Brexit is a cautionary tale for NAFTA

Brexit is a cautionary tale for NAFTA
© Getty Images

The North American Free Trade Agreement remains a cornerstone of the free trade strategies of Mexico, Canada and the United States. Why not? After all, NAFTA has done what the agreement set out to do, which is enable sustained growth in output, employment and productivity in the region, deliver more affordable goods and services within the region, attract investment to the region, and position North American companies to compete more effectively in global markets using the foundation of their efficient regional supply chains.

At least some of the answer as to why NAFTA works is because a free trade area is a commercial bargain that doesn’t infringe on national sovereignty. For example, each country still maintains its own border checkpoints, and there is actually very little labor mobility under NAFTA. Significantly, there are no superstructures for regulating or legislating on behalf of all of North America. That suits us just fine.

ADVERTISEMENT
European integration, on the other hand, is far more extensive, involving the free movement of people, goods and services and, for most members, a single currency arrangement that also constrains their ability to set their government budgets. Europe negotiates all its external trade deals as one unit, and to operate as one large market, members harmonize their regulations and laws. To accomplish that, countries must cede authority to European rulemaking bodies. There are economic gains from this model, but they come at a political cost and have left many Europeans feeling that they have no control over their schools, communities and neighborhoods.

There are limits to the European model of integration

In large part due to concerns over unrestricted migration, over-regulation, and the inability to make independent fiscal policy, the majority of Britons voted to leave the European Union after decades of ever deeper integration.

The dilemma for the United Kingdom is that, while it no longer wishes to subscribe to Europe’s full model of economic and political integration, there is no free trade area version of Europe. It’s the full-on union or nothing. For that reason, Britain must now negotiate a complex and complete, albeit amicable, divorce from the union that severs the political bonds but preserves their market access and secures commercial relationships, and it must do so by March next year under the terms of Europe’s treaty.

Negotiating its way out of Europe’s single market arrangement is one thing. Negotiating new commercial terms with Europe is another. Negotiating new commercial relationships with countries outside Europe is yet a third undertaking the United Kingdom must accomplish if it’s to avoid trading on terms worse than before Brexit.

Renegotiating these trade deals on a bilateral basis will be a time-consuming approach for Britain even if its trading partners show it the utmost political goodwill, partly because it must simultaneously rebuild its trade negotiation capability. The United Kingdom will therefore look to put in place whatever interim agreements it can to ensure business and economic continuity while untangling its current arrangements and defining new ones. Aside from rebuilding the “soft infrastructure” of the United Kingdom’s trade policies, the British government must also put people and resources in place to manage the increased tasks that will be asked of its physical customs regime.

Why would America push itself through a “Brexit”?

The United Kingdom will go to extraordinary efforts to ensure its trade preferences and existing relationships inside Europe remain intact while leaving the rest of the political and monetary union behind. They are doing this because they know the significant degree to which they benefit from free trade with the rest of Europe.

The United States faces no similar negotiation to formally leave NAFTA, an agreement that doesn’t involve the kind of transfer of sovereignty that the European Union demands. Nonetheless, “extracting” our economy would prove no less complex. North American commercial relationships run similarly deep as those in Europe. They are private, voluntary and based on 20 years of cumulative mutual gains from those exchanges. We accomplish this while maintaining three collaborative but independent trade regimes.

NAFTA can certainly be modernized, updated and expanded in many areas to reap more economic benefit from integration, all without infringing in undesirable ways on American national sovereignty. In fact, Brexit means the United Kingdom is going to great lengths to secure precisely the kind of relationship with the European Union that we have with NAFTA. That should be a lesson for the United States: We got it right with NAFTA. Let’s not mess it up.

Matthew Rooney is director of economic growth at the George W. Bush Institute. Andrea Durkin is a consultant to the George W. Bush Institute.