Conference on Redefining U.S.-Canada Relations

Americas Society/Council of the Americas

New York City

“The Way Ahead”

US/Canada relationship is fundamentally sound. Problems abound, as usual. Issue is whether governments are prepared to make commitments to resolve them, and are prepared to endure the political heat from special interests;
Good vibes in Washington last Friday, but let’s wait and see;
I would like to focus on the economic side of our ties;
While the bilateral relationship between US and Canada is crucially important, I believe we should focus, as we look ahead, on the tri-lateral relationship within NAFTA;
Why? Because NAFTA has succeeded to such an extent in integrating the three economies. One figure says it all: in 1982, 31% of US, Canadian and Mexican foreign trade within the NAFTA area; by 2001, it was 56%. (EU was 61%.)
I believe it will be increasingly damaging to the interests of all three countries for any of the partners to continue to think in bilateral, rather than tri-lateral terms. For the US, this means we should end the practice of dealing with Canada and Mexico, at least in the economic sphere, on the basis of a “dual bilateralism;”
NAFTA is a reality. Time to stop arguing about it;
As all such efforts, NAFTA had its flaws. We need to try to agree on what they were and try to fix them rather than debating whether NAFTA was a good idea or not;
We also need to keep in mind that because NAFTA has resulted in a major leap ahead in the integration of the North American economies, it begs the question as to what we need to do in areas other than trade to respond to that integration;
So, what were the shortcomings of NAFTA?
In my view, the principal one was that it was so narrowly restricted to trade;
Clearly, while of enormous importance, trade cannot, in and of itself, solve the problems posed, for instance, by the disparities in income levels between the United States and Canada, on one side, and Mexico on the other. To put this in context, the difference is about 6/1, or more than three times as large as the greatest difference within the EU (Germany vs Greece).
It is very much in the interest of the US and Canada to diminish that disparity;
What is needed is something akin to the EU’s structural funds, with perhaps $10 billion annually (say $9 from the US and $1 from Canada) going into the modernization of Mexico’s infrastructure and educational systems. Mexico will have to make the largest contribution, which will require, inter alia, tax reform, in Mexico;
This should have been part of NAFTA from the outset. We need to repair that omission;
We would not need any new institutions to carry out such a program. The IADB would be more than able to do it;
In addition to being insufficient, in and of itself, to solve the problem of income disparities, the huge increases in trade and investment flows as a result of NAFTA have exacerbated other problems within the NAFTA area;
For instance, take transportation;
In part due to the success of NAFTA in promoting the economic integration of North America, the transportation infrastructure is in need of urgent work;
In addition to helping to modernize Mexico’s rail and road systems through the program mentioned above, we must consider that the road, rail, pipeline, and electricity transmission systems were developed on a national basis, with the interconnections added more or less as afterthoughts;
In the rail area for instance, the three governments should encourage the realization of Paul Tellier’s vision of cross-border mergers, which unfortunately was thwarted by the US Surface Transportation Board;
Ultimately, we should aim for two major North American railroads, linking CN, CP, Burlington/SantaFe, UP/SP, CSX, Norfolk-Southern and the two major Mexican railways;
Another area in which we need to adopt a tri-lateral approach is energy. For historical reasons, this will not be easy, but all three countries are currently failing to take advantage of the opportunities a more integrated market for the production, transmission and consumption of energy would offer. As the blackout of last August demonstrated, integrated markets along the borders are a reality, but it has happened largely in an unplanned way, with predictable results;
Governments need to develop, on a tri-lateral basis, plans for North America’s energy future. One key part of that future should be the development of the Athabasca Tar Sands in Northern Alberta, which I believe is the world’s largest largely untapped oil resource. It has the advantage of not being in the Persian Gulf or the former Soviet Union.
We also have a shared environment which can only be protected on a tri-lateral basis;
The events of 9/11/01 created a new challenge for the NAFTA partners. Unfortunately, the US response was again based on dual bilateralism. We essentially tried to do the same thing with both Canada and Mexico, but bilaterally;
We need a tri-lateral approach to deal with the security issues, ideally seeking to establish a security perimeter around the NAFTA area rather than allowing the existing borders to become greater barriers to the movement of goods, services, capital and people throughout the region. Truly secure US borders with Canada and Mexico could well be an economic disaster given the likely impact on trade;
Finally, let me turn to trade.
NAFTA was about trade, and trade flows as well as the associated flows of investment, have increased tremendously;
But the work is not over. We need to look beyond NAFTA, and I believe that should be in the direction of a North American Customs Union. In cview of the general move to lower rates, a common external tariff, which would not be a very difficult project provided it had a reasonable phase-in period, would complement nicely the idea of a common security perimeter.

· From the Canadian point of view, it could have the advantage finally to resolve the issue of United States trade remedy laws. As a general rule, members of customs unions do not use anti-dumping and CVD measures against other partners but rely on competition policy instruments, namely rules against predatory pricing, to manage disputes in that area;

So this, in my view, should be the agenda looking ahead. It would be based on the fundamental principle of sovereign states working together to maximize the benefits each derives from their cooperation in the economic sphere, supplemented by cooperation in other areas, such as environmental protection, in which strictly national solutions simply do not make sense. It would continue to be light on the institutional side, with tri-lateral bodies formed only to oversee the agreed areas of cooperation, to facilitate the work of the national governments, and to develop ideas for enhancing cooperation that could be considered by the peoples of North America and their governments.
Finally, just as the integrative process within the NAFTA region continues, we should be alert to opportunities to expand the sphere of cooperation into the rest of the Hemisphere;
This might involve offering to associate countries such as Chile, which have FTA’s with all three NAFTA partners, with NAFTA. Should we ultimately succeed in negotiating a FTAA, there would be an obvious opportunity to associate it with NAFTA.

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