continental infrastructure for existing and new regional supply chains so critical to North American competitiveness and prosperity.

2. WithdrawalThe second scenario, withdrawal by member states as a result of failed renegotiations, is also possible if the new U.S. administration insists on protectionist measures “to return American jobs”, as suggested by Mr. Trump during his election campaign. If Canada and Mexico decide to reject increased U.S. tariffs and other trade restrictions, the American government could withdraw from NAFTA six months after it provides notice of withdrawal to the other members (Article 2205 Text of the North American Free Trade Agreement). Related NAFTA provisions allow the remaining members to keep the agreement in force, although Canada and Mexico could exercise other options available to them in the case of U.S. withdrawal (NAFTA Secretariat, no date). Canada could rely on CUSFTA, which was superseded by NAFTA but never actually terminated. This would mean that preferential access to the U.S. market remains and the flow of Canadian goods is not interrupted. Mexico does not have such an option, but could retaliate with counter-tariffs against American exports if the U.S. withdraws from NAFTA and implements protectionist measures against Mexican goods.

3. Status QuoThe third is a status quo scenario whereby member nations steer clear of renegotiations and keep NAFTA as it is now, without any changes. In an interview with the Canadian business news network BNN, the former U.S. ambassador to Canada David Wilkins downplayed the risk of NAFTA’s termination, suggesting that the agreement will survive and be around for long time. Wilkins argued that once Mr. Trump becomes President, he will realize there are benefits to keeping NAFTA (BNN, 2016).

Based on extensive and easily accessible commercial statistics, academic research, and policy-experts’ opinions, the U.S. withdrawal from NAFTA is likely the least desirable option for all members. The restoration of trade barriers would dramatically increase the cost of goods and services to thousands of businesses in the United States bound by co-production with their suppliers and customers across the entire continent. Retaliation and a possible trade war with Mexico would not only cost extra to American buyers, but also reduce U.S. exports and therefore negatively impact the American employment rate. Consumers in all North American constituencies would pay the ultimate price for protectionism and disintegration. Paul Krugman’s warning made back in 1993 sounds as current as never: “If the United States rejects NAFTA, it will virtually be asking to the bad old days of U.S.-Mexican relations. It will be a monument to our foolishness if our almost wholly irrational fears about NAFTA end up producing an alienated or even hostile nation on our southern border” (Krugman, 1993).

If the new U.S. administration applies a constructive approach, Canada and Mexico accommodate some of Mr. Trump’s reasonable policies, and all three parties accept the unavoidable costs of further integration, there may be a chance for effective modernization of NAFTA. This would establish grounds for not only supporting North American integration, but also improving continental conditions for business cooperation and successful competition with economies around the world.

The status quo scenario seems to be the safest for politicians in all three countries, and would forestall the devastation of the second scenario. However, the status quo scenario would not address the current challenges of deepening North American integration, as discussed in the previous part of this paper.

From an evolutionary point of view, the above-discussed scenarios could expedite, slow, or even temporarily reverse, but never actually stop, the process of North American integration, which will continue to be driven by the necessity of businesses to specialize and take advantage of forming cross-border supply chains across the continent. NAFTA members are bonded by their common geography and political views and economies, and should continue the process of reducing and eliminating regulatory, border, and other barriers in order to gain the benefits of a unique combination of continental assets.

Canada, the U.S., and Mexico are close neighbors occupying an area more than five times the size of the EU. North America has extensive coastlines along the Atlantic and Pacific oceans, which secure critical buffers and serve as trading zones. An intrinsically integrated river system provides natural waterways for transportation. Abundant arable land and mineral resources, geographic proximity, and the absence of significant internal natural barriers (and therefore low transportation costs) provide a natural endowment for further economic integration.

The political landscape of North America is affected by a complicated history of bilateral relations, as outlined in the first part of this paper. Each NAFTA member has a unique history, domestic sensitivities, and political culture. However, all three countries face common internal and external challenges which should prompt policy-makers to elevate and prioritize the North American relationship. It is also important to keep in mind that NAFTA was originally conceived as “an integrated economy within a global system, not as a protected bloc or experiment in shared sovereignty, as was the case with the European Union” (Council on Foreign Relations, 2014, pp.3).

With a Gross Domestic Product (GDP) of almost USD 22 trillion, the consolidated North American economy is the largest in the world compared to China’s USD 19.7 trillion and EU’s USD 19.2 trillion (CIA, 2016). NAFTA has resulted in one of the largest markets in the world, integrating over 482 million people with average per capita incomes of USD 45,406 (Table 1).

Table 1. NAFTA: Population, economy, trade (2015)Population

million

GDP,purchasing power parityUSDbillion

Average income (GDP per capita)

USD

Exports

USDbillion

Imports

USDbillion

NAFTA (total)USAMexicoCanada

482.4 21,904 45,406 2,302 3,098324.0 18,040 56,100 1,510 2,273123.0 2,230 18,400 381 39635.4 1,634 45,600 411 429

Source: Compiled from the CIA World Fact Book.

Mexico, with its relatively young and fast growing population, contributes to healthier demographics in North America as compared to those in Europe, China, Japan, and Russia (Council on Foreign Relations,

2014). According to research by the Boston Consulting Group, Mexico’s economy exhibits a growing cost advantage over China. “A tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China” (BSG, 2013, pp.1).

NAFTA is the world’s largest trading entity, with combined exports and imports exceeding USD 5.3 trillion (Table 1). Geographic closeness and relatively complimentary economies make Canada, the U.S. and Mexico natural trade partners. Energy and natural resources in Canada, the world’s largest consumer market in the U.S., and a young and low-cost labor market in Mexico make a trilateral relationship inevitable (Lanthemann, 2014).

CONCLUSIONS

The process of North American integration began with the bilateral relations of Canada and Mexico with the United States in the 19th century, climaxed with the creation of the trilateral architecture of NAFTA in the 20th century, and has come on trial in the 21st century. Continental integration has never been a linear progression, and is currently threatened by the destructive forces of protectionism and doubts about the benefits of open borders and free movement of goods, services and people across the continent.

While never constituting the core or sole driver of integration, NAFTA has become a cornerstone of trilateral relations among its member nations. The above-presented analysis suggests three possible scenarios for NAFTA’s evolution, namely: renegotiating, U.S. withdrawal from the agreement and its subsequent dismantling, and maintenance of the status quo. At first glance, the choice would appear to belong to the new U.S. President and his administration, but in reality depends on a variety of factors and realities such as a highly integrated North American system of co-production based on complimentary economies of member states and cross-border supply chains. The dismantling of NAFTA without any replacement would not halt the process of integration, but could be a very costly scenario for businesses and constituencies across North America. Instead of returning jobs, the President-elect would risk losing more American jobs and alienating his neighbors.

Over the past twenty two years, NAFTA has survived four different American administrations, the aftermath of the September 11th terrorist attacks, and warnings of renegotiation issued by the Democratic Party candidates for the U.S. Presidency in 2008. NAFTA does require modernization, but modernization should be accomplished through political negotiations grounded in economic realities and acceptance of inevitable costs by constituencies in the U.S. and neighboring states. Businesses and the general public must be made well-informed about the benefits of the modernized architecture of North American integration and the shared responsibility for addressing the numerous challenges of competition, environmental and security threats. A crucial role in promoting North American integration and educating constituencies belongs to academic institutions. Universities, colleges and academic associations across the continent should become centers of dialogue between industry, policy-experts and local communities, encouraging governments to make strategically important decisions about the future of North America.

Despite perpetual uncertainty, remaining barriers, and considerable challenges, the outlook for North American integration remains promising. Interconnected businesses and communities, potential benefits of a unified, barrier-free market, abundant energy and mineral resources, favorable demographics, as well

as accumulated political experience and democratic processes remain in place and will continue to secure the trilateral partnership of Canada, the United States, and Mexico.

REFERENCES

Arregle, J.L., Miller, T.L, Hitt, M.A. and Beamish, P.W. (2016) ‘How does regional institutional complexity affect MNE internationalization?’, Journal of International Business Studies, 47(6): 697-722.

Autor, D.H., Dorn, D. and Hanson, G.H. (2016) ‘The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade’, Annual Review of Economics, Vol. 8: 205-240.

Ayres, J. (2011) ‘The limits of power and protest: civil society mobilization against North American integration’, in T. Olesen (ed.), Power and Transnational Activism, New York: Routledge, pp.75-90.

Baker, D. (2013) ‘It Lowered Wages, as It Was Supposed to Do’, The New York Times, [www document] http://www.nytimes.com/roomfordebate/2013/11/24/what-weve-learned-from-nafta/nafta-lowered-wages-as-it-was-supposed-to-do (assessed 2 November 2016).

BCG (2013) ‘Mexico’s growing cost advantage over China, other economies will boost its exports – and U.S manufacturers’, The Boston Consulting Group, Press Releases, [www document] http://www.marketwired.com/press-release/mexicos-growing-cost-advantage-over-china-other-economies-will-boost-its-exports-us-1806911.htm (assessed 15 September 2016 ).

BNN (2016) ‘Trump could change mind on NAFTA’, BNN News, [www document] http://www.bnn.ca/nafta-will-survive-but-tpp-outlook-less-certain-with-trump-win-wilkins-1.603762 (assessed 9 November 2016 ).

CBO (2003) ‘The Effects of NAFTA on U.S.-Mexican Trade and GDP’, Congressional Budget Office of the United States: Washington, DC.

CIA (2016) ’The World Factbook’, [www document] https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html (assessed 12 November 2016).

Clement, N.C. et al. (1999) North American Economic Integration: Theory and Practice, Edward Elgar: Northampton, MA.

Council on Foreign Relations (2005) ‘Building a North American Community’, Report of an Independent Task Force, CFR: New York.

Council on Foreign Relations (2014) ‘North America: Time for a New Focus’, Independent Task Force Report No. 71, CFR: New York.

Crowley, B. L. (2011a) ‘NAFTA really about running a single integrated economy’, Financial Post, [www document] http://www.macdonaldlaurier.ca/mlis-brian-lee-crowley-in-the-financial-post-nafta-is-really-about-running-a-single-integrated-economy/ (assessed 13 November 2016).

Crowley, B. L. (2011b) ‘The axle, the bridge and police’, Commentary, Macdonald-Laurier Institute: Ottawa.

Crowley, B. L. (2014) ‘NAFTA is falling short of its potential as a global economic bloc’, The Globe and Mail, [www document] http://www.macdonaldlaurier.ca/crowley-in-the-globe-nafta-is-falling-short-of-its-potential/ (assessed 13 November 2016).

Dawson, L. (2015) ‘Canada-Mexico trade: an arranged marriage comes of age’, SPP Research Papers, School of Public Policy, University of Calgary, Vol. 8, Issue 26: 1-16.

Destler, I. M. (2016) ‘America’s Uneasy History with Free Trade’, Harvard Business Review,

[www document] https://hbr.org/2016/04/americas-uneasy-history-with-free-trade (assessed 29 October 2016).

Dethloff, H.C. (1997) The United States and the Global Economy since 1945, Harcourt Brace College Publishers: Fort Worth, TX.

Eidelson, J. (2012) ‘Trans-Pacific Partnership: Larger than NAFTA?’ The Associated Press, [www document] http://www.salon.com/2012/06/14/trans_pacific_partnership_larger _than_nafta/ (assessed 1 November 2016).

Euronews (2016) ‘Trump Victory Puts Pressure on Mexico over NAFTA Trade Deal’, [www document] http://www.euronews.com/2016/11/11/trump-victory-puts-pressure-on-mexico-over-nafta-trade-deal (assessed 12 November 2016).

Executive Office of the President (no date) ‘The Trans Pacific Partnership’, [www document] https://ustr.gov/tpp/#upgrading-nafta (assessed 1 November 2016).

Gabriel, D. (2015) ‘The Renewed Push for Deeper Economic Integration’, Global Research,[www document] http://www.globalresearch.ca/the-renewed-push-for-deeper-north-american-integration/5422860 (assessed 25 October 2016).

Hart, M. (2002) A Trading Nation: Canadian Trade Policy from Colonialism to Globalization, UBC Press: Vancouver.

Hufbauer, G.C. and Cimino, C. (2014) ‘NAFTA Rejoinder: The US Effects Are Clearly Positive for Most Workers’, Peterson Institute for International Economics, [www document] https://piie.com/blogs/realtime-economic-issues-watch/nafta-rejoinder-us-effects-are-clearly-positive-most-workers (assessed 25 September 2016).

Hufbauer, G.C., Cimino, C. and Moran, T. (2014) ‘NAFTA at 20: Misleading Charges and Positive Achievements’, Peterson Institute for International Economics, [www document] https://piie.com/publications/policy-briefs/nafta-20-misleading-charges-and-positive-achievements (assessed 25 September 2016).

Kergin M., Sarukhan A. and Wayne, A. (2016) ‘North America needs pivot … to North America’, The Globe and Mail, [www document] http://www.theglobeandmail.com/ report-on-business/rob-commentary/north-america-needs-to-pivot-to-north-america/article28438256/ (assessed 22 October 2016).

Knowledge at Wharton (2014) ‘NAFTA, 20 Years Later: Do the Benefits Outweigh the Costs?’, Wharton School, University of Pennsylvania, [www document] http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/ (assessed 27 September 2016).

Koopman, R., Powers, W., Wang, Z. and Wei, S.J. (2010) ‘Give Credit Where Credit Is Due: Tracing Value Added in Global Production Chains’, Working Paper 16426, National Bureau of Economic Research, Cambridge MA, [www document] http://www.nber.org/papers/w16426 (assessed 27 October 2016).

Krugman, P. (1993) ‘The Uncomfortable Truth about NAFTA: It's Foreign Policy, Stupid’, Foreign Affairs, Volume 72, Number 5.

Lanthemann, M. (2014) ‘NAFTA and the Future of Canada, Mexico and the United States’, Stratfor, [www document] https://www.stratfor.com/weekly/nafta-and-future-canada-mexico-and-united-states (assessed 8 October 2016).

Malkin, E. (2009) ‘Nafta’s Promise Unfulfilled’, The New York Times, March 23, B1.McBride J. and Sergie M.A. (2016) ‘NAFTA’s Economic Impact’, The Council on

Foreign Relations, Publications, [www document] http://www.cfr.org/trade/naftas-economic-impact/p15790 (assessed 27 September 2016).

Mintz, J.M. (2015) ‘Jack M. Mintz: Time for NAFTA-plus’, Financial Post, [www document]

http://business.financialpost.com/fp-comment/jack-m-mintz-time-for-nafta-plus (assessed 22 September 2016).

Moens, A. and Bartos A. (2014) ‘Canada’s Catch-22: The State of Canada-US Relations in 2014’, Fraser Institute, [www document] https://www.fraserinstitute.org/sites/default/files/canadas-catch-22-state-of-canada-us-relations-in-2014.pdf (assessed 2 July 2016).

NAFTA Secretariat (no date). ‘Chapter Twenty-Two: Final Provisions’, Text of the North American Free Trade Agreement, [www document] https://www.nafta-sec-alena.org/Home/Legal-Texts/North-American-Free-Trade-Agreement (assessed 9 November 2016).

Nevaer, L.E.V. (2004) NAFTA’s Second Decade: Assessing Opportunities in the Mexican and Canadian Markets, Thompson: Toronto.

North American Process Symposium (2016) ‘Unlocking North American Competitiveness’, [www document] https://northamericanprocess.org/?home (assessed 27 May 2016 ).

Paramonov, I. M. (2012) ‘North American Integration: NAFTA and Beyond’, The Business Review, Cambridge, Vol.20, Number 2: 82-88.

Pastor, R. A. (2011) The North American Idea: A Vision of a Continental Future, University Press: Oxford.

Petri, P. A. and Plummer, M.G. (2012) ‘The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications’, Policy Brief, Peterson Institute for International Economics, [www document] http://xxx.iie.com/publications/pb/pb12-16.pdf (assessed 9 November 2016).

The Center for Economic and Policy Research (2014) ‘Enough Magical Thinking on Trade’, CEPR: Washington, [www document] http://cepr.net/blogs/beat-the-press/enough-magical-thinking-on-trade (assessed 29 October 2016).

The Economist (2008) ‘Canada and the United States: A fence in the north, too’, [www document] http://www.economist.com/node/10766402 (assessed 1 November 2016).

The Economist (2014) ‘Ready to take off again? NAFTA at 20’, [www document]http://www.economist.com/news/briefing/21592631-two-decades-ago-north-american- free-trade-agreement-got-flying-start-then-it (assessed 1 November 2016).

The Trans-Pacific Partnership and Beyond Symposium (2015) The School of Public Policy of University Calgary and Wilson Center, December 3, 2015, Edmonton.

Trefler, D. (2001) ‘The Long and Short of the Canada-US Free Trade Agreement’, NBER Working Paper No. 8293, National Bureau of Economic Research [www document] http://www.nber.org/digest/sep01/w8293.html (assessed 12 November 2016).

Villarreal, M. A., and Fergusson, I. F. (2013) ‘NAFTA at 20: Overview and Trade Effects’, Congressional Research Service: Washington DC.

Wilson, C. (2014) ‘NAFTA’s Next 20 Years: In Face of Chinese Competition, Bonds Must Be Strengthened’, Forbes, [www document] http://www.forbes.com/sites/ themexicoinstitute /2014/01/06 /the-next-twenty-years-of-nafta/ (assessed 29 September 2016).

WTO (2016) ‘G20 trade restrictions reach highest monthly level since the crisis’, [www document] https://www.wto.org/english/news_e/news16_e/trdev_21jun16_e.htm (assessed 12 September 2016).

Yakabuski, K. (2015) ‘NAFTA risks becoming collateral damage in Obama’s geopolitical plans’, The Globe and Mail, [www document] http://www.theglobeandmail.com/report-on-business/rob-commentary/nafta-risks-becoming-collateral-damage-in-obamas-geopolitical-plans/article26318095/ (assessed 12 November 2016).