North American Free Trade

A new continentalism took hold on February 5, 1991, when the leaders of Canada, Mexico and the United States announced they would negotiate a North American Free Trade Agreement. NAFTA, if and when completed, will reshape corporate strategies, redraw the mental map of citizens in each country and gradually create a North American economic identity based on global competition.

NAFTA is the product of longstanding trends in both Mexico and Canada toward sharing production with U.S. companies and conducting more than 70 percent of their trade with the United States. The decision to deepen and formalize these economic ties, however, is a qualitative change that may prove politically challenging as well as economically rewarding. Advocates of open economic borders will have to compete with insular nationalists, ideas for innovative trinational cooperation with restrictive notions of sovereignty, liberalization with protectionism, and market philosophies with residual populism.

Mexican President Carlos Salinas de Gortari set this process in motion in June 1990 when he requested a free-trade agreement with the United States. He thus reversed decades of inward-looking policies and, in effect, toppled a wall of mistrust in U.S.-Mexican relations. The Bush administration quickly recognized that the moment was ripe for a historic political reconciliation. This reconciliation has rippled throughout Latin America, replacing fears of U.S. hegemony with a pragmatic interest in hemispheric free trade.

A year after Salinas' initial request, negotiators held their first substantive meeting in Toronto, on June 12, 1991, forming working groups on market access, trade rules, services, investment, intellectual property and dispute settlement. A final treaty could be presented as early as the beginning of 1992, well before U.S. presidential elections, or in early 1993, well before Canadian elections. The timing of the talks is thus designed to avoid politicization, which would complicate the task of making difficult concessions and achieving truly comprehensive economic liberalization.

But what forces have brought the United States, Mexico and Canada to this point? What difficulties does NAFTA present for all three nations, and what are its multilateral implications? In short what does the future hold for this new continental configuration?

II

Mexico's economy malfunctioned in the 1980s under the strain of its 60-year history of statism, economic nationalism and single-party rule. After falling oil prices, the mounting debt crisis and the exhaustion of import-substitution policies brought the economy to the brink of collapse in 1982, Mexican leaders were left little choice but to seek alternative growth strategies. Economic reform was born of necessity.

During the term of President Miguel de la Madrid, 1982-1988, Mexico jettisoned its statist policies-privatizing enterprises, trimming deficits, promoting exports and entering the General Agreement on Tariffs and Trade (GATT). It has since virtually eliminated import licenses and reduced tariff rates to the current nine percent average.

De la Madrid may not have realized it, but he laid the groundwork for NAFTA as he transformed the nation's export profile. Mexico's exports shifted from oil, for which the market is global, to manufactures. Manufactured goods soared to 55 percent of all exports in 1989 from 14 percent in 1982. And with 85 percent of its manufactured exports destined for its northern neighbor, secure access to U.S. markets became increasingly important. The move toward free trade thus began in the 1980s, when Mexico signed a series of agreements to guard against potential U.S. protectionism, including one on subsidies and another on a framework for investment and trade. The decision to seek NAFTA is the logical culmination of these trends.

International factors also reinforced Mexico's leaning to free trade. Oil sales and commercial loans would no longer finance the nation's growth. Foreign investment is now essential to the success of Mexico's economic reform, and assured access to U.S. markets is Mexico's best hope to spark an investment boom. This is especially true in today's competitive world investment climate. The east European revolutions and the need for capital inflows because of the U.S. trade and budget deficits have reshaped world financial demand and supply patterns. German reunification costs are estimated to total upwards of $600 billion and Polish, Czechoslovakian and Hungarian needs seem modest compared to those of the U.S.S.R. Moreover Persian Gulf reconstruction has absorbed Saudi and Kuwaiti resources. A free-trade agreement could help Mexico avoid suffering capital shortages.

Mexico's turn toward the United States thus reflects a rigorous facing of the facts. Dreamers may advocate trade integration with Latin America, but the region absorbs only a tiny fraction of Mexican exports. The uncertain prospects of accessing European Community markets after the EC's 1992 unification and the difficulty of penetrating Asian markets propelled Mexico toward NAFTA. The world appeared to be forming into regional blocs, and Mexico did not want to be left out. Ensuring against protectionism in its principal market seemed wiser than pursing the chimera of trade diversification.

But Mexico's economic opening and corresponding but less comprehensive political opening have posed major dilemmas for President Salinas. The decision to pursue a free-trade agreement was a stunning political act-heretical in some Mexican intellectual and political circles-and it defies Mexico's long history of defensive nationalism. This is a country haunted by the ghost of Malinche, the daughter of a local Indian ruler who was forced to betray her country by becoming the consort and adviser of its Spanish conqueror, Hernando Cortés. It is a nation that has suffered a string of traumas at the hands of foreign powers: the United States conquered half of Mexico's national territory in 1848, Napoleon III installed a Hapsburg emperor in 1864 and the United States occupied Veracruz and Tampico in 1914.

It is little surprise then that traditional Mexican nationalists see hegemonic designs in a free-trade agreement and fear a loss of cultural identity and national sovereignty. Salinas is nonetheless gambling that stagnation is riskier than violating outdated political taboos. Like Japan in the late nineteenth century, Mexico has decided that its sovereignty is best defended by opening to the outside.

III

Driving Mexico's decision to challenge political orthodoxy is a new style and generation of leadership. Older generation politicians tended to study law at national schools and matured under the influence of the Cuban Revolution. Most of the Salinas team, by contrast, received advanced degrees in economics from U.S. universities and are inspired by the economic success of Asia's newly industrialized countries. President Salinas, for example, has a strong personal interest in Japan and sends his children to Japanese schools. Three generations removed from the Mexican Revolution and conscious of Mexico's youthful population, the Salinas team has modernized and fundamentally changed Mexico's economic and political doctrines.

The easing of Cold War tensions and the winding down of Central American conflicts also facilitated a rapprochement with the United States. The electoral defeat of the Sandinistas in Nicaragua in 1990 lessened bilateral frictions over regional policy. The lowering of ideological tempers in the transition from the Reagan administration to the more pragmatic Bush administration also made it easier for Salinas to move closer to the United States.

The path to economic reform has nonetheless been difficult. Presidents de la Madrid and Salinas paid a high price for the economic mismanagement of their predecessors. The transition to economic openness entailed painful 40-percent income declines, high unemployment and left a backlog of social needs unattended. Mexico's 62-year-ruling Institutional Revolutionary Party (PRI) was taken to task in the 1988 presidential elections when Cuauhtémoc Cardenas Solórzano, the son of a revered former president, broke with the party to run on a populist platform. A chastened Salinas claimed a historically slender 50.74 percent of the vote and was forced to acknowledge the end of the single-party state. The pain of Mexico's own perestroika had unleashed the uncertainties of glasnost.

Pursuing NAFTA has become an integral part of Mexico's race to consolidate economic reform while coping with the uncertainties of political liberalization. Salinas entered office with an urgent need to make economic reform yield rapid growth, lest it be reversed by an impatient electorate and a populist opposition that viscerally rejects economic openness. A free-trade agreement would enshrine Mexico's market policies and provide some assurance against policy deviations, such as the 1982 bank nationalization under President José Lopez Portillo. The post-Salinas continuity implied by a free-trade agreement will reassure international investors seeking predictability and stability. The future costs of withdrawing from an agreement would be high, disrupting trilateral political relations and economic constituencies that, by then, will rely on export growth. More important, NAFTA could jumpstart the Mexican economy and end the stagnation that devastated the middle class and threatened to further impoverish the nation's poorest. The best guarantee of the permanence of economic reform is improved social welfare. Whoever assumes Salinas' mantle may find that economic continuity is the best policy.

President Salinas has moved gradually on political reform to safeguard the institutionalization of his economic policies. He has made the irreversibility of economic reform a precondition to democracy. Economic restructuring, he may have observed, flourished after delaying a democratic transition in South Korea, whereas it has yet to follow from the beginning of political reform in the Soviet Union. But critics charge that Salinas has pursued "perestroika without glasnost."1 Others imply that a free-trade agreement would help preserve the status quo with U.S. complicity. Indeed Mexico's history of dubious electoral practices makes political reform essential if modernization is to be complete.

Critics nonetheless tend to downplay significant, if gradual, trends toward political liberalization, such as a more impartial electoral law passed in 1989, efforts to improve the voter registration list and opposition victories at congressional, state and local levels. A free-trade agreement may help reinforce decentralized economic decision-making, erode the dirigiste tendency of an authoritarian state and decouple the economy from exclusive party control. Liberalized politics tend to accompany liberal economics.

Successful economic liberalization is an important ingredient in easing democratic transitions. Such was the case in Chile. There the coalition of President Patricio Aylwin Azócar was careful not to upset economic policies that had brought consistent growth. Consensus on economic policy moderated the extreme left and undercut the scare tactics of the right. A free-trade agreement could inspire a similar consensus in Mexico, softening resistance to political opening. Mexico's left may be complicating the task of democratization by staking out unrealistic positions.

World events have themselves undermined the intellectual position of Mexico's left, increasing Salinas' margin of political maneuver and permitting policies unthinkable only a few years ago. Mexico's free-market orientation was legitimated as the devastation of the east European, Soviet and Cuban economies became apparent. The pragmatism of socialists like France's François Mitterrand and Spain's Felipe Gonzalez also validated Mexican policy. Political opponents are thus finding it hard to capitalize on the free-trade initiative, which polls show to be popular. Indeed one survey found that 59 percent of Mexicans would support the formation of a single nation with the United States, if that signified a better quality of life, suggesting basic attitudinal changes in Mexican nationalism and anti-Americanism.2 Support for NAFTA has wooed Mexico's business and middle classes back to the fold of the PRI and permitted Salinas to straddle the center.

Mexico's free-trade strategy is already delivering results. Between January 1989 and March 1991, $13 billion entered the country, $8.4 billion (64 percent) in the form of direct foreign investment and $4.7 billion (26 percent) as other inflows, including capital repatriations. Gross domestic product grew by 3.9 percent in 1990 to $230 billion, the fourth consecutive year of growth. Economic growth associated with free trade could make possible the reconciling of political and economic reform. Salinas' gamble appears to be paying off.

IV

Mexico is not just another distant geopolitical interest for the United States. Geography alone dictates that neither country can escape the influence of the other. Mexican author Adrián Lajous Martínez captured the fate of the two nations graphically when he likened them to Siamese twins, warning that if one becomes gangrenous, the other twin will also be afflicted. U.S. interest in a free-trade agreement with Mexico must be interpreted in this context.

Mexico's economic crisis drove home this point. In 1982, when Mexico nearly defaulted on its debt, the fate of more than one U.S. banking giant hung in the balance. Main Street U.S.A. lost more than 300,000 export jobs as the Mexican economy nose-dived in the 1980s, and in this period millions of Mexicans crossed the border illegally looking for work. As Mexico's recession ground on, U.S. policymakers contemplated the nightmarish implications of a destabilized Mexico for border security and American commitments around the globe. The lesson of Mexico's economic crisis is that the United States would rather have Spain than Peru on its border; it is not in the U.S. interest to have a well of Third World misery on its southern frontier. Free trade is not a panacea to cure Mexican underdevelopment, but it may be the best chance to promote growth and stability.

Less tangible but equally important is the new political culture of bilateral or trilateral relations implicit in a free-trade agreement. Mexico's traditional political culture viewed U.S. proximity as a curse, not an opportunity. Bilateral cooperation was limited or conducted under a cloak of secrecy; Mexican leaders did not wish to be accused of consorting with the enemy. In pursuing a free-trade agreement, however, Mexico has focused on common interests and the opportunities of the U.S. market. It is laying the ghost of Malinche to rest.

With a free-trade agreement the United States is likely to have a more effective partner in managing the tasks and tensions inevitable in a complex relationship, troubled by issues ranging from drugs to the environment. In contrast to the past, deliberate efforts are now being made to contain conflict in the interest of broad cooperation. The United States is also seeking to avoid high-handed tactics, such as the kidnapping of Mexican national Humberto Alvarez Machain, implicated in the case of slain U.S. Drug Enforcement Administration agent Enrique Camarena Salazar, which would have paralyzed relations in earlier years. Qualitative leaps in cooperative drug enforcement and the revival of the annual cabinet-level Binational Commission are byproducts of this new bilateral relationship.

Mexico has also reoriented its diplomacy in light of its pragmatic economic self-interest. Mexico previously flirted with the Eastern bloc, cast anti-American votes in the United Nations, undermined U.S. regional goals, lent support to Cuban-sponsored guerrillas and romantically awaited an apocalyptic crisis in U.S. capitalism. But the image of Mexican presidents embracing Fidel Castro has now been supplanted by visits to Camp David. Indignant speeches about the perfidies of economic imperialism have been replaced by addresses to the World Economic Forum in Davos, Switzerland. Mexico's offer to increase oil production during the Persian Gulf crisis points in the same direction. A free-trade agreement may mean the difference between a friendly or ambivalent neighbor, and between shared goals or regional conflict.

Salinas' request for a free-trade agreement was virtually assured of a warm response from a Texan president needing little education in the geopolitical or economic importance of Mexico. Texas is first to feel a Mexican downturn, and southwestern constituencies have been the first to benefit from a trade-driven boom along the border. President Bush also has been sensitive to the political risks Salinas has taken in launching a rapprochement with the United States. A rebuff of NAFTA would unsettle Mexico's economic progress and vindicate voices in Mexico and throughout Latin America who warn that the United States cannot be trusted. U.S. enthusiasm for free trade with Mexico, however, is not a product of a commitment to personalities or parties but to policies that it judges will best result in a friendly, stable and prosperous neighbor.

In purely economic terms the United States profits from Mexico's own prosperity. U.S. exports to Mexico increased from $12.4 billion in 1986 to $28.4 billion in 1990 as the Mexican economy recovered. This generated hundreds of thousands of U.S. jobs. About 70 percent of Mexico's imports come from the United States. As Mexico earns more from exports, it buys more from the United States. Most major macroeconomic studies of a U.S.-Mexican free-trade agreement project growth in U.S. jobs.3

NAFTA will enhance U.S. competitiveness vis-à-vis Europe and Asia through the economies of scale and specialization in production to be achieved with continental rationalization. Trinational clarity of investment rules will provide a stable environment for long-term production strategies. Most attractive is the production-sharing option within North America. Production-sharing is a strategy that Asia and Europe have used to great advantage in penetrating U.S. markets. Japan, for example, has deliberately shifted labor-intensive production to less-developed neighbors in Asia. A North American production-sharing alliance will help U.S. industries gain competitiveness in a world where multipolar geoeconomic rivalry is supplanting bipolar geostrategic conflict.

A policy that achieves U.S. strategic purposes, improves the management of an essential bilateral relationship and furthers U.S. commercial interests is especially valuable in an era of budgetary restraint. In short, twin geoeconomic and geopolitical forces have converged to make NAFTA an attractive option for the United States.

V

The first steps toward North American trade integration were taken with the Canada-U.S. Free Trade Agreement (CAFTA), which went into effect on January 1, 1989. Canadian motivations in seeking a free-trade agreement were similar to Mexico's. Canadian trade is heavily weighted toward the United States, making guaranteed market access important to producers. Canada, too, lingered on the "third option" of diversifying its trading partners before facing the reality of trade geography. Sectoral arrangements were also considered before opting for a full-fledged free-trade agreement.

Mexico's decision to seek a free-trade agreement with the United States came as an awkward surprise for Canada at a time when Ottawa was grappling with domestic ethnic strife, Quebec's separatist urges and the future of the federation. Canada found it difficult to focus on continental trade integration when the nation itself seemed to be disintegrating.

Canada's decision to participate in the negotiations did not come easily. The prospect of reopening controversial free-trade decisions was daunting. Liberal Party opponents, who had uneasily digested the argument that Canada needed guaranteed access to U.S. markets, were now told that they would have to protect their preferences all over again. Indeed Canada fought a bitter 1988 election over the free-trade issue. Labor unions, environmentalists, church groups and cultural nationalists allied to fight CAFTA and have remobilized to fight free trade with Mexico. Prime Minister Brian Mulroney, now in a weakened political position, cannot relish the thought of renewed controversy. Unlike the United States, Canada does not yet enjoy a large export market in Mexico, nor does it face a pressing geopolitical rationale. The benefits of including Mexico are long term and abstract, while to opponents the dangers seem immediate.

Canada decided to participate in NAFTA because it could not afford to be absent from the negotiating table. Canadian exports often mirror those of Mexico, as in the automotive sector. Just as Mexico feared trade diversion due to Canada's preferential access to the U.S. market, so Canada faced a similar need to defend its trade interests. Canada also recognized that its traditionally favored position for U.S. foreign investment would face competition from Mexico. If the United States were to sign separate free-trade agreements with a multitude of countries, in what some have described as a "hub and spoke" arrangement, only the United States would have the preferential benefits of complete access to all markets.4 Canada would also lose the option of negotiating transitional arrangements for vulnerable sectors of its economy. Canadian participation was thus driven as much by the dangers of absence as by the benefits of participation.

Canada believes it will ultimately benefit from the economies of scale and the efficiencies, specializations and investment flows that follow regional integration. The evolution of integrated continental trade and investment structures will make it increasingly difficult to compete outside that framework. While trade between Canada and Mexico is now only $2.3 billion, it grew by 20 percent in 1990, leading some to believe it could double in the 1990s. Canada is betting on future Mexican growth and wants to get in on the ground floor.

VI

The politics of free trade have proven to be more complex than expected. Ironically, the trepidations have issued more from the industrialized United States than from Mexico. An array of environmentalists, labor unions and human rights activists mobilized in the United States with surprising energy seeking to block Congress' extension of presidential "fast track" authority to negotiate a free-trade agreement with Mexico. The introduction of new issues has stretched the traditional parameters of trade negotiations, and may set new precedents for trade and economic integration.

The environment was the surprise issue of the NAFTA debate. Environmentalists argued that free trade would lead companies to seek pollution havens in Mexico, deplete natural resources and lead to the downward harmonization of standards. The supposition that American firms would relocate in Mexico in search of lower pollution-control costs was not borne out by one study showing that of the 271 new plants constructed overseas by America's Fortune 500 companies, over 50 percent were in the EC, 20 percent in Asia and only 3 percent in all of Latin America.5 Similar logic suggests that California's strict regulatory environment has not hampered its ability to attract investment. Mexico's pollution problems nonetheless pose a health hazard for U.S. citizens in the border area, and Mexico's consumer exports must also meet U.S. safety standards.

Mainstream environmentalists temper concerns about ecology with sensitivity to Mexico's need for development. Environmental protection has been the luxury of rich industrialized nations. Trade-related growth could help Mexico break the vicious cycle of economic desperation that causes environmental degradation in many Third World nations. Trade talks offer environmentalists an opportunity to place their concerns on the negotiating table. Most acknowledge that Mexico is on a steep environmental learning curve and tends toward upward harmonization of standards with the United States. Compliance, however, is still spotty, and enforcement is hampered by a lack of budgetary resources and trained personnel.

NAFTA will establish new precedents regarding trade and the environment and must therefore weigh these issues carefully. The alar and dioxin scares point to the difficulty of making sensible trade-offs between safety, costs and standards based on scientific certainty. These trade-offs are particularly critical in poor countries that must ponder additional new costs to vulnerable consumers. Mexico has indicated a willingness to impose those costs, as when it mandated the use of catalytic converters on new cars. The challenge to NAFTA negotiators will be in reconciling urgent environmental concerns with cost, excessive regulation and the exportation of U.S. litigiousness.

Mexico's political disputes also entered into the NAFTA debate. Some Mexican opposition figures sought a U.S. venue to air their political complaints, implying that a free-trade agreement should be contingent on international observers to check for fraud in Mexican elections. A few U.S. congressmen questioned whether it was appropriate to deepen commercial ties with a nation that did not fully share Western democratic institutions. Most seem to have decided that while Mexico's political system is far from perfect, it is not a pariah state that warrants imposition of sanctions. Rather Mexico may be more likely to evolve toward democracy with a free-trade agreement, given that a market economy inevitably intensifies the free flow of ideas. Mexico's political situation ultimately was not a decisive issue for most members of Congress.

The core issues in the NAFTA debate revolve around a tug-of-war between a liberal attitude toward world free trade and a protectionist streak in the U.S. body politic. Protectionism was expressed in the form of fears about lost American jobs, sectoral winners and losers, and Mexico being used as an export platform by Asian countries. The AFL-CIO declared war on NAFTA, asserting that low-wage Mexican labor would entice U.S. companies and precipitate the loss of 500,000 American jobs. These claims probably overstate the likely impact of a free-trade agreement, given the large differences in labor productivity and the fact that Mexico's economy is one-twenty-fifth the size of America's.

The debate is propelled more by fundamental changes in the global economy and fears of the decline in advanced industrial societies. The trauma of Asian and European inroads to the North American market underlies much of the queasiness about NAFTA. Stagnant industrial productivity compared with Japan and Germany and persistent trade deficits have altered America's standing as the undisputed leader of the world economy. Import penetration from Asia and Europe has led to a misplaced protectionism, which has focused on Mexico.

The United States has yet to determine where to concentrate its competitive energies in the global economy. The strongest opposition to NAFTA comes from industries and unions that receive special quota and tariff protection, such as apparel and horticulture. These sectors not only oppose trade with Mexico but prefer to limit these imports from all sources. Yet the future of the U.S. work force is not in low-skill apparel jobs; arguments over low-wage Mexican labor misstate the challenge. The United States should not be competing with the low-wage Mexicos of the world, but with high-wage, high-technology nations like Germany and Japan.6

After extensive talks with Capitol Hill leaders, the White House responded to free-trade concerns with an "action plan" that expands the agenda of the trade talks to include noncommercial issues in parallel, multiple-track negotiations. The plan commits the U.S. Environmental Protection Agency and Mexican authorities to negotiate a comprehensive border agreement on environmental issues and to explore joint technical assistance and enforcement aid. Moreover it would preserve high U.S. environmental standards and offer nongovernmental environmental organizations a seat at U.S. trade representative advisory committees. The plan also promises to fund retraining of displaced workers and commits U.S. and Mexican labor departments to discuss labor standards and practices. Disputes over the size and scope of the labor-adjustment program will surely follow as labor attempts to extract a comprehensive labor-market policy from the administration. The action plan was nonetheless sufficient to win fast-track approval in both houses of Congress. Continued controversy is likely to make the final vote on NAFTA difficult.

The free-trade battle was especially divisive for Democrats. The Democratic National Committee passed a resolution against a free-trade agreement with Mexico, while the Democratic Leadership Council favored NAFTA. Democrats were forced to choose between organized labor and Hispanics, and between Sunbelt and Rustbelt constituents. Democrats who define themselves as friends of Latin America were torn between pressures at home and their foreign policy conscience. More than two-thirds of House Democrats ultimately voted against renewing fast-track negotiating authority, including 17 of the 22 Democratic committee chairmen. Interest group politics ruled the day: the textile- and shoe-producing southeast and northeast voted against fast-track; the auto and steel districts of Indiana, Illinois, Pennsylvania and Michigan followed suit; Sunbelt powerhouses like Texas, California and Florida favored fast-track and NAFTA.

The bruising battle over fast-track will leave its mark on the final document. Sensitive handling of the transition to free trade for weak sectors is important to mustering political support for a final agreement. Competitive industries can quickly adapt to a zero-tariff environment, but in sensitive sectors tariffs must be phased out slowly to prevent sudden closures and job losses. Safeguards such as tariff "snapbacks" to protect against import surges will also be considered.

The political challenge of NAFTA is to develop a trinational nonpartisan consensus on competitiveness and free trade. Four requirements stand out. First, free-traders must not sacrifice sensitivity and compassion for principle; there is no point denying that adjustment pressures exist. Second, in exchange for attention to its concerns labor, too, must end its ostrich-like denial of global economic realities. Labor has come to assume falsely that anyone who favors free trade is also anti-union. Third, all three nations must set their sights on improved economic competitiveness and so define NAFTA in the public domain. Finally is recognition that the cost of failure to achieve an agreement would be high. U.S.-Mexican relations would be set back a decade and North America would lose an opportunity to pursue a global competitive strategy, a fact that would be noticed by all trading nations.

VII

The NAFTA talks occur at a delicate moment in world trade. The GATT system was seriously strained by the December 1990 stalemate at the Brussels ministerial meeting over issues pertaining to intellectual property, agriculture and services. If the Uruguay Round stalls, or if only a minimal solution is cobbled together, confidence in the multilateral process will wane and tendencies toward regional or unilateral problem-solving will increase. Regionalism has maintained an uneasy coexistence with GATT largely because a parallel multilateral liberalization softened preferential features. A multilateral failure would only heighten concerns about a loosening of pan-Atlantic bonds and worries that NAFTA would succumb to discriminatory temptations.

Fears of bloc formation may be exaggerated. NAFTA is unlikely to violate GATT principles or raise external barriers. Global trade rules are a high U.S. priority given that 74 percent of U.S. trade is conducted outside North America. Similarly, Japan's trade with its Pacific neighbors constitutes only 35 percent of its total trade, again reinforcing GATT priorities. Only Europe shows signs of bloc behavior; the 12 EC members conduct about 70 percent of trade among themselves or within the European Free Trade Association.7 These trends explain why Japan has worried about the possible restrictive aspects of NAFTA, whereas the Europeans have been more sanguine.

Concerns about bloc formation also have overshadowed the salutary effect of NAFTA in quickly prodding Latin America to lower its external trade barriers. Jealousy over Mexico's favorable trade and investment position with the United States has Latin nations jostling to be next in the free-trade line. This feeling was amplified by President Bush's June 27, 1990, Enterprise for the Americas Initiative, which offers free trade in exchange for Latin American liberalization. Argentina, for example, announced tariff targets of 9 percent and Brazil is phasing tariffs to a target of 14.2 percent by 1994. South American tariff reduction and the elimination of import licensing benefit all exporters. Finally, most recent GATT members have come from Latin America, which will introduce new pressures on Europe and Asia to liberalize agriculture and other issues of interest to developing nations. Salinas' name was recently floated as a possible successor to GATT chief Arthur Dunkel, suggesting that Latin America's star in GATT is rising.

Progress in GATT may actually be furthered by a NAFTA that anticipates future directions in services, agriculture and investment. Regionalism, as in the case of NAFTA and Latin America, stimulates widening circles of liberalization that produce multilateral benefits. The formation of liberal regional groupings may ultimately create more manageable negotiating units for GATT. The challenge will be to sustain the vigor of multilateralism, enabling it to coexist with regionalism.

VIII

What does the future hold beyond NAFTA? What frictions might result from the close contact of a new relationship? Will NAFTA generate other forms of integration and, if so, what will North America look like 10 or 30 years from now?

Economic liberalization could transform the Americas within a generation. NAFTA signifies that Mexico has become a North American country, ready to share Western entrepreneurial values and participate in Western capital markets. Mexico is making this transition without relinquishing its Latin American identity, however, and will serve as an interlocutor between North, South and Central America. The Mexican example may spawn a host of aspiring little tigers. In the best of all possible worlds, Latin America may resemble a collection of nascent Spains.

This need not be a far-fetched scenario. Imagine a Mexico that reduces its demographic growth and sustains rapid economic expansion as a result of the specialization and productivity gains of a free-trade agreement. One need only recall that South Korea's per capita income was about half Mexico's in 1980 and that Italy was a labor-exporting country in the mid-1960s. Pioneering research suggests that Mexico may be able to increase the growth rate of its output per worker by 1.57 percent a year and increase its output per worker by 48 percent over 25 years, placing it roughly at Spain's level. U.S.-Mexican migration issues would become irrelevant, and the free movement of labor possible.8

The future will not be without problems. Some disagreement may surface between those who advocate more trilateral regulation and those who prefer more decentralization and sovereignty. These tendencies are already incipient. The left in all three countries seems more ready to minimize assertion of sovereignty, a trend embodied in ideas such as a trilateral social charter and uniform health, safety and environmental regulations. These North American equivalents of Jacques Delors may meet homegrown Margaret Thatchers who will resist the creation of NAFTA institutional and regulatory structures. Officials in all three countries insist on the limited nature of NAFTA. Indeed NAFTA as currently envisioned bears no resemblance to the EC, which sets common external tariffs, permits free movement of labor and plans for increasingly supranational political and regulatory institutions.

The gradual forces that over the past 30 years led to NAFTA could over the next 30 years lead to some additional degree of unity. Imagine, for example, a slow increase in informal macroeconomic cooperation. Mexico is already intensely motivated to achieve inflation rates comparable to its North American neighbors, and a tax treaty among the three countries is probable. The United States will be increasingly sensitive to the impact of its macroeconomic policies on its neighbors. It seems likely that over time differences in trade balances, currency valuations and fiscal policies will narrow. If so, mechanisms for joint financing of emergency trade imbalances may be considered. The creation of trinational dispute-resolution mechanisms and rule-making bodies on border and environmental issues may also be embryonic forms of more comprehensive structures. After all, international organizations and agreements like GATT and NAFTA by definition minimize assertions of sovereignty in favor of a joint rule-making authority.

A new North American political market of ideas may be another source of friction as cross-border politics becomes a feature of the NAFTA landscape. An interesting precedent was set with the cross-national coalitions formed among opponents of NAFTA during the fast-track debate. Partisans from the Pro-Canada Network made high-profile visits to Mexico City, while anti-treaty Mexicans lobbied alongside the AFL-CIO in the U.S. Congress. More broadly, political boundaries blur as Mexico cultivates U.S. Hispanic groups, Americans scrutinize Mexican elections and Canadian nongovernmental organizations expand their reach. The North American debate has become trilateralized with remarkable rapidity.

Cross-national regional integration will also be intensified. The border communities of northern Mexico and the U.S. southwest increasingly form part of the same economic and social body, with a shared anatomy in infrastructure and services. This integration is most pronounced in twin cities on the border like Ciudad Juarez and El Paso, but is also expanding to interior cities like San Antonio and Mexico's industrial hub, Monterrey. Even more distant U.S. states like Arkansas and Colorado are carefully considering their integration with north-south trade and transportation flows. Regional protectionist alliances between Ontario, the American midwest and Mexico City's left may be a persistent phenomenon.

Ultimately the three economies may blend into an integrated production network and share a universal, science-based culture that traces its roots to Francis Bacon. The modern denizens of urban Mexico will have more in common with their counterparts in Toronto and Chicago than with campesinos in rural Oaxaca.

The heat of the debate surrounding NAFTA suggests that the real and perceived costs of an agreement could revive populism and protectionism, especially if member economies suffer a long recession. Economic growth solidified commitment to trade liberalization in the EC and would do the same for NAFTA.

It may be useful to revisit the spirit of the Monnet Commission, which provided a blueprint for Europe at a moment of extraordinary opportunity. The three nations of North America, in more modest fashion, have also arrived at a defining moment. They may want to create a wiseman's North American commission to operate in the post-ratification period. One objective would be to report on the impact of the agreement during implementation, providing sober judgments that temper politicized charges and countercharges. The commission might also adopt a forward-looking agenda on themes such as North American competitiveness, links between scientific institutions, borderland integration, the continental ecological system and educational and cultural exchanges. The historic import of NAFTA calls for marshaling creative resources as never before to consider the future of North America.

1 Lorenzo Meyer, "Aqui, perestroika sin glasnost," Excelsior, Dec. 13, 1991.

2 "Economic Integration and Nationalism: Canada, the United States and Mexico," Este Pais, no. 1, April 1991, Mexico City.

3 Clopper Almon, Industrial Effects of a Free-Trade Agreement between Mexico and the U.S.A., for the U.S. Department of Labor, Sept. 15, 1990; The Likely Impact on the United States of a Free Trade Agreement with Mexico, U.S. International Trade Commission, Washington, D.C.; The Effects of a Free-Trade Agreement between the U.S. and Mexico, for the U.S. Council of the Mexico-U.S. Business Committee, prepared by the Policy Economics Group at Peat Marwick, Washington, D.C., 1991.

4 Richard Lipsey, "Canada at the U.S.-Mexico Free Trade Dance: Wallflower or Partner?" Commentary, no. 20, August 1990, C.D. Howe Institute, Toronto, Canada.

5 The Conference Board, U.S. Investment Abroad: Nineties Open with a Board, New York, Feb. 14, 1991.

6 Scholars for Free Trade with Mexico, letter to Congress signed by 24 scholars on April 10, 1991, and reprinted in The Wall Street Journal, April 24, 1991.

7 Jeffrey J. Schott, "Trading Blocs and the World Trading System," The World Economy, vol. 14, no. 1, 1991.

8 Timothy J. Kehoe, Free Trade and Economic Growth, Department of Economics, University of Minnesota, July 1991.