By ANTONIO ORTIZ-MENA
Part of an ongoing series from the Wilson Center*
It is striking that, more than a quarter century after the North American Free Trade Agreement’s (NAFTA) entry into force, it is still necessary to provide a business case for deeper North American cooperation on economics and beyond, but that is where we are.
After the 1989 Canada-U.S. FTA, the best case for deeper Mexico-U.S .cooperation was made by Sidney Weintraub in his aptly titled “A Marriage of Convenience.” After that potential marriage of convenience became a ménage-à-trois, many studies and reports highlighted the benefits of deeper regional cooperation. To highlight just two, in 2005, the Council on Foreign Relations (CFR) published “Building a North American Community,” calling for the establishment of a North American economic and security community by 2010, and, in 2014, CFR published “North America: Time for a New Focus,” with less ambitious goals, many of which are still unrealized.
The case for enhanced cooperation was clear decades ago and is more so now. Focusing on economic issues, the United States remains the main trading partner for Canada and Mexico, but a key change is that Canada and Mexico are increasingly relevant for U.S. economic prosperity. This is so because the United States’ neighbors are also its main trading partners globally (vying with China over the top three spots), but especially given shared production. NAFTA, and now the USMCA, facilitate intra-industry and intra-firm trade, which generates efficiencies, but also higher costs from disruptions to trade and investment.
The multifaceted geopolitical competition between China and the United States provides an opportunity for enhanced North American economic cooperation. Many companies are diversifying their supply chains away from China, with a view to reducing political and regulatory risks. North America can provide a competitive production platform of goods and services destined for its enormous market and for export to other regions.
The push to reduce carbon emission by international agreements (Paris Agreement), domestic environmental policies, company priorities and consumer demands also create new opportunities for the region. Relocating supply chains to North America can reduce the carbon footprint of production, yielding an increasingly important advantage for our goods and services to remain competitive.
The table seems set, but recent developments could translate into a missed opportunity.
Barely two years into the USMCA, there are troubling signs of ill-advised nationalist policies that hinder the potential of our regional production platform. For instance, Canada and Mexico have initiated dispute settlement proceedings against the United States over how to apply USMCA rules of origin for autos. While disputes are to be expected in such an intense trade relationship, the fact that the most significant one so far involves the paradigmatic industry for regional production, and that the three countries were unable to resolve their differences via consultations, does not bode well. Likewise, U.S. initiatives such as strengthened Build America, Buy America provisions, hinder the generation of truly regional perspectives to boost shared production.
Perhaps the biggest impediment to deeper economic integration lies in Mexico’s wrong-headed energy reforms. The main impetus for NAFTA, and for the USMCA, was to create stable and clear rules to foster regional trade and investment. The high level of regulatory uncertainty, and the myriad obstacles posed to energy investments, mean that the supply of energy in Mexico will likely be unreliable, without enough clean sources and not competitively priced. While this will be a foregone opportunity for investments in energy, it will affect the whole region’s production platform.
How can Mexico be part of the North American solution to re-shoring because of China-U.S. geopolitical competition, if energy supplies will likely remain inadequate How can Mexico be part of the North American solution to re-shoring for environmental reasons, if its energy policies run directly counter to an energy transition and to addressing climate change goals?
A way forward would be, in the case of the dispute over automotive rules of origin, for
the party(ies) found to be in non-compliance to promptly bring their inconsistent measures into compliance. Past disputes, such as that involving Mexico and the United States over cross-border transportation services, resulted in the United States refusing to comply with panel recommendations and Mexico engaging in sanctioned retaliation. This episode generated uncertainty for trade and investment beyond trucking services. Hopefully, the lesson has been learned and disputes will be resolved via negotiations and, if not possible, via full commitment to implementing panel recommendations as embodied in the USMCA.
Regarding energy, it will be difficult for Mexico to significantly change course, but Canada and the United States can request consultations under the USMCA to discuss concerns over energy and environmental commitments. In addition, the USMCA’s Chapter 26, on competitiveness, could be used to its maximum potential through the activities of the North American Competitiveness Committee, including dynamic engagement with business and civil society.
More than a grand vision for North American integration, what is needed now on the economic front is for Canada, Mexico and the United States to comply with the letter and spirit of the USMCA. Pacta sunt servanda – agreements must be kept!
ANTONIO ORTIZ-MENA is a senior vice president at Dentons Global Advisors-Albright Stonebridge Group and an adjunct professor at the Edmund A. Walsh School of Foreign Service at Georgetown University and at the Center for Research and Teaching in Economics (CIDE) in Mexico City.
* The Wilson Center is offering a series of articles to take a deeper look at the potential gains of more effective collaboration across North America. Drafted and coordinated by former U.S. Ambassador to Mexico Earl Anthony Wayne, the series includes articles by experts from the three countries making the case for why such cooperation across the continent is worthwhile, despite its complexity and difficulties. This is part of that series, which is being published in Pulse News Mexico with express prior permission from the Wilson Center.