Freeing Trade in North America 9780228000761

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FREEING TRADE IN NORTH AMERICA

FREEING TRADE IN NORTH AMERICA GREG ANDERSON

M c G i l l – Q u e e n’s U n i ve r s i t y Pre s s M o nt re a l & K i n g s t o n · C h i c a g o

© 2020 Greg Anderson Published in 2020 by McGill-Queen’s University Press Published simultaneously outside North America by Agenda Publishing ISBN 978-0-2280-0074-7 (cloth) ISBN 978-0-2280-0075-4 (paper) ISBN 978-0-2280-0076-1 (ePDF) ISBN 978-0-2280-0077-8 (ePUB) Legal deposit first quarter 2020 Bibliothèque nationale du Québec

We acknowledge the support of the Canada Council for the Arts. Nous remercions le Conseil des arts du Canada de son soutien. Library and Archives Canada Cataloguing in Publication Title: Freeing trade in North America / Greg Anderson. Names: Anderson, Greg, 1969– author. Description: Includes bibliographical references and index. Identifiers: Canadiana (print) 20190196181 | Canadiana (ebook) 20190196246 | ISBN 9780228000747 (cloth) | ISBN 9780228000754 (softcover) | ISBN 9780228000761 (ePDF) | ISBN 9780228000778 (ePUB) Subjects: LCSH: North American Free Trade Agreement (1992 December 17) | LCSH: North America—Economic integration—Political aspects. | LCSH: North America—Foreign economic relations. Classification: LCC HF1746.A53 2020 | DDC 382/.917—dc23 Typeset by Newgen Publishing UK Printed and bound in the UK by CPI Group (UK) Ltd, Croydon, CR0 4YY

CONTENTS

Introduction

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1. The North American idea

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2. What the NAFTA is (and is not)

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3. North America as region

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4. New ground broken and (mixed?) results

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5. Much ado about foreign direct investment

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6. Governance in the NAFTA, or lack thereof?

121

7. Labour and the environment

139

8. NAFTA 2.0: did the USMCA modernize anything?

155

Appendix 1: spaghetti bowl of commitments by the 12 Trans-Pacific Partnership signatories Appendix 2: US trade in goods and services with NAFTA partners, 1989–2017 References Index

165 173 183 197

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Turtle Island My exposure to the politics of international trade began in the mid-1980s, when Canadians were thrust into an existential debate among themselves over the future of their economic relationship with the United States. The catalyst was a proposed comprehensive free trade agreement between the two countries. Americans hardly batted an eyelash at the negotiations, but they transformed Canada’s 1988 federal election campaign into a single-issue referendum on the future of the country. Just a few years later Americans and Mexicans confronted similar angst as all three North American states debated whether to support the North American Free Trade Agreement (NAFTA). To students of North American integration, the bruising political debates that preceded the NAFTA’s eventual implementation in 1994 can myopically appear to have been one of the most important events in the history of North America: time before NAFTA and then NAFTA. The NAFTA era was unquestionably a significant development in the political economy of postwar North America. Yet it was hardly the first time anyone has thought about what North America is and what it ought to be. When Christopher Columbus “discovered” the Americas in 1492, he quickly learned a lot of people had already discovered it. Indeed, by some estimates, there were as many as 100 million people spread throughout the Western Hemisphere at the time, many of them descendants of Asian migrants from a much earlier period (see C. Mann 2005; Jennings 1975). The 1975 Pulitzer Prize for Poetry was awarded to University of California– Davis professor and poet Gary Snyder for his collection of poems entitled Turtle Island. It was a name given to what we now refer to as North America by aboriginal communities and derived from the creation myths common to many of them.

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Snyder writes: Turtle Island – the old/new name for the continent, based on many creation myths of the people who have been living here for millennia, and reapplied by some of them to “North America” in recent years. Also, an idea found worldwide, of the earth, or cosmos even, sustained by a great turtle or serpent-of-eternity. A name: that we may ourselves more accurately on this continent of watersheds and life-communities – plant zones, physiographic provinces, culture areas; following natural boundaries. The “U.S.A.” and its states and counties are arbitrary and inaccurate impositions on what is really there. The poems speak of place, and the energy-pathways that sustain life. Each living being is a swirl in the flow, a formal turbulence, a “song.” The land, the planet itself, is also a living being – at another pace. Anglos, Black people, Chicanos, and others beached up on these shores all share such views at the deepest levels of their old cultural traditions – African, Asian, or European. Hark again to those roots to see our ancient solidarity, and then to the work of being together on Turtle Island. (Snyder 1974: introductory note) In the aboriginal community’s vision of Turtle Island, we see a politically, economically and socially integrated land mass uninterrupted by the borders of the modern nation state, undivided by the exigencies of security, the politics of immigration or populist fear-mongering about what resides just beyond the border. Indeed, Turtle Island is a conception of North America that modern proponents of integration have pursued for decades, but has in recent years seemed more elusive than ever.

Whither North America? The elusiveness of a modern, coherent unifying vision of North America stems, in part, from the way in which modern political borders have shaped (limited) our thinking about the continent. In some minds, there is no “North America”, nor should there be (see Corsi 2007). How can visionaries think of knitting together cultures shaped by three different European languages, distinct political cultures and unique experiences with colonialism and federalism? Turtle Island suggests such a vision is not without precedent. Yet modern North America is full of stark contrasts and divisions, many of which have become fodder for opponents of anything approaching Turtle Island.

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Former New York Times correspondent Anthony DePalma recalls the experience of being reassigned to Toronto from Mexico City in 1996, two years after the NAFTA was implemented. During his time in Mexico there was no shortage of signals that DePalma was in a foreign country; language, culture and politics. Especially salient was the US–Mexican border, particularly near busy ports of entry that featured large fences, long lines, sceptical customs and immigration officials all standing in the way of easy entry and exit. Indeed, parts of the US–Mexican border are only slightly less militarized than the border separating North and South Korea; heavily armed patrols, surveillance aircraft, sniffer dogs and motion detectors are ubiquitous. DePalma’s arrival in Toronto was a different story. There were no sniffer dogs, no fences, no heavily armed staff ; just a few questions from a customs inspector and a short wait while relatively friendly immigration authorities examined entry papers. Toronto felt so much like being in the United States that he subsequently forgot his passport as he checked in for a flight to New York; it was a pre-trip gaffe that resulted in several missed flights, but one he would never have made had he been making the same trip from Mexico City. DePalma had quickly assimilated into Canadian society because the differences between English Canadians and Americans are comparatively subtle. It was a point that was driven home even further several months later, when he and his family tried to arrange for their Mexico City housekeeper to join them in Canada. Unlike the experience of the DePalma family itself, the bureaucratic hurdles and restrictions placed upon their housekeeper were arduous. So much so, in fact, that their housekeeper stayed a mere six months, having felt alienated and unwelcome. The physical, economic and psychological qualities of contemporary North America’s borders have been difficult to overcome. DePalma’s experience in Toronto’s airport was instructive as to the divides that remain: That was my first lesson in understanding the line separating Canada and the United States. In time, I came to appreciate that the northern border is so complex because of its ubiquitously dual nature. For Americans, the border is almost invisible, whereas Canadians are painfully conscious of it all the time. We [Americans] see the border as joining Canada to the United States. For Canadians it is the last frontier separating us from them. (DePalma 2001: 186) North America’s two internal borders are at once similar (arbitrary political lines on a map) and vastly different in terms of how they shape the lives of the people they separate. In the last half-century, assumptions about the impermeable nature of these barriers have been challenged, most substantively in North

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America by the NAFTA itself. Indeed, until recently the NAFTA was a component of the post-Cold-War reconsideration of the utility and meaning of borders in our social, economic and political lives (see Rodrik 1997). This volume is about the political economy of the North American Free Trade Agreement (NAFTA) and its apparent successor, the inelegantly named United States–Mexico–Canada Agreement (USMCA). These are very deep waters to try and swim in a short book. Underwriting the NAFTA, or soon the USMCA, is an ever-evolving set of ideas conceptualizing what North America is or ought to be. In the wake of the NAFTA’s implementation in 1994, the academic exploration of the ideas underlying the NAFTA exploded; so much so that, just two years later, Alan Metz could produce a bibliographic list of NAFTA literature totalling nearly 500 pages (Metz 1996). The NAFTA’s bibliographic possibilities now occupy significantly more storage space in libraries and data farms around the world, and do so from every corner of the social sciences and humanities. At the core of this vast, growing literature are the same two basic questions: does North America exist? And is there a “North American” idea? The ambiguity around these questions is at least part of the reason for writing this volume. As I will point out in comparing Europe with North America, what has become the European Union has had a succession of intellectual and political champions, most notably the French statesman Jean Monnet. In North America, several have tried, including many of those cited in this volume. Yet the reality is that none have succeeded in instilling anything approaching a vision for North America. There are no illusions about this volume changing that. However, an important objective of this volume is to create a short, accessible guide to some of the most important aspects of the NAFTA and the politics that flow from them, all with the aim of demystifying the NAFTA, and distinguishing the agreement itself from broader debates of which it is nevertheless a part. Long-time students of North America will quickly detect an underlying point of view to this volume that is worth making explicit here. Specifically, trade liberalization is generally a positive-sum enterprise that improves efficiencies and raises living standards through the international division of labour and increased market access. On that score, the NAFTA is viewed throughout this volume as having generally been good for all three countries. However, that judgement is tempered by what the NAFTA actually is and what it is designed to accomplish. Unfortunately, the NAFTA could have been, and probably should have been, far more than it was. The point of this short volume is less about rendering a new judgement on the merits of the NAFTA; a small army of social scientists will continue working on that for a long time. It will not, for example, try and break new econometric ground on the impact of the NAFTA on wage growth or how increased

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trade volumes may have contributed to climate change. Instead, this volume is intended as both a quick user’s guide to what the NAFTA actually is and as a primer into the complex political economy of North America, of which the agreement is a part. Chapter 1 starts with the North American idea – specifically, what the contemporary origins of that “idea” are, where the NAFTA fits within it and where it might be headed in light of the advent of the USMCA. Chapter 2 casts several components of the NAFTA against the broader postwar history of economic liberalization, institutionalization and the neoclassical stages of integration as a means of contextualizing the kind of arrangement the NAFTA actually is. Chapter 3 continues the discussion of the North American idea in the context of regionalism. Specifically, does North America pass the smell test as a cohesive economic, social and political region? Has North America been inching towards something resembling Turtle Island, and what role has the NAFTA played in advancing towards it? Chapter  4 then revisits some of the main goals and achievements of the NAFTA as it was designed. Specifically, did the NAFTA stimulate trade and investment? In what areas did the NAFTA break new ground or innovate in terms of economic governance? And, of course, where did it leave a mixed result or come up short? Chapter 5 focuses attention on foreign direct investment, an area not typically considered at length in analyses of the NAFTA. However, among the most innovative parts of the NAFTA were the investment rules embedded within. More importantly, the innovations around investment, and the controversies they engendered, are a microcosm of many of the issues plaguing the global trading regime more broadly. Chapter 6 explores the important debates about the institutional design of the NAFTA. The NAFTA infamously eschewed certain types of institutional mechanisms, yet it is hardly without them nor are they without significance as elements of regional governance. Labour and the environment are the focus of Chapter  7. Both these issues are now firmly entrenched as critical components of the global trading regime. The NAFTA was instrumental in putting them there, but did so in a roundabout way that simultaneously helped and hurt the agreement’s standing with the public. Finally, Chapter 8 looks at the 2017/18 renegotiation of the NAFTA, the USMCA, and asks how much of the NAFTA 2.0 (as some also call it) is new and improved. It is an evaluation undertaken through the lens of the merits and shortcomings of the original NAFTA outlined in Chapters 2 to 7. For those of you who would rather not read further, the punchline is this: if approved by all three legislatures, the USMCA represents a partial improvement from the NAFTA in regional governance. That is a very large “if ”, since, at the time of writing, divided government in the United States, a measure of political

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instability swirling around the Trump administration and the lack of headway in removing US tariffs imposed on steel and aluminium from Canada and Mexico (a stated condition for considering the USMCA in both countries) all cast some uncertainty on the viability of the USMCA. However, the USMCA updates the NAFTA in ways that proponents of modernization failed to do in the two decades following the NAFTA’s implementation in 1994. That said, the USMCA is not perfect, and is in other ways a lamentable turn away from anything resembling Turtle Island, a North American accord or the North American idea.

6

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Given the significant space on library shelves devoted to aspects of North American integration, there is remarkably little agreement within all that literature as to what North America actually is. For instance, the final instalment of Stephen Clarkson’s excellent trilogy on North America is titled Does North America Exist?, as if there is an agreed definition of North America that can be evaluated (Clarkson 2008). Even Robert Pastor’s last book on North America, The North America Idea, left the “idea” itself unsatisfyingly ill-defined, calling it “a spirit of community based on interdependence” (Pastor 2011: 28). When compared with Pastor’s 2001 advocacy of “deepening” the NAFTA by transforming it into a customs union, it is clear the “North American idea” includes a number of components well beyond the confines of a trade agreement such as the NAFTA (Pastor 2001: 177–86). The point of this entire volume is to offer readers a short survey of contemporary North American integration, and the politics of the NAFTA as a component part within. This chapter is about the ideational origins of contemporary North America. There is considerable variability among scholars, public officials and the general public about how North America should be conceptualized. Indeed, that conceptualization is often connected to what people think the NAFTA itself is or ought to have been. Is North America mostly about the NAFTA? What do we mean by North America as a region? Should it be defined geographically, geologically or geopolitically? A geologist looks at North America as inclusive of much of the Caribbean whereas students of political economy think mainly about Canada, the United States and Mexico. What about shared culture or institutions as a defining feature of the region? Although there is disagreement over what the North American idea is or ought to be, we can anchor the ideational foundations of the NAFTA in terms of the politics of the global economy in the early postwar period and the domestic

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politics of each NAFTA country. The international and the domestic are, of course, connected. But situating the NAFTA’s origins in this way helps demarcate the boundaries of the North American idea.

Do all roads lead to Rome … er, Brussels? The origins of the NAFTA, and the beginning of some understanding of the broader North American idea, are usefully set in several important frameworks of thought that evolved during the postwar period, and seemingly gained momentum in the aftermath of the Cold War. Among the dominant theories gaining renewed attention was what students of comparative politics refer to as modernization theory. The primary thrust of modernization theory is that economic growth is the main driver of social and political change. Sustainable market-driven growth is dependent on the free flow of information to commercial interests, entrepreneurs and individuals, which in turn fosters increasing demands for openness, participation in and accountability around political decision-making. In this view, modernization is an explicitly liberal project connecting the merits of liberal capitalism and liberal democracy to economic development and an increasingly cosmopolitan global political economy. The debate around modernization theory was famously rekindled in 1992 by Francis Fukuyama’s The End of History and the Last Man, in which he argues that the great ideological debate of the twentieth century between planned, authoritarian economies and those espousing liberal capitalism and democracy had been decided by the outcome of the Cold War (Fukuyama 1992). For a time, it appeared Fukuyama was onto something. Indeed, the collapse of the Soviet Union was seemingly followed by a burst of economic liberalism and interest in rules-based institutions to underwrite it. The proliferation of liberalization projects was dramatic:  the Bush administration’s Enterprise for the Americas Initiative in 1990, the Clinton administration’s Free Trade Area of the Americas (FTAA) in 1994, the Common Market of the Southern Cone (MERCOSUR) in 1991 and, of course, the NAFTA (negotiations initiated in 1990). According to the World Trade Organization (WTO), the growth of regional and bilateral preferences arrangements expanded dramatically after 1990, doubling to 70 such agreements by 1995 and quadrupling to nearly 300 through to 2010 (World Trade Organization 2011: 54). Multilaterally, the General Agreement on Tariffs and Trade (GATT) launched its “Uruguay Round” in 1986 with 123 members, but had ballooned to 159 by the time the “Doha Round” began in 2001, among them the People’s Republic of China. It seemed as though everyone was trying to get a piece of the liberalization

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action. Was it possible that even China would come exhibit more and more of the attributes of a capitalist democracy? Hindsight suggests flaws in modernization’s take on the post-Cold-War era. The wave of democratization that ensued after the collapse of the Soviet Union stalled in 2005, beginning a growing scepticism about democracy and a descent towards illiberal democracy and authoritarianism (see Zakaria 1997; 2003; Freedom House 2019; Latinobarómetro 2018:  31–8). Many of the regional initiatives noted above fell apart. China’s integration into the global economy on market capitalist terms remains a work in progress. And the utility of regional or multilateral trading regimes to govern rules-based trade has been subjected to considerable scepticism. The NAFTA came into being and the European project took its next big step in this period of euphoric triumphalism around the merits of integrated markets. It is, in part, for this reason they have always been useful, if not perfect, comparators.

European project In Europe, the postwar project of integration seemed to have been given its capstone in the early post-Cold-War years with the conclusion of the Maastricht Treaty in 1992. Maastricht was an enormous leap of faith for many Europeans, paving the way for passport-free travel and the adoption of the euro. The euro, in particular, was a difficult pill to swallow for some Europeans, since it meant the replacement of national currencies with a single currency – a loss of monetary sovereignty and, in some ways, the loss of a long-standing national symbol. For the United Kingdom, of course, the euro was a bridge to far in the early 1990s, and remained so through the country’s 2016 decision to withdraw from most other aspects of the European project. Although elements of Europe’s postwar integration overlap with aspects of modernization theory, including democratic or commercial peace theory, the conceptual roots of the European project are most firmly anchored in liberal theories of international relations examining the salutary benefits of greater and greater degrees of economic and political linkage. The formal study of the impact of linkage was popularized most notably among academics by Robert Keohane and Joseph Nye in the 1970s in their now standard study Power and Interdependence (Keohane & Nye 1977). Therein, Keohane and Nye advance the argument that with increasing degrees of complex interdependence, typified by the depth of economic and political linkages between nations, nation states were less and less likely to actually go to war with each other. Interestingly, it was the

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depth and sophistication of linkages then in existence between Canada and the United States in the mid-1970s that Keohane and Nye pointed to as evidence for their argument. War between the two countries had effectively been removed as a possibility between the two countries, mainly as a result of the depth of economic and political interdependence that had been fostered by years of cooperation on geostrategic, political and, increasingly, economic relations, which made the cost of armed conflict too high for both nations and, therefore, unthinkable. However, the European project has roots that go back to well before the end of the Second World War. Indeed, the intellectual connection between economic nationalism and political nationalism has its roots firmly planted in the interwar years (1918 to 1939). For example, in his political memoirs, former US Secretary of State Cordell Hull, puts it clearly: Toward 1916 I  embraced the philosophy I  carried throughout my twelve years as Secretary of State, into the Trade Agreements, into numerous speeches and statements addressed to this country and to the world. From then on, to me unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war. (Hull 1948: 211) This basic linkage spilled over into the planning for the postwar peace. For Hull, it meant convincing the US Congress to pass the Reciprocal Trade Agreements Act in 1934, aimed at jump-starting the global trading flows destroyed by the Great Depression. But it was a basic rationale that also spilled over into the postwar design of the international financial institutions at Bretton Woods , New Hampshire, in 1944 (Steil 2013; Irwin, Mavroidis & Sykes 2008). In Europe, the rationale behind interdependence in economic and politics fostering a lasting peace was most prominently advanced by Jean Monnet, a French economist and diplomat, widely considered the originator of the postwar European project. For Monnet, the roots of a lasting peace in Europe were to be found in the errors made at Versailles in 1918, which consigned Germany to economic privation and political isolation. Instead, Monnet argued, the route to peace was anchored in fostering the seeds of shared economic and political dependence between the victor and the defeated. For him, this meant firmly linking France and Germany to each other, connecting their futures together institutionally, economically and politically such that fighting could be pulled off the table. In 1951 the Treaty of Paris formally created the European Coal and Steel Community (ECSC), linking the industrial production activities of six countries under a single coordinative umbrella. North America, of course, is different.

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Proponents of continent There have been important periods of conflict among what we now think of as Canada, the United States and Mexico, much of it the result of colonial frontier expansion: the American Revolutionary War (1774 to 1783), the exodus of United Empire Loyalists north, multiple skirmishes that followed such as the Caroline Affair (1837), the Fenian raids of the 1860s, the Texas Revolution (1835 to 1836) or the “Mexican Expedition” to capture Pancho Villa in 1916/17. The devastation wrought by the twentieth century’s major European conflicts was partly responsible for laying the intellectual foundation of a modern integrated continent. The collective shock to people among all walks of European life facilitated the spread of a set of ideas for preventing a repeat of those conflicts. In North America there has been no such transcendent event lending itself to a collective response. Whereas Europe’s Jean Monnet became a vocal and active champion of European integration as a means of solidifying peace and economic prosperity, no such individual has emerged in North America. Several academics, including many cited in this volume, have been vocal proponents of movement towards forms of greater cooperation in North America, but none have had a sustained public resonance, nor have their ideas. Several of North America’s politicians have picked up the ideational torch for the North American idea, only to drop it when confronted with the politics of the NAFTA. A case in point is President Clinton, who, as described in several places in this volume, was initially lukewarm to the NAFTA, subsequently fought hard for US implementation in his first year in office but then seldom mentioned it during the remainder of his two terms of in office. One exception to the uneven attention given to the North American idea is Mexico’s Vicente Fox, who hoped to use his presidency (2000 to 2006) to pursue structural reforms to the Mexican state, including deepening the country’s integration into the North American political economy (Pastor Jr & Wise 2005; Wise 2007). Indeed, Fox’s ambitions were on display when he was the invitee for the first state visit of the administration of George W. Bush, on 5 September 2001 (White House 2001), when he used the occasion to propose the two countries reach an immigration accord (Leiken 2002). In the years since leaving office, and particularly with the arrival of Donald Trump’s brand of anti-immigrant populism, Fox has remained in the public spotlight, often appearing on English-language news programmes to challenge opponents of the NAFTA.

North America as a throwaway line One of the most prominent American proponents of North America as an “idea” was Ronald Reagan. However, Reagan is also emblematic of the

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on-again-off-again attention to that “idea”. The road to the NAFTA arguably began in November 1979, when Reagan announced his intention to seek the Republican nomination for president in 1980. Part of his announcement was a call to advance towards what he referred to as “a North American accord” (Lindsey 1979). Reagan did not spell out what exactly he meant such an “accord” to be, saying only that he was willing to invite the views of Canadians and Mexicans about forging closer ties. For some, the proposal was dismissed as a throwaway speech filler, but Reagan biographer Lou Cannon believes the future president took the North American accord idea seriously, in part, as a result of his experience with Mexico while governor of California (1967 to 1975) (Cannon 1991: 461). Yet Reagan’s announcement remarks are also emblematic of what became the politics of the North American idea. Once begun, the American interest in free trade talks with Canada and, a few years later, Mexico can be seen in a variety of areas. Some of it was geostrategic, in that all three countries were emerging from periods of economic nationalism and stagnation. Free trade offered the United States an opportunity to “lock in” reforms with two of its most important trading partners (Cameron & Wise 2004). Some went even further and speculated that further liberalization in Mexico could lead to greater democratization, as per the tenets of modernization theory (Heredia 1994; Moreno & Méndez 2002). America’s interest was also geostrategic, in that frustrations had emerged with the larger, but stagnant, multilateral negotiation process anchored in the General Agreement on Tariffs and Trade. The Reagan administration believed the symbolism of doing something separate with Canada, and later Mexico, might break the multilateral logjam. The message to the GATT was that “we have options and are willing to team up with our friends” (Bergsten 1996; Evenett & Meier 2008). Yet describing the United States as completely focused on engaging Canada and Mexico is a stretch. Were the negotiations important? Yes, for many of the reasons noted above. The NAFTA negotiations were a large undertaking that became one of the most complex and comprehensive negotiations over economic policy the United States had ever undertaken (Cameron & Tomlin 2000: 106–8). However, there is always an underlying ambivalence on the part of the United States in relations with Canada and Mexico. The US agenda is vast, and frequently distracting for American officials. The asymmetries of power in North America are pervasive and complicate relations among the three parties (Anderson 2019). And the size and depth of the US domestic economy minimizes the country’s dependence upon, and vulnerability to, fluctuations in global trade. The American public was only vaguely aware the NAFTA negotiations were happening at all, and the major focal points for the US trade bureaucracy at the time were bilateral disputes with Japan and efforts to launch a new round of the

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multilateral GATT negotiations (the Uruguay Round was finally launched in 1986) (Dryden 1995; Hart, Dymond & Robertson 1994). Not so for Canada and Mexico, both of which have economies deeply tied to the United States alone. These are issues and dynamics that arise repeatedly when considering North America and the ideas emanating from the United States that shape them. Hence, despite all Reagan’s enthusiasm for free trade negotiations when he announced his presidential run in 1979, his support for free trade with Canada starting in 1985 came only after negotiations were proposed by Canada’s newly elected conservative prime minister, Brian Mulroney. Similarly, it was Mexican president Carlos Salinas de Gortari who proposed free trade to President George H. W. Bush in June 1990, ultimately leading to the initiation of trilateral talks and the NAFTA. In other words, the United States got on board, but was not the one in hot pursuit of regional free trade. Reagan’s “accord” proposal was initially met with some trepidation in Canada and Mexico over concerns about dominance or absorption by the continental “colossus” (Granatstein 1996; Moreno 2003). However, the regional integration vision behind Reagan’s “accord” idea has been met by a populist, nativist, conspiracy-prone opposition in the United States itself, seriously complicating any pursuit of any sort of North American idea.

Canada’s change of heart The ideational origins of the NAFTA in Canada are anchored in a series of postwar reconsiderations of the nation’s economic policy posture, especially that with the United States (Hart 1989; Officer & Smith 1968; Johnston & Percy 1980). The so-called “Nixon shocks” of 1971, which included a 10 per cent surcharge on all imports, prompted a renewed debate about Canada’s economic policy options, which initially lurched towards statist intervention, protectionism and efforts to wean the Canadian economy off of dependence on the United States (Glover 1974; Fry 1983; Muirhead 2004). However, Canada as a political and economic project of its own was, in many minds, still incomplete; a referendum on Quebec sovereignty had been defeated in 1980, and the Canadian constitution was about to be “repatriated” from the United Kingdom with significant modifications. Hence, the prime minister, Pierre Trudeau, created the so-called Macdonald Commission to re-examine the country’s economic and development prospects (see Laidler & Robson 2015). One of the major conclusions of the Macdonald Commission’s final report was for Ottawa to move towards more market-driven international economic policies in an effort to diversify Canada’s economy, and propose free trade with the United States (Hart, Dymond & Robertson 1994: 29–35).

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In late 1984 the commission’s recommendations found a receptive audience in the form of the newly elected Conservative Party of Brian Mulroney. Within a year the new government had proposed free trade to Reagan, formalizing the initiation of comprehensive free trade negotiations in the spring of 1985. When Canadians went to the polls in 1988 the Mulroney government’s pursuit of free trade with the United States became the single most important issue in the federal campaign; indeed, the issue effectively transformed a general election into a referendum on Canada’s relationship with the United States (Granatstein 1996: 246–77). It was an election that some scholars argue marked the end of anti-Americanism as a major political force in Canada, as well as a broader shift in the thinking among Canadians about their economic relationship with the rest of the world, but particularly the United States.

Mexican resignation? Porfirio Diaz, a multi-term president of Mexico in the late nineteenth and early twentieth centuries, is alleged to have been the originator of a now famous quip about his country’s relationship with the United States:  “Poor Mexico, so far from God, so close to the United States.” Canada and Mexico share a certain friendly antipathy towards the United States – a country that can be simultaneously overbearing and indifferent, all the while casting long economic, cultural and military shadows over its smaller neighbours (Weintraub 1990; 2010). Mexico also walked a long ideational path to get to the NAFTA, emerging from decades of experiments with nationalizing industry, development through import substitution policies and, in the 1970s and 1980s, heavy reliance on deficit spending. By the early 1980s a heavy debt burden and weak energy prices were taking their toll on the Mexican economy, prompting the administrations of Miguel de la Madrid (1982–1988) and Carlos Salinas (1988–1994) to embark on difficult structural economic reforms (Weintraub 1991; Bergoeing et al. 2002; Devlin & Ffrench-Davis 1995). Among these initiatives were efforts to attract new foreign investment. In February 1990 President Salinas travelled to Davos, Switzerland, and the World Economic Forum meetings to pitch Mexico as a newly attractive target for private capital flows. However, European capital was not interested in Mexico (Cameron & Tomlin 2000: 1–7, 62–3; Sánchez 2001). Europe was preoccupied with German reunification, the transition of the former Soviet republics and the run-up to the Maastricht Treaty, which significantly deepened its own integration project. Europe’s preoccupations pushed Mexico towards the United States. In the wake of the cool reception he received in Europe, Salinas wasted little time in proposing a comprehensive free trade deal with the United States, first

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floating the idea in early February 1990 (Salinas de Gortari 2002: 48).1 The goal, as Carlos Salinas later wrote, was to generate foreign investment, but also to stabilize foreign perceptions about Mexico: [T]he flow of foreign investment did not increase with the speed or in the volume that Mexico required. Both domestic and foreign investors argued that the rules in Mexico changed with each administration: one nationalized, the next privatized. It was essential to provide internal stability, convince investors that our policies would have continuity and long-term validity, and that they would not depend on the discretionary powers of the administration in office. (Salinas de Gortari 2002: 42) Indeed, part of the ideational shift in Mexico, among a certain group of elites, was that Mexico’s record of economic instability, lax enforcement of the rule of law and a history of expropriation of foreign property (oil sector in 1938, banking in 1982) necessitated a signal to the rest of the world that future policy would be locked in  – something Salinas and others believed an international agreement such as the NAFTA could achieve (Levy 1995; Cameron & Wise 2004).

Context matters The diverse ideational sources for the North American idea are also reflective of the diversity of meaning in what North America has become since the advent of the NAFTA and what the NAFTA itself has come to mean as a component part. Whether it is called the North American idea, a North American accord, Turtle Island or  – more pejoratively by the American right  – the “North American Union”, the notion of the continent’s three sovereign states working more closely together has taken on numerous forms and meanings, often closely tied to the context from which they flow. Some of that context is properly located in broad, geopolitical and macroeconomic trends and ideas, some more localized, domestically situated imperatives. Part of the purpose of this volume is to describe what the NAFTA is as a trade agreement, but also what it has come to symbolize as a kind of litmus test for things it was never designed to do. The next chapter, for example, will begin 1. In his memoir, Carlos Salinas recounts that the first proposal for a free trade agreement between the United States and Mexico came from President Bush on 22 November 1988, and was rejected. Mexico’s own proposal came on 1 February 1990, in a meeting between the country’s commerce secretary, Jaime Serra Pucha, and Carla Hills, the US trade representative.

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taking up the NAFTA in the very limited terms familiar to economists: what the agreement is, what it is designed to do and how it has functioned. Yet the NAFTA has become a profoundly symbolic, too frequently pejorative, term used by politicians, proponents and critics alike as shorthand for aspects of the global economy – many unrelated to the NAFTA itself. As suggested above, the NAFTA emerged at a unique historical moment: the “End of History”. Indeed, for economists and proponents of a freer, more efficient global economy, the NAFTA was just one of many initiatives promising to raise living standards through the integration of markets and the international division of labour. Yet, whatever the ideational source material for the North American idea actually is, that material has become left behind by both proponents and critics, who either over- or undersold what the NAFTA could or would do to suit their political objectives. In fact, the NAFTA became a political piñata before anyone had seen a word of the final text. Throughout the fall of 1992, as the NAFTA text was nearing formal completion, President George H. W. Bush pushed his Democratic challenger, Bill Clinton, to take a position on its merits. Clinton finally said he was supportive of the NAFTA subject to enhanced protections for labour and the environment. Yet it was Texas businessman, and independent presidential candidate, Ross Perot who arguably did the most to transform the NAFTA into a political piñata. Perot opposed the NAFTA, scoffed at the ideas behind it and vigorously critiqued it throughout the fall campaign, and he was a central figure in the 1993 US ratification debate. Perot’s description of a “giant sucking sound” of American investment and jobs going south into Mexico in a November 1993 debate with Vice-President Al Gore on Larry King’s prime-time CNN talk show left an indelible mark on public perceptions. Although Gore seemed to win the rational arguments, Perot’s attacks presented a dark, devastating and distorted picture of the NAFTA’s impact on everything from wages, labour rights and the environment; each of these is now a commonplace set of concerns swirling around trade liberalization. Ross Perot will always be known as one of the most successful third-party presidential candidates in American history, capturing 19 per cent of the popular vote in 1992. However, Perot’s impact on American perceptions of the NAFTA, and the acronym’s transformation into a symbolic pejorative, has arguably been more consequential. The NAFTA was ultimately approved by the US Congress, but it never enjoyed much popular or political support. Indeed, whereas President Clinton spent a considerable portion of his early political capital pushing the NAFTA’s congressional approval, he hardly mentioned it again during his next seven years in office. Of course, the American debate over the NAFTA was not the only one that solidified the agreement’s status as a kind of poster child for all anxieties around trade liberalization. On 1 January 1994, the very day the NAFTA began its

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THE NORTH AMERICAN IDEA

implementation phase in all three countries, the Zapatista Army of National Liberation began 12 days of armed rebellion in the southern Mexican state of Chiapas. A major purpose of the rebellion was to draw attention to the plight of the poor in southern Mexico, but it also drew attention to the unevenness of development flowing from the liberalization of the global economy, of which the NAFTA was a newly minted example. The NAFTA debate in Canada was much more muted between 1990 and 1994, in part because the bruising 1988 federal election campaign had settled part of the debate, but also because Canada’s goals in the NAFTA were mostly defensive; Ottawa didn’t want to see the hard-won preferences it had just negotiated with Washington between 1985 and 1987 watered down in a US–Mexico initiative (Cameron & Tomlin 2000: 6; Hart 2002: 393–5). Finally, in March 1994, a series of events in Mexico solidified the NAFTA’s status as the source of controversy, tainting the agreement’s function in a broader notion of the North American idea. Part of both the Bush and Clinton administrations’ cases for the NAFTA was the rapid emergence of Mexico from a state of underdevelopment to one of rapidly developing middle-income country. A series of reforms throughout the 1980s won Mexico membership in both the Organisation for Economic Co-operation and Development (OECD) and the General Agreement on Tariffs and Trade in 1986, and suggested that Mexico would soon rank among the world’s most formidable economies. Indeed, part of the political case in favour of the NAFTA in the United States was that the agreement would effectively help “lock in” many of these reforms in Mexico, facilitating both open markets and increasingly transparent (hopefully democratic) governance. Instead, March 1994 brought the assassination of Luis Donaldo Colosio, Mexican presidential candidate and heir apparent to the political dynasty that was the Institutional Revolutionary Party (Partido Revolucionario Institucional:  PRI). A  sudden political crisis sparked capital flight, downward pressure on the Mexican peso, devaluation in December 1994 and financial panic in Mexico shortly thereafter. The NAFTA did not cause the rebellion, the assassination or the financial panic, but to many observers it had no prospect of helping with any of them. Adding insult to the injury of having spent so much of his early political capital pushing for the NAFTA’s approval, President Clinton had little choice but to intervene to help stabilize the peso and Mexico, brokering a US$50 billion infusion of financing from the United States, the International Monetary Fund (IMF), the Bank for International Settlements and Canada. Returning to the description of the North American idea as “a spirit of community based on interdependence” (Pastor 2011:  28), many could see vividly the “interdependence”. In fact, the Clinton administration’s decision to act in the face of the peso crisis was, for critics, just the first sign of how ill-conceived

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the knitting of the three economies together via the NAFTA may have been. Moreover, it was hard to see the “spirit of community” in the midst of all the criticism and crisis.

The worst agreement ever? Before the NAFTA was even a year into its implementation phase it had suffered a series of political setbacks, leaving a permanent stain that has since made the NAFTA synonymous with virtually anything critics wanted to assign to it. It was a tough blow to all the many permutations of the North American idea. The NAFTA was partly the victim of circumstance – it did not create the peso crisis or conditions in Chiapas – but it became emblematic of a number of broad flaws in governance (economic and political) with which the NAFTA sometimes had little to do and was too limited to fix (Morales 1997). Importantly, President Clinton’s disinterest in advocating for or defending the NAFTA after 1994 opened the door for critics of all stripes to pile in, appropriate the NAFTA for their cause and undermine public support for the agreement. In fact, after 1994 politicians willing to defend the NAFTA became a rarity. By the mid-2000s the NAFTA enjoyed so little public support that, when the George W. Bush administration was nearing the conclusion of the US–Central American Free Trade Agreement (CAFTA), that agreement’s prospects on Capitol Hill were diminished simply because the acronym rhymed with NAFTA. The absence of NAFTA advocates since 1994 is only part of the reason the agreement was not revised until 2018 (the USMCA). But this vacuum is also part of the reason populists such as Donald Trump could seize upon the NAFTA’s perceived ills, manipulating both the substance and symbolism of the agreement – “the single worst agreement ever approved” – to political advantage in 2016. Even though the NAFTA’s text didn’t evolve much between 1994 and 2018, the NAFTA has been at the forefront of debates about the global economy. For some, such as the late Robert Pastor, the controversy around the NAFTA has resulted in the North American idea being drowned out. Indeed, Pastor and others who spent part of their professional careers supporting the North American idea cannot be thrilled with how things have evolved. Yet that same debate has arguably shaped the contours of the North American political and economic space in ways that are entirely reflective of the uniqueness of North America itself – a discussion I take up next in outlining how limited the NAFTA really is, and what that says about the North American idea.

18

2

WHAT THE NAFTA IS (AND IS NOT)

In 2011 Robert Pastor described the NAFTA as having become a “piñata for pandering pundits and politicians” (Pastor 2011:  3). Indeed, the NAFTA has morphed symbolically into something quite different from what is actually written in the text of the agreement. There are a number of possible explanations for this larger-than-life “persona” the NAFTA has taken on. It was, at the time, a significant undertaking in North America. Just 14 months of negotiation had produced a significant leap forward in formalizing and extending the trading relationship between the three countries. It was not on the scale of the European project, but such a dramatic leap had not taken decades to complete either. Moreover, the NAFTA was significant because it was the largest regional economic undertaking any of the three countries had ever been engaged in, virtually guaranteeing it would generate considerable scrutiny. Equally important, it was the first such agreement anywhere to incorporate two rich, developed economies (Canada and the United States) and a poorer, less developed economy (Mexico) under a single set of trading rules. It was an experiment that made many people nervous, caused others to look to the NAFTA with great promise and has solidified the NAFTA as a focal point of debate around trade, but also more broadly around North America since the agreement’s inception. One of the central problems confronting the NAFTA in such a political environment has been separating the NAFTA as an agreement from the NAFTA as a symbol. Doing so is not as straightforward as it sounds, since the agreement’s symbolism has so often been tied to aspects of its performance in terms of outcomes: how many jobs did it create, did it foster economic reform, did it drive wages up or down, how much trade did it stimulate, what contribution did the NAFTA make to gross domestic product (GDP) growth, how much did the NAFTA stimulate development? Every book and article about the NAFTA presents evidence aimed at sorting through all these questions. However, definitive answers have been elusive, because so many elements of the NAFTA co-vary with numerous other variables.

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What can be said for certain, however, is that the NAFTA’s proponents oversold what it could do while its opponents claimed its deleterious effects would be far worse than they actually were. Proponents were correct to argue that the agreement would remake parts of North America’s economic landscape for the better. However, politically, some oversold the NAFTA, leading some to expect streets all over the continent would soon be paved with gold. Opponents painted the NAFTA as an economic bogyman that would destroy millions of jobs, suck investment capital south undermine state sovereignty or otherwise destroy life as we knew it. According to Robert Pastor: [T]he [1994 Mexican] Peso crisis was a symptom of both the success and inadequacy of the NAFTA. The success was reflected in the expansion in trade and capital flows; the inadequacy was manifest in the lack of institutional capacity among the three governments to monitor, anticipate, plan, or even respond to such a serious problem. NAFTA, in brief, was defined too narrowly, and the three governments paid a price for that myopia, albeit a price that varied among the three countries. Even worse, the three governments have not learned the lesson of 1994; they still apparently fail to understand the many dimensions of the phenomenon of North American integration. (Pastor 2001: 6) None of that happened, but the NAFTA has been judged on the basis of these extremes nonetheless. The reality is the NAFTA was always much more modest than either its wildest critics or proponents claimed. Like those before it, this volume about the NAFTA includes the odd table depicting flows of widgets, people and dollars during the life of the agreement. However, the importance of the NAFTA can also be understood beyond the sets of descriptive statistics privileged by politicians, pundits, the press and the public. In fact, one of the most important, and frequently glossed over, intellectual portals for understanding the merits and shortcomings of the NAFTA’s design is by casting the agreement against the larger postwar institutional design of the multilateral trading system and through the neoclassical stages of integration.

The postwar system The Second World War destroyed what remained of global flows of trade and investment already decimated by the onset of the Great Depression. Chapter 1 notes the intellectual linkage tying economic nationalism to the onset of the Great

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WHAT THE NAFTA IS (AND IS NOT)

Depression, the severity of which opened the door to the political nationalism that, in turn, led to interstate violence. One of the most significant flashpoints in the descent into economic nationalism was the notorious Smoot–Hawley Tariff Act of 1930, in which the US Congress imposed prohibitively high import tariffs on tens of thousands of goods. As other countries retaliated in kind, the collective outcome of these so-called “beggar thy neighbour” policies became a self-defeating downward spiral into global protectionism that many scholars and officials later concluded exacerbated the onset and duration of the Great Depression. As global trade ground to a halt, economic nationalism fuelled political nationalism and, eventually, another world war that smashed what remained of the global economy. The goal of delegates to the Bretton Woods Conference in 1944 was to design a postwar order that would, hopefully, manage international economic relations such that a repeat of the interwar years was unlikely. Although separated by 50 years, the NAFTA and Bretton Woods are deeply linked. Bretton Woods is most closely associated with the creation of the International Monetary Fund and the International Bank for Reconstruction and Development (IBRD, or World Bank). However, Bretton Woods delegates also puzzled over how to reboot the global trading system. Efforts to create a multilateral trading system encompassing more than 100 countries had largely failed by the late 1940s. However, out of that failure emerged a group of 23, mostly Western and developed, countries that formed the General Agreement on Tariffs and Trade in 1947. The GATT’s more modest structure and membership have, of course, been radically transformed over the postwar period. Indeed, with the GATT’s transformation into the World Trade Organization in 1994, its much larger membership (over 160 countries) and its expanded agenda, the WTO more closely resembles the multilateral organization originally conceptualized at Bretton Woods.

GATT article XXIV and NAFTA The GATT was a creature of the era in which it was created. Much of the global economy lay in ruins, productive capacities in Europe and Asia had been smashed by war, and the global trading system had become wracked with protectionism. The creation of the GATT was, in part, a reaction to the failure to create a larger multilateral system; a half-measure among a smaller coalition of those willing to set up something – anything – resembling a rules-based trading order (Irwin, Mavroidis & Sykes 2008; Irwin 1995). The desire to stimulate rules-based trade, of any kind, was so strong that the architects of the GATT included article XXIV, permitting members to conclude customs unions and free trade areas outside GATT rules.

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[T]he contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies … They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties … Provided that; … the duties and other regulations of commerce of … such a union or agreement shall not on the whole be higher or more restrictive than the general incidence of duties and regulations of commerce applicable in the constituent territories prior to the formation of such a union … the duties and other regulations of commerce. (GATT 1947, article XXIV 4, 5(a)) The NAFTA is one such agreement. Think about this for a minute. The GATT was set up, in part, to limit the use of the kind of discriminatory trade policies many concluded had contributed to the “beggar thy neighbour” economic nationalism of the interwar years. Yet, within the GATT (since 1994 the World Trade Organization) structure, provision for discrimination through free trade areas and customs unions is embedded within the multilateral structure. In short, the provisions of agreements such as the NAFTA, or its apparent successor the USMCA, go further than the GATT/WTO, but are inherently discriminatory since, although they might liberalize trade among their members (Canada, the United States and Mexico), those same benefits are unavailable to those outside the NAFTA. The neoclassical stages of integration Why did the NAFTA become such a controversial agreement? One place to look for a deeper understanding of just what the NAFTA is – and, as important, what it is not – can be found in the basic conceptual distinctions in the neoclassical stages of integration. Through this same examination of the stages of integration we can further tease out many of the political cleavages swirling around the agreement since its inception. In both areas – conceptual clarity and the politics of the NAFTA – the central point of analysis can almost always be distilled down to debates over sovereign power flowing from the trade-offs associated with the stages of integration. There are many good reasons to pursue regionalism, including possible gains from trade, strengthening policy reforms at home, efforts to augment multilateral bargaining power, market access guarantees and geostrategic considerations (Whalley 1998; Baldwin 1997). A number of these motivations were prominent 22

WHAT THE NAFTA IS (AND IS NOT)

Preferential trade agreement

Max.

Depth of integration/institutionalization

Customs union

Common market

Degrees of policy sovereignty

Free trade area

Monetary union/economic union

Political union

Min.

Figure 2.1 Neoclassical stages of integration and sovereignty

in the economic and political case in favour of the NAFTA, not the least of which was “locking in” governance reforms in Mexico (Hart, Dymond & Robertson 1994: 36–53; Dryden 1995: 340–1, 370). According to the WTO, there are currently more than 400 regional trade agreements in force around the world, the overwhelming majority of them concluded after 1990.1 In part because of their proliferation, but also because of the sheer variety of governance within each of them, economists have increasingly worried about the growth of a global “spaghetti bowl” of preferences arrangements that, for all the trade they liberalize, is generating considerable protectionism and inefficiency (Baldwin 2006; Estevadeordal & Suominen 2005; Bhagwati 1995). The NAFTA is just one of the more than 400 regional trading arrangements notified to the WTO under article XXIV. It also occupies a category of regional governance key to understanding what the NAFTA is and is not. Specifically, Figure  2.1 graphically depicts the neoclassical stages of integration and the 1. World Trade Organization, “Regional trade agreements”: www.wto.org/english/tratop_e/region_ e/region_e.htm (accessed 10 June 2019).

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trade-offs between sovereignty and institutionalization at ever deeper stages of integration that inherently bring about increasing degrees of pooled sovereignty. Sorting through how the NAFTA is mixed up in the neoclassical stages of integration is a less common approach to dissecting the politics and economics of the agreement, but no less important to either than sets of statistics.

Preferences arrangements Preferences arrangements are the most limited kind of trade liberalization permissible under article XXIV rules. Such arrangements take countless forms, but typically involve liberalization or integration that is restricted to a subset of trade between members, or in many cases a single sector. A prime example in the North American context is the 1965 Canada–US Auto Pact, which substantially eliminated tariffs on automobiles and parts crossing the border and revolutionized supply chains and production by effectively eliminating the economic significance of the international border, as auto makers decided where to locate production most efficiently (Anastakis 2005; 2000; Fuss & Waverman 1986). Years earlier, on the other side of the Atlantic, the 1951 Treaty of Paris had created the European Coal and Steel Community among a select group of European countries around, as the title suggests, coal and steel production.2 It was also the foundation of what four decades later became the European Union. Importantly, GATT article I  paragraph 2 does not require the elimination of preferences arrangements between countries as a condition of GATT membership so long as the value of that preferences trade is below that negotiated under the GATT itself. So long as the barriers within the preferences arrangements do not exceed tariff rates negotiated among the members of the GATT – the agreement generally liberalizes – arrangements such as the Auto Pact and the ECSC are compliant (Anastakis 2001).3 The terms under which preferences agreements are governed are as variable as the sectors they cover. The Auto Pact, for example eliminated nearly all impediments to cross-border trade in autos and auto parts, but left the private sector to respond to the incentive structure the Auto Pact put in place. By contrast, the ECSC created a supranational institutional arrangement to direct coal and steel production among its members. The reason preferences agreements are considered the shallowest form of integration is that, in most instances, they require the concession of very little sovereignty on the part of members. 2. Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. 3. In 2000 the WTO ruled on some of the last remaining provisions of the Auto Pact, effectively ending preferences not already eliminated by other agreements, such as the NAFTA.

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WHAT THE NAFTA IS (AND IS NOT)

Although the ECSC pooled sovereignty, it was also like the Auto Pact in that it covered just one sector of the economy – albeit an important one.

Free trade area One reason for the proliferation of free trade areas is that the standard for WTO compliance under article XXIV is a relatively low bar. A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories. (GATT 1947, article XXIV 8(a)(i), emphasis added) Importantly, it is not the case that all trade inside a free trade area is actually free. What “substantially all” means in practice varies by free trade area, as does the depth of the tariff cuts between members. So long as they are more substantial and deeper than concessions offered to member countries in the WTO, members to a free trade area can claim that duties and other restrictive regulations are eliminated on substantially all the trade. There are no established benchmarks for how long free trade area members can allow for the phase-in of these reductions. The NAFTA actually set a high bar for a free trade area, eliminating tariffs on all goods as of 2009 once the 15-year phase-ins for the most sensitive products (mainly agriculture) had been completed. At the time of its negotiation the NAFTA was considered one of the most advanced free trade agreements in the world, in part because it went some distance beyond standard tariff reductions on goods and services, many of which will be detailed later in this volume. However, the most important facet of the NAFTA as a free trade area is to acknowledge just how shallow, and therefore limited, the agreement is in terms of its institutional architecture. The NAFTA is devoid of the kind of supranational institutionalism we observe in Europe wherein state sovereignty is pooled. However, we can nevertheless think about the NAFTA’s rules themselves as a set of institutions that govern trade relations between the three countries (North 1991). A long-standing critique of the NAFTA is that it lacks the kind of pooled sovereignty that would facilitate adaptation of the agreement as conditions warranted. There is no independent secretariat, staffed with technocrats to monitor the operation of the agreement. There is no physical building one can visit to learn about the NAFTA. The NAFTA Secretariat is, in fact, just a web portal maintained by

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all three countries, where one can find the text of the NAFTA, the details of dispute settlement proceedings and communiqués issued by the NAFTA Free Trade Commission (FTC).4 Indeed, each country continues to manage its trade interests under the NAFTA in much the same manner as it always has: out of the respective federal trade departments, agencies and ministries. The NAFTA does stipulate that the Free Trade Commission, comprised of “cabinet-level representatives of the Parties or their designees”, shall meet once per year (NAFTA, chapter 20, article 2001, clause 5), but there is no requirement that the national leaders get together. The NAFTA’s institutional design is not widely discussed, in part because it lacks some of the teeth that pooled sovereignty brings. Yet the NAFTA does include several important institutional provisions that – albeit shallow – were highly innovative for the time. Several of them, such as dispute settlement, are discussed in some detail in Chapter 6, but none represents a serious compromise of national sovereignty in the form of the creation of a trilateral governance body. Even when the NAFTA’s rules appear to lean in the direction of the binding, pooled forms of sovereignty we see in Europe, a closer look at their operation reveals processes that are ad hoc and sometimes informal and lack any kind of enforcement power beyond the willingness of the member states to implement. The importance of a lack of pooled sovereignty under the terms of the NAFTA cannot be overstated in the context of the neoclassical stages of integration. The NAFTA went some distance towards substantially eliminating barriers to trade in goods, services and investment flows and imposed disciplines in a number of other areas. Yet, to the extent that the agreement’s liberalizing character brought about a new dynamism to all three North American economies, it did so with a minimalist approach to governance some argue is required to manage that dynamism. Although the North American idea has always had an intellectual and economic logic to it, that idea and the logic behind it have frequently clashed with the political trade-offs between sovereign autonomy and the benefits of additional cooperation coupled with pooled sovereignty at ever deeper stages of integration. This has historically been a sensitive issue for all NAFTA countries, particularly given the stark asymmetries of power between them. Canada and Mexico, as the smaller parties to the NAFTA, have generally favoured institutionalization out of a belief that independent adjudicatory bodies could “level the playing field” and curb the arbitrary exercise of power by the United States (Anderson 2006; 2019). The United States, on the other hand, has resisted institutionalization beyond that contemplated in free trade areas, in part because it would impose limitations on its sovereign power (see Figure 2.1) (Anderson 2016). Indeed, the United States has long-standing anxieties about even the shallow terms of institutionalization found in free trade areas, including the NAFTA. 4. See www.nafta-sec-alena.org.

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WHAT THE NAFTA IS (AND IS NOT)

Lawsuits have challenged the legality of the NAFTA’s shallow institutional structure under the US constitution,5 conspiracy theorists have depicted the NAFTA as undermining sovereignty, and President Trump pursued its renegotiation in 2017 in part because of his belief that the agreement’s institutional structure forced the United States to do things it did not want to do. As the foregoing suggests, there is little basis for those fears. However, as the discussion shifts to deeper stages of integration involving pooled sovereignty – something proponents of North American integration championed – it is worth noting the challenges of modernizing a shallow free trade agreement such as the NAFTA as well as the complexities Britain confronts as it contemplates unwinding itself from the European Union. Hint: pooling sovereignty is hard.

The advent of non-tariff barriers One reason preferences agreements and free trade areas are relatively popular is that the bulk of the liberalization takes place over tariff rates. Tariffs are generally the easiest trade barriers to identify, in most countries via publicly available tariff schedules. Moreover, tariffs come in two basic forms – ad valorem and specific – and are applied at the point of entry (border measures), making them relatively straightforward for parties to begin bargaining over. Ad valorem rates are applied to goods as a percentage of their value; a 5 per cent tariff applied to a $100 product, say, would raise the price of that product in the domestic market to $105. A  specific tariff is more like a fee applied to imports: say $10 applied to a product valued at $100, raising the domestic price to $110. Tariffs such as these are readily identifiable and comparatively easy to bargain down. However, beyond that, trade liberalization becomes more difficult. Box 2.1 contains a list of commercial policies put in place by governments. Tariffs on goods imported into the United States, for example, used to be the single most important source of federal revenue, contributing nearly 90 per cent of all revenue as late as 1861, dropping to less than 40 per cent by 1864 and never again accounting for more than 57 per cent (1890) of federal revenue. By 1992, in the midst of the NAFTA negotiations, tariff revenue contributed only 1.6 per cent to federal revenue (Eckes 1995: 46, 73).

5. See US Court of Appeals for the District of Columbia, Coalition for Fair Lumber Imports vs. United States of America et al., no. 05-1366, argued 8 September 2006, decided 12 December 2006. This case was largely about the constitutionality of the NAFTA’s dispute settlement mechanisms as applied to domestic trade remedy law. The complaint was dismissed due to the court’s lack of jurisdiction over the issue.

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Box 2.1 Commercial policies (a) Import tariffs Two types: ad valorem – essentially a percentage of price; specific – a set level, say $25 per unit. (b) Import quotas Vary widely in how they are administered, but are essentially some form of quantitative limit set on import levels. Can also be in the form of negotiated “voluntary export restraints”, such as those negotiated between the United States and Japan over autos in the 1980s. (c) Technical or administrative restrictions Health or environmental restrictions; national security provisions or exemptions – e.g. “Buy America” restrictions; cultural sensitivities – e.g. CRTC.* (d) Government procurement (government spending contracts) Gives domestic firms advantages over foreign firms in bidding for contracts. (e) State trading Essentially barter-style trade between countries – e.g. Canada sells nuclear reactors to China in exchange for something else in return. (f ) Multiple exchange rates Utilize different exchange rates depending on the product to make imports more expensive in the domestic market. (g) Subsidies/export subsidies Everything from direct cash payments to firms for production, to tax incentives, or even offering preferential borrowing terms for the financing of new production (e.g. Bombardier). Subsidies are targeted to make firms more competitive generally, whether in their domestic or foreign markets. Export subsidies are tied to whether a firm sends its products abroad and are designed to make the firm more competitive abroad. (h) Dumping Selling your products abroad more cheaply than you would in your home market. Three types of dumping: sporadic (e.g. a bumper crop of wheat); persistent; predatory (a temporary measure to capture market share and drive competitors out). * Canadian Radio-television and Telecommunications Commission, the regulator pursuant to federal legislation around radio/television/telecoms, most often aimed at promoting Canadian content and limiting foreign ownership of broadcasting and telecoms firms.

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WHAT THE NAFTA IS (AND IS NOT)

(i)

(j)

(k)

(l)

(m)

(n)

(o)

Export taxes Imposed to conserve scarce resources or generate government revenue from an industry deemed a monopolist or highly profitable. Discourages exports for revenue purposes. Export controls Usually imposed on scarce goods or environmentally sensitive goods needed in the national interest or perhaps for conservation purposes – e.g. raw log export bans. Cartel Organization of producers or producing countries that colludes to restrict output and affect price – e.g. OPEC. Intellectual property rights Patents and copyrights; pushed in international negotiations to benefit the holders of the patents. Offshore assembly provisions Charge tariffs only on foreign inputs in an effort to boost domestic sourcing (import substitution). Flipside is that it encourages companies to move offshore for assembly. Rules of origin Production and assembly requirements applied to production within a preferential trading area such as the NAFTA. Specifies that, in order to qualify for duty-free treatment within and between trading area partners, products must contain a specified percentage of inputs sourced from within the trade area (i.e. from within a NAFTA country). Supply management agreements Similar to a cartel arrangement, but the aim is to set long-term production and price levels that will enable industry to ride out fluctuations in the market while keeping steady production levels. Involves the use of stock piling. State trading enterprises, such as the Canadian Wheat Board. And provincial dairy associations and marketing boards regulate entry into the sector as well as production.

Although tariffs and quotas are explicitly designed to restrict trade, many others listed in Box 2.1 have other purposes but may nevertheless have some impact on flows of goods and services across borders. Indeed, after the Tokyo Round of GATT negotiations, tariffs were no longer the chief impediments to global trade flows (Balassa 1980; Deardorff & Stern 1981).6 Border measures 6. WTO. The post-Tokyo-Round average tariff levied on industrial products fell to 4.7 per cent.

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such as tariffs or quotas gave way to a series of non-tariff barriers (NTBs) or behind-the-border (BTB) measures (items (c) to (o) in Box 2.1) as the most serious impediments to global trade flows. Regardless of what they are called, the range of measures of a non-tariff or behind-the-border nature are very difficult to negotiate away; they are hard to identify and quantify and sometimes only indirectly affect trade. However, it is also this thicket of complex governance issues that is at the heart of the global trade agenda. This slightly extended discussion of free trade areas is important beyond its utility in categorizing the NAFTA. Indeed, the NAFTA’s limitations as a free trade area have been part of the rationale put forward for “deepening” North American integration in the direction of more pooled sovereignty in order to deal with an expanding agenda of NTBs (Box 2.1) (Whalley 1998). However, the trade-offs between the efficiency benefits of deeper integration and the loss of sovereignty through the pooling that is required have also exposed the deep political divisions around “next steps” in North American integration.

Customs union The Tokyo Round of the GATT was the first of the postwar multilateral trade negotiations to grapple with non-tariff barriers, subsidies in particular. The outcome suggested some of the difficulties that lay ahead. As Robert Pastor observed in 1980, “lowering tariffs has, in effect, been like draining a swamp. The lower water level has revealed all the snags and stumps of non-tariff barriers that have to be cleared away” (Pastor 1980: 119). That the purpose of most NTBs is primarily domestic signals that sensitivities around sovereignty will be one of the biggest challenges in bargaining them down in the name of efficiency. The sheer number and variety of NTBs with impacts on global trade flows has made it difficult to identify them, much less quantify their impact. Among 30 developed countries for which the United Nations Conference on Trade and Development (UNCTAD) had data in 2013, 30 per cent of all trade was affected by just one category of NTB:  technical barriers to trade (TBTs) (UNCTAD 2013: 4; Ferrantino 2006). One way to begin eliminating NTBs is to advance to a “deeper” stage of integration, such as a customs union. Customs unions can entail the pooling of sovereignty around any number of issues, but are most simply focused on the harmonization of tariff schedules among member countries. That might not seem like a big step, but it is significant for a number of reasons. In a free trade area, member countries maintain their own tariff schedules vis-à-vis nonmember countries. Under the NAFTA, Canada, Mexico and the United States

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maintained their own tariff schedules and customs procedures to be applied to goods from non-NAFTA countries. This then also requires complicated (and inefficient) rules of origin for intra-NAFTA trade to ensure that non-NAFTA goods do obtain tariff-free movement in North America by first entering the country with the lowest tariffs applied to non-members – a topic to be taken up in greater detail in Chapter 3. A customs union would eliminate the need for rules of origin, harmonize all tariff schedules among NAFTA members and create a single, trilateral customs agency covering all of North America, which would apply the same duties and procedures at ports of entry in all three countries. Most importantly, a customs union in North America would eliminate the necessity of separate inspections and duty application at North America’s current international land borders. Once goods had entered the North American economic space, they would be free to move anywhere on the continent; no additional inspections at El Paso–Juárez or Detroit–Windsor, two of the busiest land borders in the world (Goldfarb 2003; Pastor 2008; Dobson 2002). The idea of a customs union was never much more than an academic preoccupation in North America until the 11 September 2001 terrorist attacks on the United States brought some renewed practical thinking about the utility of a customs union for security. In fact, security quickly reanimated the North American agenda for a time, as officials struggled to both secure and facilitate border crossings for legitimate people and cargo (Anderson & Sands 2007; Ackleson & Kastner 2006; Ackleson 2009). The NAFTA left a substantial built-in agenda within the text, complete with 30 trilateral working groups aimed at advancing some of that agenda. Yet the success of these working groups was limited, most falling dormant within a few years of the NAFTA’s implementation in 1994. The post-9/11 imperatives of security renewed thinking about how to animate the post-NAFTA agenda as well. A customs union could have been part of a common perimeter security strategy in North America that brought relief to the pressures being placed on North America’s land borders with every new security measure, by, at the very least, having those measures implemented at ports of entry around the continent’s edges (Andreas & Biersteker 2014; Anderson 2016). In 2005 Canada, Mexico and the United States launched the ambitiouslooking Security and Prosperity Partnership (SPP), ostensibly aimed at managing the apparent tensions between security and economic openness. Indeed, although security was the driving force behind much of the SPP, the full agenda ambitiously reflected many of the complicated governance issues represented by NTBs in the global trading regime. However, the SPP suffered from a number of faults, including lack of input or oversight from either the public or elected officials (Anderson & Sands 2007: 14–19). The SPP eventually collided with a

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number of political realities, including the unwillingness of all three NAFTA members, but especially the United States, to move towards the pooled sovereignty that advancing the more ambitious elements of the SPP agenda would have required.

Common market The failure of post-9/11 initiatives to substantively reinvigorate momentum towards deeper stages of North American integration was a disappointment for some, particularly since the continent’s land borders quickly became reinforced as the main interdiction points for both trade and security purposes. That the infrastructure at many land border crossings was designed and built in the middle of the twentieth century to accommodate much lower levels of commercial activity compounded perceptions that the border was being “thickened” by security (Ackleson 2009; Goldfarb & Robson 2003; Walke & Fullerton 2014; Lara-Valencia 2011). The disappointment of the post-9/11 period didn’t stop scholars from thinking about what North America could become. Indeed, a significant body of research has accumulated about what a North American common market might look like, starting with increased labour mobility (Rekai 2002). A common market inherently implies significant pooling of sovereignty, since it entails the complete mobility of all factors of production among the members. In effect, a common market in North America would dramatically reduce the economic impact of borders in segmenting labour markets, make passport-free travel possible and harmonize large swathes of labour law, making it easier for nationals of all three countries to work throughout North America. The efficiency gains from a North American common market are, of course, complicated by the anxieties over sovereignty, especially given the contemporary salience of nationalist populism. Indeed, the idea of deepening North America in the direction of a common market has regularly been fodder for nationalist/ nativist conspiracy theories. These are not new anxieties, nor are they limited to North America (Duina & Blithe 1999). In fact, passport-free travel in Europe has been under considerable political pressure in recent years, as migration flows from North Africa and the Middle East have fuelled a reconsideration of the merits of the 26-member Schengen area (Geddes & Scholten 2016: 144–71). Labour and labour mobility will receive more extensive treatment in Chapter 7 of this volume. However, in broad terms, the NAFTA has steered clear of significantly liberalizing labour markets, doing so on a limited basis only for select categories of business professionals. Moreover, the practical access business professionals from each of the three countries had to those provisions was

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uneven. More importantly still, the NAFTA never contemplated harmonized labour laws, immigration policies or the pooling of sovereignty necessary to do so.

Monetary union Although a customs union has only periodically moved beyond the economists’ chalkboard and into the realm of public consideration, the idea of a monetary union in North America has never really escaped the confines of academic theorizing and speculation. Economists have typically been reinvigorated in their speculation about monetary union in periods when exchange rates between the three countries have experienced significant swings. In these periods economists pick up their chalk and argue that a common currency would alleviate exchange rate risk on all sorts of cross-border transactions. Indeed, we can imagine the economic inefficiencies that would ensue if each of the 50 US states, 31 Mexican states and ten Canadian provinces had their own currencies! The NAFTA went some distance towards stimulating trade among all three countries by moving to eliminate a number of transactions costs linked to the exchange of goods and services, but it never considered transactions costs associated with exchange rates. It was a curious limitation of the NAFTA’s architecture, since many of the commodities traded among the three countries are priced globally in US dollars, and a sizable number of Canadians and Mexicans hold US dollar assets (bank accounts, property, securities), so why not just “dollarize” the entire NAFTA area? To begin with, although paper currencies have been in wide circulation only since the middle of the nineteenth century, they have acquired a curious cultural sensitivity that makes abandoning them in favour of another tough for some publics to swallow (Gilbert & Helleiner 1999; Meier-Pesti & Kirchler 2003; Risse et al. 1999). The most prominent example of this comes from Europe, where the United Kingdom remained outside the Eurozone after it was established in 1999. Would Canadians willingly turn in their Canadian dollar coins (affectionately known as a “loonie”, because of the loon depicted on one side) or their two-dollar coins (known as “two-nies”, even though no bird is depicted) in favour of the US dollar? What about a new, yet to be imagined, trilateral currency? However, another set of important hurdles in North America are institutional, in that monetary union would require the pooling of sovereignty around central banking, which none of the three countries has ever come close to being willing to entertain. In a best-case cooperative scenario for Canada and Mexico, they would join with the United States to create a new institution, say a North American Central Bank (NACB), to manage a new currency  – the

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amero, as some have coined it (Grubel 1999). This would entail all three countries giving up their monetary sovereignty – control over their currencies and interest rate setting – to a new continental central bank: a replacement for the Bank of Canada, US Federal Reserve and Banco de Mexico. The obvious comparator is, again, the Eurozone, wherein 19 of the European Union’s 28 members abandoned their national currencies and pooled monetary policy decisions in a new institution, the European Central Bank. As the United Kingdom’s longstanding reticence over Eurozone membership attests, the decision to do so, even among countries of relative comparability and size, is politically fraught (Adler-Nissen 2016). Such a significant institutional step is complicated in North America by the stark asymmetries among the three countries. Indeed, the politics of monetary union in North America would undoubtedly be anchored in long-standing fears in Canada and Mexico of domination by the United States. In practice, a North American monetary union would likely entail dollarization rather than a brand new currency such as the amero. Instead of a new NACB, Canada and Mexico would end up dissolving their central banks, ceding their monetary sovereignty to the US Federal Reserve and hoping to negotiate terms of influence within Fed governance over the continent (Robson & Laidler 2002; Courchene & Harris 1999).

Political union The very concept of North American integration has been fodder for conspiracy theorists on both the political left and right. For them, political union is the horrific end goal of elitists who supported the NAFTA as a first step towards the demise of the nation state. The 1988 Canadian federal election campaign, for example, was effectively a referendum on the pending free trade agreement the governing Conservatives had negotiated with the Reagan administration. The opposition Liberals ran a television advertisement featuring an American trade negotiator erasing the 49th parallel on a map of North America.7 The precise identities of the elites driving all this are typically underspecified, but, more than any of the individual stages of integration, it is political union as the logical conclusion to the neoclassical stages of integration that evokes some of the strongest opposition in all three NAFTA countries – and, in recent years, the United States in particular (see Corsi 2007; Dobbs 2004; 2006; 2007). The reason for all this fear is that political union in North America would entail some kind of supranational political governance that would, in full or 7. Available at www.youtube.com/watch?v=Ezj4S73IQ1g (accessed 10 June 2019).

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in part, supplant the power of respective national governments. However, it is important to note just how far away we are from anything resembling such an outcome in North America, and also, then, how far off base certain voices are in stoking fears associated with such. Consider Europe, for example, where the postwar project has far different imperatives and meanings, yet still has considerable distance to go before political union is achieved among member states (Moravcsik 2006; Thirion 2017). As the European project has advanced, it has centralized and bureaucratized considerable areas of social and economic policy in Brussels. Moreover, EU-wide elections for membership in the European Parliament now contend in importance with elections to national legislatures. These disruptions to traditional governance patterns, and the political challenges they have spawned, have prompted efforts on the part of the European Union to ensure the legitimacy of these processes in the eyes of EU citizens (Vause 1995; Edwards 1996), in turn giving birth to an entire academic literature on multi-level governance as the European Union’s efforts have proliferated (Hooghe & Marks 2003; Leibfried et al. 2015; Ansell & Torfing 2016). In recent years simply consolidating what Europe has achieved in areas such as monetary union has been challenged by wobbly economies in Italy, Spain, Ireland and, of course, Greece. In early 2005 voters in France and the Netherlands stunned everyone by rejecting the proposed European constitution, consolidating all previous treaties into a single document. And, of course, recent migrant flows from North Africa and Syria have cast doubt on immigration policy, particularly in the United Kingdom, where “Brexit” has been fuelled, in part, by public concerns about immigration. Echoes of the recent cracks in the EU project can be heard in North America, but they are also a reminder of the relative shallowness of the North American project. Each of the NAFTA partners is in the midst of its own experiment with the complexities of federalism, and each continues to work on knitting its respective country together. Pooled sovereignty with each other is not on the table. Canada, for example, continues to struggle with knitting the country together politically and economically, east, west and north. Indeed, Canada’s unique brand of decentralized federalism had necessitated a number of internal arrangements between Ottawa and its provinces, and between the provinces themselves, to establish internal rules of trade. In June 2017 Ottawa and Canada’s provinces finally did so, approving the Canadian Free Trade Agreement – an agreement with striking similarities to the NAFTA.8 8. See Canadian Free Trade Agreement:  www.cfta-alec.ca (accessed 10 June 2019). See also the New West Partnership, a subfederal, regional integration scheme among four western provinces: www.newwestpartnershiptrade.ca (accessed 10 June 2019).

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Conclusion The purpose of this chapter has been to set the NAFTA as a “thing” in some categorical context that can then be used to parse out many of its most important elements. The main point is that the NAFTA is a relatively shallow free trade agreement; shallow in that it envisages no pooling of sovereignty in any kind of shared institutional structure. In a lot of ways, this was a completely unsatisfying outcome, because the NAFTA liberalized trade among the three countries, added additional dynamism to an economic relationship that was already robust but did not put in place the kinds of institutional mechanisms that would have allowed the NAFTA to adapt to that dynamism. The NAFTA left over a substantial agenda that, in part, was the victim of the politics of globalization in the late 1990s, which included the infamous “Battle in Seattle” at the WTO ministerial conference in November 1999. The institutional shallowness of the NAFTA went some distance to assuaging the concerns of those who thought the agreement went too far, but did not exactly keep the NAFTA out of the political spotlight. Indeed, in spite of the agreement’s relatively limited ambition in the context of the neoclassical stages of integration, the NAFTA has routinely found itself at the centre of nearly every political firestorm that erupts about trade. The NAFTA is, of course, a set of “institutions” in the form of rules governing the liberalization of trade between the three countries. Yet, limited and unchangeable as those “institutions” were, the NAFTA was also innovative for its time in terms of taking on many of the non-tariff and technical barriers to trade (“stumps and snags”) the multilateral Tokyo Round had revealed.

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3

NORTH AMERICA AS REGION

The discussion in Chapter 2 of what the NAFTA is and what it is not skirts a larger set of questions about what North America is. That sounds like a debate for a different book, but is not inconsequential here, since the answer to that question has fuelled the politics of the NAFTA itself. In the context of trade, North America is most simply expressed as the three parties to the NAFTA. Yet, geographically, North America is quite a bit broader. According to the National Geographic Society, the continent of North America extends from the tiny Aleutian Islands in the northwest to the Isthmus of Panama in the south [and] includes the enormous island of Greenland in the north east and the small island countries and territories that dot the Caribbean Sea and western North Atlantic Ocean. Moreover, North America can be divided into five physical regions:  the mountainous west, the Great Plains, the Canadian Shield, the varied eastern region, and the Caribbean. Mexico and Central America’s western coast are connected to the mountainous west, while its lowlands and coastal plains extend into the eastern region.1 Neither Panama nor Greenland is part of the NAFTA, nor is the Caribbean. For a short time after the NAFTA’s completion, in 1994, the Free Trade Area of the Americas initiative contemplated the extension of NAFTA-like trade rules to most of the Western Hemisphere. Yet even the FTAA would not have included Cuba (democracy was a condition of entry) or Greenland, a semi-autonomous part of Denmark. 1. National Geographic Society, “North America:  physical geography”:  www.nationalgeographic. org/encyclopedia/north-america-physical-geography (accessed 10 June 2019).

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Within each of the NAFTA countries, for example, we can point to numerous examples of “regionalism” affecting domestic politics: the US Civil War and its long-term impact on the American South; Canada’s challenges with threatened independence by Quebec or with western alienation; or Mexico’s struggles with restive parts of its underdeveloped southern states. Each suggests a social, political or economic distinctiveness at the subnational level important for understanding the function of the larger polity. That all three have unique experiences with federalism suggests they remain in the midst of a grand experiment with how to knit large geographies and diverse populations into a cohesive national structure. North America’s current political boundaries are arbitrary lines on a map set after a mix of European conflict in the eighteenth century, and continental expansionism, civil war and revolution in the nineteenth century. In 1981 Joel Garreau rethought North America’s divisions in terms of culture and shared values, coming up with nine distinct nations inhabiting the continent (Garreau 1981). When we think about North American regionalism, there might be broad agreement on Quebec or Dixie (the US South) being uniquely regional. Yet Garreau importantly argues that North America is a collection of regions, divided by, but more often transcending, political lines on a map. South Florida, for example, has less in common with the continental mainland than it does with most Caribbean islands – which, in the context of trade, are never described as being part of North America. Garreau is hardly the only one to point out these incongruences of political lines with how people actually interact economically, politically and culturally  – a major theme of scholarship on post-colonial Africa or the Middle East. Looking at North America as a whole, Garreau was also not the last to view North America through the lens of regionalism. In 2011 Colin Woodard generated a regional depiction of North America strikingly similar to Garreau’s, adding two regions (11 rather than Garreau’s nine: Woodard 2011), renaming a couple of others (see Table 3.1). Regionalism is one of the murkier concepts tossed around by political scientists, frequently lacking clarity and specificity. Depending on where and how it is applied, “regionalism” has quite different meanings and implications: everything from metropolitan planning to localized or cross-border economies and culture. This murkiness extends to areas such as citizenship and identity, over which considerable scholarly ink has been spilled on the constructions underwriting what it means to be American, Canadian, Mexican, or whether there is an emerging identity that might be termed North American (De la Peña 2006; Song 2009; Kymlicka 2003; Earle & Wirth 1995). A further definitional and conceptual complication around “region” stems from the stream of international political economy literature known as “the new

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Table 3.1 Regionalism in North America Garreau’s 9 nations of North America

Woodard’s 11 rival regional cultures

Ecotopia The Empty Quarter MexAmerica The Breadbasket Quebec The Foundry

The Left Coast The Far West El Norte First Nation The Midlands New France (Quebec and southern Louisiana) Yankeedom New Netherland Greater Appalachia Tidewater Deep South (South Florida part of the Caribbean)

Dixie New England The Islands (including south Florida)

Sources: Garreau 1981; Woodard 2011.

regionalism”, which emerged in the early 1990s (Kahler 1995; Bhagwati 1992; Ethier 1998; Bowles 1997). This literature’s emergence was not coincidental, since it aimed to describe and understand the proliferation of formal economic arrangements such as the NAFTA. The template frame of reference for much of this literature was the European project, but with a heavy emphasis on the economic case for integration: efficiency gains, growth, supply chains, institutions (Loughlin & Keating 2013). Hence, when scholars ask whether North America exists, they are often talking past one another about different aspects of the complex of elements that could conceivably define a “region”, often complicating the debate over the NAFTA’s contribution to the topic. Defined in terms of the new regionalism literature, the NAFTA is sometimes exhibit A in the discussion of regionalism. However, if a “region” is defined in broader historical, cultural or political terms, the NAFTA’s role in augmenting or undermining the concept becomes more contestable. This chapter cannot definitively sort through whether North America is a cohesive region, broadly defined. However, what follows aims to situate the NAFTA, and the politics that flows from it, in some of these broader debates about regionalism. Moreover, what follows will focus on the NAFTA as part of the “architecture” of region as it has evolved in North America over the postwar period.

The NAFTA’s multilateral origins The rapid deepening of the European project with the 1992 Maastricht Treaty and the subsequent advent of the NAFTA in 1994 were important focal points

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Table 3.2 Percentage of total exports to regions of the world, 2010 and 2017 2010

2017

North America (exports to) North America Asia European Union

49% 21% 17%

50% 22% 16%

European Union (exports to) European Union Asia North America

71% 9% 7%

69% 11% 9%

Source: World Trade Organization, “World and Regional Merchandise Export Profiles”, statistics on merchandise trade: www.wto.org/english/res_e/statis_e/merch_trade_stat_e.htm (accessed 10 June 2019).

for scholars interested in regionalism. Yet the seeds of the new regionalism were not actually “new”. In 1985 Canada and the United States advanced their own project in regional integration with the launch of free trade talks. The institutional origins and rationale for allowing regional trading arrangements as part of the multilateral trading system were outlined in Chapter  1. Article XXIV of the General Agreement on Tariffs and Trade codified and sanctioned the presence of inherently discriminatory preferential trading arrangements within a multilateral system that was supposed to be non-discriminatory, but justified it with the broader goal of creating more trade. Yet are trading arrangements like those justified under article XXIV necessary, sufficient, or neither when we think about regionalism? Table 3.2 depicts a common measure of regionalism anchored in comparisons of intra-regional versus extra-regional export levels for 2010 and 2017. In 2017 fully 50 per cent of North America’s exports went to other North American countries, with much smaller percentages destined for other parts of the world. By comparison, 69 per cent of exports from European Union members went to other EU members. Since a greater share of EU member exports are connected to other EU members than is the case in North America, this is just one indicator that Europe might be relatively more coherently “regional”. Yet how much of the story of regionalism is actually indicated by trade statistics alone? Confusing matters further, the definition of North America used by the WTO in Table 3.1 includes “Bermuda, Canada, Mexico, United States of America, Other territories in the region not elsewhere specified”. Bermuda? Hence, the NAFTA may be a regional trading arrangement under article XXIV, but does that make it a distinctively cohesive region or simply a component of some larger, perhaps even less coherent concept of region? Did the additional

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trade and investment stimulated by the NAFTA add to an existing base of regional activity, polity or identity of some description, or was it really a small building block in a concept of North America as region that does not actually exist? The NAFTA was an important building block of an architecture with uniquely North American qualities. However, this chapter argues that the NAFTA represented the zenith of regionalism in North America and that the new US– Mexico–Canada Agreement negotiated in 2017–18 is merely the latest nadir in a steady descent away from the idea of “region”.

North America, two views Views on North America and regionalism and NAFTA as a component, underwriter or driver of a North American region are inseparable. Indeed, if one is disposed towards thinking of North America as a coherent collection of states with a host of commonalities that can easily be augmented by the idea of “region”, the NAFTA is seen as an important institutional down payment underwriting the foundation of region beyond a set of trade rules (Pastor 2011). On the other hand, scepticism about the overlap or commonality among the diverse cultures, politics and stages of economic development among the NAFTA’s members fuels criticism of the NAFTA as both the only real foundation of trilateral connection and a profoundly inadequate one (Clarkson 2008).

Two views on institutions It is important to at least acknowledge that there are more than two views on the NAFTA’s institutions and their influence on North America as a region. Especially corrosive politically have been the exaggerated  – intellectually dishonest – claims about the NAFTA that emerged from the populist right in the United States in the early 2000s. Particularly potent were the claims of certain television pundits who argued the NAFTA and its successor initiatives – notably the 2005 Security and Prosperity Partnership – were underhand efforts by elites to destroy US sovereignty, impose a never specified global government, pave a 12-lane super-highway through the middle of the continent and throw open labour markets to low-cost competition (i.e. immigration). Analysts can, and do, cringe at all of these, since no serious examination of the NAFTA , the intent of the agreement’s negotiators or efforts to build upon it would lead to such conclusions. Unfortunately, such populist distortions have gained traction in the political vacuum left by those unwilling to defend the NAFTA’s merits or note how institutionally shallow it is.

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More serious analysts of North American integration are agreed on at least one facet of the NAFTA as underwriter of North America as a region:  that the NAFTA has too few institutions to foster in North America anything approaching the idea of “region” (Pastor 2001; Capling & Nossal 2009; Studer 2008). Yet this agreement on the lack of institutions in the NAFTA then diverges over the implications of their absence. For proponents of the NAFTA, the absence of more institutional structures represents a significant failure of vision and courage on the part of North America’s leadership to capitalize upon a convergent set of values held by populations in all three countries. The absence of governance mechanisms to deal with the substantial agenda initiated, but never completed, by the NAFTA left important governance holes in the agreement that served only to open additional doors for critics to assail the entire premise of the agreement. If it was not the abject absence of governance institutions, it was often the weakness of those that were created that undermined the utility of the NAFTA as a significant step forward in the development of North America as a region. For example, the structure of the much-hyped dispute settlement mechanisms around antidumping duty (AD) and countervailing duty (CVD) (NAFTA chapter  19) was, in fact, so limited in scope that they are either unsatisfactorily slow in, or incapable of, resolving important disputes, notably Canada–US trade in softwood lumber (Anderson 2006; Gagne 2003). On paper, the NAFTA’s state-to-state dispute settlement provisions (chapter 20) ought to elevate intractable disputes above more technocratic forms of adjudication, and give them political profile and attention appropriate for partners in an integrated marketplace of their mutual design. Yet, as Chapter 6 of this volume will detail, the state-to-state dispute process has proved even more unsatisfying (Carbaugh 2011). The other view is that the lack of institutional structure within the NAFTA was largely driven by corporate influence over the design and outcome of the negotiations. It was, in this view, a spectacular success in terms of a radical overhaul of the North American economic space in areas well beyond standard liberalization of trade and investment rules. Indeed, the NAFTA broke new ground in areas such as energy, telecommunications, patent protection and services, which had yet to be fully incorporated within the multilateral system. Moreover, any effort to more deeply institutionalize the future governance of these issue areas in the public interest was actively opposed by those corporate interests whose actions would most likely be disciplined by such institutions. The most prominent of these issue areas in which institutionalization efforts were stalled, short-circuited or watered down were labour and the environment, embodied, first, by being addressed outside the formal text of the NAFTA and, second, by their profound institutional weakness (Clarkson 2008).

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The European Union as region versus North America as region Those who complain about the institutional weakness of the NAFTA in nudging North America towards something more obviously recognizable as “region” could reasonably be taken to task for being impatient. The first reason to temper expectations revolved around the earlier discussion of the fuzzy conceptual and definitional aspects of what “region” or “regionalism” even are. Analysts can argue over whether a wide range of connective tissue between different polities – political, cultural, diplomatic, military, geographic, formal or informal, local or global – are necessary, sufficient or adequately robust to justify the “regional” label (Börzel & Risse 2016; Shaw, Grant & Cornelissen 2011; Kupchan 2010; Keohane & Nye 1977). These debates will continue, but, when analysts speak of regionalism in the context of globalization, they are most often referring to the rapid expansion of regional trading schemes like the NAFTA. Indeed, the NAFTA was significant in terms of the size of the economies it began knitting together, but it was hardly alone. Many others joined the party. As of January 2019 the WTO reports that more than 290 regional trade agreements are in force, the overwhelming majority of them coming into existence after 1990.2 Whether one is sceptical of North America as a region, frustrated by the lack of NAFTA-centred progress towards that end or terrorized by the thought that the NAFTA has driven the continent too far down that road, one would do well to return to the comparison with Europe. Doing so is even more important if the development of robust institutions is considered a necessary condition for regionalism. The punchline here is simple. Although many analysts consider Europe as anchored by the European Union to be the quintessential form of regional governance, many questions about Europe as a region remain unanswered and the focus of ongoing debate. Moreover, the European project has been nearly a century in the making, evolved in fits and starts, confronted multiple challenges along the way and is currently confronting a future without the United Kingdom. In other words, Europe and North America share one important commonality as regions: they are works in progress.

Humble beginnings The regional integration of Europe and North America share quite different political and historical origins, but are remarkably similar in the relative modesty of 2. WTO, “Regional trade agreements”:  www.wto.org/english/tratop_e/region_e/region_e.htm (accessed 10 June 2019).

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their beginnings. Put differently, both sides of the Atlantic started small: Europe with a small group of countries and a specific industrial sector, North America with just three countries and a shallow preferences agreement. The political origins of the European Union are directly traceable to the ashes of the Second World War. For many, the economic and political nationalism of interwar Europe was a causal antecedent of the horrors of the war. Diplomats, economists and political scientists puzzled over how to reconfigure relationships between states that would restrain impulses towards armed conflict (Deutsch 2015; Haas 1961; Keohane & Nye 1977). Jean Monnet, now considered one of the intellectual and political champions of European integration, picked up on many of the arguments pointing to the salutary effects of shared economic activity – a core element of what became popularized in the 1970s as “interdependence theory” – and directed them towards Franco-German relations (Fransen 2001; Duchêne & Monnet 1994). The practical application of this line of reasoning was the 1951 European Coal and Steel Community, Europe’s first supranational governance project, binding Belgium, France, Italy, Luxembourg, the Netherlands and West Germany to collective decision-making in the production of coal and steel.3 Importantly, the ECSC was an integration arrangement limited to a specific economic sector. The governing institutions were supranational, but nevertheless still limited to a single sector. From rather modest beginnings, Europe has evolved through a number of the stages of economic integration detailed in the previous chapter. Importantly, this evolution has been neither inevitable nor uniform. The 1957 Treaty of Rome broadened and deepened the integration of the same six countries by transforming the ECSC into a common market (complete factor mobility). The first expansion of the European Economic Community (EEC) did not happen until 1973, when Denmark, Ireland and the United Kingdom signed on. Shortly afterwards, in 1975, the EEC operationalized some initial thinking about “region” and how to stimulate it within Europe by creating the European Regional Development Fund (ERDF), with a focus on reducing economic disparities between different geographic areas of the EEC. By 1986, and the signing of the Single European Act, EEC membership stood at ten. Then, in the aftermath of the Cold War, there was a flurry of important agreements  – Maastricht Treaty (1993), Shengen Agreement (1995) and Lisbon Treaty (2009) – adding to its membership, deepening the single market, 3. European Commission, “Schuman Declaration  – 9 May 1950”:  https://europa.eu/europeanunion/about-eu/symbols/europe-day/schuman-declaration_en (accessed 10 June 2019). Although French foreign minister Robert Schuman “declared” the creation of the ECSC, Jean Monnet was the organization’s founding president, from 1952 to 1955.

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introducing a single currency, providing for passport-free travel and moving ever closer to political union. The European project is more than six decades in the making, began with just six members (now 28) and broadened, deepened and expanded its membership in fits and starts. Moreover, it has not been a smooth linear process. Indeed, Europe seemed on the precipice of adopting a continent-wide constitution in 2004 that would have consolidated a number of extant treaties into a single document. Final adoption required the proposed European constitution be put to a series of national referenda. Through mid-2005 18 countries had ratified the new constitution. However, in May 2005 voters in France and the Netherlands rejected it (Hurrelmann 2007; Bailey 2008). This particular defeat eventually gave way to the approval of the more modest Lisbon Treaty in 2009, but the point is that the European Union has been long in the making, at times incremental, at others bold, and has also suffered a number of setbacks, the most serious of which is the United Kingdom’s intention to withdraw from the union.

North American parallels Interestingly, North American regionalism, defined in terms of a focus on government-directed integration projects, has several similarities to what we have observed in the European project. Much as the European Union’s origins can be found in a much more limited sectoral agreement among just six countries to manage coal and steel production, North American regionalism can similarly be traced to much more limited initiatives, focused in this case on the United States. Specifically, in 1965 Mexico initiated a number of economic reforms aimed at stimulating what became popularly known as the maquiladora sector (Schechter & Brill Jr 1991; Schwartz 1987; Weintraub 1990:  11– 26). Mexican reforms were mostly aimed at attracting investment, especially American investment, to the country’s northern tier. It was a successful effort, which transformed northern Mexico’s industrial capacity, making the region a de facto arm of US manufacturing (Taylor Hansen 2003). Although the origin of these reforms was domestic, the tacit approval and participation of American multinationals utilizing low-cost Mexican labour in the assembly process meant that US and Mexican supply chains were becoming increasingly intertwined. In the same year, 1965, Canada and the United States formalized the terms of the Auto Pact, a scheme that dramatically reorganized and integrated auto manufacturing between the two countries (Anastakis 2000). Indeed, the liberalization of trade in auto manufacturing gave rise to countless parts manufacturers and suppliers to the sector and virtually eliminated the importance of the border in terms of the final assembly of vehicles. By the early 2000s it was common for

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public officials to claim that just-in-time manufacturing had become so finely tuned that the manufacturing for a single vehicle meant the components therein crossed the border multiple times in the assembly process (Anastakis 2001).4 Yet, apart from the general period in which the integration initiatives began, and the fact that they were sectoral, the parallels between Europe and North America become more difficult to sustain. First and foremost, the intellectual and political impetus for the ECSC in 1950 was a desire not to repeat the mistakes of the interwar years, by enmeshing former adversaries inside a supranational institution that would collectively direct a major source of industrial activity. Although North America has not been immune to conflict – notably the Mexican–American War of 1846–48 and the 1916–17 US intervention in pursuit of Pancho Villa – none has approached the destructive scale of Europe’s two twentieth-century conflicts. Moreover, each of the three eventual NAFTA partners had narrow, domestic motivations for the initiatives they pursued in the years leading up to 1994. Europe has also made incremental, at times dramatic, progress in advancing integration towards ever deeper stages of integration encompassing more and more members. In North America there has always been “talk” of moving to deeper stages, but seldom any real action in building upon the success of the Auto Pact. Ronald Reagan made a vague reference to pursuing a “North American accord” as he announced his run at the US presidency in 1979, but few knew what exactly he meant and most dismissed it as a kind of filler to begin his campaign (Cannon 1991: 461). North America’s march towards regionalism seemed to have had a breakthrough or two in the late 1980s and early 1990s, with the advent of the Canada–US Free Trade Agreement (1988) and the NAFTA (1994) – perhaps the realization of Reagan’s “North American accord”? Yet, after expending political capital to win congressional approval for the NAFTA, the Clinton administration seldom mentioned it, and certainly spent no additional capital to advance its built-in agenda. Instead, scholars spent most of the next two decades highlighting the merits and challenges of advancing the NAFTA more robustly towards a more integrated and cohesive “region” (see, e.g., the C. D. Howe Institute’s “Border Papers” series, notably Dobson 2002; Robson & Laidler 2002; Goldfarb 2003). Even attaching security to the North American economic agenda after the September 2001 terrorist attacks on the United States failed to significantly reanimate progress, incremental or otherwise, towards deeper

4. In late 1999 the World Trade Organization issued the last of several rulings on the compatibility of the Auto Pact with the multilateral trading system, effectively putting an end to the operability of the last provisions of the pact. However, by then the North American auto sector had become so integrated that cars had come to be called “industrial tourists” because of the frequency with which they crossed the border. See Tong (2017).

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forms of “regionalism” (Ackleson & Kastner 2006; Ackleson 2009; Anderson & Sands 2007). However, just months after Donald Trump’s election as president of the United States, his threat to withdraw from the NAFTA concentrated minds and refocused attention on both the agreement and what the threat meant for North America as a region. Indeed, the populist rhetoric of the 2016 US presidential campaign, much of it directed at supposed flaws with the NAFTA (the “worst agreement ever”) and Mexico, cast a pall over the negotiations. Rather than looking for ways to advance, deepen or “fi x” the alleged ills of the NAFTA, the renegotiation process was mostly defensive in nature, an effort to prevent the erosion of the NAFTA’s benefits rather than an attempt to build upon them. A number of the institutional oddities in the transformation of the NAFTA into the USMCA are given deeper treatment elsewhere in this volume:  the dual bilateralism in dispute settlement, complicating rules of origin with new wage provisions, and the contrast between leaving temporary entry intact while augmenting environmental protections. Yet it was, arguably, in the renegotiation process itself that the contrast between the NAFTA and USMCA is most revealing about North America as region. By the fall of 1991 American negotiators had become frustrated with the slow pace of NAFTA negotiations (Cameron & Tomlin 2000). This was not at all unlike the frustration expressed by the Trump administration throughout the course of 2018 at the similarly slow pace of renegotiation. The parallels between the two periods extend to a number of negotiating pressures imposed by legislative and electoral calendars in one or more countries. However, the similarities end there. In mid-February 1992 the three parties met in Dallas, Texas, for what became known as the “Dallas Jamboree”. It was a multi-day, face-to-face negotiation over all issues at once that had never been attempted before. The “Dallas Jamboree” did not complete the NAFTA negotiations, but did result in a set of important breakthroughs on a number of difficult issues that paved the way for completion of the full text by the fall of 1992 (Cameron & Tomlin 2000: 108). The regional symbolism of organizing a complex, trilateral “jamboree” suggested a commitment by all three countries to the conclusion of the talks. The renegotiation of the NAFTA in 2017–18 was very different, and occurred against a backdrop of withering, non-stop criticism of Mexico by Donald Trump over trade and immigration, starting with the announcement of his candidacy for president. If the NAFTA was (according to President Trump) the “worst agreement ever negotiated”, the US–Mexican relationship within it was the most problematic. Canada and Mexico have always had an uneasy, at times challenging, courtship (Stevenson 2000; Daudelin 2003; Castro-Rea 2016). Indeed, an important

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motivation for Canada being at the NAFTA table was not out of a philosophical commitment to, or vision of, “region” but to make sure Mexico did not get a better deal than Canada had achieved with the United States just a few years beforehand (Pastor 2011). However, between late 2017 and the spring of 2018 Canada and Mexico maintained a united front:  the NAFTA renegotiation was to be trilateral. Then, in the summer of 2018, Canada disappeared from the negotiations while Washington and Mexico City worked on issues that were supposedly unique to their relationship. Canadians vigorously asserted that they remained in regular touch with their US and Mexican colleagues about progress in their discussions and would rejoin the talks at the appropriate time. Then, on 27 August 2018, the United States and Mexico announced they had reached an agreement, suddenly putting significant pressure on Canada to do similarly. When process is considered alongside the final, arguably patchwork, text, it is not a stretch to suggest that North America as region has less of a trilateral foundation anchored in the USMCA than it did under the NAFTA.

Asymmetries of power Many analysts of North American integration note the stark asymmetries among the three NAFTA countries. Indeed, the asymmetries are everywhere, and rather easily identified. What’s interesting about most of those analyses is how seldom they disaggregate the components of such a defining characteristic of North America (Andreas 2005; Clarkson 1998). In what ways does it matter that the US economy is more than 16 times as large as either of its NAFTA partners? How exactly is the exponentially larger US military budget important in the context of trade negotiations around rules of origin? Are Canada and Mexico under any real threat of having military action directed at them because of the failure of trade negotiations? Certainly not. However, the depth, breadth and power of America’s consumer market, Canada’s and Mexico’s dependence on it as an export market and, of course, the threat of market closure or restriction are existential challenges to both the smaller economies. For a variable that is advanced as foundational to the politics and economics of North America, surprisingly little scholarly attention has been paid to where asymmetries of power exist, in what policy domains or in what ways they matter (Anderson 2019). Scholars have nevertheless pointed to the asymmetries of power in North America as a structural impediment to deeper stages of integration (Clarkson 2008). Asymmetries of power exist within the European project, they argue, but none are as stark as those found in North America. The result is a basic starting point for Canada and Mexico of structural weakness in dealing

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with Washington that cannot be overcome with institutions. Moreover, with so much power accruing to just one North American state, how, these scholars would argue, are Canada and Mexico going to make the case for supranational institutions that would pool power and sovereignty? The United States is unlikely to agree to create new trilateral institutions that would water down its relative power advantage (Anderson 2016). The more likely scenario is that any pooling of sovereignty in North America would come only at the expense of Canadian and Mexican sovereignty. North American monetary union, for example, would not entail the creation of an entirely new currency like the euro (some have termed such a thing the amero) (Courchene & Harris 2000; Chriszt 2000; Grubel 2000). Rather, Canada and Mexico would likely just end up adopting the US dollar but with uncertain input into the governance of the US Federal Reserve. Others see things very differently, arguing that a general convergence of economic and political values among the populations in each NAFTA country suggests they may be more receptive to closer ties (Pastor 2011:  59–73). Moreover, the main problems confronting closer ties are not found in asymmetries of power, resistance to more cooperation or a reluctance to pool any sovereignty but a failure of political leadership and imagination (ibid. 73–9). Asymmetries of power are everywhere. In fact, asymmetries of power are often the very basis upon which negotiations proceed:  one party invariably “needs” something from the other. Moreover, the proposition that perfect symmetry in negotiations leads to better outcomes does not have much empirical support (Zartman & Rubin 2000: 272). Hence, some scepticism about the “asymmetries-as-impediment” to integration is merited. Table  3.3 draws several indicators of human development from the United Nations applied across a group of EU and NAFTA countries. While it is clear that the gaps between Table 3.3 Select human development indicators

Canada Mexico United States Germany France Italy Greece Poland

HDI overall ranking

Life Infant expectancy mortality per 1,000 births

Health GDP Per GDP GINI expenditure capita (2011, US$ (% GDP) (2011, billions) US$)

0.926 0.774 0.924

82.5 77.3 79.5

4.3 12.6 5.6

10.4 5.9 16.8

44,018 17,336 54,225

1,615.8 2,239.2 17,662.3

34.0 43.4 41.5

0.936 0.901 0.880 0.870 0.865

81.2 82.7 83.2 81.4 77.8

3.2 3.2 2.8 3.1 4.0

11.2 11.1 9.0 8.4 6.3

45,229 38,606 35,220 24,574 27,216

3,740.2 2,591.2 2,132.6 264.4 1,033.6

37.1 32.7 34.7 36.0 31.8

Source: United Nations Development Programme (2018).

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Mexico and its NAFTA partners on a number of indicators are significant, there are also important asymmetries among European states: Germany and Greece in per capita income, France and Germany on income inequality (GINI), Italy and Poland on life expectancy. Moreover, those asymmetries extend to regions within those same countries. Table 3.4 depicts the extreme ends of subfederal, regional development among the same list of countries compared throughout the OECD. For example, on public health the province of British Columbia ranks highest in Canada and is within the top 20 per cent of all OECD regions on the same measure. By contrast, Canadians living in the Territory of Nunavut rank near the bottom of the OECD in terms of public health. Similarly, the Aosta Valley region of Italy is among the safest in the OECD while Sicily is, dubiously, among the most dangerous. Another important point flowing from the regional differences depicted in Table  3.4 is that underdeveloped regions can be found on both sides of the Atlantic, and in countries with otherwise high human development values. For example, it might not come as a surprise that Chiapas, Mexico, ranks low on access to education and income relative to many other OECD regions. However, Italy has the largest disparities in the OECD on safety and all 13 Greek regions are in the bottom 10 per cent of the OECD in terms of access to jobs.

Smoothing the asymmetries An important difference between European regionalism and what has transpired in North America is the degree to which resources have been dedicated to reducing some of the asymmetries among and within members. Specifically, the European project has always been aimed at making its membership more of a cohesive whole with every expansion or deepening stage of integration. Just a year after the 1957 Treaty of Rome rechristened and deepened the ECSC as the European Economic Community, the European Social Fund was created as a means of managing the transition away from the forms of economic nationalism that establishment of the EEC would entail.5 In 1974, just a year after the addition of three new countries, the EEC put in place the European Regional Development Fund, which began transferring large sums of money from wealthier parts of the community to poorer areas. And, finally, the 1993 Maastricht Treaty put in place the Cohesion Fund, aimed at reducing economic and social disparities in areas where gross national income per person is less than 90 per cent of the EU

5. European Commission, “European Social Fund”:  http://ec.europa.eu/esf/main.jsp?catId= 35&langId=en (accessed 15 February 2019).

50

Aosta Valley

Northern Greece (middle 60%)

Podkarpackie (middle 60%)

Italy

Greece

Poland

Nunavut

Alberta

H20% Nunavut

L20% Northwest Territories

H20%

Income L20%

H20%

Education

WarmińskoMazurskie (middle 60%)

Eastern Macedonia and Thrace

Sardinia

Picardy (middle 60%)

California (middle 60%) Bremen (middle 60%)

Prince Edward Island (middle 60%) Chiapas

L20%

Source: Organisation for Economic Co-operation and Development, “Regional well-being” database: www.oecdregionalwellbeing.org (accessed 10 June 2019).

Notes: Region pairs on each dimension represent the extremes within country. Except where indicated, e.g., “(middle 60%)”, each region falls within either the upper 20 per cent or lower 20 per cent of all OECD country regions.

Lower Normandy

France

British Columbia

L20%

Jobs

British Prince Edward Island Columbia (middle 60%) Guerrero Mexico Chihuahua Yucatán Querétaro Mexico, DF Chiapas Mexico, DF (middle 60%) (middle 60%) (middle 60%) (lowest 20%) (lowest 20%) District of Hawaii Mississippi North Dakota Mississippi District of Mississippi Maine Columbia (middle 60%) Columbia (highest 20%) Brandenburg BadenSaxonyBavaria Berlin (middle Bavaria Mecklenburg- Thuringia (middle 60%) Wurttemberg Anhalt 60%) Vorpommern (middle 60%) (middle 60%) Corsica Ile-de-France Nord-PasCorsica Île-de-France Nord-Pas-de- Brittany Brittany de-Calais (middle 60%) Calais (middle (middle 60%) 60%) Sicily Province of Campania Province of Calabria Province of Campania Lazio Bolzano(middle 60%) BolzanoBolzano(middle 60%) (middle Bozen Bozen Bozen 60%) South Aegean Central Attica West Greece Attica Central Epirus Eastern (lowest 20%) Macedonia (middle 60%) (middle Greece Macedonia 60%) and Thrace (middle 60%) Lubuskie Podkarpackie Łódzkie Mazowieckie Podkarpackie Mazowieckie Podkarpackie Śląskie (middle 60%) (middle 60%) (middle 60%) (middle 60%)

Prince Nunavut Edward Island

Yucatán (middle 60%) United Iowa (middle States 60%) Germany Bavaria

Mexico

Canada

H20%

H20%

L20%

Health

Safety

Table 3.4 Select within-country regional disparities (highest and lowest)

FREEING TRADE IN NORTH AMERICA

average.6 Between 2014 and 2020 the European Union estimates that regional policy transfers will account for more than 30 per cent of the European Union’s entire budget, by far the largest single component of EU spending (DirectorateGeneral for Communication 2014: 3). North America is a very different story. Each of the three NAFTA countries has unique experiences with federalism that entail, to varying degrees, funding transfers from one level of government to another in pursuit of a variety of policy objectives. Canada, in particular, has an equalization payments scheme aimed at levelling a number of economic disparities between “have” and “have not” provinces. According to Canada’s Department of Finance, federal transfer payments to the provinces will total nearly C$80 billion in 2019/20, with more than C$2 billion going to both Nova Scotia and New Brunswick in the form of “equalization” payments while Alberta and British Columbia will receive no such “equalization”.7 Indeed, although advocates of periodically called for some form of NorthAmerica-wide regional funding mechanism to be put in place, none ever has. Soon after his election to the Mexican presidency, in 2000, Vicente Fox put forward a number of proposals to revive the NAFTA and give North American integration a shot in the arm, among them a “cohesion” fund, presumably along the lines already established in Europe (Pastor 2011: 153–4; 2008). The NAFTA, of course, got off to an ominous start in January 1994 when the Zapatista rebellion was launched specifically to coincide with implementation. The Zapatistas’ cause was, in part, to draw attention to the disparities of wealth between Mexico’s relatively wealthy industrial north and its more underdeveloped south, which many believed were being exacerbated by the rapid liberalization represented by the NAFTA (Rich 1997; Stahler-Sholk 2007). Some form of social cohesion programming to coincide with the NAFTA’s implementation might have gone some distance to mute a set of longer-term critiques about the adjustment costs of trade liberalization, but certainly would have limited the political damage done by the Zapatistas. One very limited effort to establish some form of regional development fund was the North American Development Bank (NADBank). Although the NADBank was created on the same day as the NAFTA was implemented, 1 January 1994, the two institutions are only connected by the expectation of increased trade and industrialization along the US–Mexican border flowing from the NAFTA. Indeed, the purpose of the NADBank was to fund a variety 6. European Commission, “Cohesion Fund”:  https://ec.europa.eu/regional_policy/en/funding/ cohesion-fund (accessed 15 February 2019). 7. Department of Finance, “Federal support to provinces and territories”:  www.fin.gc.ca/fedprov/ mtp-eng.asp (accessed 15 February 2019).

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of projects related to environmental sustainability limited to the region along the US–Mexico border (Hinojosa-Ojeda 1994; Perwin 1997). Unfortunately, the NADBank’s limited construction restricted its potential as part of the architecture underwriting North America as a region. For starters, the bank’s mandate to provide funding for projects within narrow strips of territory on either side of the US–Mexico border did nothing to address broader regional disparities. Second, its mandate around environmental degradation and sustainability linked to trade-related production were also limiting. Finally, the NADBank has only ever been a US–Mexico venture, in spite of Canada having been invited on many occasions to join (Pastor 2011: 152). It is debatable whether North America’s asymmetries inherently preclude moves towards deeper stages of integration and a more cohesive regionalism. Scholars have either assumed these asymmetries are impediments or not looked very deeply into how such asymmetries have functioned. Yet it is also true that the European project’s explicit efforts to construct regional cohesiveness necessitated a robust financial commitment to make it happen that has never seriously been considered in North America. In addition to regional development and social cohesion funding, the European Union spends considerable amounts of money effectively studying itself. In the late 1980s the European Community provided funding to establish more than 160 European Centres of Excellence, nearly 900 Jean Monnet Chairs and many more teaching and research modules at universities around the world (Yang 2015). The Monnet Chairs and EU Centres of Excellence are part of the European Union’s larger Erasmus+ programme, aimed at facilitating educational mobility, which in 2017 had a budget of €2.7 billion, supporting more than 700,000 students in education, work or volunteer experience abroad.8 The Monnet Chairs and Centres of Excellence are aimed at broadening the study of integration in the European Union, including spreading interest in such studies within university curricula. In 2017 alone 55 new Monnet Chairs and 18 new Centres of Excellence were created around the world (Directorate-General for Education 2018). Between 2012 and 2018 the Erasmus+ programme awarded 16 Monnet Chairs (nine in Canada, seven in the United States, one in Mexico) and created 14 Monnet Centres of Excellence (three in Canada, 11 in the United States) to North American researchers and universities (European Commission 2019). The contrast with North America in terms of the educational study of the region could not be greater. There are no state-backed efforts in any of the NAFTA countries targeted at research into North America as a region. Academic enthusiasts of 8. European Commission, “Erasmus+”: https://ec.europa.eu/programmes/erasmus-plus/resources/ documents/erasmus-annual-report-overview-factsheets_en (accessed 18 February 2019).

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North American studies have attempted to create programmes, research centres and a variety of research consortiums to advance the study of North America as region, but few of them were ever trilateral in orientation – most focused narrowly on one of the two bilateral relationships, or on specific problems – and many of those have disappeared in recent years. The Center for North American Studies at American University in Washington, DC, has been downsized into a research initiative within the Latin American and Latino Studies programmes.9 The Center for Transborder Studies at Arizona State University has been turned into a formal school, but has also refocused primarily on the US–Mexican border.10 And the Centro de Dialogo y Analisis sobre America del Norte (CEDAN), located at the Mexico City campus of Tecnologio de Monterrey, had disappeared entirely by 2011. The Woodrow Wilson International Center for Scholars in Washington, DC, maintains separate programmes for Canada and Mexico, but nothing North American apart from periodic collaboration between the two. Interestingly, one of the more robust of the remaining research centres dedicated to North America is not even in North America: the John F. Kennedy Institute for North American Studies at the Free University of Berlin, founded in 1963.11 In 2000 the government of Canada established the Canada Research Chair (CRC) programme to incentivize the attraction and retention of universitybased researchers and enhance knowledge and competitiveness in a wide range of disciplines and subdisciplines of importance to Canada. There are currently more than 1,800 Canada Research Chairs. A search of the database of CRCs and their areas of research reveals that not one is dedicated to understanding North American integration, Canada’s relationship with its most important trading partner, or the United States itself.12 The contrast with EU efforts to educate and stimulate research in European studies could not be greater. In 2017 there were eight Jean Monnet Chairs based at Canadian universities.13 This phenomenon was compounded in 2012 when Ottawa cut all Canadian studies funding in the United States, a considerable amount of which went to the study of North American integration. Among the casualties of this funding cut was Duke University’s Center for Canadian Studies, established back in 1974, 9. See www.american.edu/centers/latin-american-latino-studies/north-america-research-initiative. cfm (accessed 18 February 2019). 10. See https://sts.asu.edu (accessed 18 February 2019). 11. See www.jfki.fu-berlin.de/en/index.html (accessed 19 February 2019). 12. See Government of Canada, “Canada Research Chairs”: www.chairs-chaires.gc.ca/home-accueileng.aspx (accessed 18 February 2019). 13. See European Community Studies Association – Canada, “Jean Monnet Chairs”: www.ecsa-c.ca/ europe-in-canada/jean-monnet-chairs-and-eu-centres-of-excellence (accessed 18 February 2019).

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and the significant diminishment of the Association for Canadian Studies in the United States (ACSUS).

Whither regionalism? Until recently the two basic views of North America as a region contended with each other for a kind of dominance. The first was forward-leaning and optimistic, sensing possibility in the broad convergence of values among the people of all three countries (Pastor 2011: 56–79). In this view, the failure to move North America towards something more coherently “regional” is the result of a lack of leadership and courage, which only ever produces incremental change seldom noticeable to the general public. The more pessimistic view sees much more ambition in the existing NAFTA project, but only for select commercial interests that insisted on rewriting rules but also pressured governments to limit the agreement’s governance and transparency. As Stephen Clarkson (2008:  454) concludes in Does North America Exist?, North America is and is not the following.

• •

•

•

It is an identifiable geographic entity, although Hawaii seems an incongruous extension, and Russia may be challenging the exact location of the continent’s legal margins in the Arctic. It is not a community in the sense that Mexicans, Americans, and Canadians think of themselves primarily as members of their continent. Among civil society organizations, trinational continentalist activism is a rarity compared to the much more common global engagement of international oriented nongovernmental organizations. It is a new, if weak, legal-institutional reality with thousands of powerful norms and rules whose long-term effectiveness is being vitiated by institutions too ineffectual to adapt the continent’s collectively changing circumstances. It has some coherence as a market, particularly in those economic sectors that are strongly integrated within the region owing to the expansion of US transnational corporations for which the continent is a meaningful production and marketing zone. Otherwise, it is generally more integrated in the global economy than an identifiably continental regime of accumulation. Trade and investment have increased substantially but separately along the US–Mexico and US–Canada axes, with trinational automobile supply chains providing a notable exception.

It is perhaps this last point that is most salient for contemporary thinking about North America as a region. Indeed, after more than two decades of the NAFTA

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Table 3.5 Export Development Corporation, NAFTA by the numbers United States

Mexico

Trade: $453.7 billion in exports, 72.6% of all Canadian exports, largest trading partner, $348.5 billion of all imports.

Trade: $8.8 billion in exports, Canada’s third largest trading partner, and 5.5% of all Canadian imports

15% of all US exports bought by Canadians, top export market for 32 states, second largest for nine other states.

10% annual growth in exports to Mexico since 1993, sevenfold increase in bilateral trade flows.

Investment: $474.4 billion in Canadian direct investment in the United States, 45.2% all of Canada’s investment abroad. $392.1 billion US direct investment in Canada, 47.5% of all direct investment in Canada.

Investment: $16.8 billion of Canadian investment flows into Mexico, or 1.6% of Canada’s foreign stock. $1.7 billion of Mexican direct investment in Canada, or a 0.2% share of all foreign investment in Canada.

Employment: 595,547 Americans employed by Canadian affiliates. 1,202,085 Canadians employed by US affiliates.

Employment: 65,746 Mexicans employed by Canadian affiliates. 3,239 Canadians employed by Mexican affiliates.

Travel: 40,989,135 trips by Canadians to the United States. 23,985,377 trips by Americans to Canada (2016).

Travel: 1,926,000 Canadians visited Mexico. 252,218 Mexicans visited Canada (2016).

Source: Export Development Corporation of Canada, “NAFTA by the numbers: where we stand as the renegotiation begins”: https://edc.trade/nafta-by-the-numbers/#sub-one (accessed 20 February 2019).

as the underwriting architecture of “region”, it is not hard to sustain the argument that North America was, and remains, composed of two bilateral relationships each anchored by Washington. One important problem in fostering trilateralism has been the historical ambivalence embedded in relations between Canada and Mexico (Pastor 2011: 156–8). To be clear, Canadian and Mexican ambivalence towards one another is just one of many complicating factors in building on the NAFTA. Yet it has been both important and sustained. In spite of having many shared interests in Washington, Mexicans and Canadians know very little about each other beyond interactions on the beaches of Cancun every winter.14 Table  3.5 summarizes the points made by Canada’s Export Development Corporation as to the importance of the NAFTA as the three countries entered negotiations in the spring of 2017. It was intended as way to emphasize the importance of the NAFTA to Canada and that it ought to remain trilateral. However, it also starkly depicts both the depth of Canada’s bilateral relationship with the United States and the shallowness of its relationship with Mexico.

14. In November 2018 alone some 40,000 Canadians travelled to Mexico (Statistics Canada 2019).

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NORTH AMERICA AS REGION

Table 3.6 Annual merchandise trade: Canada’s top ten principal trading partners (seasonally adjusted, current dollars) 2016

2017

2016 to 2017

2016 to 2017

(billions of dollars)

(billions of dollars)

(change in billions of dollars)

(% change)

Total exports United States China Mexico United Kingdom Japan Germany South Korea Italy France Netherlands

521.5 392.4 22.4 8.9 18.0 11.0 4.4 4.7 2.5 3.5 2.9

549.6 410.8 24.9 9.2 18.7 12.2 4.4 5.6 2.4 3.5 3.3

28.1 18.4 2.6 0.3 0.8 1.2 0 0.9 –0.1 0 0.3

5.4 4.7 11.6 3.4 4.3 10.7 0.1 19.8 –4.4 0.5 11.0

Total imports United States China Mexico UK Japan Germany South Korea Italy France Netherlands

547.3 360.0 37.6 18.9 7.7 11.8 14.6 9.0 5.6 4.4 4.8

573.6 370.7 42.6 21.2 8.1 13.6 15.2 7.4 6.1 4.6 5.5

25.9 10.6 5.0 2.3 0.4 1.8 0.6 –1.6 0.5 0.1 0.7

4.7 3.0 13.4 12.3 4.7 15.2 4.1 –17.5 8.0 2.8 14.0

Source: Statistics Canada, “Canadian international merchandise trade: annual review, 2017”: www150.statcan.gc.ca/n1/daily-quotidien/180606/dq180606c-eng.htm (accessed 20 February 2019).

The growth in aspects of Canada–Mexico relations since 1994 is positive, but it began from a very modest base. Some of Canada’s most recent merchandise trade numbers are presented in Table 3.6. Mexico is Canada’s third largest trading partner (exports plus imports), but not significantly so given its status as a NAFTA partner. Moreover, in 2016/17 trading relationships with non-NAFTA partners were quickly catching up. However, Canadian and Mexican ambivalence towards one another was on full display in the years just before and after the September 2001 terrorist attacks on the United States and the advent of security as the main driver of the North American agenda. In 2000 Mexico had a momentous election that for the first time in 70 years brought a peaceful transition of power to a party other than the Partido Revolucionario Institucional. The new president, Vicente Fox of the Partido Acción Nacional (PAN), immediately began putting proposals on

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the table to reinvigorate the NAFTA and North America, including the previously noted social cohesion fund similar to that employed in Europe (European Commission c 2019). In the United States, President George W. Bush was initially receptive to some of Fox’s ideas, but Canada remained cool. When 9/11 altered the North American agenda, Ottawa and Mexico City went their separate ways. Each concluded border security accords with nearly identical sets of points, principles and action commitments. They even had nearly identical names: the Canada–US Smart Border Declaration and the US–Mexico Border Partnership Action Plan (Department of State 2002a, b). All three briefly came together again under a trilateral banner of sorts in the form of the deeply flawed, and ill-fated, North American Security and Prosperity Partnership in 2005 (Anderson & Sands 2007). Relations between Mexico City and Ottawa soured again in 2009, when Canada suddenly imposed a new visa requirement on Mexican nationals, too many of whom, it was claimed, were abusing Canada’s asylum rules. The new visa requirement effectively cut off an embryonic northbound leisure travel market (Mexico Institute 2014; Pastor 2011: 165–6). It was all part of a broader “rebilateralization” process, which accelerated when Stephen Harper was Canadian prime minister (2006 to 2015). Several of the prime minister’s main advisors believed Canada advanced its interests in Washington more effectively without Mexico alongside (Anderson 2016). As all traces of the trilateral SPP were removed from government websites in 2009, Canada and Mexico advanced their respective bilateral tracks with Washington, often on the exact same issues, and giving their initiatives nearly identical names: Canada–US Regulatory Cooperation Council (February 2011), US–Mexico High-Level Regulatory Cooperation Council (March 2011), US– Mexico Framework on Clean Energy and Climate Change (2009), Canada–US Clean Energy Dialogue (2009). After his election victory in 2015, the new prime minister, Justin Trudeau, promised to reverse course with respect to Mexico, eventually making good on his promise to relax the visa travel requirement (Office of the Prime Minister 2016).

The USMCA and the end of trilateralism? The show of solidarity between Canada and Mexico has not fared well since the election of Donald Trump.15 The American threat to withdraw from the NAFTA in early 2017 prompted some early shows of Canadian–Mexican solidarity when 15. Mexico’s Vicente Fox expressed his own concerns about Canada’s steadfastness in an interview in November 2017, warning Justin Trudeau not to be “like Judas” over NAFTA – an apparent biblical reference to treachery and betrayal. See BBC News (2017).

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that threat morphed into renegotiations. Yet Canada mysteriously disappeared from the negotiations in the summer of 2018, only to rejoin after the United States and Mexico announced the completion of a bilateral agreement. As also detailed elsewhere in this volume, the final text of the USMCA retains many of the trilateral elements found within the NAFTA, but also represents a significant erosion of the trilateral architecture of region that the NAFTA augmented. Specifically, dispute settlement over antidumping and countervailing duties remains in place only for Canada and the United States; governance of investment disputes is now a patchwork of rules applying differently depending on the countries involved; and rules of origin have become more onerous for all, but especially for Mexico, because of a new a new minimum wage requirement and political commitment to reform Mexican labour law (Martin 2019).

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The NAFTA has assumed a larger-than-life persona during the course of its nearly three-decade-long existence. In its narrow economic persona, it is a shallow preferences agreement, with ambition restricted to the exchange of goods, services and investment. In its political persona, the NAFTA is the quintessential political football: kicked around by politicians and routinely invoked by people who have not read it as supporting their point of view. In the NAFTA’s earliest days as a political football, proponents such as President George H.  W. Bush claimed the NAFTA would generate countless US export jobs, solidify Mexico’s place as a well-governed consumer of those exports and drive a global effort to pave streets with gold. Critics, of course, thought the NAFTA was going to end civilized life as we knew it. There is not much gold pavement anywhere, and the debate about whether we are nearing the end of civilized life goes on. However, it was not as though the NAFTA lacked any ambition. Knitting three economies comprising US$8.4 trillion in 1994 was bound to generate plenty of political hyperbole. President Trump is not well known for offering evidence to support his assertion that the NAFTA is the “worst agreement ever negotiated”, but some factual latitude can be extended to the 45th president, in part because so much of the debate around the NAFTA has been devoid of real fact. The reality is that the set of measures upon which we can claim the NAFTA had a direct impact is fairly small, partly because of the relatively shallow stage of integration the NAFTA represents. Politicians want to be able to claim that their economic initiatives have created jobs. Moreover, they and those who vote for them are not necessarily moved by abstract statistics about how many widgets cross the border. Consider, for example, the NAFTA Commission’s joint statement from April 2012, which reads, in part: Since its entry into force in 1994, the North American Free Trade Agreement (NAFTA) has contributed to increased trade and investment between us and to greater economic competitiveness in each country. From 1993 to 2011, trade among the NAFTA countries has 61

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more than tripled, from $288 billion to $1 trillion. This historic figure underscores the daily $2.7 billion trade between our countries. As we share in the NAFTA’s ongoing benefits, today, we agree on actions to expand trade and investment, reduce administrative costs, and thereby further strengthen North American competitiveness. (Government of Canada 2012) None of this makes for good sound bites on the campaign trail. Figures such as US$2.7 billion and US$1 trillion sound large, but do not resonate on the campaign trail, especially in front of those displaced by the trade those numbers represent. Moreover, economists have been fighting over nearly everything the commission assigns to the NAFTA, including the agreement’s impact on trade flows themselves. Even less clear is the NAFTA’s direct contribution to things such as competitiveness, reductions in administrative costs or investment. Most assessments of the NAFTA suggest positive effects on all these issues. However, nearly all are indirect or on margins the public finds hard to appreciate. Politicians want talking points about how the NAFTA contributed to GDP growth, created specific numbers of jobs or reduced the costs of consumer goods. Each of these presents challenging measurement problems for economists that have been difficult to sort out. Equally difficult to sort through are the NAFTA’s perceived shortcomings. How many jobs were “lost” due to the NAFTA? What has been the NAFTA’s impact on wage rates? What about the environmental degradation brought on by all that extra trade? Unfortunately, the political need for stark, definitive clarity about the impact of trade agreements routinely clashes with the limitations of social science methodology to deliver any more than limited pronouncements. Take the NAFTA’s impact on GDP or job growth, for example – two must-have measures of progress for politicians. Figure  4.1 depicts GDP growth for each of the NAFTA countries between 1990 and 1994. The two most obvious “events” depicted here are the dramatic fall in Mexican GDP growth in 1995 in the wake of the peso crisis and the decline in all three NAFTA countries with the onset of the global financial crisis in late 2008. Neither of these crises, including the peso crisis, can be directly tied to the NAFTA, nor can the otherwise positive GDP growth observed in all three countries during the three decades of the NAFTA’s existence. What about the counterfactual claim that the NAFTA moderated the depth and duration of declines in economic growth? To all these questions, the answers are not especially clear-cut, lending themselves to arguments put forward by critics and proponents alike. What about the World Bank data in Figure 4.2 depicting the size of each North American economy in terms of GDP since 1990? What are we to make of what looks like dramatic growth in the US economy relative to its NAFTA partners? There is relatively broad consensus that the NAFTA played a positive role. How big a role

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8 6 4 2 0 –2 –4 –6 –8

1990

1995

2000 United States

2005 Mexico

2010 Canada

2015

Figure 4.1 NAFTA annual GDP growth (per cent), 1990–2017 Source: World Bank, “World development indicators” database: https:// databank.worldbank.org/source/world-development-indicators (accessed 10 June 2019). 25

20

Trillions

15

10

5

0 1990

1995

2000

2005

2010

United States

Mexico

Canada

2015

Figure 4.2 NAFTA annual GDP (trillions of US dollars), 1990–2017 Source: World Bank, “World development indicators” database: https:// databank.worldbank.org/source/world-development-indicators (accessed 10 June 2019).

is the source of considerable debate. Indeed, economists have had a tough task discerning the impact of a relatively shallow free trade agreement from a host of other factors juicing the US economy. A Google Scholar search of “NAFTA and GDP growth” reveals more than 47,000 scholarly papers on the subject.

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It is not the purpose of this volume to render an original judgement on these issues, nor to weigh the evidence contained in over 47,000 papers. Instead, the main point of this chapter is to present and update some basic evidence of economic performance during the NAFTA’s existence, and to highlight areas in which the NAFTA laid the foundation for today’s trade governance architecture. So, what exactly can we say? One of the most definitive surveys of the NAFTA’s economic effects was carried out in 2005 by scholars at the Petersen Institute for International Economics, to coincide with the tenth anniversary of the agreement’s implementation (Hufbauer & Schott 2005). Gary Hufbauer and Jeffrey Schott surveyed the breadth of the economic literature on the NAFTA’s effects after ten years and reached some important conclusions. This section summarizes and updates some of that work. Their conclusion in 2005, judged on the basis of the negotiators’ stated goals, was that the NAFTA had been mostly, but not completely, successful. Unlike some commentators on the NAFTA, who attribute to the negotiators ulterior or secret motivations, Hufbauer and Schott let the negotiators’ stated intent within the NAFTA itself be the benchmark for judgement. Article 102 of the NAFTA is clear about the objectives: (a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; (b) promote conditions of fair competition in the free trade area; (c) increase substantially investment opportunities in the territories of the Parties; (d) provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory; (e) create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and (f ) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement. (NAFTA, article 102(1)(a–f ))

Goods and investment Hufbauer and Schott argue that the NAFTA contributed to a sharp increase in regional trade flows in the 1990s. The statistics they present as evidence are stark (see Appendix 2, Table A2.1). For example:

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• • • •

Between 1993 and 2004, US exports to Mexico increased 166 per cent, US imports from Mexico were up 290 per cent. Two-way US–Mexico merchandise trade between 1993–2004 grew by 227 per cent, whereas US trade with non-NAFTA countries only grew by 124 per cent. Between 1989 (the year the Canada–US bilateral FTA went into effect) and 2004, US exports to Canada rose 140 per cent while US imports from Canada rose by 190 per cent. US trade with NAFTA partners accounted for 31 per cent of all US merchandise trade in 2004, up from 29 per cent in 1993. (Hufbauer & Schott 2005: 18)

Table A2.1 extends this same data set through 2017 and shows continued strong growth in total trade (exports and imports) within both the NAFTA area and with non-NAFTA trading partners. For example, between 2003 and 2017 total US merchandise trade with NAFTA partners increased nearly 45 per cent, while US merchandise trade with non-NAFTA trading partners expanded by just over 50 per cent. Of note here is the period after the 2008 financial crisis, when US merchandise trade growth with NAFTA partners outpaced (35.2 per cent) that with the non-NAFTA partners (28 per cent) after significant declines in global economic activity in the wake of the crisis. However, as Hufbauer and Schott note, increases in trade among NAFTA partners are not necessarily evidence of increases in trade because of the NAFTA. Was the slightly better US trade growth with NAFTA partners in the aftermath of the 2008 financial crisis a sign the agreement was a stabilizing set of institutions that facilitated broad economic recovery? Hufbauer and Schott rightly argue that economic analyses of the NAFTA’s precise impact vary considerably depending on the assumptions that studies have made in their modelling, specifically with regard to the US-led economic boom of the 1990s and the anaemic recovery from the post-2000 recession. In short, it is safe to conclude that the NAFTA has something to do with the significant change in flows of merchandise in the early 2000s, and might have had some salutary effects on aftermath of the crisis, but it is unclear how much. Also notable in Table A2.1 and A2.2 are the differences in the US trade balance with respect to its NAFTA partners relative to its trade with non-NAFTA partners. The period after 2003 (Table A2.2) is particularly noteworthy in terms of how small a share of the overall US trade deficit is with its NAFTA partners. In 2017 the United States ran an overall trade deficit of US$795.69 billion, of which only US$88 billion (or less than 10 per cent) was with its NAFTA partners. This is significant given the populist vitriol unleashed against the NAFTA, Mexico in particular, as a source of many of America’s trade policy problems.

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US export growth to NAFTA partners relative to non-NAFTA partners has been consistently robust: 110 per cent versus 60 per cent between 1993 and 2004; 21 per cent versus 13 per cent between 2003 and 2017; and holding steady after the 2008 crisis at 21.5 per cent US export growth to NAFTA countries relative to just 13 per cent growth to non-NAFTA markets. Unfortunately, this same data set reveals plenty of fodder for populist criticism of trade if one focuses only on deficits. In 1989 the combined US trade deficit with Canada and Mexico was just US$12.2 billion. That deficit peaked in 2007 at US$143 billion before falling off through 2017 to US$88 billion. Yet the NAFTA is unfairly maligned when considering the growth of the US trade deficit with the rest of the world. In 1989 America’s trade deficit with the world (excluding Canada and Mexico) was US$97.5 billion. That figure peaked in 2008 at US$800 billion and has hovered around that level since then, finishing in 2017 at US$795.7 billion. Once again, assigning causation to the NAFTA is confounded by a range of other factors difficult to isolate from the agreement itself. However, as the Trump presidency has reaffirmed in abundance, the politics of trade deficits is especially prone to populist distortion. Yet, as economists point out, trade deficits are the macroeconomic counterpart to low savings rates (overconsumption) in the United States. Although a detailed analysis of these issues is beyond the scope of this volume, it is important to note that President Trump’s focus on the elimination of trade deficits through trade policy – renegotiation of the NAFTA, for example – might lend itself to politically salient talking points for supporters, but reflects a poor understanding of the function of macroeconomics (Hufbauer, Cimino & Moran 2014; Steinberg 2018; Jackson 2018; see also President Trump’s Executive Order 13786 of 31 March 2017: Trump 2017).

Agriculture Agriculture is a highly complicated sector, politically, economically and culturally sensitive. The NAFTA broke important ground in even having agriculture as part of the negotiations. Indeed, since the transformation of the GATT into the WTO in 1994, agriculture has been the focal point of multilateral negotiations, although to little effect. In fact, part of the compromise between developed and developing countries that launched the Doha Round of WTO negotiations in November 2001 was a commitment to deal with agriculture. It has not worked, and progress in Doha has been effectively stalled since 2003. Surprisingly, the NAFTA made considerable progress in freeing nearly all trade in agriculture, with NAFTA agricultural trade more than doubling in the first two decades, all while growing much more rapidly than agriculture trade with the rest of the world (Hufbauer & Schott 2005: 22).

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The NAFTA has a single chapter dedicated to “Agriculture and sanitary and phytosanitary measures”  – a fancy name for health and safety standards in agriculture. However, agriculture in the NAFTA is actually a series of bilateral arrangements embedded in a single chapter. To see why, one needs to go no further than article 702. Indeed, 702 refers directs you to two annexes (annexes 702.1 and 703.2) that effectively outline the terms of three sets of different bilateral obligations. In 702.1, Canada and the United States break little new ground within the NAFTA, merely reaffirming the significant commitments made in the 1989 Canada–US Free Trade Agreement. The lack of new ground in Canada–US agriculture trade turned out to be problematic, as major commodities areas such as wheat, dairy and poultry remained bilateral irritants through the renegotiation process in 2017/18. Indeed, Canada’s supply management system in dairy was an important sticking point for those negotiations. Annex 703.2 is ostensibly about “market access” but in reality acts to separate bilateral agreements concluded with Mexico, one for the United States, and one for Canada. Although Canada and the United States broke little new ground, setting the stage for disputes, and the terms of part B of annex 703.2 (Canada–Mexico market access) were rather limited in ambition, the terms of the US–Mexico arrangements were a major step towards liberalization – albeit with some of the lengthiest phaseins in the entire NAFTA. For Mexico, those phase-ins were designed to facilitate a period of adjustment prior to Mexican agriculture being forced to confront the industrialized economies of scale of agri-business as it had evolved in Canada and the United States. Unfortunately, the needed reforms to ease the adjustment process were never implemented, with a number of uneven economic and political consequences (Yunez-Naude & Paredes 2002; Audley et al. 2003; Polaski 2006).

Services The NAFTA was “state of the art” in 1994, but, with the rapid commercialization of the Internet and expansion of professions information technologies, the agreement seemed strangely dated in just a few short years. Nevertheless, the NAFTA broke new ground, with separate chapters covering cross-border trade in services, telecommunications and financial services (chapters 12, 13 and 14, respectively). As reported in 2005 (Hufbauer & Schott 2005), North America experienced a significant expansion in the provision of professional services, and some liberalization of telecommunications and financial services (see Table A2.3). Canadian and American financial services firms took advantage of new NAFTA commitments to extend their reach into each other’s markets, as well as into Mexico’s hitherto comparatively closed financial sector. However, the treatment of services was not as high a priority in the NAFTA as it has been

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in subsequent trade agreements. The NAFTA was mostly focused on traditional “old economy” trade in goods and investment. The major focus of trade negotiators in developed countries on rapidly innovating areas of intellectual property, financial services and e-commerce has evolved alongside rapid changes away from traditional industrial production and towards economies anchored in the commercialization of knowledge acquisition. E-commerce, for example, did not even exist in 1994. Note in the data depicted in Tables A2.3 and A2.4 that the United States has enjoyed a positive balance of trade in services since 1989 with all its trading partners, including the NAFTA. The slow and steady growth of services as an important US export has only made them a more prominent part of the broader global trade agenda, particularly as negotiators tackle a host of non-tariff barriers in these rapidly evolving areas. A linked area of innovation in the NAFTA was the provision for temporary entry of professionals, the purveyors of many of those services. This volume deals with labour mobility more explicitly elsewhere, but the provision of services by professionals also failed to anticipate the rapid growth in services in economic activity as well as the range of professionals delivering them. In fact, NAFTA chapter 16, covering the temporary entry of professionals, included what is known as a “positive” list – meaning that only the specific categories listed could be considered – rendering it obsolete almost immediately, as the range of services jobs evolved. Finally, the dramatic increase in cross-border trade depicted in Tables A2.1 and A2.2 suggested the need for expanded transportation services to handle all that liberalized trade. Yet cross-border trucking services were never fully liberalized, and, in the case of the United States and Mexico, remain a significant point of dispute. Specifically, Mexican trucking services providers have never been granted full access to the US market, because of unsubstantiated “safety concerns” by American trucking interests (Alexander & Soukup 2010; Hynes 2015). But, more broadly, there is also the issue of “cabotage” throughout North America, whereby carriers (land, air or sea) can transport goods and people back and forth across borders but cannot take on and transport cargoes between points within (Blank & Prentice 2015; Prentice & Coleman 2020). In other words, a Canadian truck can enter the United States, unload cargo and reload in the same location for a return trip to Canada. However, that same Canadian truck cannot haul cargo between US points as it travels to another US city to pick up a Canadian-bound load.

Investment Investment merits the lengthier treatment it will receive in the next chapter of this volume, in part because investment was one of the few areas of the NAFTA

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with institutional teeth, and because investment became an important focal point of critique for the NAFTA generally. However, an important goal for both Canada and Mexico in the late 1980s and early 1990s advances towards free trade with the United States was to seek new infusions of investment capital. Although the circumstances for each were different, the main idea was to secure investment rules that (in the context of a tariff-free North America) would bring new investment that could then seamlessly access the entire North American market. The result has been a mixed bag. Foreign direct investment (FDI) in Mexico has seen steady growth since 1993, some of it traceable to the NAFTA as firms located there to service the North American market. As reported by Hufbauer and Schott, in 1994 the US stock of FDI in Mexico was US$44 billion, and it had risen to US$166 billion by 2003. However, much of that accumulation came after 1998, with considerable investment by US financial services firms (Hufbauer & Schott 2005: 30–5). The reasons were twofold. First, Mexico was a growing emerging economy with a low stock of foreign direct investment. The certainty provided by the NAFTA gave foreign firms significant incentive to locate there. The second, of course, was Mexico’s relatively low cost of labour. Moreover, some of the benefits of additional inflows have been offset by concerns over domestic security and because of competition from other low-wage manufacturing jurisdictions, notably China. By contrast, the Canada–US investment relationship was already well developed. Neither the NAFTA nor the prior Canada–US Free Trade Agreement of 1989 generated significant new flows of investment capital in either direction. Two-way stocks of FDI increased from US$104 billion in 1989 to US$289 billion at the end of 2003, a gain of 187 per cent. However, to put that in some perspective, two-way US FDI flows with non-NAFTA countries grew by 333 per cent over the same period (ibid. 35). The other important point to be made about investment in the NAFTA is the degree to which the United States has drawn in large capital flows from around the world during the life of the agreement. Indeed, capital inflows to the United States far outpaced the rate of combined capital inflows to Canada and Mexico from non-NAFTA partners. In the US–Mexico context in particular, the rate of US capital outflows into Mexico represents a drop in the overall US investment bucket. The anxieties raised by Ross Perot in the 1992 US presidential election campaign about a “giant sucking sound” of investment out of the United States were unrealized. Through 2004 “U.S. FDI flows into Mexico have averaged less than one-half of one per cent of nonresidential investment in the United States” (ibid. 36.). Put differently, any job loss associated with US investment flows into Mexico is insignificant relative to flows (and jobs) into the United States from around the world.

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Employment and wages To engage in any discussion of employment and wages flowing from a trade agreement is to invite scorn and criticism. More importantly, it risks dragging one into an inevitable, but entirely false, discussion of zero-sum gains from trade (gains from trade are positive-sum). It also means wading into a bewildering forest of literature in different disciplines trying to tease out the NAFTA’s effects on labour. One reason for this confusion is simple: politics. Advocates and critics alike need material with which to continue treating NAFTA as a political football. However, another significant reason is also simple: the North American economy boomed in the 1990s and early 2000s, making it very difficult to assess exactly how many jobs were created or lost as a direct result. Economic theory predicts there will be adjustment in labour as production of post-liberalization goods of comparative advantage expands while that of goods of comparative disadvantage declines. Those working in areas of comparative disadvantage will not be happy, and do complicate the politics of trade. However, theory holds they ought to be able to find work in the newly expanded sectors; in theory, anyway. Between 1993 and 1994 US employment rose from 110 million to 134 million. In the same period the Canadian employment base went from 12.9 million to 15.7 million. In Mexico, where the 1994 peso crisis had a significant negative impact, employment between 1993 and 2003 nevertheless grew from 32.8 million to 40.6 million jobs (ibid. 38). The NAFTA’s contribution to any of it has been the subject of considerable debate, which, once again, is tough to separate from other aspects driving economic activity. As can be seen in Table 4.1, estimates of the NAFTA’s impact on jobs in the United States have varied widely.

Table 4.1 US employment and NAFTA (a) US employment (millions) 1994

2003

Change

Current Employment Survey Seasonally adjusted employment Seasonally adjusted labour force

114.3 131.1

129.9 146.8

15.6 15.8

Quarterly Census on Employment and Wages Gross jobs gains (1994–2003) Gross job losses (1994–2003) Difference

327.8 312.9 14.9

Sources: Bureau of Labor Statistics, “Current employment statistics”, “Current population survey”, “Business employment dynamics”.

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(b) NAFTA total US job predictions (thousands) Gain 1

Perot and Choate Kantor

Loss

Net

Years

5,900

–5,900

n.a.

200

2

44 to 150

4

171

5

200

Zoellick Hufbauer and Schott

316

145

Sources: Perot & Choate (1993); Kantor (1993); Zoellick (1991); Hufbauer & Schott (1993).

(c) Estimated annual NAFTA effects on US employment (thousands per year) NAFTA-TAA and jobs supported by exports Scott 2

Hinojosa-Ojeda et al.

Gain

Loss

Net

As of

100

58

42

December 2002

88

186

–98

December 2002

74

23

51

December 1997

Sources: Public Citizen, “NAFTA-TAA database”, 1994–2022: www.citizen.org/article/tradeadjustment-assistance-database (accessed 28 May 2019); Scott (2003); Hinojosa-Ojeda et al. (2000) (reproduced from Hufbauer & Schott 2005, with permission).

Overall, the consensus about the NAFTA’s impact on employment is that it was “positive” in terms of both raw numbers of jobs and the wage rates associated with tradables within the NAFTA area (Willem & Eigen-Zucchi 2002; Lustig 1997; Hornbeck 2013). However, as this discussion suggests, both the measurement of those outcomes and the politics that swirl around them are murky and fraught (see Wood 2018). Economic theory suggests, of course, that in the wake of trade liberalization there will be an adjustment process whereby sectors of comparative disadvantage will face import competition from countries with a comparative advantage in the production of that same good. Trade adjustment assistance (TAA) is a form of social support provided in many developed countries to help those displaced by that process retrain for employment in other sectors, perhaps even an expanded area of comparative advantage (Kapstein 1998: 501). Critics have always complained that TAA is entirely inadequate to the task; how do you rapidly transform low-skill assembly line workers into high-tech knowledge workers? Programmes are there nevertheless, and targeted specifically at firms or production where the displacement can be tied to a specific liberalization initiative, such as the NAFTA. Inadequate or not, TAA statistics 1. Perot & Choate (1993) calculate jobs “at risk” due to NAFTA; no time period is specified. 2. Hinojosa-Ojeda et  al. (2000) use data from 1990 to 1997 in their analysis, arguing that the Canada–US Free Trade Agreement and Mexican market opening, and associated trade impact, pre-date NAFTA.

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should give us a reasonable measure of the severity of the adjustment process flowing from liberalization. They do not. Statistics around so-called trade adjustment assistance should be relatively straightforward. Whatever the political consensus around the need for TAA, the implementation of such compensatory programming has been a politically football. Trade adjustment has been part of the US trade policy landscape since the 1960s. However, as part of the political compromise engineered by the Clinton administration to ensure passage of the NAFTA, the NAFTA’s implementing legislation created a separate NAFTA-TAA programme. This programme ran separately through 2002, but, with the renewal of trade promotion authority under the George W. Bush administration, TAA and NAFTA-TAA were merged. Hence, statistics after 2002 about how many workers have taken advantage of TAA because of NAFTA are difficult to discern (Hornbeck 2013). The NAFTA-TAA statistics report that, through 2002, approximately 525,000 jobs were lost as a result of imports from Canada and Mexico (Hufbauer & Schott 2005:  41). However, as reported by Hufbauer and Schott, one of the problems with TAA in the United States specifically as it relates to the NAFTA is that applications need only demonstrate that imports from Canada or Mexico put pressure on the jobs or the firm, incentivizing their relocation. No evidence is needed demonstrating that the imports were a result of liberalization under the NAFTA (ibid.). The Department of Labor reports that, in 2017, there were 1,037 TAA petitions filed covering just over 94,000 workers and a retraining fund allocation of almost US$400  million (Department of Labor, Employment and Training Administration 2017). However, with the consolidation of TAA into a single programme, sorting through which of those workers was displaced by the NAFTA is a fraught – and politicized – measurement problem (Cimino-Isaacs & Hufbauer 2015; see also Public Citizen, “Trade adjustment assistance” database: www.citizen.org/article/trade-adjustment-assistance-database).

Dispute settlement International relations scholars have focused on the salutary effects of institutionalization for a long time – democratic peace theory and commercial peace theory among them (Kant 1970 [1795]; Mearsheimer 1994). A  major consequence of instituting a rules-based system of trade is that it regularizes patterns of trade among the parties, limiting the arbitrary exercise of power by the more powerful parties to the agreement. An additional layer of institutionalization is the mechanisms for the resolution of disputes between the parties. The NAFTA broke considerable new ground, establishing three distinct dispute settlement mechanisms: embedding long-standing investment arbitration rules in a trade

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agreement (chapter 11), extra-judicial review of domestic “trade remedy” laws (chapter 19) and a state-to-state system of review anchored by the ministeriallevel Free Trade Commission (chapter 20). Each of these mechanisms was unique, either by being in a trade agreement at all or as an entirely new experiment in the governance of trade. The next chapter of this volume discusses how old investment arbitration rules made it into a free trade agreement; in a sense, the only new ground here was the embedded quality of these rules. However, entirely new were the disciplines brought to “trade remedy” laws under the NAFTA. Indeed, NAFTA chapter 19 was innovative in establishing a review panel mechanism to examine the application of domestic trade remedy laws to imports – something many see as entirely anachronistic in the context of a free trade area. Important here is the political sensitivity of trade remedy laws, since all are written in law to shield domestic industry from the pressure of imports allegedly dumped or subsidized by a foreign entity, ultimately the state itself (Blonigen 2005). Scholars have debated the utility of chapter 19 in actually resolving disputes, particularly since the standard of review is whether trade remedy laws were applied as written, not to ascertain whether those laws were intrinsically good or bad (Macrory 2002). Yet these mechanisms have taken on an outsized importance within North America, particularly in Canada, where they are seen as important devices in limiting the arbitrary application of US trade remedy law against Canadian products (Anderson 2006; Powell 2010). This particular mechanism was so important to the Canadians that they walked out of talks with the United States over the issue in the final stages of the Canada–US Free Trade Negotiations in 1987, insisted on preserving them in the NAFTA and encouraged Mexico to demand the same. Interestingly, in the transformation of the NAFTA into the USMCA, Canada was again poised to walk away from the talks if trade remedy laws were not subject to dispute settlement, whereas US and Mexican trade remedy laws will no longer be subject to review. Finally, NAFTA chapter  20 established both the Free Trade Commission, comprised of each country’s trade ministers, and a state-to-state dispute settlement mechanism, presided over by the ministers, that could be invoked to deal with any dispute arising from the agreement. The FTC was successful in terms of institutionalizing annual ministerial meetings to assess the NAFTA’s operation. However, formal state-to-state dispute panels have taken place on only three occasions and there is no requirement to publish the number of requests for consultations that did not result in formal panels being convened (Hufbauer & Schott 2005: 213–15). Given the intractable nature of some of the disputes noted above (softwood, trucking), the kinds of disputes state-to-state dispute resolution was designed to manage, chapter 20 can readily be interpreted as a disappointment (Clarkson 2008: 76–8; see also Kaufmann-Kohler 2011).

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Labour and the environment The NAFTA’s side agreements on labour and the environment are two oftoverlooked areas of the agreement, and receive a more detailed treatment in Chapter 7 of this volume. However, it is important to note here that labour and the environment were firmly cemented into the global trading agenda when, in the midst of the 1992 US presidential election campaign, President Bush and Arkansas governor Bill Clinton clashed over their support for the nearly complete NAFTA negotiations. Pressed as to whether he supported the emerging text of the NAFTA, then governor Clinton conceded his support, with important caveats around labour and environmental protections. These caveats eventually produced the side agreements on labour and the environment and created the North American Commission for Labor Cooperation (NACLC) and the North American Commission on Environmental Cooperation (CEC). Perhaps the most important aspect of the creation of these two institutions is that doing so made labour and environmental issues central to regional and global trading agendas in a way neither had been previously (Patton 1994). Although the NACLC never really achieved a status or effectiveness (partly due to its limited design), labour issues remain front and centre in global trade discussions. By contrast, the CEC has achieved a level of robustness as a forum for the exchange of scientific information and citizen input on environmental issues never envisaged by the three governments – sometimes to their chagrin, as the CEC’s findings periodically embarrass the states into action (Betsill 2007; Markell & Knox 2003). Importantly, the newly renegotiated NAFTA (USMCA) includes labour and environmental chapters within the main text, not in side agreements as under the NAFTA. Moreover, although the CEC was not designed with powerful enforcement teeth, it has become robust enough that the environment provisions of the USMCA (chapter 24) will use the administrative functions of the CEC to receive citizen submissions about the environment.

The spaghetti bowl The NAFTA cannot be assessed outside the multilateral trading system. Indeed, the NAFTA, and regionalism generally, are both a direct by- product of that system. At Bretton Woods , New Hampshire, in 1944 the allied governments were putting together the outlines of the postwar financial architecture. Among the issues debated at that conference was the future of the global trading regime and, specifically, how to create a stable, rules-based multilateral system that would be relatively free of the “beggar thy neighbour ”

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economic nationalism and discrimination that had been so widespread in the interwar years. When talks aimed at a large multilateral organization on the scale of today’s World Trade Organization broke down in 1946/47, a subset of 23 countries broke away and formed a sort of interim set of measures known as the General Agreement on Tariffs and Trade. The GATT expanded its membership in the postwar period, especially after the Cold War, and was transformed into the WTO in 1994. Importantly, the original 23 members of the GATT were particularly concerned with jump-starting patterns of global trade. With just 23 members and a painstaking multilateral negotiation process unlikely to make that happen quickly, the GATT negotiators included language permitting the establishment of free trade areas and customs unions provided they liberalized more trade than they restricted. Article XXIV sanctioned the formation of free trade areas and customs unions, in many ways permitting the very discriminatory trading behaviour postwar planners were trying to prevent – in effect creating a bewildering, overlapping, perhaps conflicting set of global preferences that some have termed a spaghetti (or noodle) bowl (Bhagwati 1995; Crook & Gordon 2017). Establishing a free trade area or customs union did entail liberalization deeper and more comprehensive than concessions offered in the multilateral system. However, because a free trade area maintains each member state’s tariff schedule vis-à-vis non-members, tariff rates applied to non-members can differ widely. As a result, free trade areas also require complicated rules of origin to prevent trans-shipment of third-party goods via the free trade area member state with the lowest tariff rate. Unfortunately, as firms attempting to qualify for tariff-free trade within the NAFTA region have discovered, satisfying rules of origin requirements is a time-consuming, laborious and ultimately inefficient activity. Indeed, for small or medium-sized firms, rules of origin compliance is onerous enough that some firms would rather pay the non-NAFTA tariff levies or are simply discouraged from exporting at all (Cadot & de Melo 2007). There have been some Free Trade Commission initiatives to simplify the NAFTA’s rules of origin (most recently in 2004), but industrial associations in all three countries have periodically called for the three countries to advance towards a customs union, inherently eliminating the need for rules of origin (Fruend 2017a; LaNasa 1993). Although all the products qualifying for duty-free treatment under the NAFTA must satisfy rules of origin requirements, the most prominent set of rules of origin in the NAFTA were those applicable to the manufacture of automobiles. Auto manufacturing was already one of the most integrated North American industrial sectors. However, with the NAFTA, tariff-free shipment of finished autos required that 62.5 per cent of their content be manufactured in North America. For a time this relatively high content requirement provided a

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significant cost advantage to incumbent firms such as General Motors, Chrysler and Ford that could not be met by Japanese, German or South Korean automakers. Moreover, the content requirement stimulated the significant growth of auto parts suppliers as well as the further integration of Mexican manufacturing into what had been a heavily bilateral production chain straddling the Canada–US border (see Weintraub & Sands 1998). These particular content requirements for NAFTA treatment were arguably supported by the incumbents as a defensive measure, a way to shield themselves from import competition and augment their market share as consumers opted for less expensive vehicles produced in the NAFTA area. All this eventually incentivized foreign direct investment by foreign firms, which were then able to take advantage of the same rules of origin (Cameron & Tomlin 2000: 132–6; Averyt & Ramagopal 1999). Under the new USMCA, rules of origin applied to autos have been raised significantly, to 75 per cent North American content. Added to the content requirement is a wage provision mandating that between 40 per cent and 45 per cent of that content must be manufactured by labour earning at least US$16 per hour. Critics of the new rules of origin worry they’ve just been made even more onerous, discourage the adoption of new technologies – many of which originate abroad – and may do little to help the legacy firms of GM, Ford or Chrysler become more competitive. Indeed, there is already speculation that broad swathes of the now deeply integrated North American auto sector will simply pay the so-called “most favoured nation” tariff rates under World Trade Organization rules – currently just 2.5 per cent – rather than comply with the USMCA’s rules of origin (Dziczek et al. 2018). One of the biggest concerns with respect to the outcome of the NAFTA, and free trade areas generally, is what economists refer to as “trade diversion”. The fact is, the members of any free trade area are not necessarily the world’s lowcost producers of the goods they exchange. However, the reduction of tariffs among members of a free trade area “artificially” stimulates production and trade in goods not necessarily of the member state’s comparative advantage. In other words, the free trade area “diverts” trade away from whoever has a comparative advantage in the production of some goods, incentivizing instead that production within a free trade area member state (Sorgho 2016). Trade diversion is an inherent quality of free trade areas that the GATT was willing to live with so long as article XXIV free trade areas liberalized more than they restricted. However, as the number of free trade areas has proliferated, especially in the context of the long-stalled multilateral negotiations of the Doha Round, inefficiencies from trade diversion have become more worrisome. Figure 4.3 depicts data on the more than 290 regional trade agreements reported to the World Trade Organization and their rapid proliferation after 1990. If some

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800 700 600 500 400 300 200 100 0 1950

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Figure 4.3 Evolution of regional trade agreements in the world, 1948–2019 Source: World Trade Organization, “Regional trade agreements”: www.wto.org/english/ tratop_e/region_e/region_e.htm (accessed 10 June 2019).

set of rules of origin is assumed to be part of each of these, it is not hard to see why their proliferation could be complicating the pursuit of the efficient, nondiscriminatory trade embedded in the notion of comparative advantage. For advocates of advancing North American integration, a more efficient path forward suggested a customs union. Moving in this direction would not eliminate the trade diversion inherent to regional trade; globally inefficient firms within preferences areas would still have an advantage. But a customs union would end the layer of inefficiencies for member state firms embodied by rules of origin. Unfortunately, the new rules of origin in the USMCA have moved in the opposite direction. Indeed, the auto sector is not the only one in which compliance has become more difficult. The rules of origin provisions of the new USMCA top out at 271 pages, a full 70 pages longer than those in the NAFTA (including basic text and product-specific rules of origin). Hence, when layering the world’s 291 regional trade agreements on top of one another, complete with all their trade diversion and complicated rules of origin, it is easy to appreciate the threat posed to the openness and non-discrimination upon which the multilateral system was based and why some argue it resembles a spaghetti bowl (Bhagwati 1995; Majluf 2004; Kimura, Kuno & Hayakawa 2016). Figure 4.4 represents a 2005 attempt by Antoni Estevadeordal and Kati Suominen to visually represent the complexities of regionalism in just the Western Hemisphere (Estevadeordal & Suominen 2005). Prospects for the proliferation of regional trade agreements is not limited to trade diversion flowing from the complexities of rules of origin requirements. The prospect of inefficiencies also resides in the unevenness of commitments

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Figure 4.4 Spaghetti bowl of free trade agreements in the Western Hemisphere, 2004 Source: Estevadeordal & Suominen (2005).

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among the various regional trading schemes themselves, and their potential to conflict with WTO rules and standards. What, for example, happens when the dispute settlement provisions of different preferences arrangements clash, or when they result in outcomes different from those generated by the multilateral system (Pauwelyn 2006; Anderson 2006)? Consider the extent of the spaghetti bowl of preferences depicted in Appendix 1, Table A1.1, involving all 12 signatories to the Trans-Pacific Partnership prior to the January 2017 US withdrawal from the pact. The upper portions of Table A1.1 depict many of the additional bilateral or regional preferences agreements that the TTP-12 members have with each other indicated by year of completion. For example, in addition to being newly minted TPP signatories, Canada and Chile have an existing bilateral free trade agreement from 1997. Similarly, Mexican and Japanese membership in the TPP is on top of the bilateral commitments made to each other in 2005. Further, numerous TPP-12 members (Australia, Malaysia, New Zealand, Singapore and Vietnam) all have commitments to the Association of Southeast Asian Nations (ASEAN). Further down Table A1.1 is a list of non-TPP countries to which members of the TPP-12 are bound through a preference arrangement of some kind. For instance, the European Union has or is negotiating bilateral agreements with Canada (2017), Chile (2003), Japan (2018) and Mexico (2000), all TPP signatories. The scope for overlap, diversion, inefficiency and simple confusion about which rules apply where is significant. Determining exactly how much scope is more difficult, since TPP-12 commitments probably supersede those made in any of the bilateral dyads among TPP-12 members. Yet the commitments of TPP-12 members to non-TPP members affirm the necessity of rules of origin requirements. This volume revisits the notion of a spaghetti bowl of proliferating, overlapping or conflicting commitments in the context of investment in Chapter 5. Whether the focus is on the trade in goods or flows of capital, the proliferation of regional preferences generates artificial incentive structures that may be far more about politics than economic efficiency. Allowing regionalism within the multilateral system was an expedient strategy for stimulating trade at a time when there was little trade at all. Yet GATT article XXIV also embedded within the multilateral system the inefficiencies and discrimination that come with preferences, and, of course, the potential for the very economic nationalism the multilateral system was designed to short-circuit.

Conclusion The point of this chapter is to sketch out some of the new ground broken by the NAFTA in 1994. The NAFTA was not the first regional or preferential trading

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arrangement reported under article XXIV of the GATT but US involvement made it one of the most economically significant. Moreover, it was a novel effort to knit two developed economies (Canada and the United States) to an evolving, but still developing one: Mexico. That alone made the NAFTA unique, but the agreement also broke new ground in areas of dispute settlement, electronic commerce, labour and the environment that solidified these topics as issues in global trade. In many ways, the advent of the NAFTA (state of the art, or otherwise) seemed to invite only controversy. The debates prior to implementation simultaneously over-promised, under-delivered, fear-mongered, and understated. These fights continued in the years afterwards, as all points of view sought to evaluate the NAFTA’s impact in the midst of a dynamic, bustling North American economy in the 1990s and early 2000s. Although most assessments of the impact of the agreement conclude the NAFTA did what its negotiators set out to do (stimulate trade and investment), nearly everyone agrees the NAFTA’s institutional structure (taken up in detail in Chapter 6) was not robust or dynamic enough to wrestle with some of the challenges brought about by a newly integrated North American economy.

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Of all the provisions of the NAFTA, chapter 11, covering investment, arguably became the most consequential. Yet it was not necessarily the most controversial – at least, not at first. Indeed, critics of the NAFTA generally seldom mention investment as a major source of weakness in the agreement. However, to those who have watched the postwar evolution of rules governing capital flows, seeing them suddenly embedded in a free trade agreement such as the NAFTA was a novelty, with important consequences for the future evolution of both investment rules and the NAFTA itself. The NAFTA marked a turning point in the global evolution of foreign direct investment rules. It was the first instance in which developed economies (Canada and the United States) with substantial investment flows between them had subjected themselves to a powerful set of dispute settlement mechanisms, known as investor–state dispute settlement (ISDS). A by-product of the postwar evolution of international law, ISDS procedures were designed to install rules under which foreign private owners of investment capital could pursue legal means of compensation from the state in the event of expropriation or nationalization of that property by the state. Yet, whereas the NAFTA was a significant innovation in investment arbitration, the NAFTA’s recently negotiated successor, the United States–Mexico– Canada Agreement, has significantly curtailed the role of ISDS between the United States and Mexico while eliminating it entirely between Canada and the United States. The origins of NAFTA chapter 11, its impact on the debate over global investment rules and ISDS’s evident demise in the newly negotiated USMCA are the subject of this chapter. The conclusion is that, whereas the United States once aggressively pursued strong investor protections in bilateral investment treaties (BITs) with numerous developing countries, the NAFTA experience shook the confidence of all three governments in the merits of ISDS. The NAFTA experience prompted a significant rethink of the role ISDS should play in the broader

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governance architecture around global capital flows. This rethink was well under way prior to the NAFTA’s renegotiation in 2017/18, for reasons that aligned with broader concerns about sovereignty, the regulatory power of the state and the role of multinational corporations in the evolution of the global economy. However, the Trump administration’s rationale also included a less well-founded set of arguments around the incentives the NAFTA’s investment rules had created for the outsourcing of jobs.

The postwar origins of chapter 11 BITs, BITs and more BITs The origins of the investor–state dispute settlement mechanisms of the NAFTA are part of a much larger history of the institutionalization of international economic activity in the postwar period. The advent of investment rules, and their inclusion within the NAFTA’s architecture, were the product of decades of efforts to situate private international commercial activity within an international legal and political system dominated by relations between states. However, the NAFTA experience with investment as part of the evolution of rules to fill a gap in the practice of international law has, paradoxically, served to undermine the public perception of these very rules. Chapter 11 of the NAFTA has frequently been at the centre of a storm of controversy around these rules. The fundamental problem being addressed with investment protection rules is that private capital doesn’t flow as readily as many would like from wealthy developed states, where it is abundant, towards relatively underdeveloped jurisdictions, in which capital is scarce. Although there is some debate about how to fully maximize the benefits of FDI (see Graham 2000: 3–7; Swenson 2005; Salacuse & Sullivan 2005), one of the historical challenges for developing states is actually getting FDI to flow in their direction at all. The Organisation for Economic Co-operation and Development reports that, in 2007, FDI outflows from OECD countries reached a record US$1.82 trillion in value, with outflows from the United States alone amounting to US$333 billion (OECD 2008). However, the disparity in flows of FDI between rich and poor countries is as stark as ever. As reported by the OECD, there is a strong correlation between FDI outflows from rich countries and FDI inflows to poor countries. In 2007 developing countries matched the record growth in FDI outflows from the OECD by attracting record inflows amounting to US$471 billion. However, the BRIC countries (Brazil, Russia, India and China) accounted for 50 to 60 per cent of all developing country inflows (ibid.; Palmade & Anayiotas 2004). In 2014 OECD countries still accounted for 40 per cent of

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Table 5.1 Global flows and US, EU shares, 2015 2015 (millions of US dollars) Global outflows Global inflows High-income OECD outflows High-income OECD inflows US outflows EU-28 outflows US inflows EU-28 inflows US + EU-28 outflows US + EU-28 inflows LDC outflows (–China) LDC inflows (–China)

1,474,424 1,762,155 1,098,527 (74.5% of total) 698,064 (55.0% of total) 316,549 487,150 379,894 439,457 803,699 (61% of global flows 819,351 (54% of global flows) 701,090 (47.6% of global total) 335,121 (19.0% of global total)

Note: LDC = least developed country. Source: United Nations Conference on Trade and Development, “UNCTADstat” database.

FDI inflows and 70 per cent of all outflows – in spite of serious economic crises among them (OECD 2016). Not much has changed. Moreover, as depicted in data from UNCTAD in Table 5.1, removing the large flows into and out of China leaves the rest of the developing world attracting a paltry 19 per cent of all global inflows. Moreover, if we take away the large flows into and out of China, investment flows into the developing world represent a paltry 19 per cent of all global inflows. Economic theory suggests that capital ought to naturally flow from regions in which capital is abundant (rich, industrialized, OECD countries), and therefore inexpensive, to those regions in which it is scarce (poor, developing countries), and therefore expensive. The reasons for this discrepancy are multifold but include things such as poor infrastructure, the lack of market proximity and access to a skilled labour force.

The individual and international law The 1648 Treaty of Westphalia is broadly accepted as the starting point of the modern state system. Scholars have subsequently debated the dominance of the state within that system and the difficulty it’s had incorporating a range of nonstate actors – such as firms – into its formal structure. This challenge has largely been mirrored in the development of international law (law between states) since the Second World War, and international trade law in particular (Salacuse 2007). Although the role of individuals as subjects of international law has grown considerably in the postwar period, thanks to the emergence of human rights

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law, the debate over the role of private commercial entities has been raging since at least the eighteenth century (see Blackstone 1765–70; Bentham 2000 [1789]; Janis 1984). Customary international law is based on the search for legal principles flowing from norms of state behaviour, some of which have then been codified into formal treaties (including the NAFTA). Yet, because customary law relies so heavily on historic interpretation of state practice, pinning those legal principles down has been the subject of considerable debate (Goldsmith & Posner 2005; Koh 1997). In 1900 the Paquete Habana case was among the first to engage in a lengthy historical recitation of state practice regarding the seizure of private foreign vessels (US Supreme Court, Paquete Habana, 175 US 677 (1900); see Goldsmith & Posner 2005: 66–78). In addition to trying to define traditional state practice, Paquete Habana also tackled the problem of the role of individuals (the owners of the Paquete Habana) within customary international law. In the postwar period, but particularly since the 1970s, the rise of international human rights law has firmly entrenched individuals as subjects in international law, particularly as states have increasingly try to assert themselves on behalf of the individual (Koh 1997: 2614, 2624–9; Goldsmith & Posner 2005: 107–34).1 Nevertheless, the role of private and individual interests in international law and international relations remains controversial (Koh 1997: 2603–34; Wedgwood 1999; Rivkin & Casey 2000) and, surprisingly, unsettled.2

Non-state actors in international commerce A similar pattern has developed in the area of private international finance. One of the central issues plaguing international commercial relations is that the private interests at the heart of international flows of goods, services and capital have traditionally lacked any “personality” within customary international law. Without standing or “personality” in the context of international law, private foreign commercial interests, like individuals, have had few avenues through which to pursue their international legal claims (Reif 2004; Salacuse 1990; Graham 2000: 20–4). In the case of foreign direct investment, this typically meant seeking 1. Jack Goldsmith and Eric Posner put forward a realist perspective on the emergence of human rights law rooted in self-interest and the coincidence of interests among states rather than the growing power of non-state actors and international regimes in the postwar era. 2. Although human rights law has developed rapidly over the past several decades, the debate over the proper status of individuals within international law continues with respect to US reservations to the International Criminal Court, as well as the uproar over “enemy combatants” in the “War on Terror” and whether they should be given the same protections as uniformed soldiers under international law. See US Supreme Court, Hamdan vs. Rumsfeld, Secretary of Defense, et al., certiorari to the United States Court of Appeals for the District of Columbia circuit, June 2006.

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compensation for expropriation through host-country court systems with no guarantee of national treatment. In the event of nationalization or expropriation of private property, private foreign commercial interests had little recourse. They could pursue their claims through the domestic legal systems of host countries, but the act of expropriation made this moot. Private entities could also petition their home governments to “espouse” their case diplomatically; in essence, take up their cause. Even when international agreements were part of the governing structure of commercial activity, provisions often required exhaustion of hostcountry legal avenues and then “espousal” before third-party legal process could be invoked (Vandevelde 2005). The challenge within international commercial law has been to develop institutions and practices to deal with essentially private and commercial law issues in an international context dominated by the customary practice between states. Without international “personality”, private investors and exporters have had difficulties binding themselves contractually to sovereign hosts in ways that secure their market access or private investments, as would be the case in their home markets. Property rights regimes in most countries permit the use of “eminent domain” by the state to seize private property, most often for a public purpose such as a rail line, highway or other infrastructure project. The key is that, within a domestic setting, the private owners of that property have “standing” to challenge the state in court to ensure just compensation is paid for the proposed “takings”. One popular mechanism for mitigating these problems internationally with respect to foreign direct investment has been the emergence and use of bilateral investment treaties (BITs) in the postwar era (Salacuse 1990: 664–73). The use of BITs between state parties to define the treatment of private investment, including rules for dispute settlement and compensation, have offered private interests a form of “personality” within international law through which they can defend their interests. Similarly, the provisions of chapter 11 of the NAFTA did on a regional basis what BITs have done for the international personality of private investors on a bilateral basis, by allowing disputes to be submitted to existing international arbitration bodies within the World Bank (ICSID) or United Nations (UNCITRAL) systems.3 The United States and BITs Bilateral investment treaties have been a large part of the search for ways to fill the void in international law governing commercial activity and assist in the 3. Respectively, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL).

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management of asymmetry between host sovereigns and the private holders of capital, frequently multinational corporations in developed countries such as the United States. For the United States in particular, these usually took the form of treaties of friendship, commerce and navigation (FCN), primarily covering trade in goods, but also the treatment of private property held by US nationals (Vandevelde 2005:  162). However, with the expansion of international capital flows following the First World War, the United States began expanding the use of these treaties to deal with the treatment of US nationals investing in foreign countries (Salacuse 1990: 656). After the Second World War innovation in FCNs included property protections for American firms (in addition to individuals) and required that host sovereigns consent to the arbitration of disputes through the International Court of Justice (ICJ) (Vandevelde 2005: 164–5). Much like the United States, developed European states sought similar treatylike arrangements to both facilitate and secure investment flows into parts of the developing world. Germany, in particular, spearheaded the European development of BITs, concluding the world’s first with Pakistan in 1959 (Salacuse 1990: 657). The United States did similarly, incorporating investment provisions within some 22 bilateral commercial treaties in the two decades prior to 1966 (Salacuse 1990: 656; Vandevelde 2005: 162). In comparison with European countries, the United States was slow to adopt a formal BIT programme, doing so only in 1981. Moreover, by the end of 2014 the United States had negotiated and implemented just 41 BITs.4 One reason for the lower number of US BITs, apart from the programme’s short history, is that US-style BITs tended to be much more rigorous in spelling out the terms of the treaty, and they were more demanding of host-country investment protections than are those concluded by Europe (Salacuse 1990: 657; 2004). Nevertheless, in general, BITs have three basic objectives (investment protection, promotion and liberalization) within which there were eight basic content areas: (a) the scope of the agreement, (b) the conditions for the entry of FDI, (c) the general standards of treatment of foreign investment by host countries, (d) monetary transfers, or the repatriation of profits from host-country investments, (e) prohibitions on performance requirements, (f )  protection from expropriation or nationalization, (g) compensation for losses from expropriation and (h) dispute settlement mechanisms (Salacuse & Sullivan 2005).

4. Department of State, Office of the Legal Adviser, “Claims and investment disputes”: www.state.gov/bureaus-offices/bureaus-and-offices-reporting-directly- to- the-secretary/officeof-the-legal-adviser/international-claims-and-investment-disputes (accessed 10 June 2019); Department of Commerce, Trade Compliance Centre, “Bilateral investment treaties”:  http:// tcc.export.gov/Trade_Agreements/Bilateral_Investment_Treaties/index.asp (accessed 21 July 2019).

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Each of these objectives has periodically been the focus of controversy, but once incorporated into the NAFTA the focus became just three of the above: (c) the general standard of treatment, or how the operation of foreign firms should be treated relative to incumbent domestic firms; (f ) the definition of expropriation; and (h)  the process by which disputes around expropriation should be settled.

Multilateral rules and bilateral problems Numerous proposals for regional or multilateral investment rules or conventions, as well as schemes for investment security funds to guard against the nationalization or expropriation of private capital, have been hatched, among them the failed Havana Charter of 1948, which would have created the International Trade Organization (ITO), and the disastrous Multilateral Agreement on Investment in 1998 (Canner 1998; Dattu 2000; Kurtz 2002). Among the most successful mechanisms to emerge from the struggle to find international investment rules was the creation of centres for the arbitration of disputes between consenting parties (states and private investors). In 1965 the International Centre for the Settlement of Investment Disputes was created as part of the World Bank, followed a year later by the United Nations Commission on International Trade Law (Broches 1995: esp. chs 5–8). It was thought that the ICSID and UNCITRAL mechanisms would facilitate the satisfactory resolution of conflicts between foreign investors and sovereign hosts. However, up to 1970 few states had been willing to submit to the jurisdiction of these bodies, and the first ICSID arbitration case was not filed until 1972. In fact, ICSID and UNCITRAL were created just prior to organized resistance to developed country dominance of global governance, as embodied by the Declaration of the New International Economic Order (NIEO), passed by the United Nations General Assembly in 1974 (Vandevelde 2005:  167). Among the provisions of the NIEO was the reassertion of the sovereign right to transfer ownership of assets to host-country nationals; in other words, expropriate foreign property and give it to domestic interests. ICSID and UNCITRAL have become important mechanisms for the resolution of investment disputes. But the use of their dispute resolution procedures requires the acquiescence of both parties to a dispute – something many nations are still reluctant to do. In reaction to the NIEO movement, developed countries, particularly in Europe, responded through the pursuit of even more BITs (ibid.:  168–9). By the end of 2001 the United Nations Conference on Trade and Development had recorded nearly 2,902 BITs, the overwhelming majority of which continue to be

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concluded between developed and developing countries (UNCTAD 2014: 114).5 The dramatic rise in BIT activity since the Second World War (44 BITs in 2013 alone) has reflected the desire on the part of capital-exporting countries – and, more specifically, the private investors within them – to bring additional certainty to the process of investing in foreign countries with weak legal protections or a history of expropriation. For countries in need of development capital, particularly in the wake of the debt crisis of the 1980s, BITs have become an attractive way to solidify confidence in potential foreign investors regarding nationalization, expropriation, creeping confiscation through regulatory changes, or performance requirements such as local content rules (Swenson 2005). Although the United States was slow adopt BITs relative to its European counterparts, the most consequential adoption of BITs in American commercial history was easily the trilateralization of the US Model BIT within chapter 11 of the NAFTA.

North American FDI asymmetries On its face, North America would not be the first place where the introduction of a regime of aterritorial investment protection rules would need to be implemented. Indeed, the original BIT between Germany and Pakistan in 1959 is reflective of the overwhelming pattern of postwar investment protection agreements:  dyads of developed and developing countries. According to UNCTAD, there are nearly 3,000 BITs and 350 treaties with investment provisions within them, the overwhelming majority of which are between dyads of developed and developing countries.6 This recurring pattern of dyads flows from concerns about comparatively weak property rights protections in developing countries and the lack of legal recourse to foreign holders of capital in the event of expropriation or nationalization by the host state. In North America, the main source of comparable concern was Mexico, notably its nationalization of PEMEX in 1938. However, investment was also an irritant between Canada and the United States in the 1980s, as Ottawa implemented a series of nationalist energy policies favouring domestic over foreign (mostly US) investment in the energy sector (Mendes 1981; Glover 1974; Globerman 1984; Grover 1985). In the late 1980s and early 1990s Canada and Mexico were looking for new sources of foreign direct investment (Salinas de Gortari 2002: 37–47, 394–491; Hart 2002: 298–304). 5. In 2001 only 8 per cent of all BITs concluded were between developing countries, reflecting the relative lack of FDI flowing between them. 6. UNCTAD, “Investment Policy Hub”: http://investmentpolicyhub.unctad.org/IIA .

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A little BIT for Canada Canada has historically managed its economy in the service of political unity behind a range of protectionist, sometimes nationalist, economic policies dating back to the late nineteenth century (Clarkson 2002: 207–8; Norrie, Orwam & Herbert Emery 2002; Norrie 1979; Phillips 1979; Dales 1979). However, the development of an extensive raw materials processing and manufacturing base has always necessitated access to significant pools of capital, of which Canada has few domestic sources. From Canada’s earliest years tariff structures were traditionally set to discourage the importation of value-added manufactures that would, in turn, encourage inflows of investment capital for plant construction to serve the Canadian market (Barnett 1976). These policies, aided by the rapid expansion of production capacity brought on by two world wars, helped Canada become one of the world’s premier industrial powers by the 1940s and 1950s. Yet, into the 1960s and 1970s, many Canadians began to question the range of industrial policies that encouraged so much foreign investment in Canada. Concerns were raised in several quarters over the implications of foreign ownership of Canadian-based enterprises, and also because so much of Canada’s manufacturing sector was of a branch plant variety that conferred few spillovers into the broader economy (Clarkson 2002:  207–8). Indeed, by the late 1970s several economic studies suggested that subsidiaries of foreign-controlled firms (most of which were American) were spending very little on research and development (R&D) and that Canada ranked far behind other major OECD nations in R&D expenditures as a percentage of GDP (Fry 1983: 80). In the late 1960s the government of Pierre Trudeau began the push for what would later be referred to more colloquially as “the third option”. The third option itself intended to reduce Canada’s large and growing dependence on the US market for its economic prosperity, through trade policies directed at solidifying ties to other trading partners, notably Japan and the European Community. However, more generally, the 1970s were a period in which Canada adopted a series of policies supported by economic and political nationalists who worried about the influence of foreigners (namely Americans) on the Canadian economy. In addition to trade diversification, the Trudeau government, in 1980, campaigned on a platform that included the “Canadianization” of the economy, with a policy mix that included a more overt industrial policy, greater control in the energy sector and government review of incoming foreign investment (Hart, Dymond & Robertson 1994: 16; Fry 1983: 82). Of particular concern to American (as well as many Canadian) business interests were policy changes to energy and investment embodied by the creation of the National Energy Program (NEP) and the Foreign Investment Review Agency (FIRA). According to Earl Fry, in 1980, when the NEP was

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created, foreign investors controlled nearly 70 per cent of all Canadian oil and gas production, and assets valued at over US$25 billion (Fry 1983; see also Globerman 1984). Supporters of the NEP argued that no other industrial country permitted such overwhelming foreign investor control over such key economic sectors. In several respects, the policy dilemmas the government of Pierre Trudeau faced were similar to those currently faced by many developing countries, and involved the apparent trade-off between attracting the FDI and spin-off technology transfer that were so important to Canada’s standard of living and exercising greater national control over the country’s own economic affairs. Through FIRA and the NEP, Canadian policy sent a chill wind of uncertainty through existing foreign-held operations and any future investment flows into Canada. The stated goal of the NEP was to reduce foreign control of the oil and gas sector by 50 per cent within a decade. In theory, the NEP was not designed as a confiscatory programme to transfer foreign-owned assets to Canadian ownership but, rather, as an incentive programme for Canadian-owned operations. However, the differential in the incentives offered to Canadian firms in new and existing oil exploration put foreign-held operations at a significant disadvantage, weakening foreign-held asset values and paving the way for Canadian firms to acquire ownership stakes in them (Fry 1983: 86–7). American officials complained that Canadian policies were a form of “creeping expropriation” of private property. At a minimum, US officials charged that the NEP was a denial of national treatment and that the incentives offered to Canadian firms also had the effect of being equivalent to expropriation in instances when US-owned asset values fell, thereby facilitating their acquisition by Canadian interests. None of this involved the outright expropriation of American property, but the problems were similar in nature to those that US firms were encountering in developing countries – and the main reason for BITs. In essence, the Canadian government changed the rules governing economic activity in the oil and gas sector starting in 1980. The changed rules affected asset values, which altered the choice set under which domestic and foreign firms exchanged property. The rule changes did not themselves make a new market for exchange, but they did dramatically alter the incentives for entry and exit from the Canadian market. Although the climate for foreign investment in Canadian oil and gas remained much more favourable than in other parts of the world, there were several prominent sales of American assets to Canadians as well as several instances of American firms simply leaving the Canadian market (ibid.). Likewise, Canada’s Foreign Investment Review Agency, launched in 1974, also shifted the incentive structure facing potential foreign investors in many other sectors of the Canadian economy. FIRA’s mandate was to screen both new foreign investment and expansions of existing foreign-controlled firms within the

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Canadian economy. The purpose of FIRA was to ensure that foreign activities in Canada were of significant benefit to Canada, including considerations of employment effects, the potential for productivity enhancement, technological transfer to Canadians, the impact on competition domestically and the compatibility of provincial policies (ibid.: 89; Foreign Investment Review Act §3.1(1), 12 December 1973; Clarkson 2002:  204–10). Although FIRA approved virtually all investment proposals that it reviewed (Fry 1983: 89), the policy structure had the effect of also reshaping the institutions governing the acquisition and exchange of private property in Canada. In a sense, Canada’s nationalist economic policies were moving the goalposts. Lengthy and time-consuming application procedures, coupled with the absence of transparency in the review process and the arbitrary quality of many decisions, contributed to the addition of significant uncertainty regarding potential investments – a risk premium on foreign-controlled Canadian assets. The imposition, or threatened imposition, of “undertakings” by Ottawa on new investments – essentially, performance requirements as a condition of approval – constituted an additional set of constraints to the choice set facing foreign as well as domestic firms, many of which could then enjoy protection in the domestic economy afforded them by Canadian policies. Canadian nationalists complained that the real impact of the NEP and FIRA was much less than promised by the rhetoric of the day. Yet foreign discontent over Canadian policies grew throughout the 1980s. In 1979 alone US$1.7 billion in FDI left Canada for the United States, while Canada took in only US$675 million. In 1981 capital outflows from Canada reached a record US$10 billion. In addition, the overall net outflow of capital from Canada, which averaged US$2 billion annually during the 1970s, jumped to US$10 billion during the early 1980s (ibid.: 101). In 1980 Canada’s share of all North American inward FDI was over 38 per cent; by 1985 that share had fallen to just over 23 per cent (Sancak & Rao 2000). On the other side, Canada’s share of all North American FDI outflows rose from just over 9 per cent in 1980 to over 15 per cent towards the end of the 1990s (ibid.) In short, Canada had become a less attractive investment climate for private capital (Hart, Dymond & Robertson 1994: 222). The speed with which the United States had become a comparatively attractive destination for FDI was, in part, due to the policies of the US Reagan administration favouring deregulation and low taxes. Because of the policy divergence in Canada and the United States, as well as the growing competition for capital flows, in 1984 the Canadian government initiated a review of FIRA’s mandate that resulted in a name change, to Investment Canada, and a dramatic reversal of its function, from one of screening FDI to one of promoting Canada as a destination for FDI (ibid.). Much the same happened with the NEP, which was abandoned in 1984.

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These specific Canadian policy reforms were part of a much broader opening of the Canadian economy brought about in the early years of Brian Mulroney ’s tenure as Canada’s new prime minister (from 1984 to 1993), which included a 1985 proposal for a free trade agreement with the United States. US interest in such an agreement was driven, in part, by a desire to deal with specific Canadian policies, such as investment, that were hindering American interests and contributing to a generalized perception of Canada as hostile to foreign, and particularly American, capital (ibid.; Robert & Wetter 1999: 391). As an important exporter of capital itself, Canada had the interests of its own multinational corporations in mind in the pursuit of stronger investment provisions on a bilateral, regional and multilateral basis (Clarkson 2002: 219–20). The Canada–US Free Trade Agreement (CUFTA) dealt directly with investment issues, and in many ways reversed the just-described domestic institutional changes to property rights in Canada by internationalizing them in a formal agreement. By itself, chapter 16 of the CUFTA was essentially a BIT, complete with the three basic aims and eight content areas found in the US BIT model outlined above. The main difference (albeit an important one) was that it was one of the first such BIT-like agreements concluded between two developed countries. Chapter  16 of the CUFTA guaranteed that investments made in the host country by each other’s nationals would be accorded treatment no less favourable than that accorded to firms in the domestic market (national treatment). Such treatment included securing rights for the establishment, acquisition, sale and conduct of enterprises in each other’s territory (CUFTA, article 1602). In addition, the threat of the imposition of performance requirements, such as minimum export levels or local content rules, as a condition of investment, as proposed under FIRA , would no longer be permitted under the agreement (CUFTA, article 1603). And, of course, both parties agreed to a prohibition on measures that directly or indirectly nationalized or expropriated FDI of the other party in its territory, and would not impose any measures that would be tantamount to expropriation, such as those that depressed foreign asset prices under the NEP (CUFTA, article 1605). Ambiguity in international law governing investment between the two countries allowed frictions to develop during the 1970s and early 1980s, when policy changes in Canada generated significant uncertainty regarding new investment. The rules of the game had changed the incentive structure governing the exchange of private property in Canada, and, with few options available to American firms disadvantaged by Canada’s policy changes, there was little that could be done other than have government representatives complain on their behalf to Canadian authorities (espousal). Interestingly, CUFTA chapter 16 was an incremental, not fundamental, change to institutions governing the distribution of property in North America. There

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were irritations, particularly in oil and gas, but both Canada and the United States have strong domestic legal systems and well-established procedures covering private property. Many US and Canadian subsidiaries in each other’s countries have successfully used domestic legal systems to pursue their rights. As such, the real need for a BIT-like investment chapter within a free trade agreement could reasonably be questioned. Moreover, the relative stability of property protections between the two countries made it so that chapter  16 was among the least controversial aspects of the CUFTA when the text of the agreement and free trade with the United States became the singular issue in the 1988 Canadian federal election.

Mexico chomps at the BIT Like Canada in the early 1980s, Mexico in the early 1990s was looking for additional sources of foreign investment. Indeed, the pursuit of new investment capital was a significant factor in the Mexican government’s decision in 1990 to pursue free trade with the United States (Salinas de Gortari 2002; Cameron & Tomlin 2000). Importantly, Mexico’s access to international capital flows was especially challenging as the country struggled to emerge from the crushing debt crises, soaring interest rates and falling oil prices of the early 1980s. As part of Mexico’s effort to put its economic house in order, the administration of Miguel de la Madrid began a long process of domestic economic reforms in 1985 that included privatization, deregulation and the start of a broad shift away from years of industrial import substitution (Salinas de Gortari 2002:  394– 491). This general trend in Mexican economic openness was broadened and deepened under the administration of Carlos Salinas de Gortari in his efforts to bring greater privatization to state enterprises and banks, liberalize prices and wages and stimulate additional trade and investment (Pastor Jr & Wise 1998: 41–4; Salinas de Gortari 2002: 9–36). These reforms not only began to reverse Mexico’s economic fortunes but also won the country formal membership in both the GATT, in 1986, and the Organisation for Economic Cooperation and Development, in 1994. However, the improvement in Mexican economic performance that went along with the reforms contributed to the appreciation of the Mexican peso and a rising current account deficit (Salinas de Gortari 2002: 27). In fact, between 1987 and 1994, the year the NAFTA was implemented, Mexico watched its US$8.8 billion trade surplus evaporate into a deficit of US$18.5 billion (Pastor Jr & Wise 1998: 46). The lingering effects of the debt crisis resulted in Mexico’s leaders casting around for ways to finance its mounting current account deficit as well.

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Part of the solution was the revision of Mexico’s investment statutes, which had – much like Canada – turned what was an inward-looking, defensive investment climate into one that was more open and favourable for development capital to flow into Mexico. In 1989, for example, Mexico revised its 1973 Act to Promote Mexican Investment and Regulate Foreign Investment, which, as the title suggests, aimed to promote domestic investment while discouraging foreign. In 1993 Mexico went even further, partly in anticipation of the conclusion of the NAFTA’s investment provisions, by replacing the 1973 law with the Foreign Investment Law, which substantially liberalized Mexico’s investment regime (Vargas 2001:  ch. 1; Cameron & Tomlin 2000:  59). Most famously, in 1989 the Decree for Development and Operation of the Maquiladora Industry greatly enhanced Mexico’s export-driven production by allowing foreigners 100 per cent ownership and preferential customs treatment provided that all production was exported (Salinas de Gortari 2002: 37–47). However, as President Salinas discovered when he travelled to Europe in early February 1990 to attend the World Economic Forum meetings in Davos, Switzerland, the competition for investment capital had become even more intense with the entry of many former Soviet republics as competitors for scarce resources. European finance was not interested in Mexico (Cameron & Tomlin 2000: 1–3, 62–3). During the late 1980s the United States and Mexico engaged in several discussions on economic issues, and  – much like Canada prior to the CUFTA in 1987  – considered pursuing several sectoral trade and investment arrangements with the United States. In fact, in 1987 the two countries concluded the Framework Understanding on Trade and Investment, which set the agenda for such negotiations (ibid.: 59). However, following the cool reception Mexico received in Davos, Salinas wasted little time in proposing a comprehensive free trade deal with the United States, formally doing so in early February 1990 (Salinas de Gortari 2002: 48). But why did Mexico need a comprehensive agreement with the United States that covered investment when it had already liberalized its rules governing investment? Many scholars immediately suggest that Mexico concluded it needed an agreement with the United States in order to bring credibility to the reforms it had already put in place; a kind of policy “lock-in” that would ensure Mexico would remain a stable, predictable destination for investment. Given Mexico’s historical record of economic instability and lax enforcement of the rule of law, and a history of expropriation of foreign property symbolized by the 1938 nationalization of the Mexican oil sector and the 1982 nationalization of the banking sector, it is easy to understand why some inside and outside Mexico wanted these policy changes locked in. Salinas himself suggests as much, writing that the flow of foreign investment did not increase with the speed or in the volume that Mexico required. Both domestic and foreign investors argued that the rules in Mexico changed with each administration: one nationalized, the next privatized. It was essential 94

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to provide internal stability, and convince investors that Mexico’s policies would have continuity and long-term validity and that they would not depend on the discretionary powers of the administration in office (Salinas de Gortari 2002: 42). In the creation of NAFTA chapter 11, we see almost all the arguments and rationales for the US BIT programme at play. For the United States, its firms now had a legal framework and set of mechanisms governing their activities and limiting the actions of sovereign hosts. For the sovereign hosts of American investment, additional credibility in policy reform at the expense of some policy autonomy was thought to be a reasonable price to pay for additional flows of foreign investment capital (Swenson 2005). All this appeared to be business as usual for the US BIT programme. Some surprises lay ahead. As the tables and graphs below depict, the impact of all these efforts is hard to discern. For example, as can be seen in Table 5.2, the United States accounted for 86 per cent of all inflows into North America in 1985. In 2016 that proportion was essentially unchanged. Some of the persistent gap can be correlated with the similarly persistent gap in GDP growth over the last 30 years (see Tables 5.2 and 5.3, and Figures 5.1 and 5.2), but the fact is that investment rules do not appear to have obviously redistributed the shares of investment capital flowing into each of the three countries. The uneven results flowing from investment protection rules under the NAFTA were compounded by a broader collection on anxieties about sovereignty that began flowing from the operation of chapter 11 itself. Table 5.2 North American FDI inflows (US$ millions) 1985

United States Canada Mexico Total

2006

2015

2016

Inflows

% NA

Inflows

% NA

Inflows

% NA

Inflows

% NA

20,490 1,372 1,983 23,845

86.0 5.8 8.3

237,136 60,293 21,147 318,576

74.4 18.9 6.6

348,402 41,512 33,181 423,095

82.3 9.8 7.8

391,104 33,721 26,738 451,563

86.6 7.4 5.9

Source: US Bureau of Economic Analysis.

Table 5.3 North American FDI outflows ($US millions) 1985

2006

2015

2016

Outflows % NA Outflows % NA Outflows % NA Outflows % NA United States 13,388 Canada 3,862 Mexico 222 Total 17,472

76.6 22.1 1.2

224,220 46,213 5,758 267,191

83.9 17.2 2.1

303,177 67,036 10,733 380,946

79.5 17.5 2.8

299,003 66,402 –787 364,618

82.0 18.2 0

Source: U.S. Bureau of Economic Analysis.

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Table 5.4 North American gross domestic product (US$ billions) 1985 GDP United States 4,347 Canada 364 Mexico 184 Total 4,895

2006

2015

% NA

GDP

% NA

88.8 7.4 3.8

13,163 1,271 839 15,273

86.2 8.3 5.5

GDP 17,946 1,553 1,151 20,650

2016 % NA 86.9 7.5 5.6

GDP 18,624 1,529 1,046 21,199

% NA 87.9 7.2 4.9

Source: Organisation for Economic Co-operation and Development.

25

Trillion

20 15 10 5 0

1990

1995

2000

Canada

2005

Mexico

2010

2015

United States

Figure 5.1 North American GDP, 1990–2017 (US$ trillions) Source: World Bank, “World development indicators” database: https://databank. worldbank.org/source/world-development-indicators (accessed 10 June 2019).

The NAFTA’s aftermath: something has changed Members of Congress began to have doubts about chapter  11 just four years later, when Loewen Group, a Canadian firm, filed a chapter 11 case, claiming a 1996 Mississippi jury decision against Loewen Group denied the firm national treatment and effectively expropriated the firm’s private property and future earnings.7 Although this case was eventually dismissed in its entirety in June 2003, five years of litigation, the apparent mechanism provided by chapter 11 to circumvent domestic law, by undermining the decision of a Mississippi jury, suggested that the investor–state arbitration rules were not being used as

7. See the Loewen Group and Raymond L Loewen vs. United States of America, Statement of Claim, 30 October 1998.

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MUCH ADO ABOUT FOREIGN DIRECT INVESTMENT 600,000 500,000 400,000 300,000 200,000 –100,000 0 –100000 Canada

Mexico

United States

Figure 5.2 North American foreign direct investment inflows, 1970–2017 Source: United Nations Conference on Trade and Development, “UNCTADstat” database.

intended. Never before had such rules been used by a firm from a developed country to challenge treatment of an investment in another developed country. As of mid-2018 there had been 55 chapter  11 cases alleging discriminatory treatment at the hands of a NAFTA government. Interestingly, only 17 of the 55 were filed against Mexico, the ostensible focus of chapter 11 protections in the first place; the rest were against the United States (17) and Canada (21). Between 1981 and 2012 not a single dispute against the United States had been launched under the US BIT programme.8 Yet, under the NAFTA, the majority of chapter  11 claims have been made against the two developed states with traditions of strong property rights protections. Critics have alleged that the application of national treatment within the NAFTA has conferred legal rights to foreign companies that are not accorded to domestic companies (Beachy & Wallach). What has really transpired is the application of an old legal regime (ISDS within BITs) to a new circumstance, in the form of substantial flows of investment between developed states. This new circumstance brought creative legal challenges as to the meaning and intent of the NAFTA’s language that had seldom been challenged when incorporated within traditional BIT dyads. The NAFTA’s negotiators did not intend for chapter 11 to confer more legal rights to foreign investors than already afforded to domestic investors making investments “in like circumstances”.9 The agreement was mainly intended to fill 8. In 2012 four separate cases were launched in connection with the Allen Sanford financial services Ponzi scheme fraud, one each using the investment protection provisions of, respectively, the US–Uruguay BIT, the US–Peru FTA, the US–Chile FTA and the CAFTA-DR. 9. See Free Trade Commission Clarifications Related to chapter 11, 31 July 2001.

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a hole in international law and level the playing field between firms and host states. However, chapter 11 has generated a range of creative suits testing the definitional boundaries investment rules. Indeed, firms have alleged they’ve been denied a “minimum standard” or “fair and equitable standard” of treatment (article 1105) as required under customary international law (i.e. customary state practice).10 Others have claimed that the state has imposed forms of performance requirements (article 1106)  on their investments as a condition of their investment.11 And, of course, the cases of many investors have claimed that the intervention of the state has been “tantamount to” expropriation (article 1110).12 Interestingly, virtually none of them allege that there was an outright nationalization or expropriation of property as we think about it historically, or as the NAFTA’s negotiators envisaged (Levy 1995).13 Instead, most allege discriminatory treatment in the application of regulatory measures that have the effect of expropriating (taking) private property.14 Few of these cases have resulted in arbitral awards,15 and most have been decided in favour of the state.16 However, by the late 1990s several public interest and environmental groups were growing increasingly concerned with the potential for the provisions of chapter 11 to be used to challenge state regulatory control over safety and the environment, in spite of explicit language within the agreement to the contrary (articles 1101 and 1114). Several cases 10. ADF Group vs. United States, Methanex Corp. vs. United States, S. D. Meyers vs. Government of Canada, Waste Management vs. United Mexican States, Metalclad vs. United Mexican States. 11. ADF Group vs. United States, Ethyl Corp vs. Government of Canada, S. D. Meyers vs. Government of Canada, Metalclad vs. United Mexican States. 12. Methanex Corp. vs. United States, Ethyl Corp. vs. Government of Canada, S.  D. Meyers vs. Government of Canada, Waste Management vs. United Mexican States, Metalclad vs. United Mexican States. 13. An exception here is AbitibiBowater Inc. vs. Government of Canada, launched in April 2009. Abitibi, a US forest products company, alleged that the province of Newfoundland and Labrador directly expropriated the firm’s assets via provincial legislation. In 2010 Ottawa settled with AbitibiBowater for C$130 million. 14. One possible exception to this is Metalclad vs. United Mexican States, in which Metalclad was forced to abandon an investment to operate a hazardous waste facility in Mexico. The divestiture of the facility resulted from a bureaucratic dispute between local and federal officials in Mexico over permits for operation that the tribunal ruled was tantamount to expropriation, but not outright expropriation. The tribunal awarded Metalclad US$16.7 million on 30 August 2000, only to have the award set aside by a British Columbia court. 15. Pope & Talbot Inc. vs. Government of Canada, S. D. Myers vs. Government of Canada, Ethyl Corp. vs. Government of Canada (settled outside arbitration), Metalclad vs. United Mexican States. 16. For example, ADF Group vs. United States, Loewen Group Inc. vs. United States, Mondev International Ltd vs. United States, Azinian et  al. vs. United Mexican States, Marvin Roy Feldman Karper (CEMSA) vs. United Mexican States (partial dismissal); Methanex Corp. vs. United States.

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became lightning rods for such criticism, as private investors tested the limits of the NAFTA’s rule governing private property rights. Cases such as Ethyl vs. Government of Canada, S. D. Myers vs Government of Canada and Metalclad vs. United Mexican States are all derided by environmentalists and others as a subversion of the state’s ability to regulate in the public interest. The most watched of these cases, Methanex Corp. vs. United States, was a case in point. Methanex Corporation, a Canadian marketer and distributor of methanol, claimed damages of US$1 billion for alleged injuries resulting from a California ban on the use or sale of the gasoline additive MTBE that contains methanol as a key ingredient. Methanex contended that a Californian executive order and the regulations banning MTBE expropriated parts of its investments in the United States in violation of article 1110, denied it “fair and equitable” treatment in accordance with international law in violation of article 1105 and denied it national treatment in violation of article 1102.17

NAFTA, domestic law and where can you win? In the absence of chapter 11, Methanex would have had little recourse but to pursue its claim through the US court system or via “espousal” of its claim through Canadian government diplomacy (Vandevelde 2005:  160; Egli 2006). The jurisprudence around takings in all three NAFTA countries is continuously evolving.18 Unfortunately, chapter  11 of the NAFTA did not attempt to harmonize those differences, and came up with no explicit definitions or criteria for determining which measures rise to the level of expropriation, no body of jurisprudence through which definitions have emerged and a clause in the agreement (article 1136 (1)) explicitly separating the cases from one another, thus limiting the scope for the creation of precedent. Critics of the NAFTA worried chapter 11 would set standards for expropriation that were more liberal than those enshrined in the domestic law of all three countries, broadly shifting the balance within these proceedings away from a presumption of the pre-eminence of state prerogatives and towards private interests (Aldrich 1994: 609; Clodfelter 2001).19 If the NAFTA somehow established new 17. See Methanex Corp. vs. United States, Notice of Claim, 3 December 1999. 18. Legal battles over the fifth amendment’s property protections and takings remain unsettled, with tests for regulatory takings emerging in the early twentieth century with Pennsylvania Coal Co. vs. Mahon, 260 U.S. 393 1922 introducing the concept of de facto, or regulatory, takings. However, Kelo vs. City of New London on 23 June 2005 and the reaction to it have generated new uncertainties about the state and takings; see The Economist (2006). 19. Formally named the Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims of the Government of the United States of

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legal grounds for property rights claims beyond their traditional conception, and the institutional mechanisms to pursue them, the implications for governing, including regulation in the public interest, could be profound (De Pencier 2000; Yee 2002). Private foreign actors would have recourse to a set of legal mechanisms and standards of expropriation unavailable to domestic firms (Yee 2002). Two early chapter 11 cases, Pope & Talbot vs. Government of Canada and Metalclad vs. United Mexican States, offered some sense of where jurisprudence on chapter  11 was headed that explains the subsequent nervousness regarding the Methanex case (Alvarez-Jimenez 2006). The Pope & Talbot decision acknowledged that “the exercise of police power needed to be analyzed with special care”, and it also concluded that “regulations can indeed be exercised in a way that would constitute creeping expropriation”.20 Further, the tribunal argued “much creeping expropriation could be done by regulation, and a blanket exception for regulatory measures would create a gaping hole in international protections against expropriation”.21 Although the panel went on to reject Pope & Talbot’s claim because the regulatory change imposed upon it was not substantial enough, the decision inserted the notion of creeping expropriation due to regulatory changes squarely into chapter 11’s body of jurisprudence, thus placing the standards for expropriation under the NAFTA near those of US domestic law. In Metalclad vs. United Mexican States, the chapter 11 tribunal went even further in expanding the definition of expropriation under article 1110, saying: Expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure of formal or obligatory transfer of title in favor of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.22 By using the phrase “in whole or significant part” the Metalclad tribunal seemed to go one step beyond the “substantial” economic test put forward in Pope & Talbot and introduced a more expansive and subjective standard for America and the Government of the Islamic Republic of Iran (Claims Settlement Declaration), 19 January 1981. 20. See Interim Award by Arbitral Tribunal in the Matter of an Arbitration under Chapter Eleven of the North American Free Trade Agreement between Pope & Talbot and the Government of Canada, 26 June 2000, 35: www.dfaitmaeci.gc.ca/tna-nac/documents/pubdoc7.pdf. 21. Interim award, Pope & Talbot vs. Government of Canada, 34. 22. Award between Metalclad Corporation and the United Mexican States, ICSID Additional Facility, Case no. ARB(AF)/97/1, 30 August 2000: www.worldbank.org/icsid/cases/awards.htm.

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expropriation, thus opening the door for a range of regulatory measures that even slightly infringed upon investment performance to be considered a form of expropriation, including the possibility of lost opportunity (see Fietta 2006). This definition went beyond standards for takings in any of the three NAFTA parties’ domestic legal systems, but was not out of step with where other investment arbitration bodies had also ruled (Aldrich 1994). This line of reasoning around what constituted expropriation worried observers of the Methanex proceedings, in part because it would have the effect of extending to foreign firms a standard of protection from expropriation not available to domestic firms in any of the three NAFTA countries (Kirkman 2002; Yee 2002; Alvarez-Jimenez 2006). A legal victory for Methanex could have had profound impacts on the domestic legal systems had a separate, higher standard for expropriation been established (Yee 2002). Indeed, Methanex was also anxiously watched because it would have seemingly established chapter 11 as a parallel legal mechanism with a low threshold for challenging the state that was accessible only to foreign firms.

Governments to the rescue? Outwardly, none of the NAFTA governments appeared nervous about Methanex. But they obviously were. In July 2001 the Free Trade Commission issued an “interpretation” of parts of chapter 11 (see United States Trade Representative 2001). The particular focus of the FTC ’s interpretation was article 1105 and definitional ambiguities around “minimum standards of treatment”, “fair and equitable treatment” and “full protection and security” (Kirkman 2002: 389–90; Clodfelter 2001: 1278; Fietta 2006: 399). The FTC’s “interpretation” was arcane and lawyerly, but its timing came on the eve of Methanex’s notice of intent to file suit under chapter 11. Indeed, part of Methanex’s case took issue with the FTC’s apparent narrowing of the scope of “fair and equitable” (Kirkman 2002: 381–92; Alvarez-Jimenez 2006: 433). The FTC’s interpretation language was subsequently incorporated into US negotiating positions in other free trade agreements, notably those with Chile, Singapore and five Central American states (Costa Rica, Honduras, Nicaragua, Guatemala and El Salvador) (Mann 2005). The investment chapters of each of these agreements went to great lengths, much further than the NAFTA, to more precisely define terms such as “fair and equitable” and “full protection and security” (Clodfelter 2001:  1278).23 The FTC did not come to a consensus on 23. See article 10.4 of the United States–Chile Free Trade Agreement, article 10.5 of the US–Central American FTA and article 15.5 of the US–Singapore FTA, all available at www.ustr.gov. Each of

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the definition of “expropriation” itself, but subsequent free trade agreements concluded by each of the three countries narrowed the scope of ISDS to be used as a vehicle for challenging the sovereign power to regulate in the public interest.24

1994: it was a very big year The experience with investment protections under the NAFTA can readily be seen as an important watershed for the international debate over investment rules, the politics of the NAFTA itself and the fallout as manifested in the NAFTA’s successor, the US–Mexico–Canada Agreement (USMCA). First, early chapter 11 jurisprudence alarmed all three NAFTA governments, prompting calls for significant reforms to the language, application and adjudication of investment rules, many of which were put into action in the mid-2010s. Second, until chapter 11 jurisprudence drew the attention of a broad cross-section of civil society in the mid-2000s, debates about investment rules were largely the purview of a small cadre of civil servants and investment lawyers. That all changed with the NAFTA, and chapter 11 became part of a much larger, mostly negative, narrative about the merits of the agreement. And, third, the debates about the NAFTA’s investment provisions inevitably fuelled some of the populist impulses around the agreement generally, and contributed to calls for an end to investment protections in North America and, ultimately, their strange, uneven reformation within the USMCA. For most of the postwar period BITs generated virtually no controversy. According to the World Bank, Germany, the originator of the modern BIT in 1959, is now party to 160 BITs, France party to 111, the United Kingdom 117, nearly all with developing countries. In North America, Canada (23), Mexico (32) and the United States (58) are parties to 123 investment agreements.25 None of it generated dispute proceedings in which developed countries were defendants. This was partly due to the comparatively small amounts of capital

these agreements also contains a provision regarding the parties’ shared understanding regarding the definition of the “minimum standard of treatment” under customary international law, which says that “the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens”. 24. US–Chile FTA, annex 10-D, 4(b): “Except in rare circumstances, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.” See also US–Central American FTA, annex 10-B, and US–Chile FTA, annex 10-A. See also Inside U.S. Trade 2002a; 2002b. 25. See World Bank, International Centre for Settlement of Investment Disputes, “Database of bilateral investment treaties”: https://icsid.worldbank.org/en/Pages/resources/Bilateral-InvestmentTreaties-Database.aspx.

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MUCH ADO ABOUT FOREIGN DIRECT INVESTMENT 35 30 25 20 15 10 5

20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18

0

Figure 5.3 Arbitration cases under Energy Charter Treaty by year, 2001–2018 Source: Energy Charter Secretariat.

flowing from developing countries into developed states upon which a dispute could be generated. With the rapid economic growth of several developing countries, notably China, those patterns have begun to change. However, 1994 was important because of the BITs, complete with ISDS provisions, that were incorporated into trade agreements with application to other developed states:  the NAFTA and the European Energy Charter (later expanded and renamed the Energy Charter Treaty).26 Much as Mexico was the assumed target of investment protections under the NAFTA, it was those with chequered histories of property rights protections – such as Russia or former Soviet republics – that were assumed to be the likely defendants in Energy Charter Treaty ISDS cases. Until the mid-2000s that’s how things unfolded. However, in recent years Energy Charter Treaty ISDS cases have spiked (Figure  5.3), and increasingly included measures in ostensibly developed countries with stable histories of property rights (Figure 5.4 and Table 5.5).

An ISDS earthquake and tsunami in Germany North America and Europe have parallel experiences where investment dispute provisions within regional economic arrangements are concerned. In North

26. See the Energy Charter Treaty, at https://energycharter.org/process/energy-charter-treaty-1994/ energy-charter-treaty.

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Table 5.5 International Energy Charter case distribution Spain 32 Italy 7 Germany 2 Czech Republic 7 Poland 1 Slovakia 1 Russia 6 Ukraine 4 Romania 1 Hungary 5 Slovenia 1 Croatia 2 Bosnia and Herzegovina 2

Albania 3 Macedonia 1 Bulgaria 4 Romania 1 Moldova 2 Turkey 6 Georgia 1 Azerbaijan 2 Kazakhstan 5 Uzbekistan 1 Tajikistan 1 Kyrgyzstan 1 Mongolia 2 Total: 101 cases

America, it was Methanex. In Europe, it was Vattenfall. Both prompted reviews of government policy around ISDS, reform proposals and the near-total rejection of investment within the USMCA. In 2009 the Swedish power company Vattenfall invoked the ISDS provisions of the Energy Charter Treaty, alleging Germany was unfairly and arbitrarily phasing out certain kinds of coal-fired power generation; generation Vattenfall had only recently invested in (Bernasconi-Osterwalder 2009). Yet, in 2012, Vattenfall set off alarm bells all over Europe when it again invoked Energy Charter Treaty provisions to challenge Germany’s decision to rapidly phase out all nuclear power generation in the wake of the Fukushima nuclear disaster (Bernasconi-Osterwalder & Brauch 2014). The political consequences of the Vattenfall cases could not have been worse, and nearly derailed the Comprehensive Economic and Trade Agreement (CETA) negotiations with Canada in 2016 (Khan 2016). European civil society’s objections to the Canada–EU Comprehensive Economic and Trade Agreement included typically controversial issues, such as agriculture, intellectual property and culture, but ISDS became a lightning rod of controversy capable of drawing tens of thousands of protesters into the streets of European cities (Deutsche Welle 2016). The controversy flowing from Vattenfall effectively hijacked the CETA, forcing both parties into a rapid rethink of their positions on ISDS (European Commission 2015a). For Europe, the CETA quickly became a high-stakes test bed for hastily cobbled-together ISDS reform proposals (ibid.; Puccio & Harte 2017). On the horizon was the proposed Transatlantic Trade and Investment Partnership (TTIP) negotiations with the Americans, the first such negotiations over investment since the failed Multilateral Agreement on Investment in 1998 (Graham 2000; Canner 1998).

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In the United States, the Methanex case rattled nerves inside and outside government. In addition to prompting the Free Trade Commission’s “interpretation” of chapter 11 in July 2001 (Anderson 2017), the controversy also prompted the first US government review of its Model BIT since 1994, when that US Model BIT had been inserted into the NAFTA. When unveiled in 2004, the new US Model BIT included substantial changes aimed at stemming the most notable criticisms of the NAFTA’s investment rules. Among these changes was explicit language limiting the capacity of firms to challenge the state’s right to regulate in the public interest, together with clearer definitions of “expropriation” and “standards of treatment” firms could reasonably expect (Kantor 2004; Anderson 2017). The US Model BIT was slightly upgraded again in 2012, the language from which found its way into the Trans-Pacific Partnership (TPP) (Anderson 2017: 2956–60). Although the Trump administration withdrew its support for the TPP, the changes to investment were enough to allay the reservations of other state parties about ISDS. Of note is Australia, which in mid-2011 was sued by the Hong-Kong-based subsidiary of American tobacco giant Philip Morris, under the terms of the 1993 Hong Kong–Australia BIT.27 Like Methanex under the NAFTA, Philip Morris alleged that an Australian public health measure (tobacco product labelling) violated the terms of the BIT (Easton 2015). In August 2011 the Australian government turned its angst over ISDS into policy by discontinuing the inclusion of ISDS provisions in future trade agreements (Department of Foreign Affairs and Trade 2011) – until ultimately agreeing to the inclusion of ISDS in the final TPP text of 2016. In Europe, the two Vattenfall cases against Germany concentrated opposition to ISDS, imperilling the final stages of CETA negotiation with Canada (Whittington 2014). At the behest of Germany, the European Commission surveyed member state governments via the Council of the European Union (government ministers) in 2015 about whether ISDS should be a part of future European trade agreements at all (European Commission 2015a). Much like the 2004 US Model BIT review, the European review generated new recommendations reasserting the state’s right to regulate in the public interest, promoting enhanced restrictions on the scope for private firms to claim expropriation and declaring the intention to establish a permanent “investment court” (Matić 2017; see also European Commission 2015b; 2015c). The eleventh-hour incorporation of European preferences in the CETA saved the agreement from near-certain rejection by member state parliaments. Europe’s efforts vis-à-vis the CETA were about a much bigger negotiation: the proposed Transatlantic Trade and Investment Partnership (Matić 2017; 27. Technically, the Agreement between the Government of Hong Kong and the Government of Australia for the Protection of Investments, 15 September 1993.

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European Commission 2015b; 2015c). However, the debate on both sides of the Atlantic flowing from the NAFTA about investment governance firmly planted a range of possible reforms on the table: reform of the age-old BIT, as the United States had done; scrapping ISDS altogether, as the Australians did in 2011; or moving towards pooled institutionalization of investment through an “investment court” or other state-driven mechanism, as Canada and the European Union had done.28

Investment spaghetti Chapter  3 of this volume noted how the proliferation of free trade areas since the end of the Cold War was creating an overlapping, inefficient set of commitments that seemed anachronistic in the context of a multilateral trading system predicated on non-discrimination. As chronicled by UNCTAD, the postwar period has seen the proliferation of investment treaties and trade agreements with investment rules embedded within  – currently numbering over 3,000. Figures  5.4(a) through 5.4(f ) depict each of the investment treaty commitments of the NAFTA parties to each other and to non-NAFTA countries embedded in BITs or via investment rules in free trade agreements. Economists have not focused on the incentives created by investment treaties in the same way they have with respect to trade diversion and rules of origin associated with the trade in goods. However, investment treaties are inherently designed to incentivize capital flows that would not otherwise happen in the absence of their legal protections. Investment treaties have evolved in a relatively standardized manner; the language found in the US Model BIT is not so different from that in Canada’s foreign investment promotion and protection agreements (FIPAs). However, as the NAFTA experience (as well as that with the Energy Charter Treaty) suggests, investment rules have generated incentives for both capital flows and legal action centred on the interpretation and meaning of those commitments. Of the more than 3,000 investment treaties around the world, North America accounts for fewer than 150. However, the potential for a spaghetti bowl of commitments would be obvious if Figures 5.4(a) through 5.4(f ) were to be superimposed on one another. If the proposed USMCA is ratified by all three governments, North America’s investment spaghetti bowl will become more convoluted still. 28. See European Commission (2017). See also the Comprehensive Economic and Trade Agreement (CETA), article 8.29; and Department of State (2004); (2009).

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Is the USMCA the end of ISDS? When the Trump administration initiated the renegotiation of the NAFTA in early 2017, investment was thought to be a major target for reform. Indeed, reform work undertaken on different tracks by Canada and the United States found its way into the investment provisions of the Trans-Pacific Partnership (chapter 9), to which all three NAFTA countries were parties until the Trump administration withdrew in January 2017. The investment chapter of the TPP contained many reformist nods to transparency, reassertions of the state’s right to regulate, clarity on expropriation and minimum standards of treatment, but also a basic commitment to investor–state dispute settlement. Importantly, the language of the TPP investment chapter, like NAFTA chapter 11 more than two decades earlier, was grafted primarily from the 2012 US Model BIT. Judged by the Trump administration’s announced priorities, investment in the NAFTA renegotiation was mostly going to be about tinkering around the edges of the existing US Model BIT (United States Trade Representative 2017:  9). Indeed, the Trump administration’s announced position on investment aimed to affirm the United States’ long-standing efforts to prohibit expropriation, the imposition of performance requirements or limitations on capital transfer, or other provisions inconsistent with US domestic legal standards (ibid.:  8). Moreover, there were important post-NAFTA US BIT objectives around transparency, public access to dispute settlement (ISDS) hearings and third-party amicus submissions to those proceedings. At the same time, the controversy swirling around chapter  11’s perceived threat to sovereignty, coupled with the Trump administration’s openly nationalist positions on economic policy, led some observers to conclude that significant changes to investment were possible. Moreover, Robert Lighthizer, the United States Trade Representative, had introduced a new critique of investment provisions that resonated with President Trump and his supporters: the NAFTA’s investment rules conferred a subsidy to American firms investing abroad, incentivizing the outsourcing of jobs to Mexico (Ikenson 2017). When the draft text of the USMCA was released in the fall of 2018, investment turned out to be an area of surprisingly significant change. Surprising because investment was never the source of high-profile tension between the three countries the way rules of origin, wage rates or the Trump administration’s broader imposition of steel and aluminium tariffs had become. The punchline of the USMCA investment text is that, although firms’ so-called “legacy investments” (those made by firms while the NAFTA was in force) will still have access to ISDS under chapter 11 of the NAFTA (see USMCA article 14.2.4 and annex 14-C), Canada and the United States have eliminated ISDS altogether in the new USMCA. In other words, firms will no longer have access to ISDS

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CAFTA-DR CAFTA-DR

USMCA

NAFTA

R CAFTA-D

Figure 5.4(a) US FTAs with ISDS provisions

Figure 5.4(b) US BITs

CETA NAFTA

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11)

Figure 5.4(c) Canadian FTAs with ISDS provisions

Figure 5.4(d) Canadian BITS or FIPAs

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11)

Figure 5.4(e) Mexican FTAs with ISDS provisions

Figure 5.4(f) Mexican BITs

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for future investments in either country. There are still standard prohibitions against expropriation, standards of treatment and the imposition of performance requirements, but less clear is what mechanism would be invoked in the event of a breach of the USMCA’s revised rules. Moreover, the state-to-state consultative dispute settlement mechanism of chapter 31 specifically excludes investment from being handled there (USMCA article 31.2). More puzzling still is that, under the new USMCA, ISDS will still apply between Mexico and the United States in a select group of sectors, mostly around potential breaches of government contracting in oil and gas, telecommunications, transportation and infrastructure (USMCA article 14.2.4 and annexes 14-D and 14-E.6). Unfortunately, North America’s investment governance regime is quickly becoming a confusing patchwork, with the very kinds of uncertainties that discouraged flows of private capital and BITs were designed to simplify. Canada and Mexico remain members of the oddly renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11), and thus subject to that agreement’s investment disciplines – including ISDS. The United States, on the other hand, currently sits outside the TPP, has eliminated the application of ISDS bilaterally with Canada and has an arrangement with Mexico for ISDS to apply in specific sectors. At the time of writing the USMCA’s legislative ratification in all three countries was far from certain, particularly in the United States, where it seemed likely to fall off the 2019 legislative calendar and beyond as partisanship over the Trump presidency raged and the 2020 presidential election campaign neared. Moreover, significant changes, including to investment, could yet be imposed by the newly elected Democratic majority in the House of Representatives. There are critics of ISDS among Democrats and Republicans on Capitol Hill who will be happy with its elimination between Canada and the United States; indeed, there could be demands that it also be scrapped in the US–Mexican context as well. However, there will also be pressures from the US business community to restore ISDS fully to the USMCA, in the belief that ISDS gives American businesses operating abroad an important set of assurances in securing their investments. Indeed, American business interests were at the forefront of shaping the US BIT programme, and were integral to the reform efforts in the mid-2000s and affirming the role and utility of ISDS in the TPP just a few years ago. As President Trump frequently notes, “We’ll see what happens …”

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Lack thereof? One of the most important, and persistent, critiques of the NAFTA, which has already been touched on several times, is that it lacks a robust institutional structure. However, the NAFTA is not without governance institutions. Indeed, the NAFTA as a whole can be considered a set of institutions, since the rules it establishes, the trade it frees through tariff liberalization and the affirmation of concepts such as national treatment around a host of issue areas are by definition forms of governance. In fact, until it was recently rediscovered and popularized as behavioural economics, the niche discipline of institutional economics focused on the impact of the “scaffolding” of both formal and informal rules in structuring the behaviour of economic decision-makers. This analytical approach to the study of institutions has included everything from the theory of the firm (its organizational structure) to how legal institutions structure the long-term macroeconomic performance of countries and regions (Coase 1937; Williamson 1998; de Soto 2001). As Douglass North writes, Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights) … Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline. (North 1991: 97) Under these terms, the NAFTA certainly qualifies as a set of institutions. However, when critics of the NAFTA argue that the agreement lacks enough

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of an institutional structure, they are, first, talking about the design of “formal” institutions and, second, whether they pool enough sovereignty within them to act as the arbiters of disputes around a broader set of rules. The domestic rule of law is, of course, enforceable via the state’s monopoly over the exercise of coercive power. This volume has already noted in several places the ways in which enforcement power between states is less readily found, among them the discussion of foreign direct investment and the historical absence of the rule of law governing flows. Hence, the critique of the NAFTA as lacking institutions is not that the agreement is devoid of governance structures . It is that those governance structures have too few coordination or enforcement mechanisms to act as arbiters of disagreement over the application of those rules. Hence, one of Robert Pastor’s most pointed and enduring critiques of the NAFTA comes through his comparison with the governance structures in the European Union. In Pastor’s view, The agreement did not envisage any unified approach to extract NAFTA’s promise, nor did it contemplate any common response to new threats … [T]he [1994] peso crisis was also a metaphor for both the success and the inadequacy of NAFTA. The success was reflected in the expansion of trade and capital flows; the inadequacy was manifest in the lack of institutional capacity among the three governments to monitor, anticipate, plan for, or even respond to such a serious problem. NAFTA, in brief, was defined too narrowly, and the three governments paid a price for that myopia … (Pastor 2001: 2, 5) The NAFTA is hardly devoid of the kinds of formal institutions described by North and others; the agreement’s entire structure is a set of “institutions”. However, in those places where more formalized arbiters of governance disputes were put in place, the NAFTA has an uneven legacy that some, such as Pastor, argue has left North America with an unfortunate mix of the benefits of integration without the necessary governance structures to manage it.

Asymmetries of power There are at least two important points often missed by analysts of the NAFTA who compare the relative absence of pooled sovereignty in North America to more extensive experimentation with pooling seen in Europe: the European project has been more than half a century in the making and remains uneven; and

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Table 6.1 NAFTA asymmetries (US$ billions), 1975–2015 1975

1987

1994

2000

2012

2015

Canada GDP % of North American GDP Exports + imports as a % of GDP

$170 9% 47%

$420 7.9% 53%

$560 7.0% 67%

$770 6.5% 85%

$1,780 9.3% 63%

$1,550 7.5% 65.4%

Mexico GDP % of North American GDP Exports + imports as a % of GDP

$88 4.7% 17%

$140 2.6% 33%

$420 5.9% 38%

$581 5.2% 64%

$1,178 6.1% 66%

$1,144 5.5% 72.9%

United States GDP % of North American GDP Exports + imports as a % of GDP

$1,600 86% 16%

$4,700 89.3% 19%

$7,017 87.7% 22%

$9,764 88.2% 26%

$16,240 84.5% 29%

$17,946 86.9% 28.1%

Source: World Bank.

Europe is comprised of states of more equal size and power than are found in North America. It is this second point that some scholarly analyses would point to as explaining the relative absence of pooled sovereignty in North America. Table 6.1 depicts a stable set of two highly asymmetrical bilateral relationships in North America, anchored by the United States. Not only does the United States alone account for more than 80 per cent of North American GDP, but Canada and Mexico are much more heavily dependent on an open global economy for their GDP (exports + imports as a % of GDP), with the United States alone accounting for large proportions of it (Table 6.2). Europe certainly has its asymmetries – Germany’s US$3 trillion GDP versus Malta’s $10 billion GDP, for example – but none is quite as stark as those in North America.

Gulliver and the neoclassical state Wherever we look in the political economy of trade and finance, we see significant variance in degrees of integration and pooled sovereignty. For example, no two free trade areas are exactly alike in terms of the depth of tariff liberalization or institutionalization. However, with each stage of integration discussed in Chapter 2 of this volume, the institutional constraints on policy for the state multiply. Therein resides a kind of “Gulliver” effect for states of varying size and power in the international trading system. For small states (Lilliputians), engaging larger trading powers (Gulliver) in ever deeper forms of integration can restrict, or at least curb, the arbitrary application of policy by larger powers. Increasing levels

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Table 6.2 NAFTA export partners (rank order and percentage of total), 2015 Canada

Mexico

United States

Exports to

United States (76.7%) China (3.9%) United Kingdom (3.1%)

United States (81.1%) Canada (2.8%) China (1.3%)

Canada (18.6%) Mexico (15.7%) China (7.7%) Japan (4.2%)

Imports from

United States (53.1%) China (12.2%) Mexico (5.8%)

United States (47.3%) China (17.7%) Japan (4.4%)

China (21.5%) Canada (13.2%) Mexico (13.2%) Japan (5.9%) Germany (5.5%)

Source: CIA World Factbook.

of institutionalization in economic relations breed interdependence between states, but also facilitate a more predictable application of domestic law within the confines of the agreement; in short, international economic cooperation yields institutionalization, positive-sum gains and self-interested peace. This line of argument broadly reflects the postwar rationale for the integration of Europe and parallels a significant body of scholarly literature in international relations anchored in liberal theory (Moravcsik 1997; Keohane & Nye 1977). By contrast, large states are less dependent on small states for their economic prosperity and tend to resist encumbering institutionalization both in form and in practice. What in all of this can help us understand patterns of regional integration in the context of neoclassical theory? The arguments of liberal scholars focused on the salutary effects of interdependence are in tension with arguments put forward by realists, who assume that state action is driven by the pursuit of the national interest. Stephen Krasner, for example, argues that the international trading regime has been constructed with the pursuit of these interests squarely in mind. The regime does so by facilitating the pursuit of aggregate national income, social stability, political power and economic growth (Krasner 1976: 318). However, Krasner argues that there are very different incentives for states of varying size within the international trade regime and that large powerful states have had a significant advantage in both setting the structure of the regime and reaping the benefits from it. Krasner maintains that small states actually reaped the largest country-specific gains from an open trading regime, but the regime’s construction and underwriting by the large state accumulates important marginal political gains. Specifically, Krasner argues that “the utility costs [of openness] will be less for large states because they generally have a smaller proportion of their economy engaged in the international economic system … Hence, a state that is relatively large and more developed will find its political power enhanced by an open system because its opportunity costs of closure are less” (ibid.: 320–2).

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Small states, Krasner argues, are likely to opt for an open regime, even one undergirded by hegemonic power, because the benefits of openness for small economies are so large and the opportunity costs of closure significant (ibid.). The result is the accumulation of national power by the hegemonic state at the margins while small states weigh the significant costs of remaining outside the trade regime’s structure. Contrary to depictions of the international trade regime suggesting that interdependence was softening the use of power, Krasner persuasively argues that it is in the design and operation of the system itself that we see hegemonic power being wielded (see also Wallerstein 1979).1 The implication is that small states tend to look to the rules-based regime as a means of bringing additional predictability to their economic relations with larger states, but the reality, according to this view, is that the many Lilliputians (small states) engaged with Gulliver (the big state) have little impact on the underlying utility of power within the regime. Importantly, the incentives for large states to institutionalize that regime in a way that restricts the exercise of power are limited. In North America, this is exactly what has happened: Canada and Mexico seeking to enmesh and bind the United States in a system of rules and binding institutions, the United States steadfastly refusing them except in their most limited form.

NAFTA chapter 11: investment The investment provisions of the NAFTA merit additional discussion in this context because of their important qualities as governance institutions. Observers of the NAFTA who complain about the shallowness of the agreement’s institutions frequently overlook just how powerful the investor–state dispute settlement mechanisms of chapter 11 have proved to be. Part of the reason is that none of the negotiators believed chapter  11 would end up being wielded against Canada or the United States. However, when the terms of the US Model Bilateral Investment Treaty were incorporated as the backbone of chapter 11, negotiators incorporated within its structure the NAFTA’s only binding, independent arbitration process. It turned out to be far more powerful than envisaged, in part because ISDS had historically been applied to developed/developing country dyads in which

1. It is worth acknowledging that these events spawned a competing interpretation by scholars known as dependency theory, wherein weaker states are drawn into a hegemonic orbit that perpetuates dependence on the large state rather than facilitating a path towards higher stages of development.

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investment mostly flowed in one direction: developed state to developing state. Hence, ISDS arbitration was typically invoked only when the developing state expropriated or nationalized the property of a developed-state firm. Within the NAFTA, there was substantial capital flowing among all three, but particularly between Canada and the United States. It was only after a surprising number of chapter 11 cases were launched against Canada and the United States that civil society groups raised the alarm and the three governments realized what had been created. Investor–state dispute settlement has become controversial outside North America as well, prompting many governments to propose significant reforms limiting the terms of arbitration. For a short time after 2011 Australia’s solution was to refuse to enter into agreements containing ISDS provisions, but now it enters such agreements on a case-by-case basis.2 Interestingly, in the renegotiated NAFTA, the USMCA, investor–state dispute settlement has been eliminated altogether in the Canada–US context, but remains in place for selected sectors (mostly oil and gas) for the United States and Mexico. The “break-up” of investment within the new USMCA also involves the absence of language covering the relationship between Canada and Mexico, although both are parties to the revived Trans-Pacific Partnership (TPP-11), in which ISDS remains in place. North America’s governance around investment became a governance patchwork after 1994, as each NAFTA member signed agreements with non-NAFTA parties. The new USMCA promises to add to that patchwork by undercutting the consistency of the rules to be applied in North America.

NAFTA chapter 19: trade remedy laws A similar story of patchwork governance can now be described for so-called trade remedy laws under the new USMCA. Trade remedy laws are a set of legal measures available to domestic producers in virtually all countries enabling them to seek protection from import competition underwritten by dumping or subsidy. In other words, if a foreign producer is attempting to sell in the domestic market at prices below the cost of production, or that production is unfairly subsidized by a foreign government, domestic producers can petition their governments for “temporary” protection via trade remedy laws. The World Trade Organization has managed to bring some discipline to the use of antidumping and countervailing duties (anti-subsidy measures), but only 2. Department of Foreign Affairs and Trade, “About foreign investment”: https://dfat.gov.au/trade/ investment/Pages/investor-state-dispute-settlement.aspx (accessed 20 June 2019).

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some. Many disputes have been heard under the WTO’s dispute settlement mechanisms, arguing that the imposition of domestic trade remedy laws violates either the antidumping agreement (Agreement on Implementation of Article VI of the GATT) or the Agreement on Subsidies and Countervailing Measures.3 One of the most intractable disputes involving trade remedy laws has been the nearly five-decade-long softwood lumber dispute between the United States and Canada, wherein the United States accuses Canada of subsidizing the harvest and export of housing lumber (Anderson 2006). The utility of trade remedy laws is partly in the eye of the beholder. For exporters whose products are subjected to restrictions in important markets, trade remedy laws are costly and punitive, feel arbitrary and are frequently invoked by healthy industries doing nothing more than trying to limit import penetration. From the point of view of domestic industries, trade remedy laws can act as a life-saver from stiff, sometimes unfair, import competition. Others see a utility in trade remedy laws for “purchasing” additional trade liberalization, since such laws act as an insurance policy for domestic producers worried about unfair foreign competition resulting from liberalization (Voon 2010; Hathaway et al. 2003). Yet it is also the case that trade remedy laws the world over have varying degrees of transparency and standards of application and are mostly written with strong presumptions in favour of domestic industries (Horlick & Vermulst 2005: 67). And, finally, what place do domestic trade remedy laws have in the context of an integrated, increasingly singular marketplace for goods, services and capital such as North America? The application of trade remedy laws has long been a point of contention in Canada–US relations. Indeed, the intensity of cross-border trade, currently valued at more than US$1.7 billion per day, inherently subjects a considerable amount of trade to potential trade remedy action. When Canada and the United States entered free trade talks in 1985, disciplining the application of American trade remedy laws to Canadian goods was one of Ottawa’s highest negotiating priorities (Hart, Dymond & Robertson 1994: 54–86, 372–85). Canada’s initial position on trade remedy laws was to seek their complete elimination in what were already two of the world’s most deeply entwined economies. However, negotiations over trade remedy laws were among the most contentious in those bilateral talks, with Canadian negotiators walking away late in the talks over American unwillingness to make concessions. Only in late October 1987, faced with a US legislative deadline to conclude the negotiations, did American negotiators make some concessions. The result was chapter 19 of the Canada–US Free Trade Agreement, including a dispute settlement mechanism. 3. See World Trade Organization, “Legal texts: the WTO agreements”: www.wto.org/english/docs_ e/legal_e/ursum_e.htm#fAgreement (accessed 10 June 2019).

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Chapter  19’s dispute settlement mechanism has periodically been hailed as a major breakthrough in disciplining the application of trade remedy laws. However, the mechanism is much more limited than the immunity from trade remedy laws Canada has always sought. Even so, chapter 19 broke new ground, by creating a binational review process that, for the first time, introduced a quasi-judicial review of trade remedy investigations, which had previously been the exclusive purview of domestic administrative agencies. Indeed, it was not long before domestic stakeholders went to court alleging that the NAFTA had broadly circumvented the article I treaty ratification process of the US constitution,4 and, more narrowly, that chapter 19 was an unconstitutional circumvention of the right to judicial review.5 The controversy over chapter 19 is odd, since, by comparison to most institutional arrangements at different stages of integration, these particular dispute settlement mechanisms are remarkably limited. Indeed, the binational panel system originally enshrined in CUFTA was given no supranational authority to arbitrate or rule on the fairness of domestic trade remedy actions. In fact, the standard of review for chapter 19 panels is limited to whether domestic administrative agencies correctly apply the law as it was written and intended by legislators. Since trade remedy laws are invariably written with the protection of domestic industry squarely in view, such a standard for dispute resolution could never confer the immunity sought by Canadian negotiators (Anderson 2006). In practice, chapter 19 rulings alleging the misapplication of domestic law are “remanded” (sent back) to the domestic agency, which then embarks on additional investigation of dumping or subsidy allegations to bring the original ruling into “compliance” with domestic law. Meanwhile, critics of the weakness of chapter  19 allege, disruptions to normal market signals in the sector concerned continue, with the most acute impact being felt on the foreign firms whose products were the subject of investigation in the first place. The United States was never willing to cede much sovereignty over legislation aimed at protecting domestic producers. Hence, Canada did not get the immunity from US trade remedy laws it sought in the CUFTA negotiations. However, after Ottawa had staged public walk-outs and threatened to call off the CUFTA talks altogether, the United States gave a bit more than it initially wanted in the form of chapter 19’s limited binational panel system. When the

4. See General Accounting Office (1995); see also Made in the USA, United Steel Workers of America et al. vs. United States of America, US 11th Circuit Court of Appeals, DC Docket no. 98-01794CV-PT-M, 27 February 2001. 5. See Coalition for Fair Lumber Imports vs. United States of America, United States Court of Appeals, no. 05-1366, decided 12 December 2006.

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NAFTA negotiations began in February 1991, Mexico, not surprisingly, put immunity from US trade remedy laws high on its agenda as well (Cameron & Tomlin 2000: 88). Having just been through difficult negotiations with Washington, Canadian negotiators knew Mexican goals would be difficult to achieve. Canada was sceptical, but supported Mexican efforts – perhaps defensively, hoping to have as much of the CUFTA’s provisions enshrined in the NAFTA as possible (ibid.).6 That is exactly what happened. Chapter  19 was trilateralized in the NAFTA with the exact same mechanisms, no pooled institutionalization and the same standards of review. As of January 2019 there had been 76 chapter 19 cases, only a few of which, such as softwood lumber from Canada, proved to be intractable. Chapter 19 has to be given credit for smoothing the disruptive application of trade remedy law in one of the world’s largest free trade zones. Indeed, merely having an ad hoc review of the application of domestic law as a way of checking administrative action has, in all but a few cases, had a salutary effect on the incidence and resolution of disputes. But it has also remained controversial. In spite of chapter 19’s relatively limited scope, it has been a useful tool for ensuring additional transparency and consistency in the application of a set of laws inherently designed to protect domestic industry (Macrory 2002; Pan 1999). Of course, the perception, if not the reality, of chapter 19’s scope and power to force domestic administrative action of any kind has also made this form of dispute settlement a significant component of broader critiques of the NAFTA. Returning to the idea that institutions and governance mechanisms within trade agreements such as the NAFTA can be viewed, especially in the context of start asymmetries of power, as strictures on the arbitrary exercise of power, chapter  19 has to be scored as a partial success. Canada and Mexico, as Lilliputians, were marginally successful in restraining the United States, as Gulliver, in its use of trade remedy laws against them.

USMCA and chapter 19 All this made chapter 19 an obvious focal point for negotiators when President Trump demanded the renegotiation of the NAFTA in the spring of 2017. In July that year, after a compressed public comment period, the United States Trade 6. Cameron and Tomlin argue that one point of leverage Mexico enjoyed with Washington in at least arguing for chapter 19 to be enshrined in the NAFTA was the weak state of Mexico’s legal regime for administering its own trade remedy laws. Chapter 19, Mexico argued, would effectively compel Mexico towards a series of domestic reforms.

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Representative released its NAFTA negotiating objectives. On trade remedy laws, Washington could not have been clearer:

• •

Preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws. Eliminate the Chapter 19 dispute settlement mechanism. (United States Trade Representative 2017)

By contrast, Canada again stuck its heels in the ground and insisted dispute settlement mechanisms be included in any renegotiated NAFTA (Globe and Mail 2017). Throughout the late summer of 2017 to the completion of USMCA negotiations late in 2018, Canada insisted on the inclusion of chapter-19-like dispute settlement mechanisms and was prepared to walk away from the talks without them. In August 2017 Mexico similarly released its negotiating objectives, also insisting on the incorporation of chapter-19-like mechanisms (Stargardter 2017). The text of the USMCA resulted in a bizarre split between these competing objectives: Canada and the United States to retain chapter 19, largely as it was written under the NAFTA; Mexico and the United States to eliminate the bilateral application of chapter 19. It is as if half the Lilliputians attempting to restrain the arbitrary use of Gulliver’s considerable power suddenly abandoned the effort. Instead of a trilateral set of governance mechanisms covering the application of trade remedy laws, we now have in the USMCA just one set of bilateral mechanisms. Although Canada and Mexico are not as frequently litigants in trade remedy disputes (just three during the life of the NAFTA), the two countries have set up no bilateral mechanisms of their own within the USMCA, nor are there dispute settlement mechanisms covering trade remedy laws within the text of the Trans-Pacific Partnership, to which Canada and Mexico remain parties.

Chapter 20: useful, to a point The most important thing about chapter 20’s governance mechanisms was the establishment of the Free Trade Commission (article 2001). Indeed, the FTC was arguably the single most important institutional arrangement in the entire agreement. First, article 2001 mandated that the FTC be comprised of Cabinetlevel representatives charged explicitly with supervising the implementation, operation and revision of the NAFTA . Significantly, article 2001(5) mandated that the FTC meet each and every year. The importance of having regularized, Cabinet-level attention dedicated to the NAFTA was significant, and indicative. On the one hand, the significance

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of the NAFTA, along with the agreement’s built-in agenda, for all three countries necessitated high-level political guidance. Moreover, the FTC was unique in terms of trilateral governance. Never before had there been a single institution with regularized meetings created for North America. However, the fact that the FTC was limited to Cabinet-level membership and the NAFTA did not mandate any regular meetings of presidents and prime ministers was also reflective of a relatively shallow set of ambitions for North America (Pastor 2011: 23–8, 149–56). Indeed, although the FTC had plenty to monitor, implement and interpret with respect to the NAFTA itself, the adoption of a more ambitious agenda for North America – perhaps advancing towards deeper stages of integration – would probably have necessitated the participation of presidents and prime ministers. The second important institutional arrangement created by chapter 20 was the NAFTA Secretariat (article 2002). Yet it too was simultaneously a manifestation of the heightened importance of North America flowing from the NAFTA’s creation and its relatively limited ambitions. The term “secretariat” suggests an administrative function. Indeed, that is exactly what the NAFTA Secretariat is:  the agreement’s administrative arm. However, it is an arm that exists only in cyberspace. The secretariat maintains a website wherein the text of the agreement can be found, filings for some dispute settlement actions and any announcements made by the FTC.7 However, there is no office complex at which someone could visit the secretariat, no administrative office staff, no centralized record-keeping around trilateral activity.8 Indeed, the secretariat is comprised of the part of each country’s bureaucracy charged with trade policy: in Washington, the Office of the United States Trade Representative; in Ottawa, Global Affairs Canada; and, in Mexico City, Secretaría de Economía. Whether one sees this institutional arrangement as a model of efficiency – why create a new bureaucracy when you can use existing ones? – or a by-product of reluctance on the part of the United States, in particular, to take any steps down the road towards pooling sovereignty in trilateral institutions depends heavily on whether one sees the NAFTA as either overly or insufficiently ambitious. Yet the design and operation of chapter 20’s dispute settlement mechanisms suggest that the United States’ reluctance to pool sovereignty loomed large over all of chapter 20.

7. See NAFTA Secretariat, “Welcome!”:  www.nafta-sec-alena.org/Home/Welcome (accessed 20 June 2019). 8. Indeed, although chapter 19 dispute settlement filings can be found on the secretariat website, filings for chapter 11 investment disputes are “housed” in several different locations: the United Nations, the World Bank and the national ministries in charge of adjudicating them.

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In connection with the Cabinet-level political direction for the NAFTA, chapter  20 also established a formal dispute settlement mechanism formalizing the adjudication of disputes not covered by other parts of the agreement – chapter 19, for example – or were significant and broad enough as to require political decision-making (article 2004). Indeed, section B of chapter  20 lays out an elaborate set of consultation rules (articles 2006 to 2012), procedures, timelines for reporting, third-party participation requirements (article 2013), the terms for the use of experts (article 2014) and review boards (article 2015) and the process for implementing final reports (article 2018). Interestingly, the brand of state-to-state dispute settlement has increasingly been favoured by civil society because of the associated perception of public accountability connected to officials using “Good offices, conciliation, and mediation” (article 2007) as the primary means of adjudication. It is a form of dispute resolution that relies heavily on diplomacy and accommodation instead of independent arbitral panels (NAFTA chapters 11 and 19) perceived as distant, technocratic and unaccountable to voters. Indeed, the new USMCA (chapter 31) re-enshrines the preference for state-to-state mechanisms. However, if the experience with NAFTA chapter 20 is any indication, the utility of state-to-state dispute settlement may be limited. In the more than two decades of the NAFTA’s operation there have been just three chapter  20 (article 2008)  dispute settlement procedures initiated. One in particular, concerning cross-border trucking services from Mexico, was initiated in 1998 but did not contribute much to the resolution of the dispute, which continues to this day (Kitroeff 2018; Cazamias 1998; Arnett 2002).9 However, one problem with state-to-state mechanisms is the potential for disputes handled within it to revert to the arbitrary self-interested application of power such institutions are, theoretically, designed to mitigate. As Peter Cazamias notes of the US–Mexican trucking dispute: National governments are not inclined to resort to dispute resolution procedures when they stand to gain more through political posturing. NAFTA assumes that a party will fulfill its obligations out of self-interest or because of the threat of another party’s recourse to Chapter 20. But when both parties’ governments benefit by staying outside the dispute settlement process, Chapter  20 encourages the kind of political bargaining in which the US and Mexican governments are currently engaged. (Cazamias 1998: 361)

9. NAFTA, “In the matter of cross-border trucking services”, USA-MEX-1998-2008-01, 24 July 2008.

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State-to-state dispute settlement mechanisms may give the feel-good appearance of greater accountability, transparency and diplomatic negotiation, but they also reintroduce asymmetrical power in ways other forms of dispute settlement, such as NAFTA chapter  11’s arbitration proceedings, do not. Specifically, although private interests affected by state action can initiate independent adjudication under chapter  11, the state-to-state provisions of chapter 20 can be initiated only by the state. In other words, individual interests impacted by arbitrary state action cannot, under chapter  20, compel the initiation of a resolution process. Finally, as the Mexican trucking services case highlights, there is nothing in chapter 20 to compel a complete resolution of the dispute wherein a party meets its obligations under the agreement. Chapter 20 may compel political bargaining, but – as the case history indicates – does not also compel resolution.

The built-in agenda and the failure to launch Shallow and, in some areas, inadequate though the NAFTA has seemed in retrospect, its ambition in the early 1990s was a significant leap forward for North America. Part of the perception of inadequacy has been rooted in the complex set of circumstances repeatedly thwarting efforts to build upon what had been started with the original text. The original text broke new ground in a number of domains that would grow in prominence within the global trading agenda; areas such as telecommunications , services, subsidies and competition policy have subsequently become core to regional and global trading agendas. Much though the NAFTA did to break new ground, doing so inherently left much undone. Few commentators ever note the significant built-in agenda negotiators embedded within the NAFTA text:  nearly 30 committees and working groups. Table 6.3 lists the many working groups and committees created by the NAFTA’s provisions. These committees and working groups entailed a diverse membership – some composed of government officials, others of private citizens – with an equally diverse set of mandates – some mostly about the NAFTA’s implementation, others looking ahead to “next steps” – and, it turned out, varying degrees of longevity. Yet the built-in agenda did not net very much. Many committees and working groups ceased to meet shortly after they were created. Others continued their work, but seldom saw much of it implemented. A good example of the sputtering of the built-in agenda comes from chapter  20, and the Advisory Committee on Private Commercial Disputes (article 2022(4)). The NAFTA’s negotiators assumed that growing levels of trade and investment had the potential to

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Table 6.3 NAFTA committees and working groups Committees

Working groups

Committee on Trade in Goods (article 316)

Working Group on Rules of Origin (article 513)

Committee on Trade in Worn Clothing (annex 300-B, section 9.1)

Customs Subgroup (article 513(6))

Committee on Agricultural Trade (article 706)

Working Group on Agricultural Subsidies (article 705(6))

Advisory Committee on Private Commercial Disputes regarding Agriculture Goods (article 707)

Bilateral Working Group on Agricultural Grading and Marketing Standards (US– Mexico) (annex 703.2(A)(25))

Committee on Sanitary and Phytosanitary Measures (article 722)

Working Group on Trade and Competition Policy (article 1504)

Subcommittee on Pesticides (proposed under article 722)

Temporary Entry Working Group (article 1605)

Committee on Standards-Related Measures (article 913)

Working Group on Emergency Action (established by the Supplemental Agreement on Import Surges under article 2001(2)(d))

Land Transportation Standards Subcommittee (article 913(5) and annex 913.5.a-1) Telecommunications Standards Subcommittee (article 913(5) and annex 913.5.a-2) Automotive Standards Council (article 913(5) and annex 913.5.1-3)

Working Group on Government Procurement (established by the NAFTA trade ministers 14 January 1994) Working Group on Chapter 19 Working Group on Services and Investment (established by the NAFTA trade ministers 14 January 1994)

Subcommittee on Labeling of Textile and Supplemental Agreement on Environmental Cooperation Apparel Goods (article 913(5) and annex 913.5.1-4) Council on Environmental Cooperation Committee on Small Business Joint Public Advisory Committee (article 1021) North American Air Working Group Financial Services Committee (article 1412) Advisory Committee on Private Commercial Disputes (article 2022(4))

generate more and unforeseen conflicts. The mandate of the committee was to explore the viability of alternative dispute resolution (ADR) modes. If the measure of success for the 2022 Committee is education and outreach, it might receive a passing grade. The 2022 Committee has held nearly one formal meeting per year since 1994, including its most recent in Mexico City in 2018, in an effort to seek input from, spread awareness about and recommend best practices in ADR to the Free Trade Commission, ostensibly with the aim of having the three governments implement them.

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Yet, as the committee’s 2009 15-year retrospective report notes, “the work of the Committee has also evolved over time”; initially consistent with the original mandate, but shifting mostly to outreach and training as the prospects for substantive implementation of ADR ran into legislative obstacles in all three NAFTA countries (Lussenburg & Lutz 2009). Moreover, resource constraints on the 2022 Committee’s activities had constrained its effectiveness (ibid.: 44). Minutes of the June 2017 meeting of the 2022 Committee in Montreal noted the impending renegotiation of the NAFTA was about to begin, that the Committee had not communicated with the Free Trade Commission in several years and that the FTC needed to be made aware of the volumes of work the 2022 Committee had undertaken (NAFTA 2022 Committee 2017: 7). Work on the NAFTA’s built-in agenda mirrored the broader decline in enthusiasm for the agreement as a whole through the end of the 1990s, as the public backlash against trade liberalization and integration routinely – and violently – spilled into the streets of Seattle, Washington, Quebec City and Genoa. The work of the built-in agenda gained little traction until after September 2001, when parts of that work were cobbled together, first in the two “smart border” accords among the three countries and, second, in the equally ill-fated North American Security and Prosperity Partnership (Anderson & Sands 2007; Ackleson & Kastner 2006). For a brief time, roughly March 2005 through August 2009, there was a positive alteration to North America’s governance architecture, with the instituting for the first time of annual trilateral summits among the presidents and prime ministers: the North American Leaders’ Summit (NALS). However, after the originators of the NALS left office, the NALS quickly faded from view, as did the SPP itself. Indeed, a lack of political interest, an SPP agenda that looked more ambitious than it was and, importantly, an absence of institutional mechanisms constructed to facilitate implementation all combined to scuttle the initiative.

The NAFTA’s unexpected governance When the NAFTA negotiations began in June 1990, labour and the environment were not among the topics on which the three countries were hoping to break new ground. That changed in the autumn of 1992, at the height of the US presidential election campaign, when President Bush challenged Arkansas governor Bill Clinton to make his support or opposition to the nearly completed NAFTA negotiations clear. In what some have argued became a signature of his governance style as president (Greenstein 1998), then Governor Clinton hedged, saying in a public speech at North Carolina State University that he supported the NAFTA subject

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to appropriate protections for labour and the environment (Clinton 1992). These protections came in the form of side agreements to the main NAFTA text, negotiated in the spring and summer of 1993. The NAFTA side agreements receive a lengthier treatment in the next chapter of this volume, but their specific governance mechanisms are important in the context of the NAFTA’s overall governance. Like the majority of the NAFTA’s other institutional mechanisms, the side agreements on labour and the environment were never designed to have strong enforcement teeth. Indeed, although Bill Clinton’s eleventh-hour endorsement of the NAFTA was subject to additional negotiations with Mexico City and Ottawa over protections for labour and the environment, he was not thinking in terms of trilateral management of either policy area. In fact, Clinton was quite explicit about the limited scope of what he had in mind: “I will negotiate an agreement among the three parties that permits citizens of each county to bring suit in their own courts when they believe their domestic environmental protections and worker standards aren’t being enforced” (Clinton 1992, emphasis added). Since citizens of each country could already launch legal actions in their domestic court settings over these issues, the need for a trilateral agreement was perplexing. Nevertheless, Clinton’s efforts resulted in the creation of two entities, one each for labour and the environment:  the North American Commission for Labor Cooperation and the Commission for Environmental Cooperation. Of the two, only the CEC remains active. Indeed, it became far more active than President Clinton, or any of the negotiators, intended. Although the CEC was arguably marginalized by being situated outside the NAFTA itself and was never given enforcement powers to compel states or polluters to action, it has become an important trilateral body for the exchange of scientific information, civil society engagement and public submission around a host of regional environmental issues. When the Trump administration compelled the renegotiation of the NAFTA in the spring of 2017, many assumed provisions connected to the environment would be on the administration’s target list for elimination. In fact, one of the main administration negotiating objectives was to “bring the environment provisions into the core of the Agreement rather than in a side agreement”, suggesting to some the elimination of the CEC (United States Trade Representative 2017). Instead, chapter  24 of the new USMCA underwrites the CEC’s importance in several different ways. First, the USMCA augments the CEC’s relevance by making it the institutional location for the coordination and review of trilateral activities under a new Agreement on Environmental Cooperation (AEC)

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(USMCA article 24.25(3)). Moreover, article 2 of the new AEC – a kind of side agreement to the USMCA – reaffirms that all three countries will continue to participate in the activities of the CEC.10 Finally, the CEC will also serve as the administrative portal for public submissions on environmental enforcement under the new USMCA (article 24.27).

10. See US Environmental Protection Agency, “Agreement on Environmental Cooperation among the governments of the United States of America, the United Mexican States, and Canada”: www.epa.gov/sites/production/files/2018-11/documents/us-mxca_eca_-_final_english.2.pdf (accessed 22 July 2019).

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The liberalization of international trade has always been associated with social, political and economic disruption. Indeed, such disruptions are the very source of much popular opposition to liberalization. The moment humans began trading with one another, anxieties were provoked about the impact of exotic foreign wares on everything, from local culture and politics to, of course, economic activity (Irwin 1996: 11–15). These anxieties have periodically, but regularly, spilled over into the kind of populist, anti-trade xenophobia infecting modern debates about trade. This chapter begins with a short discussion of how embedded the politically, economically and socially disruptive qualities of trade liberalization actually are. In part, this chapter will argue, there has always been a connection between trade and both labour and the environment. However, it was the NAFTA that permanently situated labour and environmental issues as meriting consideration in the governance of regional and global trade. Yet having labour and the environment on the agenda has produced uneven results. The NAFTA’s side agreements on labour and the environment may have started it all, but these same agreements are also emblematic of the uneven treatment and impact of labour and the environment on global trade. Indeed, the NAFTA side agreements were initially afterthoughts, born of the politics of the day and – much to the mutual chagrin of people on different sides of the debate around the nexus of trade, labour and the environment  – designed more for show than substance. The result was that the labour half of the side agreements quickly went dormant while the environmental half survived and become more robust than their authors intended. In other words, few were entirely happy with the side agreements. Finally, this chapter will note the significant, but also surprising, degree to which the importance of labour and the environment was affirmed in the NAFTA’s successor, the United States–Mexico–Canada Agreement.

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Winners, losers and spillovers There are few certainties in life, but there are two that students of international trade can commit to memory:  (a) trade liberalization creates “winners” and “losers”; and (b) the “winners” are broadly distributed and the “losers” are highly concentrated. This basic reality is also the source of most of the populist politics swirling around trade liberalization. The case in favour of trade liberalization is compelling in its simplicity. Yet, strangely, it has also seemingly befuddled politicians for centuries. The problem for politicians is often not that they fail to understand free trade. It is that free trade frequently puts politicians in a difficult bind, captured by the fact that liberalization inherently creates broadly based “winners” but also concentrated “losers”. Put simply, it is mostly the losers in front of whom politicians have to stand and defend the decision to liberalize. The diffuse beneficiaries of trade liberalization – consumers or export interests – rarely spill into the streets to voice their support for more liberalization. When Adam Smith advanced the case for free trade, in 1776, his target was the inefficiency and monopoly power of mercantilism as enforced by the British Crown. International trade effectively extended his ideas around the efficiencies to be gained through the division of labour; why not produce a lot of what you make most efficiently and exchange it for those products others produce most efficiently? Yet it was David Ricardo’s articulation of the case for free trade anchored in comparative advantage, in 1817, that made the source of both discombobulated politicians and angry, concentrated “losers” become most clear. Smith’s case for free trade was mainly premised on relative labour costs, effectively assuming labour was the only important input in the production process. Ricardo built on this by asking why countries would trade with each other at all if they could simply produce everything they needed. Ricardo’s argument was rooted in the opportunity costs of production: could Britain produce one extra unit of product X while drawing fewer resources away from Y production than could be done in France? If so, Ricardo argued, Britain ought to specialize in the production of X, move away from Y production and simply export X to France in exchange for Y. This bit of elegant reasoning in favour of the efficient allocation of resources in production and trade has given politicians fits ever since. Why? The elegance of Ricardo’s reasoning also involved an adjustment process that, in his view, was temporary. As Britain ceded the inefficient production of Y to France and both specialized and expanded the production of X, some of which would go to France, Y workers in Britain would be “released” into the labour force. Ricardo assumed workers released from Y production would quickly be absorbed into the newly expanded production of X. However, in practice, X and Y production

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do not necessarily entail the use of the same skill sets, so there is a delay in that transition from being “released” to being re-employed (see, generally, Irwin 1996: esp. chs 5 & 6). Indeed, in modern economies, the skill sets required for one industry are seldom readily transferable to another; it takes a long time to retrain textile workers to manufacture semiconductors. Some of these challenges arise from normal product cycles, in which mature manufacturing techniques are easily replicated elsewhere. There is also considerable labour market adjustment because of technological change, something economists have long pointed to as a greater source of domestic job loss than international trade (Freeman 2004; Goos & Manning 2007; Goos, Manning & Salomons 2014; Autor, Levy & Murnane 2003; Autor, Katz & Kearney 2008; Autor & Dorn 2013). However, because the job loss from trade liberalization is more directly the byproduct of government policy than modernity, and is an outcome of that policy as predicted by economic theory, politicians are inevitably confronted with the cleavages that flow from creating broadly based “winners” and concentrated “losers”. Satisfied “winners” seldom tie their “winnings” to the effects of trade liberalization, and even less frequently coalesce politically in support of more. However, organized groups of concentrated “losers” can often be found confronting politicians about their plight in the adjustment process, while the politicians themselves fumble around for arguments more politically compelling than the nuances of “comparative advantage”. One further bit of economic theory that inherently complicates the politics of trade liberalization is something known as “factor price equalization”. According to this theory, the liberalization of trade between countries tends to start a process of convergence of prices for the inputs into those goods that are being traded, including labour costs (Samuelson 1948). Trade becomes a kind of vehicle for harmonizing price differentials between markets. Factor price equalization suggests that, as trade between Mexico and the United States opened under the terms of the NAFTA, high US wage rates would begin to converge with much lower Mexican wage rates in manufacturing. For some, this meant long-sought improvement in Mexican labour standards. For others, high-wage US manufacturing would increasingly come under downward pressure. Hence, the same economic theory that outlines the efficiency gains to be had from international trade simultaneously makes the difficult politics of trade obvious. In fact, with the benefits of trade come important challenges. As noted in the earlier discussion of governance within the NAFTA, labour and the environment were eleventh-hour additions insisted upon by the then Arkansas governor, Bill Clinton, during the 1992 US presidential election campaign. The resulting labour and environmental side agreements to the NAFTA were an effort to respond to the politics of international trade flowing from the inherent

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creation of winners and losers in the midst of the adjustment process. The side agreements were also an important response to a different set of concerns regarding the impact expanded manufacturing and trade would have on the environment. As Mexico, for example, took advantage of the NAFTA’s preferential access to the US and Canadian markets, long-standing issues regarding the environmental impact of maquiladora industrial zones were of heightened concern (Williams 1995; Voigt 1993; Friedman 1992).

Labour The NAFTA attempted to address labour issues in three basic ways. First, the debate over the NAFTA implicitly acknowledged there would be an adjustment process flowing from trade liberalization and, in the United States at least, would require enhancing mechanisms to assist labour with that adjustment. Second, although the NAFTA did not include provisions for labour mobility generally, the NAFTA broke important new ground with respect to the mobility of North America’s professional classes. Finally, the NAFTA side agreement on labour, the North American Agreement on Labor Cooperation (NAALC), tried to address many of the concerns about wage rates and labour rights connected to the exposure of high-wage, highly regulated labour markets in Canada and the United States to low-wage, weakly regulated competition from Mexico.

Trade adjustment assistance The basic ideas behind trade adjustment assistance are relatively straightforward, since they flow directly from the adjustment costs predicted by economic theory: offer up some compensation or pathways to retraining for those workers who find themselves employed in a sector at a comparative disadvantage as a result of trade liberalization. In practice, trade adjustment assistance is a challenge, as it is seldom obvious which firms or sets of workers have been displaced specifically by trade liberalization. Is trade liberalization the culprit, or is it some combination of product cycles, outsourcing elsewhere and technological change that drives that displacement (David 2015; Irwin 2016)? In part because it is complicated, each NAFTA country has a slightly different approach to softening the impact of trade liberalization on labour markets. Such measures can sometimes be construed to include any part of the welfare state’s social safety net:  measures directly targeting employment, such as unemployment benefits, to indirect parts of the broader social safety net, such as healthcare. As one might expect for a developing country, of the three

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NAFTA states it is Mexico that has the least well-developed set of social safety nets for labour: no unemployment benefits, relatively weak labour rights laws and no broad-based social safety net of the type one finds in social democracies such as Canada. Canada also lacks a specific set of programmes focused on the adjustment of labour to trade liberalization (Lysenko, Mills & Schwartz 2017). However, Canada does have relatively generous unemployment benefits, part of which includes access to significant retraining opportunities, as well as a singlepayer healthcare system, all of which provides an important set of supports to labour affected by trade. By contrast, the United States has explicitly chosen to direct funds towards adjustment assistance. America’s social safety net is more robust than Mexico’s but less so than Canada’s, particularly in terms of the provision of healthcare, for which the United States maintains a mixed private/public system that still leaves many without coverage. Trade adjustment assistance in the United States grew out of congressional frustration with the impact that successive rounds of multilateral negotiations under the GATT were perceived to be having on some domestic industries. In 1974 the US Congress put in place funding and retraining mechanisms for workers displaced by trade liberalization, in essence seeking to purchase additional political space for liberalization through the creation of the Trade Adjustment Assistance programme (see Anderson 2012; Department of Labor, Employment and Training Administration 2017). The Trade Adjustment Assistance programme was enhanced and reaffirmed in the 1993 legislation passed by Congress to implement the NAFTA (United States House of Representatives, 103rd Congress, First Session, HR 3450, North American Free Trade Agreement Implementation Act). However, since its inception few have been entirely satisfied with it. The obvious critique is that the funding allocated to such programming is seldom enough; indeed, the NAFTA’s Transitional Adjustment Assistance programme was given an annual disbursement cap of just US$30 million (ibid.: SEC. 250, (d)(2)). Job loss directly related to trade liberalization is difficult to discern. However, even when it is possible to directly tie job loss to the adjustment from trade, compensation is frequently inadequate to the task of transitioning workers, often because entirely new skill sets are required; jobs in the sector being rationalized through free trade are disappearing (Kapstein 1998; Decker & Corson 1995).

Chapter 16: temporary entry One of the underlying themes of this volume has been just how limited the NAFTA really was. As a relatively shallow preferences arrangement, the NAFTA never envisaged the kind of supranational governance institutions present

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at deeper stages of integration. Although the NAFTA did much to integrate the three countries into a single marketplace for trade in goods, services and investment, the agreement never envisaged a single market for labour. Indeed, although the liberalization of trade linked labour in all three countries to one another through tradables (factor price equalization), the physical mobility of labour itself has remained segmented into three distinct markets. The one exception to this within the NAFTA was the provision for the temporary entry of business professionals in chapter  16. The NAFTA, in effect, created a whole new category of visa, the TN (Trade NAFTA) visa, for a select group of professionals (NAFTA, chapter 16, appendix 1603.D.1). However, several problems with chapter 16 emerged almost immediately. First, the NAFTA specified a “positive” list of roughly 60 specifically defined professions that would be eligible for expedited processing and elongated stays in member countries. Rapid changes to the global economy quickly made that static list obsolete. For example, the years that followed implementation of the NAFTA saw an explosion of technology jobs, for which the NAFTA’s prescribed list of professionals was inadequate. Indeed, “computer systems analyst” was the one category under which nearly all the exploding range of information technology professional had to be admitted. Moreover, the list of eligible professions proved stubbornly difficult to amend, with state and provincial professional associations frequently resistant to the mutual recognition of credentials, which could destabilize the supply and demand for professions in localized markets. The limitations of the NAFTA experience saw subsequent trade agreements define professions mostly in terms of more flexible educational achievement standards. The second major problem with the NAFTA’s temporary entry provisions is the variability in the procedures for obtaining a TN visa. The disparity in the number of TN visas issued to Canadians and Mexicans is starkly depicted in the US Department of Homeland Security entry data presented in Table 7.1 for the period 2000 to 2017. Part of the explanation is undoubtedly due to the more onerous administrative procedures Mexicans must go through to obtain a TN visa. Remarkably, because Canadians are on the “visa-exempt” list for travel to the United States, business professionals can apply for a TN visa at a port of entry on the day of travel to take up work in the country. By contrast, Mexicans must apply for, and obtain, a TN visa prior to planned travel. In practice, this has meant going through the normal (slow) visa application process at US consular outlets in Mexico.1

1. See Department of State, Bureau of Consular Affairs, “Visas for Canadian and Mexican NAFTA Professional Workers”:  https://travel.state.gov/content/travel/en/us-visas/employment/visascanadian-mexican-nafta-professional-workers.html (accessed 5 March 2019).

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Table 7.1 Admissions under TN visa (2000–2017) 2000 Canada 110,740 Mexico 2,720 Total 113,460

2009 Canada 77,793 Mexico 21,225 Total 99,018

2001

2002

2003

2004

2005

2006

2007

92,915 2,571 95,486

71,535 1,821 73,356

57,932 1,269 59,201

63,847 2,123 65,970

59,832 4,881 64,713

64,633 9,247 73,880

69,843 68,872 15,299 19,510 85,142 88,382

2010

2011

2012

2013

2014

2015

2016

2008

2017

573,675 815,159 651,062 524,104 596,570 657,579 670,296 590,739 60,446 84,296 82,630 88,431 116,167 129,601 145,853 151,160 634,121 899,455 733,692 612,535 712,737 787,180 816,149 741,899

Source: Department of Homeland Security.

After 2004 Mexico was no longer subject to numerical caps on TN visas (previously 5,000), facilitating growth in the number of applicants. However, Mexican TN visa numbers remain significantly below those issued to Canadians, because Mexicans are not “visa-exempt”, meaning they have to apply through consular offices, not at ports of entry. A further change was made by US authorities in 2008, when the duration of TN visa validity was extended from one year renewable to three years renewable. This might account for the significant spike in Canadian applications for TN visas after 2009, as the three-year duration made firms more willing to take on prospective workers.2 The use of TN visas by professionals, particularly from Canada, has clearly grown. However, the variability in access and the limitations in the positive list of professions itself remain important problems, around which there have been calls for reform. Some of the limitations made obvious by the NAFTA experience, especially those flowing from the “positive” list of defined professions, prompted the adoption of the more general standard of educational attainment in other agreements, such as the Trans-Pacific Partnership.3

2. The US Department of State’s current “Reciprocity” guidelines for the TN visa state, for Canadian nationals, that they are “issued for multiple entries for a period of 36 months, or for the duration of the principal alien’s visa and/or authorized period of stay”. No such language covers Mexican nationals. See https://travel.state.gov/content/travel/en/us-visas/Visa-Reciprocity-and-CivilDocuments-by-Country/Mexico.html (accessed 6 March 2019). Indeed, despite the 2009 change, anecdotal evidence suggests some Mexican TN visa holders were being approved for one-year stays; see Law Office of Brian D. Zuccaro (2010) (accessed 6 March 2019). 3. Chapter  12 of the Trans-Pacific Partnership (for the full text, see https://ustr.gov/tradeagreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text; accessed 8 March 2019), for example, defined professionals and technicians in terms either of their years of experience or background commensurate with an expertise in their fields.

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One of the first acts of the Trump administration in early days of 2017, of course, was to formally announce the United States’ withdrawal from the TPP. When the administration’s threat to scrap the NAFTA in the spring of 2017 turned into a renegotiation, chapter 16 and the TN visa were thought to be high on the list of targets for outright elimination. The xenophobia of the 2016 presidential campaign, coupled with the animus towards the NAFTA itself as “the worst deal ever negotiated”, signalled that fixing the limitations of chapter 16 was not on the table. Almost inexplicably, the text of the USMCA, released in the fall of 2018, left chapter 16 entirely unchanged. There were no fixes, but there was also no deterioration in the status quo. Indeed, there is no evidence chapter 16 was even an important topic for negotiation among the parties.

North American Agreement on Labor Cooperation The third way in which the NAFTA attempted to deal with labour issues was through the side agreements, specifically the North American Commission for Labor Cooperation. This part of the NAFTA was the most tangible response to a growing list of concerns on the part of labour rights advocates about the impact advances in the global economy were having on labour rights and labour conditions. Indeed, these concerns were at the forefront of Governor Bill Clinton’s conditional support of the NAFTA in October 1992 at the height of the US presidential election campaign (Clinton 1992). Nearly a year later the three NAFTA signatories had concluded a side agreement capturing these concerns and establishing mechanisms to build trilateral cooperation in addressing them. Linkages between the expanded economic activity flowing from trade liberalization and its impact on labour had been brewing for some time. Labour advocates in developed states worried about downward pressure on worker protections and salaries in the face of increased pressure from low-wage, lightly regulated labour forces in other jurisdictions. Some of those same labour advocates worried that agreements such as the NAFTA would do little to raise working conditions in developing countries, as some promised, and instead actually undercut existing standards as pressures for efficiency and output grew under a liberalized trading regime. In many respects, the labour side agreement, like its environmental counterpart, formalized the growing links between these issues and trade. Indeed, the preamble to the labour side agreement notes the NAFTA’s intent to expand markets, competitiveness and employment opportunities. It also claims the NAFTA’s intent is to “protect, enhance, and enforce basic workers’ rights”, seeking to “complement” the economic opportunities created by the NAFTA with “human resource development, labor–management cooperation”, “continuous

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human resource development” and the “promotion of employment security and career opportunities for all workers” (Government of Canada 1993). It was an ambitious set of objectives for labour cooperation that would never be realized. Improving standards for workers throughout North America is reiterated throughout the NAALC. In fact, the very first objective stated in article 1 is to “improve working conditions and living standards in each Party’s territory” (article 1). Unfortunately, the NAALC and the Commission for Labor Cooperation it established were never given the institutional design to achieve such lofty objectives. In brief, the NAALC set up a state-to-state system of accountability and cooperation anchored principally in each NAFTA party’s labour ministries. The NACLC was composed of each NAFTA party’s Cabinet minister or secretary responsible for labour issues (article 9). A small secretariat was also created (article 8(2)), based initially in Dallas, Texas, but reportedly moved to Washington, DC (Hufbauer & Schott 2005:  124). However, as of 2019 there is no physical address or website for the Secretariat. The NACLC owes its real failure to the shallowness of its institutional design (Dombois, Hornberger & Winter 2003; Hufbauer & Schott 2005: 119– 32; Clarkson 2008:  104–6). The NACLC was empowered to receive citizen complaints about a host of labour issues, but there was never a binding institutional mechanism designed to actually facilitate a rise in labour standards in any of the three countries. The dispute settlement mechanisms were entirely state to state in nature, and the standard for action revolved around whether states were enforcing their existing labour laws – not whether laws were being improved or standards being raised. In other words, much like the shallowness of the NAFTA itself, the labour side agreement was institutionally weak, designed to preserve the sovereignty of each state, and never structured to significantly alter conditions in any of the three parties. Critiques of the NAFTA side agreements are not dissimilar to those levied at the NAFTA proper: proponents over-promised, critics over-criticized. There is a large body of literature trying to sort out whether the NAFTA (text proper and side agreements) did much to improve wages, labour conditions or labour rights. A  full examination of that literature is well beyond the scope of this volume. However, one reasonable conclusion to be drawn from it all is that the results for labour have been a mixed bag (Hufbauer & Schott 2005: 38–54; Weisbrot, Lefebvre & Sammut  2014). Isolating the predicted “winners” from “losers” in North America resulting from the NAFTA has been the source of a hot political debate that will continue to rage through the USMCA ratification debate and beyond. Particularly interesting is the new minimum wage requirement embedded in the USMCA’s rules of origin. The renegotiation of the NAFTA in 2017/18 resulted

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in an increased North American content requirement to qualify for tariff-free treatment (62.5 per cent under the NAFTA to 75 per cent under the USMCA). But the renegotiated NAFTA couples these content rules with a number of significant new labour provisions, primarily aimed at Mexico. Specifically, the new rules of origin content requirements mandate that between 40 per cent and 45 per cent of that content be manufactured with labour earning at least US$16 per hour. Unfortunately, the purpose and intent of this new wage requirement are fraught with mixed motives. For some, the new content rules enshrine within the USMCA something the NAFTA promised but never delivered: wage rates and bargaining rights for Mexican labour unrealized since the 1994 peso crisis (see Chapter 1 of this volume). However, others see in the new requirements a nakedly protectionist ploy to impose a wage bill burden on Mexican manufacturing that will make parts of it less competitive relative to American manufacturing. However, critics point out that the NAFTA’s rules of origin were already too burdensome (Fruend 2017a). Making them tougher could actually backfire (see Fruend 2017b). Whatever the weaknesses of the NAFTA’s labour side agreement, it nevertheless broke new ground in planting labour issues firmly on the global trading agenda. Interestingly, the only references to labour in the main NAFTA text are found in the preamble:  vague commitments to “improve working conditions and living standards” and “protect, enhance, and enforce basic workers’ rights”. Yet, while there has never been another side-agreement-style arrangement by NAFTA countries in subsequent negotiations with non-NAFTA countries, labour is now front and centre in the main text of nearly all their agreements. The Trans-Pacific Partnership (TPP-12, 2016), for example, contains an entire chapter (chapter 19) devoted to labour issues, the language, institutions and commitments of which owe much of their lineage to the NAFTA side agreement. The TPP includes commitments to cooperation (TPP article 19.10), creates a labour council (article 19.12) and has provision for citizen submissions (article 19.9) and effective enforcement of domestic labour laws (article 19.5); much like the NAFTA side agreement on labour. However, the TPP goes further in enshrining standards for conduct among members adopted from the International Labour Organization (ILO) (TPP articles 19.1, 19.2 and 19.3) and explicitly prohibits the weakening or lax enforcement of labour laws for the purposes of trade (articles 19.4 and 19.5). Whereas the NAFTA had little language around labour rights, the USMCA now contains an entire chapter (chapter 23) devoted to labour, in addition to the wage thresholds in the rules of origin. However, what is surprising is the lack of evolution in the labour provisions within the USMCA when compared to

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other recent agreements. Given the vitriol directed at the NAFTA by the Trump administration around its failure to advance the cause of labour, one might have expected more significant, perhaps interventionist, language around labour in the USMCA. Instead, chapter 23 of the USMCA inserted verbatim the labour provisions of chapter 19 of the TPP-12, an agreement the Trump administration withdrew from in its first week in office in 2017. Like the NAFTA’s side agreements, contemporary labour provisions in trade agreements such as the USMCA or TPP-12 text maintain a strong deference to sovereignty over labour issues. There are still no institutional mechanisms in these arrangements to meaningfully compel the enforcement of existing labour standards or rights, and certainly none that would bring about a broad raising of standards among members. For some, that may symbolize a continuing failure of global trading rules. After all, it has been nearly 30 years since the NAFTA permanently implanted labour issues on the global trading agenda. However, and somewhat confusingly, the new USMCA also contains a lengthy annex compelling Mexico to make significant changes to its domestic labour laws, mostly around rights to collective bargaining. Indeed, annex 23-A committed the new Mexican administration of Lopez Obrador (which assumed office in December 2018) to introduce labour legislation by 1 January 2019, on penalty of delaying implementation of the broader USMCA in all three countries (USMCA annex 23-A-1). The Mexican Congress approved new legislation in May 2019, but Democrats in the United States have already signalled that they want further protections enshrined either in the USMCA or in Mexican law (Villegas 2019; Leonard & Cattan 2019). The insertion of annex 23-A was at the behest of the Trump administration, mostly as a carrot to US labour, but also to Democrats in hopes of winning their support. However, the provisions further highlight the deeply asymmetrical nature of North America. Mexico arguably had little choice but to acquiesce to US demands on collective bargaining rights. The Trump administration’s threat to simply withdraw from the NAFTA, coupled with Mexico’s relative dependence on the United States as a primary export market, conferred considerable US leverage over Mexico to improve labour rights. This is an important change from the NAFTA, which sought to “lock in” important economic and political reforms undertaken by Mexico (and Canada) in the years leading to the agreement. Indeed, the NAFTA represented an opportunity for each of the parties to indirectly consolidate domestic reform efforts through trade liberalization. Whereas the NAFTA consolidated reforms autonomously undertaken by each of the three parties, on both wage rates and labour rights, the USMCA represents a more strongly interventionist approach by using the trade agreement itself to compel change domestically. Progressive critics of trade liberalization can undoubtedly cheer the advent of higher wages

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and improved bargaining rights. Still others might be uncomfortable with the precedent set by the exercise of power within the USMCA negotiations to force these changes. However, the USMCA’s annex 23-A is a one-off requirement over which the main body of the USMCA has no enforcement power. Hence, even if Mexico changes its laws in accordance with annex 23-A, there is nothing in the labour provisions of chapter 23 to enhance enforcement or engage in cooperative activities to further enhance labour rights in all three countries.

The environment The wedding of the environment to the global trading regime came about at almost the exact same time as labour. It was, in many ways, the NAFTA that formalized for the environment what it also did for labour through the side agreements. However, although labour and the environment seemed to share the stage in midst of the NAFTA debate, and the NAFTA side agreements share some similarities, there are also important differences. First, the global trade regime had already been accumulating some important experiences with the environment prior to the NAFTA (Esty 1994; 2003; see also Weinstein & Charnovitz 2001). Indeed, the nexus of trade and the environment had arguably matured further than labour by the time the NAFTA was completed. Second, and partly a by-product of pre-existing experience, the North American Agreement on Environmental Cooperation (NAAEC) institutionalized cooperation and governance over the environment in ways the labour side agreement did not. The result has been a longevity and effectiveness, albeit modest, for the institutionalization of environmental cooperation in North America that none of the negotiators could have predicted at the time. Interestingly, and perhaps surprisingly given the Trump administration’s general orientation towards environmental stewardship, as well as concerns about the erosion of sovereignty, the NAAEC’s institutional structure has been re-enshrined within the environmental provisions of the USMCA.

Market failure Whereas economic theory has always predicted the generation of “winners” and “losers” in labour markets flowing directly from trade liberalization, economic activity and the environment have always been more problematic, because of things such as “spillovers” and “market failures”. Intuitively, the environmental impact of economic activity is often borne collectively, and economists and

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public officials have struggled to come up with ways to deal with it. When environmental impacts have been directly attributable to a single firm or sector, the “polluter pays” principle has been perhaps the most common approach. However, public policy has had a much more difficult time grappling with the broader impacts of economic activity associated with the “global commons” – in other words, the collective contributions to poor air or water quality, and, of course, climate change.

Global trade up to the task? A major question confronting the modern trading regime is whether its rules are capable of dealing with the environmental aspects of increased trade and production flowing from liberalization. For example, if there are differentials in the labour and environmental standards among members of the World Trade Organization and those with lower standards expand their productive capacities for export on the basis of those standards, how can the WTO’s rules be adapted to deal with these effects? Should those rules be revised to prohibit the exploitation of a lax environmental and labour regulatory regime for the purposes of trade? Could the dispute settlement mechanisms, for example, be used to account for the production of “dirty goods” as a form of subsidy – in other words, goods produced via environmentally unsustainable processes (Hufbauer, Charnovitz & Kim 2009; Weinstein & Charnovitz 2001; Charnovitz 2002)? Moreover, could global trading rules be used in the context of the production of goods with a high carbon footprint as a means of combating climate change? To date, the multilateral trading regime has adopted a distinction between “product” and “process” in the adjudication of trade disputes. In short, there are multiple mechanisms within the multilateral system by which a country can limit or prohibit trade for reasons that can generally be categorized as “product safety”. However, the WTO system has generally prohibited trade restrictions because of the “process” by which products are produced (Esty 1994). In the late 1980s the predecessor to the WTO, the General Agreement on Tariffs and Trade, began accumulating some experience with the tension between “product” and “process” within the dispute settlement mechanisms that existed at the time. In the early 1970s the United States Congress passed the Marine Mammal Protection Act, part of which permitted the imposition of bans on products harvested with technologies resulting in the excessive incidental deaths of other marine wildlife. In the fall of 1990 the United States imposed an import ban on tuna harvested in the eastern Pacific with “purse-seine” netting, because it ensnared too many dolphins in the process.

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Mexico objected, arguing before the GATT that the ban unfairly targeted “process” rather than the “product” itself. The timing of the GATT ruling supporting Mexico’s complaint generated some political discomfort when it came in mid1991, right in the middle of the NAFTA negotiations. The sensitivity of the report resulted in a kind of “settlement” (the report was “not adopted”) between the two countries as the NAFTA negotiations continued. Environmentalists were livid that GATT rules could be used to undermine US laws meant to protect sensitive marine species. The next year the European Community put the issue back on the table with its own case before the GATT over the same US tuna import ban, once again raising the profile of environmental issues in the midst of the US presidential election campaign and as the NAFTA negotiations were nearing their completion.

NAFTA and the CEC When Governor Bill Clinton finally made his support for the NAFTA clear just weeks prior to the 1992 presidential election, he did so, of course, with labour and the environment on his mind. In many ways, the NAAEC was a lot like its labour side agreement counterpart. It was institutionally weaker than environmental advocates had hoped, was focused narrowly on ensuring domestic environmental laws were being enforced (article 2) but had no real enforcement teeth to independently police anything apart from state-to-state consultation and dispute settlement procedures (articles 2, 37, and articles 22–36). In other words, the NAAEC was not designed to challenge the state’s sovereign supremacy on the environment. A case in point here was the reservations Canada enshrined in the NAAEC with respect to its provinces, in which constitutional power over natural resources resides within its federal system. Specifically, annex 41 spells out a long list of caveats and exceptions to the application of the NAAEC to Canada, including clause (7), which states: “Canada shall use its best efforts to make this Agreement applicable to as many of its provinces as possible.” The NAAEC established the Commission on Environmental Cooperation (CEC) (article 8), which, at first blush, seems to resemble the Commission on Labor Cooperation. A council led by the environment ministers for each of the three countries is complimented by a secretariat and a joint public advisory committee (article 8.2). However, a major difference between the two side agreements is the formalization of the Secretariat independently of the three parties’ environment ministries (section B). Indeed, the NAAEC spells out in considerable detail the organizational structure and function of the CEC (article 11.1–8) and mandates annual reporting (article 12) and the process by which the Secretariat will facilitate the creation of factual records around enforcement

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matters (articles 13–15). Moreover, the NAAEC specifies that the three parties will make equal financial contributions to the CEC’s staff and operations (article 43). The establishment of the Secretariat as a bricks and mortar institution (headquartered in Montreal, Canada) was significant, permitting the CEC to become more important and influential than the negotiators imagined when the side agreements were completed in the fall of 1993. Specifically, the Secretariat’s reporting mandate (article 12), information-gathering functions (article 13), ability to receive citizen submissions (article 14) and capacity to establish a factual record (article 15)  of any violations gives the Secretariat a function and purpose independent of the CEC, headed by the three countries’ environment ministers. Although the intent of the entire NAAEC was limited to a focus on the enforcement of domestic environmental laws as embodied by the state-tostate dispute settlement mechanisms, the relative independence and function of the Secretariat allowed the institution to evolve into something more robust. Specifically, the Secretariat has become an important focal point for epistemic communities in sharing scientific information about a range of domestic and trans-border environmental issues (VanNijnatten & Craik 2015). Moreover, the citizen submissions, the annual reports and the repository of factual records have maintained a focus on the environment in North America that might not otherwise have existed.

The side agreements, free trade and the USMCA Perhaps most important of all, the NAAEC did for the nexus of environment and trade much as the NAALC did for labour and trade: they both firmly planted the issue on the global trade agenda. The global trading regime, including virtually every regional arrangement subsequent to the NAFTA, began incorporating text on the environment directly into the agreements. Although the institutional design of many of these agreements may leave much to be desired where independent enforcement or binding dispute settlement are concerned, contemporary texts are much more elaborate and embedded into the heart of such agreements. The text of the Trans-Pacific Partnership (TPP-12) is, once again, comparatively instructive. In addition to explicitly stating the inappropriateness of manipulating or weakly enforcing environmental statues for the purposes of trade (TPP article 20.2.3 and 20.3.4), the TPP-12 text lays down a long list of markers of norms the agreement hoped to establish among the parties. Indeed, new norms of practice were spelled out around protection of the ozone layer (article 20.5), protecting the maritime environment from ship pollution (article

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20.6), corporate social responsibility (article 20.10), trade and biodiversity (article 20.13), invasive species (article 20.14), the transition to a low-carbon economy (article 20.15) and conservation (article 20.17). Interestingly, in the cases of both labour and the environment, the text of the TPP-12, from which the Trump administration withdrew, has been directly incorporated into the new USMCA. In fact, the environmental provisions of the new USMCA are indistinguishable from the TPP-12 text, which is ironic given the rhetoric from the administration about the TPP-12, the NAFTA and matters related to climate change. The institutional mechanisms of chapter  24 of the USMCA remain strongly statist: disputes will be handled through state-to-state diplomacy (USMCA article 24.26). However, the most fascinating part of the USMCA’s environment chapter – and a major difference with the TPP-12 text  – is the formal insertion of the CEC and Secretariat directly into the text (USMCA article 24.25 and 24.27). In essence, the form and function of the CEC and Secretariat around information gathering, citizen submission and the formulation of a factual records as evolved from the NAAEC will now be a part of the USMCA. The CEC and Secretariat were unique by-products of the NAFTA, never replicated under any agreement concluded by any of the three NAFTA parties – until the USMCA. The USMCA perpetuates a degree of institutional weakness also established by the NAFTA: it has no supranational institutions or enforcement power to independently enforce or raise environmental standards. However, the NAFTA established a precedent formally connecting labour, the environment and trade. Compared with the NAALC, the NAAEC has become the more robust of the two in terms of longevity and impact – particularly given the centrality of the CEC in the USMCA. Yet the NAFTA side agreements both left an important legacy foundation upon which norms around labour and the environment are being advanced, perhaps at some point towards some form of supranational governance of labour and environmental issues in the context of the rules of international trade.

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8

NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?

After nearly three decades of the NAFTA as a political “piñata for pandering pundits and politicians”, what has changed with the agreement’s “modernization” in the form of the United States–Mexico–Canada Agreement (Pastor 2011:  ch. 1)? Much like the incessant debates about the merits of the NAFTA itself, one’s assessment of the USMCA, or the way in which it came into being, depends on your point of view. If the NAFTA was indeed the “worst agreement ever negotiated”, as President Trump frequently opined, or one is fundamentally opposed to trade liberalization, then renegotiation and replacement with the USMCA are not a positive outcome. If genuine “modernization” of the NAFTA was one’s goal, and by “modernization” one hoped to deepen trilateralism through greater cooperation, liberalization and institutionalization, the USMCA will also disappoint. Finally, there were also those who recognized the political potency of contemporary anti-trade populism and hoped simply to maintain the status quo. Of the three camps, those hoping to preserve the “status quo” have the most to cheer about. The NAFTA was not formally scrapped, as the Trump administration had initially threatened. Moreover, the USMCA effectively updates the NAFTA by including topics and disciplines not considered in 1994, a number of which were the subject of the NAFTA’s never completed built-in agenda. Table 8.1 comparatively lists the table of contents, or topics, for the NAFTA, the Trans-Pacific Partnership (prior to US withdrawal) and the USMCA. There are certainly major differences between the NAFTA and the USMCA: 34 core chapters in the USMCA (not including annexes and side letters), compared with just 21 for the NAFTA. Even when topics covered mirror each other, such as chapter  4’s rules of origin, the USMCA text is several orders longer than the original NAFTA; however, as noted elsewhere in this volume, the extra length is not necessarily an improvement. However, what is abundantly clear is that the genetic material of the USMCA can be traced to the NAFTA’s architecture. Although the NAFTA itself proved hard to update, amend or complete via its many working groups, trade

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Table 8.1 NAFTA and its descendants NAFTA (January 1994)

TPP-12 (February 2016)

USMCA (October 2018)

Preamble 1. Objectives 2. General definitions 3. National treatment and market access 4. Rules of origin 5. Customs procedures 6. Energy and basic petrochemicals 7. Agriculture and sanitary and phytosanitary measures 8. Emergency action 9. Standards-related measures (technical barriers) 10. Government procurement 11. Investment 12. Cross-border trade in services 13. Telecommunications 14. Financial services 15. Competition policy, monopolies and state enterprises 16. Temporary entry for business persons 17. Intellectual property 18. Publication, notification and administration of laws 19. Review and dispute settlement in AD/CVD matters 20. Institutional arrangements and dispute settlement procedures 21. Exceptions 22. Final provisions

Preamble 1. Initial provisions and general definitions 2. National treatment and market access 3. Rules of origin 4. Textiles and apparel 5. Customs administration 6. Trade remedies (antidumping/ countervailing duties) 7. Sanitary and phytosanitary measures 8. Technical barriers to trade 9. Investment 10. Cross-border trade in services 11. Financial services 12. Temporary entry for business persons 13. Telecommunications 14. Electronic commerce 15. Government procurement 16. Competition 17. State-owned enterprises 18. Intellectual property 19. Labour 20. Environment 21. Cooperation and capacity building 22. Competitiveness and business facilitation 23. Development 24. Small and mediumsized enterprises 25. Regulatory coherence 26. Transparency and anti-corruption 27. Administrative and institutional provisions 28. Dispute settlement 29. Exceptions 30. Final provisions

Preamble 1. Initial provisions and general definitions 2. National treatment and market access for goods 3. Agriculture 4. Rules of origin 5. Origin procedures 6. Textiles and apparel 7. Customs administration and trade facilitation 8. Recognition of Mexican ownership of hydrocarbons 9. Sanitary and phytosanitary measures 10. Trade remedies 11. Technical barriers to trade 12. Sectoral annexes 13. Government procurement 14. Investment 15. Cross-border trade in services 16. Temporary entry 17. Financial services 18. Telecommunications 19. Digital trade 20. Intellectual property 21. Competition policy 22. State-owned enterprises 23. Labour 24. Environment 25. Small and mediumsized enterprises 26. Competitiveness 27. Anti-corruption 28. Good regulatory practices 29. Publication and administration 30. Administrative and institutional provisions 31. Dispute settlement 32. Exceptions and general provisions 33. Macroeconomic policies and exchange rate matters 34. Final provisions

NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?

negotiators from all three NAFTA countries continued building upon the foundation put in place by the NAFTA in other negotiations. In many respects, the Trans-Pacific Partnership represented a culmination of that building for each of the three NAFTA countries when they were signatories to that text in January 2016. The table of contents for the TPP is also depicted in Table 8.1, even more clearly showing the evolution of these trade agreements from the NAFTA to the USMCA. In the early 1990s electronic commerce, digital trade and regulatory transparency were not significant trade topics. However, we can see with the advent of the TPP and USMCA that such topics are now subjects of negotiation. The other striking thing about the USMCA is how closely it mirrors the TPP – striking because withdrawing the United States from the TPP was among the first tasks of President Trump upon assuming office in January 2017. Yet the compressed timeline for NAFTA renegotiation initiated in mid-2017, and the fact the same negotiators from all three countries had just completed the TPP a year beforehand, meant that the TPP inevitably served as a starting point for “modernizing” the NAFTA. The previous chapters of this volume have outlined a number of the merits and weaknesses of the NAFTA and how the politically polarizing qualities of the agreement stood in the way of its amendment, and discussed how these dynamics had fuelled calls for modernization for most of the last three decades. The brief sketch of major changes to the governance of the North American economic space that follows fall into two categories: “modernization”, as defined in terms of areas of North American governance that both needed and received updates in the USMCA; and those areas of “retreat”, wherein the USMCA represents a significant deterioration in what the NAFTA began.

Modernization One of the most important areas of modernization for the NAFTA may turn out to be the name itself. Although the United States–Mexico–Canada Agreement, or its abbreviation, USMCA, do not roll of the tongue smoothly, a name change may turn out to be politically welcome. Rhetorically, the NAFTA became a political battering ram used for the purpose of bludgeoning political opponents. Those that used it had seldom read the agreement, never acknowledged its limited scope and liberally assigned to the NAFTA responsibility for multiple social ills unconnected to trade. The reality is that the “NAFTA” became radioactive, symbolic of anything and everything perceived to be wrong with the trade policy, the global economy, capitalism or modernity itself. Even agreements that rhyme with NAFTA were politically poisonous. Between January 2003 and January 2009 the United States, the Dominican Republic and a

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group of five Central American countries negotiated what is known in the United States as the Dominican Republic–Central American Free Trade Agreement, or CAFTA-DR. Opponents of the CAFTA in the United States, such as Public Citizen, gleefully, but erroneously, attacked the CAFTA as being some kind of extension of the NAFTA, “NAFTA on steroids” or part of a NAFTA-inspired neoliberal plot to undermine the environment, organized labour and American consumers.1 Of course, the use of the term “NAFTA” to bludgeon opponents was only aided by the political vacuum left by supporters of the agreement unwilling to defend its merits. It remains to be seen whether “USMCA” will catch on linguistically. Indeed, “NAFTA 2.0” seems much more straightforward, although it is doubtful whether North American integration will ever have as many revisions to its DNA as the various computer operating systems from which this bit of colloquialism is derived.

Modernized NAFTA? Sure Even those who viewed the USMCA negotiations mostly as a defensive victory aimed at preserving some semblance of the NAFTA’s status quo have to acknowledge there were important improvements. First and foremost, in spite of President Trump formally withdrawing the United States from the Trans-Pacific Partnership in early 2017, it was that same text that became the default starting point for the USMCA. The irony of using the text of an agreement rejected by the Trump administration is hard to ignore, but, as Table 8.1 depicts, the TPP included the most up-to-date content areas and language being used in trade negotiations by all three countries. There are important updates to areas such as intellectual property, telecommunications, and financial services around which frustratingly little progress had been made by the many working groups created by the NAFTA’s so-called built-in agenda. Other areas of the USMCA include topics and disciplines never contemplated in the NAFTA negotiations. Areas that are entirely new include digital trade, small and medium-sized enterprises and regulatory practices. Others, such as state-owned enterprises, competitiveness and competition policy, are no longer bundled together as under the NAFTA but now merit distinct treatment. And, of course, whereas labour and the environment were dealt with outside the main text of the NAFTA, bundled together in side agreements, the USMCA updates and embeds them in the main text.

1. Public Citizen, “Global trade watch”:  www.citizen.org/our-work/globalization-and-trade (accessed 14 March 2019).

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NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?

The final point regarding the modernization of the NAFTA and how much of the TPP ended up in the USMCA concerns the unfortunate, unorthodox process by which the Trump administration engaged in this process. No matter where one looked, the negotiating process appeared rushed and, at times, incoherent. In many ways, the compressed timeline was a double-edged sword regardless of where one stood on the merits of the NAFTA. Legally mandated public consultations in all three countries were rushed, negotiating positions in all areas were never completely fleshed out and the Trump administration’s specific complaints and demands obsessively focused on just a couple of areas. The obsession with major changes to the rules of origin requirements, including a minimum wage provision, consumed the lion’s share of the negotiating space throughout 2017/18. Given the withering criticism of the NAFTA and the TPP by Donald Trump during the 2016 presidential election campaign, it is surprising that so much of the USMCA contains text effectively cut and pasted directly from the TPP. That said, the political pressure to get an agreement done quickly necessitated the use of existing templates, which may have done more to preserve the status quo and “update” the NAFTA than a more normalized trilateral process could have achieved. The Trump administration had the capacity to focus only on a small subset of issues, the result being that the USMCA looks a lot like the TPP. Those for whom the cancellation of the NAFTA was a distinct fear breathed a sigh of relief that more damage had not been done.

A retrograde NAFTA? Yes, that too However, the news is not all good for proponents of NAFTA modernization. Indeed, for all the parallels between the USMCA and the TPP, there are many reasons to read the USMCA as having taken several steps away from modernization. First and foremost, the USMCA represents a significant decline in the already tenuous nature of trilateralism described in Chapter  3 of this volume. A  significant part of the decline can be seen in the negotiating process itself. The Trump administration’s obsession with some of the unique bilateral issues in US–Mexican relations resulted in a negotiation process that appeared at times to be on two different tracks: a US–Canadian track and a US–Mexican track. The emphasis on Mexico undermined the semblance of trilateralism and exploited the tepidness of the relationship between Ottawa and Mexico City. In the spring of 2017, when the NAFTA renegotiation process was launched, all three NAFTA parties maintained that it would be a trilateral negotiation aimed at modernizing the existing structure. Canada and Mexico, in particular, made

159

FREEING TRADE IN NORTH AMERICA

public efforts to project solidarity in their dealings with Washington. Indeed, the Canadian prime minister, Justin Trudeau, and the Mexican president, Enrique Peña Nieto, made a public show of some new-found solidarity in advance of a June 2016  “three amigos” summit that included President Obama. That solidarity lasted through the announced modernization of the NAFTA in March 2017 and all the way through the early summer of 2018, when Canada suddenly disappeared from the negotiations. Officially, the Canadians were in regular communication with their Mexican and American counterparts, as those two parties sorted out issues specific to the bilateral relationship. However, when the United States and Mexico suddenly announced in late August 2018 that they had struck a deal, it put significant pressure on Canada not only to re-engage with the process but to find some way to strike a deal or be left out. Whether Canada’s absence at the negotiating table during the summer of 2018 was a by-product of US preference for dual bilateralism or Canadian and Mexican indifference towards one another is not as important as the impact of a generalized lack of conviction on the part of all three parties to trilateralism. By almost any standard of evaluation, the USMCA significantly degrades the notion of North America as a trilateral economic zone. Instead of building upon the tenuous, but real, trilateralism embodied by the NAFTA, the USMCA eats away at it in several ways, once again reducing North America to two bilateral relationships anchored by Washington, DC. Three specific areas of the text are indicative of the decline in trilateralism. First, the US obsession with toughening the rules to qualify for tariff-free treatment in North America was clearly oriented towards protecting American workers from the perceived effects of low-cost Mexican labour, particularly in automobile manufacturing. Labour rights advocates can certainly get behind the new minimum wage requirement as a component of the much higher threshold for tariff-free treatment. Yet one does not have to be overly cynical to conclude that concern for the rights and living standards of Mexican labourers was not top of mind for US negotiators. Indeed, making Mexican production less competitive relative to that in Canada and the United States on the basis of wages alone was a fairly obvious objective. The USMCA also undermines trilateralism by scrapping the application of dispute settlement to trade remedy laws in the US–Mexican context. In other words, disagreements between Mexico and the United States over dumping and subsidies will no longer have recourse to dispute settlement mechanisms as laid out in NAFTA chapter 19. Canada, on the other hand, much as it had in both the NAFTA and Canada–US free trade negotiations, insisted the USMCA contain these provisions. Hence, the NAFTA’s chapter  19 dispute settlement mechanisms will continue to apply in the Canada–US bilateral context. As noted in Chapter 6 of this volume, the NAFTA’s dispute resolution around trade

160

NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?

remedy has never been without criticism. Yet, with the exception of a few especially contentious disputes, chapter 19 has been an effective mechanism, giving Canada and Mexico (but also US interests) an additional set of mechanisms through which to make a reasoned case for resolution. Hence, giving up on dispute settlement over trade remedy laws represents a bizarre concession by the Mexicans given how hard they had fought for them in the NAFTA. Only slightly less concerning is the lack of alarm at this development by Canada, since the mechanisms’ reduction to bilateral applicability merely weakens their import. A similarly odd set of developments transpired where investment disputes are concerned. As noted in Chapter  5 of this volume, the type of investor– state dispute settlement mechanisms contained in NAFTA chapter  11 began raising controversies in the 1990s whenever they were deployed. In response to critiques, a number of civil society organizations had been lobbying for governments to eliminate ISDS altogether. Many governments responded by incorporating important reforms into newer trade agreements; others proposed eliminating ISDS entirely. When Canada and the European Union concluded their large preferences agreement in 2016 (the Comprehensive Economic and Trade Agreement), it contained ISDS but also an important set of commitments to actively promote Europe’s international investment court idea in all future trade agreements. Under the USMCA, Canada and the United States have agreed to eliminate the bilateral application of dispute settlement in investment. Mexico and the United States, on the other hand, have agreed to continue with the application of ISDS, but only in a narrowly defined set of sectors  – mostly government contracting related to petrochemicals. In each of these areas, the USMCA has eroded the broad application of trade rules to all three countries. Instead, we now have an uneven patchwork of trilateral and bilateral rules in important areas under the USMCA that undercuts the broader objective of a unified, efficient North American economic space.

Retrograde trilateralism There are other oddities within the USMCA that give pause for concern. For starters, unlike most trade agreements, the USMCA makes explicit reference to the management of macroeconomic policy, including exchange rates (chapter 33). There is a connection between macroeconomic policy and trade, but explicitly including these two policy areas inside a trade agreement has seldom been done beforehand. President Trump’s (or his advisors’) mistaken belief that trade deficits can be dealt with through trade policy may be responsible for the attachment of a currency provision to the USMCA. However,

161

FREEING TRADE IN NORTH AMERICA

currency manipulation is a political football, typically managed by finance ministries and through broader negotiations over exchange rate stability and fiscal imbalances. It remains to be seen whether chapter 33 will play a significant role in the USMCA, but the insertion of macroeconomic issues directly into the text of a trade agreement may generate unpredictable outcomes. There is also an obsession with state-owned-enterprises (chapter  22) and non-market economies (article 32.10) in the USMCA wherein none of the three USMCA parties seems to actually be the target of the agreement’s disciplines. Indeed, when coupled with chapter 33’s focus on macroeconomics and exchange rates, it is not hard to conclude that these provisions are mostly about China. Specifically, article 32.10 allows for the cancellation of the USMCA if any of the three parties to it concludes a major trade agreement with a non-market economy. The negotiators may as well have replaced “non-market economy” with “China”. It will be interesting to see how these provisions are ultimately interpreted given that, in the ensuing year since completion of the USMCA negotiations, the United States has been actively pursuing a negotiated resolution to a host of trade issues with China. Finally, the NAFTA contained provisions for formal withdrawal, embedded in chapter 20. Under these provisions, any of the NAFTA parties could withdraw six months after formal notification of their intent to do so (NAFTA article 2205). The USMCA contains a nearly identical formal withdrawal mechanism (USMCA article 34.6). However, unlike the NAFTA, the USMCA now contains a kind of sunset review process by which the agreement will automatically terminate after 16 years unless unanimously extended by the parties (article 34.7.1). Moreover, after just six years in operation, the three parties are required to meet and indicate in writing whether they want the agreement extended (article 34.7.2–3). All extensions will be subject to the same six-year reviews, in which the future of the USMCA will again hang in the balance (article 34.7.4–5). For the populist trade sceptics in the Trump administration, these reviews are all about retaining as much latitude as possible to pull out of agreements that no longer “work” in US interests. Reviews of the operation of trade agreements are not inherently problematic. Indeed, the NAFTA Commission met annually to do exactly that, periodically publishing guidance as to how the three governments wanted the agreement to be interpreted. The difference with the USMCA is that it will not live on in perpetuity pending an active move to extend. Indeed, the USMCA will automatically expire without the active support of all three governments to extend it. The problems this creates for private sector investment and supply chain management decisions are obvious. Long-term decision-making about these issues needs a degree of certainty about the stability of the trade and investment regime that will be in place, which, under the terms of the USMCA, is simply not there.

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NAFTA 2.0: DID THE USMCA MODERNIZE ANYTHING?

Could have been worse Although the USMCA failed to build upon the trilateral scaffolding laid down by the NAFTA in 1994, and in several respects is a considerable setback, it has to be acknowledged that the outcome could have been much worse. The contemporary politics of economic integration are much more favourable to the destruction of such arrangements than their deepening. By comparison, the chaotic effort by the United Kingdom to extract itself from the European Union is much more complicated than a withdrawal from the NAFTA by the Trump administration. Indeed, the shallow level of North American integration would make such a break-up slightly less complex. Yet the politics and rhetoric surrounding Britain’s membership in the European Union and America’s participation in the NAFTA are not dissimilar, and could easily have put North America on a similar precipice about the economic and political future of the region. The USMCA still has a number of hurdles to overcome before it can formally replace the NAFTA. Indeed, the outcome of the November 2018 US midterm elections has cast considerable uncertainty over the legislative future of the USMCA in the United States. There is considerable potential for bipartisan agreement about the terms of the USMCA text as currently written. However, Democratic opposition to Donald Trump’s presidency, as well as the non-trade chaos seemingly swirling around the White House, may push legislative consideration of the USMCA into the next Congress and the next president (2021) to deal with. Assuming that President Trump does not formally withdraw from the NAFTA in an effort to press consideration of the USMCA, the original NAFTA will live on and continue to polarize our discussion of what North America is and what it can become. For some, the NAFTA remains a down payment on a return to Turtle Island, and an integrated, efficient and cohesive vision of North America with fewer divisions demarcated by borders. For others, the NAFTA will remain the symbol of everything that is wrong with the global economy, trade and investment policy and the erosion of the sovereign state. It is perhaps a useful debate about the future of North America worth having, and one the NAFTA sparked and will undoubtedly continue to fuel.

163

APPENDIX 1

SPAGHETTI BOWL OF COMMITMENTS BY THE 12 TRANS- PACIFIC PARTNERSHIP SIGNATORIES

165

Table A1.1 Framing the spaghetti/noodle bowl: regional trade agreements involving TPP-12 members, 2017 Australia Australia Brunei

Brunei

Canada

ASEAN

Chile

Japan

Malaysia

2009

2015

2013

2008

ASEAN

2007

2012

ASEAN

Canada

1997

Chile

2009

1997

Japan

2015

2008

2007

Malaysia

2013

ASEAN

2012

2006

1999

2005

Mexico

1994/9

New Zealand

1983

Peru

2018*

Singapore

2003

ASEAN

Vietnam

ASEAN

ASEAN

United States

2005

ASEAN

2010 2009

2009

2014

1989/94

Argentina ASEAN

2006

2012 2002

ASEAN

2009

ASEAN

2008

1993

2004

1991 2010/12

1993

Bahrain

2004

Bolivia

1993

(GCC)

Brazil CAFTA-DR+++ China

2015

ASEAN

2006

Colombia

2011

Costa Rica

2002

2009

Cuba D-8*** Ecuador

2010

ASEAN

Mexico

New Zealand

Peru

Singapore

Vietnam

1983

2003

ASEAN

ASEAN

ASEAN

ASEAN

1994/9

2009

1999

2009

2005

2012

United States

1989/94 2014 2002

2004

2009

2011 2010

2012

ASEAN 2008

2012

2009 2008

1994

2009

2009

ASEAN ASEAN

2004

1987 2010/12

1993

1993

(GCC)

2006

1995/2010 2003 2006/9 2008

2010

2009

1995 1995

2009 2012

2013

2013

CAFTA-DR

2001

1987 (continued)

Table A1.1 (Cont.) Australia

Brunei

Canada

Chile

EFTA+

2009

2004

EU

2017

2003

Japan

Malaysia

2018*

Eurasia** GCC++

2013

Honduras Hong Kong

2014 2018*

India Indonesia

ASEAN*

2014

ASEAN

2007

2018*

Israel

1997

Jordan

2012

MERCOSUR‡‡

ASEAN* 2011

2011

2008

ASEAN

1996

Morocco Mongolia

2016

Nicaragua OIC‡

2014*

Oman

GCC

Pacific Alliance‡‡‡ Pacific Is.

2016 2017*

Pakistan

2008

Panama

2013

2008

Paraguay Philippines South Korea

2008 2014

ASEAN

2015

2004

ASEAN

Sri Lanka Switzerland Taiwan

EFTA

ASEAN

2007

Mexico

New Zealand

2001

Peru

Singapore

2011

2003

Vietnam

United States

2000 2016 2013 2001

2017 2011

ASEAN

CAFTA-DR ASEAN*

ASEAN*

2005

ASEAN

ASEAN

ASEAN

2000

1989/96 2010

2006 2006

1996

CAFTA-DR

2016

GCC

2009

2006

2012

2016 2017

1986/2015

2012

1994/2000

2015

2011

ASEAN

ASEAN

2006

ASEAN

2012

2018 EFTA 2013

2015

2014 (continued)

Table A1.1 (Cont.) Australia Thailand

Brunei

Canada

2005

Turkey Ukraine

Chile

Japan

Malaysia

2015

ASEAN

2011

2015

2017

Uruguay Venezuela

1993

Notes: * = pending ratification. ** = “Eurasia”: Russia, Armenia, Belarus, Kazakhstan, Kyrgyz Republic. *** = eight developing countries (D-8 Organization for Economic Cooperation): Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan, Turkey. + = European Free Trade Association: Iceland, Lichtenstein, Norway, Switzerland. ++ = Gulf Cooperation Council: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates. +++ = Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua. ‡ = Organisation of Islamic Cooperation: 57 member states; for list, see www.oic-oci.org/states/?lan=en.

Mexico

New Zealand

Peru

Singapore

Vietnam

2009

ASEAN

ASEAN

United States

2017

2004 1995

2013

‡‡ = Argentina, Brazil, Paraguay, Uruguay. ‡‡‡ = Chile, Colombia, Mexico, Peru. Sources: Asian Regional Integration Center, “Free trade agreements”: http//aric.adb,org/database/ fta; Australian Government, Department of Foreign Affairs and Trade, “Australia’s free trade agreements”: http://dfat.gov.au/trade/agreements/Pages/trade-agreements.aspx; Government of Canada, “Trade and investment agreements”: www.international.gc.ca/trade-commerce/tradeagreements-accords-commerciaux/agr-acc/index.aspx?lang=eng; Organization of American States, “Trade agreements in force”: www.sice.oas.org/agreements_e.asp; Office of the United States Trade Representative, “Free trade agreements”: https://ustr.gov/trade-agreements/free-trade-agreements.

APPENDIX 2

US TRADE IN GOODS AND SERVICES WITH NAFTA PARTNERS, 1989– 2017

173

Table A2.1 US merchandise trade, 1989–2004 (billions of US dollars) Partner

Canada Exports Imports Total Balance

1989

1990

1991

1992

1993

1994

1995

1996

1997

78.3 83.0 88.2 91.4 166.5 174.3 –9.9 –8.4

85.1 91.1 176.3 –6.0

90.2 98.5 188.7 –8.3

100.2 110.9 211.1 –10.7

114.3 128.9 243.2 –14.7

126.0 145.1 271.1 –19.1

132.6 156.5 289.1 –23.9

150.1 168.1 318.2 –17.9

33.3 31.2 64.5 2.1

40.6 35.2 75.8 5.4

41.6 39.9 81.6 1.7

50.8 49.5 100.3 1.3

46.3 61.7 108.0 –15.4

56.8 73.0 129.8 –16.2

71.4 85.9 157.3 –14.5

Mexico Exports Imports Total Balance

25.0 27.2 52.2 –2.2

28.4 30.2 58.6 –1.8

World Exports Imports Total Balance

363.8 473.4 837.2 –109.6

393.0 473.4 866.4 –80.4

421.9 447.5 496.0 488.8 917.9 936.3 –74.1 –41.3

464.9 532.1 997.0 –67.2

512.4 580.5 1,092.9 –68.1

583.0 663.8 1,246.9 –80.8

622.8 687.6 743.5 870.2 1,366.3 1,557.8 –120.7 –182.6

NAFTA Exports Imports Total Balance

103.2 115.4 218.6 –12.2

111.3 121.5 232.9 –10.2

118.4 122.3 240.8 –3.9

130.8 133.7 264.4 –2.9

141.8 150.9 292.7 –9.1

165.1 178.4 343.5 –13.3

172.3 206.8 379.2 –34.5

189.3 229.5 418.8 –40.1

221.5 253.9 475.4 –32.4

NonNAFTA Exports Imports Total Balance

260.5 358.0 618.5 –97.5

281.6 351.9 633.5 –70.2

303.4 316.7 373.7 355.2 677.1 671.9 –70.3 –38.5

323.0 381.2 704.2 –58.2

347.3 402.2 749.4 –54.7

410.7 457.0 867.7 –46.3

433.5 514.0 947.5 –80.5

466.1 616.3 1082.4 –150.2

1998

1999

2000

2001

2002

2003

2004

Per cent change, 1989– 2004

Per cent Per cent change, change, 1993– 2000–2004 2004

154.2 174.8 329.0 –20.7

163.9 198.3 362.2 –34.4

176.4 229.2 405.6 –52.8

163.7 217.0 380.7 –53.2

160.8 210.6 371.4 –49.8

169.5 224.2 393.6 –54.7

187.7 139.8 255.9 190.1 443.6 166.5 –68.2

87.4 130.7 110.1

6.4 11.7 9.4

79.0 94.7 173.7 –15.7

87.0 109.7 196.8 –22.7

111.7 135.9 247.6 –24.2

101.5 131.7 232.9 –29.9

97.5 134.7 232.3 –37.2

97.5 138.1 235.5 –40.6

110.8 343.7 155.8 473.3 266.6 411.2 –45.1

166.1 290.3 226.9

–0.8 14.7 7.7

693.3 723.7 816.5 124.5 1,163.5 1,259.4 1,469.5 210.4 1,856.8 1,983.1 2,286.0 173.1 –470.3 –535.7 –652.9

75.7 176.2 129.3

4.6 20.8 14.5

680.5 913.9 1,594.4 –233.4

233.2 269.6 502.7 –36.4

447.3 664.3 1091.6 –197.0

692.8 780.4 731.0 1,024.8 1,216.9 1,142.0 1,717.6 1,997.3 1,873.0 –331.9 –436.5 –410.9

251.0 308.0 559.0 –57.1

288.2 365.1 653.3 –77.0

265.2 358.4 613.6 –83.2

258.3 345.3 603.7 –87.0

266.9 362.2 629.2 –95.3

298.5 189.1 411.8 256.8 710.3 224.9 –113.3

110.5 173.0 142.7

3.6 12.8 8.7

441.9 492.3 465.8 716.7 851.8 793.6 1158.6 1344.0 1259.3 –274.9 –359.5 –327.8

434.9 818.2 1253.2 –383.3

456.8 897.2 1354.0 –440.4

518.1 98.8 1057.7 195.4 1575.8 154.8 –539.6

60.4 177.5 123.8

5.2 24.2 17.2

Table A2.2 US merchandise trade, 2003–2017 (billions of US dollars) Partner

2003

2004

2005

2006

2007

2008

2009

2010

Canada Exports Imports Total Balance

169.9 221.5 391.4 –51.6

189.8 256.3 446.1 –66.4

211.8 290.3 502.1 –78.5

230.6 302.4 533 –71.8

248.8 317.1 565.9 –68.3

261.1 339.4 600.5 –78.3

204.6 226.2 430.8 –21.6

249.2 277.6 526.8 –28.4

Mexico Exports Imports Total Balance

97.4 138.0 235.4 –40.6

110.7 155.9 266.6 –45.2

120.2 170.1 290.3 –49.9

133.7 198.2 331.9 –64.5

135.9 210.7 346.6 –74.8

151.2 215.9 367.1 –64.7

128.8 176.6 305.4 –47.8

163.6 229.9 393.5 –66.3

World Exports 723.74 816.55 904.38 Imports 1,259.40 1,469.67 1,670.94 Total 1,983.14 2,286.22 2,575.32 Balance –535.65 –653.13 –766.56

1,037.14 1,855.12 2,892.26 –817.98

1,162.71 1,953.70 3,116.41 –790.99

1,300.14 1,056.93 2,100.14 1,557.88 3,400.28 2,614.81 –800.01 –500.94

NAFTA Exports Imports Total Balance

364.3 500.6 864.9 –136.3

384.7 527.8 912.5 –143.1

412.3 555.3 967.6 –143.0

672.72 1,353.44 2,026.16 –680.73

777.73 1,429.79 2,207.52 –652.06

887.68 723.21 1,548.67 1,156.43 2,436.35 1,879.64 –660.99 –433.22

267.3 359.5 626.8 –92.2

300.5 412.2 712.7 –111.6

332 460.4 792.4 –128.4

NonNAFTA Exports 456.80 518.06 572.91 Imports 897.16 1,057.90 1,212.87 Total 1,353.96 1,575.96 1,785.78 Balance –440.35 –539.84 –639.96

333.4 402.8 736.2 –69.4

1,278.49 1,913.86 3,192.35 –635.36

412.8 507.5 920.3 –94.7

865.57 1,406.23 2,271.80 –540.66

2011

2012

2013

2014

2015

2016

2017

Per cent change, 2003– 2017

Per cent change, 2003– 2008

Per cent change, 2008– 2017

281.2 315.3 596.5 –34.1

292.6 324.2 616.8 –31.6

300.7 332.5 633.2 –31.8

312.8 349.2 662.0 –36.4

280.8 296.3 577.1 –15.5

266.7 277.7 544.4 –11.0

282.2 299.3 581.5 –17.1

39.7 25.9 32.7

34.9 34.7 34.8

7.4 -4.8 -3.2

198.2 262.8 461.0 –64.6

215.8 277.5 493.3 –61.7

225.9 280.5 506.4 –54.6

241 295.7 536.7 –54.7

236.4 296.4 532.8 –60.0

230 293.9 523.9 –63.9

243.3 314.2 557.5 –70.9

59.9 56 57.8

35.5 36.1 35.8

37.8 31.2 34.1

1,482.51 1,545.82 1,578.52 1,621.87 2,207.95 2,276.27 2,267.99 2,356.36 3,690.46 3,813.81 3,846.51 3,978.23 –725.45 –730.45 –689.47 –734.48

1,503.33 2,248.81 3,752.14 –745.48

1,451.02 2,187.60 3,638.62 –736.58

1,546.27 53.1 2,341.96 46.2 5,184.89 61.7 –795.69

44.3 40.0 41.6

16.0 10.3 34.4

479.4 578.1 1057.5 –98.7

517.2 592.7 1109.9 –75.5

496.7 571.6 1068.3 –74.9

525.5 613.5 1139.0 –88.0

35.1 35.2 35.2

21.5 9.4 15.0

48.50 42.06 28.00

13.00 10.30 11.30

508.4 601.7 1110.1 –93.3

526.6 613.0 1139.6 –86.4

553.8 644.9 1198.7 –91.1

1,002.93 1,037.30 1,051.81 1,068.05 1,629.76 1,674.41 1,654.93 1,711.34 2,632.69 2,711.71 2,706.74 2,779.39 –626.83 –637.12 –603.12 –643.29

986.01 954.24 1,656.07 1,615.89 2,642.12 2,570.13 –670.06 –661.66

49.1 41.4 44.9

1,020.69 55.2 1,728.38 48.1 2,748.76 50.7 –707.68

Table A2.3 US trade in cross-border services, 1989–2003 (billions of US dollars) Partner

1989

1990

1991

1992

1993

1994

1995

1996

1997

Canada Exports Imports Total Balance

13.3 8.6 22.0 4.7

15.7 9.1 24.8 6.6

17.8 9.7 27.5 8.1

17.3 8.3 25.6 9.0

16.9 8.9 25.8 8.0

17.0 9.7 26.7 7.3

17.7 10.8 28.5 6.9

19.3 12.2 31.5 7.1

20.3 13.7 34.0 6.6

Mexico Exports Imports Total Balance

4.8 6.7 11.6 –1.9

8.6 6.7 15.3 1.9

9.7 7.1 16.7 2.6

10.5 7.3 17.7 3.2

10.4 7.4 17.8 3.0

11.3 7.8 19.2 3.5

8.7 7.9 16.6 0.8

9.4 8.9 18.3 0.5

10.8 9.8 20.6 0.9

World Exports Imports Total Balance

117.9 85.3 203.2 32.6

137.2 98.2 235.4 39.0

152.4 99.9 252.4 52.5

163.6 102.0 265.6 61.6

171.1 107.8 278.9 63.3

186.1 118.3 304.4 67.7

203.1 126.8 329.8 76.3

221.4 136.9 358.3 84.5

237.9 150.0 387.8 87.9

NAFTA Exports Imports Total Balance

18.1 15.4 33.5 2.8

24.3 15.9 40.1 8.4

27.4 16.8 44.2 10.6

27.7 15.6 43.3 12.1

27.3 16.3 43.7 11.0

28.3 17.5 45.8 10.7

26.4 18.7 45.2 7.7

28.7 21.2 49.9 7.6

31.1 23.5 54.6 7.6

NonNAFTA Exports Imports Total Balance

99.8 69.9 169.7 29.9

113.0 82.3 195.3 30.6

125.0 83.2 208.2 41.9

135.9 86.4 222.3 49.4

143.8 91.5 235.2 52.3

157.8 100.8 258.6 57.0

176.6 108.0 284.6 68.6

192.6 115.7 308.4 76.9

206.8 126.4 333.2 80.3

1998

1999

2000

2001

2002

2003

Per cent change, Per cent change, 1989–2003 1993–2003

19.3 15.1 34.4

22.5 16.1 38.5

24.4 17.6 42.0

24.5 17.6 42.1

24.3 18.4 42.7

26.7 19.1 45.9

100.6 121.6 108.8

58.0 114.5 77.5

11.6 9.8 21.4

12.8 9.5 22.3

14.3 11.0 25.3

15.2 10.5 25.7

15.9 11.1 27.0

16.6 11.7 28.3

244.2 73.5 144.8

59.7 57.6 58.8

243.8 163.6 407.4 80.2

264.7 180.5 445.2 84.2

283.5 204.7 488.1 78.8

275.5 201.6 477.2 73.9

279.5 205.2 484.7 74.3

294.1 228.2 522.3 65.9

149.4 167.6 157.0

71.9 111.7 87.3

30.9 24.9 55.8 6.0

35.3 25.6 60.8 9.7

38.7 28.6 67.3 10.1

39.7 28.1 67.8 11.6

40.2 29.5 69.7 10.7

43.3 30.8 74.1 12.5

138.8 100.6 121.2

58.6 88.7 69.9

212.9 138.5 351.5 74.3

229.4 155.0 384.4 74.5

244.8 176.1 420.9 68.7

235.8 173.5 409.3 62.3

239.3 175.8 415.1 63.5

250.8 197.4 448.1 53.4

151.3 182.3 164.1

74.4 115.8 90.5

Table A2.4 US trade in cross-border services, 2003–2017 (billions of US dollars) Partner

2003

2004

2005

2006

2007

2008

2009

2010

2011

Canada Exports Imports Total Balance

27.56 19.97 47.53 7.59

29.52 21.21 50.73 8.31

32.79 22.58 55.37 10.21

37.85 23.92 61.77 13.93

42.66 25.69 68.35 16.97

45.37 25.97 71.34 19.40

43.46 23.69 67.15 19.77

53.12 27.35 80.47 25.77

58.31 30.51 88.82 27.80

Mexico Exports Imports Total Balance

18.50 12.52 31.02 5.98

19.45 13.90 33.35 5.55

22.53 14.42 36.95 8.11

23.8 14.87 38.67 8.93

24.97 15.33 40.30 9.64

26.23 15.90 42.13 10.33

22.94 14.02 36.96 8.92

24.61 13.96 38.57 10.65

26.43 14.66 41.09 11.77

World Exports Imports Total Balance

289.97 242.22 532.19 47.75

337.97 373.01 416.74 488.40 283.08 304.45 341.17 372.58 621.05 677.46 757.91 860.98 54.89 68.56 75.57 115.82

532.82 409.05 941.87 123.77

512.72 386.80 899.52 125.92

562.76 409.31 972.07 153.45

627.06 435.76 1,062.82 191.30

NAFTA Exports Imports Total Balance

46.06 32.49 78.55 13.57

55.32 61.65 67.63 37.00 38.79 41.02 92.32 100.44 108.65 18.32 22.86 26.61

71.60 41.87 113.47 29.73

66.40 77.73 37.71 41.31 104.11 119.04 28.69 36.42

84.74 45.17 129.91 39.57

NonNAFTA Export Imports Total Balance

243.91 209.73 453.64 34.18

289.00 317.69 355.09 420.77 247.97 267.45 302.38 331.56 535.97 575.14 657.47 752.33 41.03 50.24 52.71 89.21

461.22 367.18 828.40 94.04

446.32 349.09 795.41 97.23

542.32 390.59 932.91 151.73

48.97 35.11 84.08 13.86

485.03 368.00 853.03 117.03

2012

2013

2014

2015

2016

2017

Per cent Per cent Per cent change, change, change, 2003–2017 2003–2008 2008–2017

61.94 31.13 93.07 30.81

62.85 30.77 93.62 32.08

60.97 30.12 91.09 30.85

54.69 29.28 83.97 25.41

54.36 30.58 84.94 23.78

54.44 33.02 87.46 21.42

97.5 65.3 84.0

64.6 30.1 50.1

19.99 27.15 22.6

28.19 15.44 43.63 12.75

29.86 17.25 47.11 12.61

30.14 19.89 50.03 10.25

31.44 22.87 54.31 8.57

31.65 24.09 55.74 7.56

32.87 25.49 58.36 7.38

77.7 103.6 88.1

41.8 27.0 35.8

25.31 60.31 38.52

655.72 700.49 741.09 755.31 758.89 797.69 452.01 461.09 480.76 491.97 509.84 542.47 1,107.73 1,161.58 1,221.85 1,247.28 1,268.73 1,340.16 203.71 239.40 260.33 263.34 249.05 255.22

175.1 124.0 151.8

83.7 68.9 80.0

49.71 32.62 42.29

87.31 58.51 145.82 28.8

89.6 80.0 85.6

55.5 28.9 44.5

21.94 39.74 28.51

565.59 607.78 649.98 669.18 672.88 710.38 405.44 413.07 430.75 439.82 455.17 483.96 971.03 1,020.85 1,080.73 1,109.00 1,128.05 1,194.34 160.15 194.71 219.23 229.21 217.71 226.42

191.3 130.8 163.3

89.1 75.1 82.6

54.02 31.8 44.17

90.13 46.57 136.70 43.56

92.71 48.02 140.73 44.69

91.11 50.01 141.12 41.10

86.13 52.15 138.28 34.13

86.01 54.67 140.68 31.34

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INDEX

acquisition, 90, 91 Agreement on Environmental Cooperation, 134, 136, 137, 150, 152 annex 23-A, 149, 150 anti-dumping and countervailing duties, 42, 59 anti-trade, 139, 155 article XXIV, 21, 22, 23, 24, 25, 40, 75, 76, 79, 80 Association for Canadian Studies in the United States (ACSUS), 55 asymmetries of power, 12, 26, 48, 49, 122, 129 behind-the-border (BTB), 30 bilateral investment treaties (BITs), 81, 85, 86, 87 bipartisan agreement, 163 borders, 2, 3, 29, 31, 32, 68, 163 Bretton Woods, 10, 21, 74 Bush, George H. W., 13, 16, 61 byproduct, 74, 81, 150, 160 Canada’s Foreign Investment Review Agency (FIRA), 89, 90, 91, 92 Canada–US Free Trade Agreement (CUFTA), 92, 94, 127, 128 capital outflows, 69, 91 Centro de Dialogo y Analisis Sobre America del Norte (CEDAN), 54 Clarkson, Stephen, 7, 55 Clinton, Bill, 16, 74, 135, 136, 141, 146, 152 Cold War, 4, 8, 9, 44, 75, 106 commercial peace theory, 9, 72 Commission for Environmental Cooperation (CEC), 136, 152, 154 common market, 32, 44 Common Market of the Southern Cone (MERCOSUR), 8

comparative advantage, 70, 71, 76, 77, 140, 141 Comprehensive and Progressive TransPacific Partnership, 120 Comprehensive Economic and Trade Agreement (CETA), 104, 105, 106, 161 customary international law, 84, 98, 102 customs union, 7, 22, 30, 31, 33, 75, 77 Davos, 14, 94 de la Madrid, Miguel, 14, 93 democratic peace theory, 72 deregulation, 91, 93 developed country, 87, 97 Diaz, Porfirio, 14 dispute settlement mechanism, 42, 72, 73, 81, 82, 86, 120, 127, 130, 147, 151, 153, 160 economic growth, 8, 62, 103, 124 economic nationalism, 10, 12, 20, 22, 50, 74, 79 employment and wages, 70 Energy Charter Treaty, 103, 104, 106 European Economic Community (EEC), 44 European project, 9, 19, 35, 39, 43, 45, 48, 50, 53, 122 European Regional Development Fund (ERDF), 44 exchange, 28, 33, 61, 74, 76, 90, 91, 92, 136, 140, 156, 161, 162 expropriation, 15, 81, 85, 86, 87, 88, 90, 92, 94, 98, 99, 100, 101, 102, 105, 107, 120 financial services, 67, 69, 97, 158 foreign direct investment (FDI), 5, 69, 76, 81, 84, 85, 88 foreign-controlled firms, 89, 90 Fox, Vicente, 11, 15, 52, 57, 58 Free Trade Area of the Americas (FTAA), 8

197

INDEX

Free Trade Commission (FTC), 101, 130, 131, 134 General Agreement on Tariffs and Trade, 8, 12, 17, 21, 40, 75, 151 giant sucking sound, 16, 69 global economy, 7, 9, 16, 17, 18, 21, 55, 82, 123, 144, 146, 157, 163 Gore, Al, 16 governance structures, 122 Great Depression, 10, 20 imposition, 91, 92, 107, 127, 151 inefficiency, 23, 79, 140 institutional mechanisms, 5, 36, 100, 135, 136, 149, 154 institutionalization, 5, 24, 26, 42, 72, 82, 106, 123, 129, 150, 155 integrated markets, 9 International Bank for Reconstruction and Development (IBRD), 21 international law, 92, 98, 99 International Monetary Fund (IMF), 17, 21 interventionist, 149 investment arbitration, 72, 73, 81, 101 investment climate, 91, 94 investment protections, 86, 102, 103 investor-state dispute settlement (ISDS), 107, 125, 161 jurisprudence, 99, 100, 102 labour rights, 145 liberal capitalism, 8 limitations, 26, 30, 62, 107, 144, 145, 146 Lisbon Treaty, 44, 45 longevity, 133, 150, 154 low taxes, 91 Maastricht Treaty, 9, 39, 44, 50 Macdonald Commission, 13 macroeconomic, 15, 66, 121, 161 minimum wage, 59, 147, 159, 160 modernization, 6, 8, 9, 12, 155, 157, 159, 160 modernization theory, 8, 9, 12 monetary union, 33, 34, 35, 49 Monnet, Jean, 4, 10, 11, 44, 53, 54, 187, 188 Mulroney, Brian, 13, 14, 92 multilateral trading system, 20, 21, 40, 46, 74, 106 national currencies, 9, 34 National Energy Program (NEP), 89, 90, 91

198

nationalized, 15, 92, 94, 126 New International Economic Order (NIEO), 87 Nixon Shocks, 13 non-tariff barriers, 27, 30 North American Accord, 6, 12, 15, 46 North American Commission for Labor Cooperation (NACLC), 74 North American Commission on Environmental Cooperation (NACEC), 74 North American Development Bank (NADBank), 52 North American economic space, 31, 42, 157, 161 North American Free Trade Agreement, 1, 4, 19, 25, 39, 41, 61, 62, 65, 100, 107, 121, 130, 143, 155, 158, 159 North American idea, 5, 6, 7, 8, 11, 12, 13, 15, 16, 17, 18, 26 North American integration, 1, 7, 20, 27, 30, 32, 34, 42, 48, 52, 54, 77, 158, 163 North American Leaders’ Summit, 135 North American political economy, 11 North American Security and Prosperity Partnership (SPP), 58, 135 oil and gas, 90, 93, 120, 126 outsourcing, 82, 107, 142 ownership, 87, 89, 90, 94 Partido Accion Nationale (PAN), 57 Partido Revolucionario Institucional (PRI), 57 Pastor, Robert, 7, 18, 19, 20, 30, 122 Perot, Ross, 16, 69 peso crisis, 18, 62, 70, 148 piñata, 16, 19, 155 policy reforms, 22, 92 political capital, 16, 17, 46 political sensitivity, 73 political union, 34, 35, 45 pooled sovereignty, 24, 25, 26, 27, 30, 32, 122, 123 populism, 11, 32, 155 preferences arrangements, 24 private property, 85, 86, 90, 91, 92, 93, 96, 98, 99 privatized, 15, 94 protectionism, 13, 21, 23 ratification, 16, 120, 128, 147, 170 Reagan, Ronald, 11, 14, 46 Reciprocal Trade Agreements Act, 10

INDEX

regional trading arrangements, 23, 40 rhetoric, 47, 91, 154, 163 rules-based trade, 9, 21 Salinas, Carlos, 13, 14, 15, 88, 93, 94 shallowness, 35, 36, 56, 125, 147 Shengen Agreement, 44 solidarity, 58, 160 sovereign power, 22, 26, 102 sovereign state, 15, 163 spaghetti bowl, 165 state-owned-enterprises, 162 state-to-state, 42, 73, 120, 132, 133, 147, 152 supply chain management, 162 supranational institution, 24, 25, 46, 49, 154 sustainable market-driven growth, 8 tariff free treatment, 148, 160 telecommunications, 42, 67, 120, 133, 158 temporary entry, 47, 68, 134, 143, 144 TN visas, 144, 145 trade adjustment assistance, 142 trade liberalization, 4, 17, 24, 27, 71, 135, 140, 141, 142, 143, 146, 149, 150 trade remedy laws, 73, 126, 127, 128, 129, 130, 160

trade-offs, 22, 24, 26, 30 Trans-Pacific Partnership, 79, 105, 107, 126, 130, 145, 146, 148, 153, 155, 157, 158 Trans-Atlantic Trade and Investment Partnership (TTIP), 104, 105 transparency, 55, 91, 107, 127, 129, 157 Treaty of Rome, 44, 50 trilateralism, 56, 58, 155, 159, 160, 161 triumphalism, 9 Trudeau, Justin, 58 Trudeau, Pierre, 89, 90 Trump, Donald, 11, 18, 47, 58, 159, 163 Turtle Island, 1, 2, 5, 6, 15, 163 United Nations Commission on International Trade Law (UNCITRAL), 85, 87 United Nations Conference on Trade and Development (UNCTAD), 30, 87 United States–Canada–Mexico Agreement (USMCA), 139, 157, 161, 162, 163 Vattenfall, 104, 105 wage rates, 62, 71, 107, 141, 142, 148, 149 World Trade Organization (WTO), 21 xenophobia, 139, 146

199