Neighbors should not be an after-thought when it comes to trade strategy

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Fortunately, this week’s trip to Mexico should reaffirm the president to look no further than our neighbors to find the best path to global competitiveness and the best leverage to negotiate the two deals. In 2011, 48 percent of North America’s merchandise exports went to the three NAFTA partners, for a total of $1.1 trillion. This is twice the total of merchandise exports to Asia ($476 billion) and almost triple what we export to Europe ($383 billion).   Furthermore, 25-40 percent of the value of U.S. imports from its neighbors comes from components made in the United States. Canada and Mexico are not only the United States’ most important markets and the largest source of energy imports, but also vital links in North American supply chains.

The proliferation of free trade agreements has not had much effect on the composition or direction of trade. Trade still occurs in higher volumes within regions than between regions. Therefore, to boost competitiveness, we need to deepen integration and create a seamless continental market.  A customs union is the next step.

Two separate tasks are needed: the removal of all internal customs duties and quantitative restrictions among the three countries, and second, the harmonization of tariffs to third countries to create a common external tariff (CET) towards non-member states. The original six members of the European Economic Community tried to achieve both in a span of 12 years (1958-1970), and while they did not quite make it, trade among the six grew almost six-fold by the time the customs union was virtually completed in 1970. The competitiveness gained by integrating European production chains created a platform for tripling the region's trade with the rest of the world. By 1970, the Community accounted for 1/3rd  of total world trade, a 10 percent increase from 1958. Economies that were devastated at the end of the war, emerged together as a globally competitive powerhouse, second only to the United States and growing almost twice as fast.                

Much of this growth is due to the elimination of costly barriers to trade, especially the elimination of rules of origin requirements. This is the moment for North America to take the same jump. Economists have estimated that rules of origin, which stop all products at the border to determine the North American content, cost anywhere from $36 billion to over $400 billion a year, depending on whether indirect effects are included. That is a whopping, unnecessary tax.  

Harmonizing tariffs should begin with tariff lines that have differences of less than 10 percent. About 40 percent of U.S. and Canadian MFN tariffs are within 1-2% of each other, and will be easy to adjust. For most cases this will mean lowering tariffs to U.S. levels.  Ironically, Mexico is most supportive of this approach, though they would be most costly to them. That's because they are eager to ascend to the first world economically and because their leadership is the most far-sighted.

The common tariffs collected at the border should be placed in a North American Investment Fund to build continental highways, improve railroads, and develop intermodal transportation. Nothing would narrow the income gap with Mexico or expand its buying power as effectively as that, and nothing would stimulate growth in all three countries more. A common tariff would mean eliminating customs forms and hassles at our two borders so that our officials can focus on drugs, terrorists, and undocumented workers. A common approach would allow us to focus on regulatory harmonization while strengthening our bargaining power in multilateral talks.  

This would not be easy because all three countries need to reconcile their different free trade agreements, but it would not be as hard as NAFTA, and it would begin to create a seamless market. The closer that we get to that goal, the more that the European Union and Asia will take our proposals seriously. Given the importance of the continental market, the idea of adding North America as an after-thought to negotiations with the TPP and Europe is backwards. If we want to move forward, we should start with our neighbors.    


Pastor is a professor at American University and author of The North American Idea: A Vision of a Continental Future. Barbee is a U.S. trade policy researcher in Washington, D.C.