The North American Approach to NorthSouth Integration: Mexico, Canada, and the United States Under N

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The North American Approach to North-South
IntegrationMexico, Canada, and the United
States Under NAFTA

• Colloque du Réseau Intégration Nord Sud (RINOS)
• INTÉGRATIONS RÉGIONALES ET STRATÉGIES DE
  DÉVELOPPEMENT 
• Les relations Nord-Sud dans lEuromed, les
  Amériques et lAsie
• Université du Québec à Montréal
• Conférence Spéciale
• 2 Juin 2005
• Robert A. Blecker
• Professor of Economics
• American University
• Washington, DC

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• Alternative Title
• Pobre México!
• Tan lejos de la Unión Europea, y tan cerca de
  los Estados Unidos!

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Distinguishing Characteristics ofNorth American
Integration

• Large and persistent development gap between
  Northern (US, Canada) and Southern (Mexico)
  economies in a FTA
• Asymmetries in economic size and political power,
  US vs. Canada/Mexico
• Mostly dual bilateral relations, Canada-US and
  Mexico-US weak trilateral ties
• Narrow institutional framework (NAFTA) does not
  cover important aspects of the integration
  process
• Legal and institutional framework mostly ignores
  the development dimension and North-South issues

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Dimensions of North American Economic
Integration Trade

• Trade Flows the US accounts for
• nearly 90 percent of Mexicos exports and over 80
  percent of Canadas exports
• about 60 percent of Mexicos imports and 70
  percent of Canadas imports
• Canada and Mexico are the United States two
  largest trading partners, but together account
  for only 30 percent of US trade (exports
  imports)
• Intra-NAFTA trade grew rapidly in the 1990s, but
  has grown more slowly since 2000
• Rising imports from China and other Asian
  countries have displaced intra-NAFTA trade since
  2000

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Source U.S. Department of Commerce, Bureau of
Economic Analysis, International Transactions
Accounts, Release of March 16, 2005
ltwww.bea.govgt. Data for 2004 are preliminary.
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Dimensions of North American Economic
Integration Investment

• N.A. capital markets have been integrated through
  financial market liberalization and the
  liberalization of trade in financial services
• The US accounts for a majority of the FDI in
  Mexico and Canada
• But other countries (European, Asian) also
  provide FDI inflows
• FDI inflows into Mexico have increased in
  financial services as well as in manufacturing
• Mexico succeeded in replacing hot money inflows
  with FDI after the 1994 crisis and NAFTA
• But FDI inflows into Mexico have diminished since
  2000
• FDI inflows were surpassed by remittances in
  2003-04

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Sources International Monetary Fund, Banco de
México.
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Dimensions of North American Economic
Integration Migration

• Mexican emigration is driven by
• Rapid growth of the labor force (nearly 1 million
  workers per year)
• Inadequate domestic job creation
• Lower wages (roughly 1/10 of US and Canada)
• An estimated 4-5 million Mexicans migrated to the
  United States in the 1990s
• roughly half of them were illegal
  (undocumented)
• US efforts to enforce migration restrictions have
  not stopped migration, but have increased
  hardships for migrantsand have induced Mexicans
  who reach the US to stay

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Dimensions of North American Economic
Integration Migrationcontinued

• An estimated 8 of all Mexican-born people live
  in the United States
• Existing networks of immigrants attract more
  migrants
• Mexican immigration in Canada is smaller but
  legalized through a guest worker program in
  agriculture
• By 2003-04, annual inflows of remittances from
  Mexicans abroad exceeded FDI inflows into Mexico
• Remittances reached nearly 17 billion in 2004

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Employment in Mexico Since NAFTAOverview

• Overall, job creation in export-oriented
  manufactures and agriculture has been offset by
  job losses in domestic/import-competing
  manufactures and agriculture
• Most net job growth in Mexico has been in
  non-traded services and the informal sector in
  spite of NAFTA and export promotion efforts
• Trade liberalization has not solved Mexicos
  employment problems

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Employment in Mexico Since NAFTADetails

• No single, comprehensive data source exists
• We have to rely on partial and incomplete
  surveys, some of which have changed over time
  (Polaski, others)
• Maquiladoras
• Increased by approx. 750,000 from 1993-2001
• Then fell by 180,000 from 2001-2004
• Net increase of 570,000 from 1993-2004 (more than
  doubled)
• Decreasing female share (now just over half)
• Large non-maquiladora manufacturing firms
• Net decrease of about 100,000 (roughly 7) from
  1994-2004, but with larger cyclical fluctuations
  up and down in-between
• Agriculture
• New survey shows decline of 730,000 from
  1998-2003
• Old survey showed decline of 370,000 from
  1991-1998
• Census data show an 8 percentage point drop in
  the share of agriculture in male employment,
  little change in female share (Hanson)
• Evidence of skill upgrading in the most dynamic
  export industries (Hanson, Verhoogen)

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Why NAFTA Didnt Create More Jobs in Mexico (1)
Slow GDP growth

• Growth rates have been lower since trade
  liberalization than in the import substitution
  era
• Average for 1951-1980, 6.4 percent per year
• Post-GATT (1987-2004), 3.0 "
• Post-NAFTA (1994-2004), 2.8 "
• Post-peso crisis (1996-2004), 3.7 "
• Mexico needs a higher GDP growth rate (at least 6
  percent) to keep up with productivity growth,
  raise real wages, and promote convergence to
  US-Canadian income levels and real wages

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Macro Factors that Have Affected Mexican
Employment

• Mexican growth is positively correlated with US
  growth since 1996
• US business cycles late 1990s boom, 2001
  recession, 2002-03 slow recovery
• Exchange rate fluctuations
• Peso or tequila crisis of 1994-95
• Subsequent real appreciation
• Restrictive macro policies designed to prevent
  another financial crisis since 1995
• under both Zedillo and Fox
• Trade surplus with US is outweighed by a larger
  deficit with rest-of-world

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Source International Monetary Fund, World
Economic Outlook, on-line databases.
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Sources Federal Reserve (USA), International
Monetary Fund (Canada), Banco de Mexico (Mexico).
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Why NAFTA Didnt Create More Jobs (2) Rapid
productivity growth

• Rapid productivity growth allows output to
  increase with proportionally smaller increases in
  employment
• Features of Mexican productivity growth
• Trade liberalization destroys jobs in
  import-competing industries as less efficient
  plants shut down and surviving plants increase
  efficiency to compete (similar to Canada see
  Trefler)
• Significant inter-industry reallocation to export
  sectors with higher (and faster growing)
  productivity (Lopez-Cordova)
• Productivity has increased in both maquiladora
  and non-maquiladora manufacturing plants
• Quality upgrading in non-maquiladora exports
  emphasizes activities with higher capital
  intensity, higher productivity, and greater skill
  requirements (Verhoogen)

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Why NAFTA Didnt Create More Jobs(3) Exports
not linked to rest of economy

• Value added in Mexican manufacturing has not kept
  up with the growth of exports (UNCTAD)
• Export activities are increasingly integrated
  into regional (North American) and global
  production chains, but not well integrated into
  the Mexican economy
• Exports accounted for 17.7 of output but only
  10.6 of employment in 1995-2000 less than one
  indirect job is created for each direct export
  job (Ruiz-Napoles)
• Maquiladora imports account for 76 of
  maquiladora exports and 36 of total exports
• MNC exporters have higher import coefficients
  than domestic firms
• Export growth is not generating adequate
  backward linkages

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Maquiladora imports
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Why NAFTA Didnt Create More Jobs (4) Growing
competition from China

• Mexico is a victim of the fallacy of
  composition in the export-led growth paradigm.
  Especially
• China displaced Mexico as the second largest
  source of US goods imports (after Canada) in
  2003-04.
• China has kept its currency undervalued while
  Mexico has let the peso appreciate (in real
  terms) to hold down inflation
• China and other Asian countries are also
  increasing their shares of Mexicos imports at
  the expense of imports from the US (and at the
  expense of Mexican domestic production)
• American big box retailers (Wal-Mart etc.)
  encourage consumption of cheap consumer goods
  from outside N.A.

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More Unequal Income Distribution

• Overall, real wages in manufacturing still had
  not recovered to their 1994 level by 2004 in
  spite of rapid productivity growth (in both
  maquiladoras and non-maquiladoras)
• Wages for more skilled (educated) workers have
  risen relative to less skilled (educated)
  workers in Mexico as well as the US (Hanson)
• Real wages have fallen more in the center/south
  compared with the border/north regions
  (increasing regional disparities) (Hanson)
• Adjustment costs have been severe in both
  expanding and contracting regions
• Less skilled workers have to compete with
  lower-wage workers in other developing countries,
  including China

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Political and Institutional Framework NAFTA

• North American Free Trade Agreement (NAFTA)
• Not completely free trade, many exceptions
• Includes strong protections for property rights
  and liberalization of capital flows
• No significant institutions or governance
  mechanisms (except for dispute resolution
  tribunals)
• Side Agreements
• Labor and Environmental Commissions small
  budgets, no enforcement powers
• N.A. Development Bank very limited mandate and
  funding for projects in the Mexican-US border
  region
• NAFTA restricts industrial development policies
  and government regulation of foreign investment
• Expropriation clause used to overturn social
  and environmental regulations at state/provincial
  levels

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Whats NOT Included in NAFTA

• No common external tariffs or harmonization of
  other trade barriers
• Not a customs union
• No coordination of monetary, fiscal, and exchange
  rate policies
• No common currency/monetary union
• No significant development assistance for Mexico
  (infrastructure, education, etc.)
• No parallel to the EUs regional and social
  cohesion funds
• Exception the NADBank in border areas only (very
  limited funds and mandate)
• No provisions for free migration, labor mobility,
  or rights of migrant workers
• Except for highly educated professional and
  technical workers

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Whats NOT Included in NAFTA continued

• No harmonization of social standards and policies
• Labor rights/standards, environmental protection,
  consumer health safety, occupational safety
  health, etc. are all left up to individual
  countries
• Some progress in phytosanitary standards and a
  few other technical areas
• No integration of security, borders, customs,
  etc.
• Businesses complain this creates barriers to
  trade (increases costs of border crossings)
• Politically difficult because of US post-9/11
  security concerns and desire to limit Mexican
  immigration
• No continental governance mechanisms
• Few international (trinational) institutions
• Nothing like the European Commission, European
  Parliament, etc.

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Political Obstacles to Further North American
Integration

• Asymmetrical economic weight and power relations
• US has greater bargaining leverage, imposes its
  interests
• US sees itself as a global power, tends to ignore
  Canada and Mexico
• Intra-N.A. relations are relatively more
  important for Canada and Mexico than for US
• Canadians and Mexicans resent/fear US domination

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Political Obstacles to Further North American
Integration

• Lack of North American identity or consciousness
• Citizens identify with their individual
  nationalities and regional/ethnic groups
• Governments often prefer to address issues on a
  bilateral basis, not trilaterally
• Very different political cultures no sense of
  shared history
• Deep political/partisan divisions within each
  country
• George Bushs unilateralist foreign policy has
  lessened Canadian and Mexican interest in deeper
  ties with the US

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Political Obstacles to Further North American
Integration

• Free-market views enshrined in NAFTA
  (ideological lock-in)
• Lasting influence of Mulroney/Salinas/Bush
  administrations
• Ideological belief in relying on markets (trade
  not aid)
• Resistance to public policy solutions to
  development problems
• Official integration agenda is limited to trade
  and investment issues (business perspectives
  dominate)
• Now augmented by US security concerns

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NAFTA Plus Expanding the Institutional
Framework

• Certain business interests, governmental actors,
  political activists (NGOs), international
  agencies, and intellectual elites are promoting
  various types of additional trilateral
  integration efforts
• Proposals vary according to interests and
  ideologies
• Various proposals include
• customs union
• monetary union
• labor rights/environmental standards
• migration reform
• framework for intergovernmental policy
  coordination
• development assistance funds
• For example

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Independent Task Force ReportBuilding a North
American Community(May 2005)

• Sponsored (but not endorsed) by
• US Council on Foreign Relations
• Consejo Mexicano de Asuntos Internacionales
• Canadian Council of Chief Executives
• Members consisted of ex-government officials,
  corporate financial leaders, think-tank
  scholars, academic experts, etc.
• Mostly center-right leaning with a few exceptions
• Proposes to create a North American security and
  economic community by 2010
• Much less ambitious than the EU
• Less bureaucracy and institutions compared with
  EU

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Caveats

• These proposals are presented as an important
  example, for information and discussion only
• I do not endorse all of these proposals, although
  I think some have merit
• The report contains the task forces majority or
  consensus views
• The task force also had many dissenting views
  from various perspectives (left/right, national)
• Warning this sort of elite opinion can be very
  influential!

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Specific Recommendations of Task Force for N.A.
Community

• Security issues
• Common security perimeter and harmonized border
  policies (emphasis on anti-terrorism)
• N.A. border pass for expedited passage of
  individuals with security clearances
• Move toward freer flows of people in the long run
  (deliberately vague what this means)
• Military and intelligence cooperation
• This is a reaction to post-9/11 US political/
  military concerns, but also linked to trade and
  migration issues

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Specific Recommendations of Task Force for N.A.
Communitycontinued

• Economic development
• Mexico to rely primarily on domestic reforms and
  initiatives
• US and Canada to fund a North American
  Investment Fund for Mexican development
• Focused on infrastructure and technical education
  to attract private capital
• Conditioned on Mexican reforms and financial
  contributions
• Enhanced capacity for the NADBank
• Further opening of the energy sector especially
  in Mexico
• But no commitment to privatization of PEMEX
• Emissions controls and conservation efforts (weak
  exhortations)

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Specific Recommendations of Task Force for N.A.
Communitycontinued

• Deeper economic integration efforts
• Common external tariffs on individual goods (but
  not a complete customs union?)
• Review NAFTA exclusions
• Permanent N.A. tribunal for dispute resolution
• Joint approach to unfair trade practices (very
  vague)
• Trinational competition (anti-trust) policies
• Greater harmonization of domestic regulations
• Increased labor mobility, including temporary
  migrant worker programs, eventual North American
  preferences in employment, full labor mobility
  between US and Canada (but delayed with Mexico)
• Greater educational cooperation

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Specific Recommendations of Task Force for N.A.
Communitycontinued

• Political framework
• Regular trinational summits and intergovernmental
  consultation
• A permanent North American Advisory Council (with
  members appointed by the 3 governments)
• No politically representative or democratic
  bodies (e.g., no elected N.A. parliament or
  congress)
• All of this seems to represent a consensus view
  of what is considered politically feasible in
  North America in the near future (post-Bush and
  Fox?)

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Conclusions

• The official N.A. integration process (NAFTA) has
  largely ignored North-South issues, lacks a
  developmental agenda
• Also neglects labor migrationor allows it to be
  regulated by unilateral US border policies
• Undemocratic process largely geared to business
  interests and US priorities
• There has been no convergence of Mexico with the
  US and Canada in the 11 years since NAFTA went
  into effect
• Some indicators show a slight divergence

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Conclusions (continued)

• Limited gains to Mexico in trade and FDI have not
  fostered rapid enough growth to solve the
  countrys employment problem
• Both structural obstacles and macroeconomic
  constraints have impeded rapid growth
• Result is continued out-migration and increased
  reliance on remittances
• Mexican society is also becoming more unequal
• There is a growing North-South divide and a
  rising skill premium within Mexico
• Sectors, regions, and interests positioned to
  benefit from the global/regional economy have
  prospered (relatively) while other parts of the
  domestic economy have suffered dislocations and
  declines

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Conclusions (continued)

• North America is sufficiently integrated that
  regional cooperation is essential to solving
  continental problems
• Yet political obstacles have prevented a
  European-style approach to promoting convergence
  of less-developed regions
• Mexico does need more domestic reforms
  (strengthen democracy, rule of law, transparency,
  justice system, anti-corruption efforts)
• Global developments (e.g., WTO, China, other
  FTAs) are undermining Mexicos special
  preferences in the US market and US preeminence
  in Mexico
• Yet NAFTA commitments restrict Mexican policy
  makers ability to manage trade and investment in
  the national interest

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The Road ForwardNAFTA Plus What?

• Status Quo free trade and investment, no social
  integration or development aid
• Deeper Economic Integration improve borders and
  infrastructure, move toward a customs union,
  common market, and/or monetary union
• Social NAFTA migration reform, development
  assistance, labor/environmental cooperation
• US Strategic Interests energy, security
• A North American political community
• what kind of community, and whose interests will
  be served?