Requiem for the North American Idea

There are many things about the Trump Presidency that keep me awake at night. After Trump was elected, I was among those who turned to James Madison and the Federalist Nos. 10 and 51 for solace. I was certain the same institutional design that intentionally put so many barriers in the way of "getting things done" would constrain Trump's worst (but then not fully appreciated) excesses. My alarm at the damage being done grows by the day. In fact, as great as Madison's design is, I'm not sure it was designed to constrain this kind of aberrational president, nor the sustained assault on the core institutions of American democracy.

I openly wonder who is going to put the toothpaste back in the tube? Can it be put back? Trump didn't create this mess so much as he's a manifestation of a host of problems that have been simmering for a long time. Indeed, one of the most insightful comments I read during all of the memorials around Sen. John McCain's death is that in selecting Sarah Palin as his running mate in 2008, he played a significant role in laying the foundation of today's populist assault on the truth in the GOP

Rock Paper Scissors for Trade

To Trade or Not to Trade?

Of course, one of my interests is the global trading system and my alarm at the damage being done here is also acute. The amount of damage Trump has done to America's leadership credibility in global trade is going to take a very long time to repair. It's unclear to me that it can be repaired since, in my view, Trump has arrived at the most inopportune moment for resolving important problems within. Smarter, more thoughtful voices were already calling for significant changes to how the global trading system's rules were written. Of note here, the basis for the long-stalled Doha Round of the WTO launched in late 2001 was development; hence the name Doha Development Round. Indeed, issues important to the developing world were to be the center-piece of the Round, starting with agriculture. We know what has happened there.

Much as I turned to Madison to ease my concerns about the erosion of American political institutions during Trump's reign, I similarly sought solace in the rules of the global trading regime. "We'll be able to ride this out," I thought. Moreover, "we've seen this movie before." Indeed, xenophobia in the hands of anti-trade populists has been the weapon of choice for centuries. Yet, I reasoned that rules largely designed and underwritten by U.S. leadership would, even in the face of nonsense from Trump, not quickly be tossed aside.  It was in America's interests to stick to the rules. Not only had the United States been a financial beneficiary of open, rules-based trade, the political prestige and leadership benefits of being the "indispensable" country for that system would surely appeal to Trump's better senses (or at least his ego).

Nope.

Don's real goal

With his third Executive Order the day he assumed office, Trump formally withdrew U.S. consideration of the Trans Pacific Partnership (TPP); an own-goal of epic proportions strategically in Asia-Pacific. Oh, and don't forget that by virtue of Canadian and Mexican membership, the TPP would have effectively modernized the NAFTA. Arrrgh!!!! The Japanese gamely picked up the torch to try and salvage the remaining TPP-11, all-- I thought-- with the intent of either drawing Trump back in if he flip-flopped or waiting it out until a normal president entered the White House. We've seen ridiculous steel and aluminum tariffs levied against allies and trade rivals alike, all on national security grounds-- a flimsy argument that crosses a normative line against doing so and will undoubtedly be copied by many countries in the years ahead. Trump is evidently laying the groundwork to threaten tariffs on automobiles and parts on the same grounds. Sure.

There are, of course, the unilateral tariffs on Chinese imports, the latest round of which will seemingly impose a 10% tariff on an additional $200 billion of imports. Trump seems to think this is all buying him leverage at the bargaining table. It's an obvious point, but if he really wanted leverage to go after Chinese trade practices (some, it must be said, need to be addressed), he would have done better to partner with Europe to put some collective pressure on Beijing.

My horror at what's transpired, of course, is mostly focused on the NAFTA, or what remains of it. In a nutshell, Mexico has been picked off and we're headed toward a North America comprised of two deeply asymmetrical bilateral relationships that looks more like 1990 than it should in 2018.

NAFTA in the Bullseye

From the moment of its implementation in January 1994 until Trump almost withdrew from the NAFTA in March 2017, the Agreement has been a lightning rod for criticism of anything and everything that's perceived to be wrong with the economy. The NAFTA's supporters oversold what it could do, but detractors definitely overstated the degree to which it was responsible for anything that was going wrong.

Some not-Trump Leadership

It would nice if we could get a few things straight about the NAFTA's impact. It's the shallowest of the stages of integration, requires the fewest concessions of sovereignty of any form of integration, and brings the most straight-forward benefits-- the efficiency of tariff free trade on a non-discriminatory basis. Trump doesn't have the slightest idea what's in the NAFTA; truth be told, he's in depressingly good company there.  But, if he had, rather than assuming it's the "worst agreement ever negotiated" because it has laid waste to the American economy, he might be aghast at just how limited it really is.

A brave, but familiar face

Trump's near-withdraw from the NAFTA in 2017 morphed instead into two years of painful "renegotiation" or "modernization." The NAFTA needed modernization (more on that below), but as I have followed the talks thus far, I'm struck by how far away the outlines of NAFTA2.0 are from anything resembling the North American Idea.

The Idea

One of my very first blog posts here was a sort of obituary to Robert Pastor, a scholar, past U.S. National Security Council official, and one of the foremost advocates for an integrated, trilateral North American economic space. Those who knew Robert Pastor probably experienced his sharp elbows. He didn't suffer fools lightly. But he was a dogged advocate for the idea that North America could, and should, be genuinely trilateral. Virtually to the moment of his death in 2012, Pastor would talk to anyone and everyone about the many virtues of closer trilateral cooperation between the three countries.

Robert Pastor

He offered plenty of criticism to Mexico City and Ottawa when it was deserved, but some of his most vigorous efforts were made trying to convince his own countrymen of the merits of trilateralism. There were many. Apart from the economic efficiency that free trade could bring, Pastor firmly believed that more cooperation with Mexico City was part of the solution to a host of shared problems-- everything from border management, governance in Mexico, even the tensions around immigration reform in the United States. None of it was going to happen overnight, but he'd be horrified at just how many steps we've taken in exactly the opposite direction.

One of his most pointed critiques of Ottawa was the Harper Government's decision to throw Mexico under the bus in 2008, first by imposing a visa requirement on all Mexican nationals, and then actively courting Washington bilaterally out of the flawed belief Mexico was a dead weight. In Pastor's view (I agree), the re-bilateralization of North America was flawed since it exacerbated the asymmetrical relationships among the three countries and failed to acknowledge many of the shared interests Ottawa and Mexico City actually have in Washington. The Trudeau Government has made some efforts to re-build solidarity with Mexico City, but they have remained too tenuous to present a common front vis-a-vis Washington. It's unclear who is to blame for allowing the NAFTA2.0 talks to descend into U.S.-Mexico bilateralism for nearly two months last summer, but the impact has been disastrous.

Phone isn't only problem with U.S.-Mexico deal

Pastor was often critiqued for supposedly advocating North America become as integrated institutionally as Europe. Some American officials bristled at the idea of becoming Europe. However, it was a profound misunderstanding of what Pastor was actually saying. In 2001, Pastor published a book called "Toward A North American Community" in which he compared the evolution of the postwar European project with what was happening in North America. His conclusion was that Europe was over-governed, had too many institutions and, as a result, had become sclerotic, risk-averse, and anemic in terms of economic growth. North America, by contrast, had too few institutions and sources of cooperation on a host of problems that were limiting the region's potential.

Pastor NEVER argued that North America should become Europe. In fact, Pastor's appreciation for the unique history of the three countries (their federal characters, differing histories, and unique cultures) meant that North America would inevitably chart its own path. However, he did promote the creation of a number of institutions, including a "North American Commission" that would identify agenda items to be advanced by the three national leader, and a "social cohesion" fund that would be directed at underdeveloped areas of North America (mostly in southern Mexico). After 9/11, Pastor also called for a kind customs union enhanced by a perimeter security strategy. Doing so would advance economic integration one further stage (common external tariff and, presumably, customs officials), but also ease cooperation on a host of security challenges.

Faux Trilateralism

Finally, Pastor argued that the populations of all three countries were ready to move forward, if only their respective leaderships could be shown the way. The cultural readiness of all three populations for deeper cooperation is debatable, but Pastor had data to back his claim. I personally think this was a stretch, particularly when I consider the interactions of Canadians and Mexicans-- most of it comes on the beaches of Cancun during Canadian winters. Given the bilateral deal Mexico City was prepared to cut with Washington, the Canada-Mexico relationship obviously remains a work in progress.

One of the things I liked most about Pastor was his willingness to confront the kind of populist rubbish propagated by people like Trump. He was one of the few academics or public officials willing to openly defend either the NAFTA or the merits of going further. Sadly, the number of people willing to do so was already in decline when Pastor passed away in 2012. His lonely voice is sorely missed today.

My Modernized NAFTA

I can imagine someone reading this blog post and saying something like: "Okay smart guy, you think what's transpired is nonsense? Put your ideas on the table? Let's see you do better."

Okay, let's give it a go.....

The NAFTA was overdue for a tune-up, the tires were bald, and the muffler starting to rust out. Let's start with what I would like to have seen preserved in the NAFTA, things beyond reduction of trade barriers that are unique to the NAFTA or would remain novel if improved.

The Unique

Getting to yes,... no,... maybe

The Environmental Side Agreement: Hardly anyone ever talks about this, but the NAFTA side agreements, and especially the environmental side agreement, are among the most important byproducts of the NAFTA. It's true, the North American Agreement on Environmental Cooperation, is not technically part of the NAFTA text. However, as I've written about elsewhere in this blog, it's clearly related and become a far more important institution for sharing of scientific information about shared environmental issues than any of the negotiators envisioned. Trade agreements since the NAFTA have included language about the connection between trade and the environment, including prohibitions on the relaxation of environmental regulations to juice trade. Some agreements even subject these provisions to dispute settlement, although such provisions are seldom invoked because they are state-to-state in nature (both states have to agree to look at the problem).

However, none since the NAFTA have actually created an institution like the Commission on Environmental Cooperation (CEC). The CEC has never had any real enforcement teeth to compel governments to clean up their act. However, it has usefully evolved into a forum for receiving and sharing scientific information, raising public awareness, and, in a number of cases, effectively shaming governments into action.

It's a keeper, and ought to be made more robust. Interestingly, the promotion of such an institution, or revitalization of the CEC itself, is NOT a part of the Trudeau Government's over-hyped "Progressive Trade Policy" agenda.

Chapter 19: a quasi-legal mechanism for dealing with trade remedy laws is a good idea. As constituted in the NAFTA, I'd like to see it either overhauled and made more robust and binding, or simply scrapped altogether. Like the CEC, no American trade agreement since the NAFTA has contained institutional mechanisms like Chapter 19 for dealing with so-called trade remedy laws; the pernicious anti-dumping and countervailing duty laws maintained by every country. A lot of Americans think Chapter 19 created some sort of extra-judicial body that circumvents U.S. Constitutional protections around due process, etc. NOT SO. Indeed, Chapter 19 is far more limited than that and doesn't really compel anyone to do anything except apply their domestic laws as written. That's it. It's one of the reasons I am not sure Chapter 19 is worth fighting over; I don't think it does much more than provide symbolic victories.

In fact, if you really wanted to improve Chapter 19, you'd go even further and find some means to discipline the use of trade remedy laws in the NAFTA area more generally. Indeed, one of the best ways to improve upon what the NAFTA began would be to just eliminate the use of trade remedy laws against member states. That's a bit of a pie in the sky since that would also mean trying to find ways to discipline (or at least harmonize) the use of subsidies. I'm allowed to dream....

Walking away from a bad deal?

Chapter 11, Investment: When Chapter 11 was written in 1994, it basically took the existing U.S. Bilateral Investment Treaty model and dumped it into the NAFTA. The short story here is that the investor-state dispute settlement mechanisms began generating controversy when some creative lawyering and the application of ISDS to developed states seemingly opened the door to challenge the state's regulatory power in a range of areas. While a number of critics have argued that Chapter 11 represents a serious threat to the state's power to regulate in the public interest, I am surprised at the vehemence with which the Trump Administration seems willing to toss Chapter 11 overboard. Chapter 11, BITs, and the ISDS provisions are mechanisms long-supported by the U.S. business community, and especially American multinationals, because of the strong arbitration mechanisms within that provide those firms with some legal protections for their overseas operations in the event of nationalization or arbitrary expropriation.

If reports are correct, the new U.S.-Mexican portion of NAFTA2.0 throws investment out the door. Remember, Chapter 11 was inserted the way it was at U.S. insistence, mostly because of Mexico's 20th Century history of nationalization of foreign assets. Trump and Co. seem to be willing to throw this out just as Mexico begins a new "sexenio" under President Lopez Obrador, an openly nationalist president. I'm not predicting a wave of expropriations by the Mexican state, but as a check on arbitrary actions by the state (Canada and the U.S., are hardly innocent on this, incidentally), it seems contra to U.S. interests to throw this one out.

I think Chapter 11 is unfairly maligned and serves a number of useful purposes in both checking arbitrary discrimination by the state against foreign firms and bringing about greater transparency, stability, and consistency in legal regimes that can facilitate investment flows. Flowing in part from controversies around Chapter 11, modern investment chapters in trade agreements contain explicit language around the right of the state to regulate in the public interest. A great example of this can be found in the investment chapter of the Trans Pacific Partnership, language driven mostly by U.S. negotiators and pulled from the 2012 U.S. BIT model.... did I mention Trump pulled out of the TPP?

Chapter 16, Temporary Entry: The NAFTA remains the only U.S. trade agreement to ever create a brand new visa category, the TN Visa. The idea here was to facilitate the movement of professionals across North America's borders. Newer agreements, like the TPP, included temporary entry provisions, but there was no real mechanism for facilitating ease of access, such as a special visa. Indeed, under the TPP, each country maintained a variety of restrictions as spelled out in each of the annexes to Chapter 12, and committed only to an expeditious treatment of "immigration formalities" from member countries.

Chapter 16 never quite functioned as intended, and was quickly outdated. First, access to the new TN Visa was never as generalized as intended. While Canadians could essentially show up at U.S. ports of entry, apply, and be admitted for up to 5yrs, all before their plane took off, Mexicans had to apply in advance through U.S. consular facilities. The other reason Chapter 16 never quite functioned as intended is that the "positive list" of professions drafted in 1994 (Appendix 1603.D.1)hasn't exactly kept up with the times; "computer systems analyst" is now the catch-all under which the ever-growing range of IT professionals now fall. Most new agreements don't list professions and instead more practically note educational standards; bachelors or masters degree.

When I put on my North American Idea hat, I'd like to see even greater labor mobility in North America, and not just for professionals. In this sense, I am willing to go much, much further than Pastor ever was. Here I am talking about eventually moving toward a common market, total factor mobility for the entire NAFTA area. Cue the world government, globalist conspirators!!!!

Fox: A lonely voice these days

Among the many consequences of 9/11 was the little-known progress the U.S. and Mexico were making toward "regularizing" the flow of people across the border. Indeed, Mexican President Vicente Fox had been in Washington just days prior to 9/11 to work out the details of what looked to be some kind of "guest worker" program. However, Fox's long-held vision was to eventually move toward a North American common market. 

Fox understood the labour market differences among the three countries and that it would take a long time to get to a common market, which is why he also advocated some sort of "development fund" to assist poorer areas with the adjustment to a single market.

If a common market was a long-shot in 2001, it's a political impossibility in the midst of today's anti-immigrant populism. But think about this for a minute. Instead of enshrining some sort of piecemeal wage increases in the Mexican auto sector to qualify for tariff-free treatment (as the new bilateral agreement has done), but if we're serious about raising wages in Mexico reducing the impact of borders on a continental labour market is the quickest way to do it. What if we could liberalize more of the North American labour market to include, say the trades, in addition to professionals? What if it was done such that labour standards (and wages) were standardized upward toward U.S. or Canadian standards? My point is that North America's current labour market functions like a gated-community; walling off Mexicans from more efficient workers subject to higher standards of labour law, and "protecting" workers in Canada and the U.S. from low-wage competition.

The salutary benefits of moving in this direction in terms of illegal crossings, narco-violence, improved governance in Mexico, and foolishness of Trump's proposed border wall are pretty obvious. Is it a political pie in the sky? Absolutely. But I am allowed to dream.

The Rest

My modernized NAFTA would start with the text of the Trans Pacific Partnership (TPP) and build toward something deeper, and more genuinely trilateral than even the NAFTA. Indeed, the TPP was a modernized NAFTA since it included all three NAFTA countries. However, like the NAFTA, the TPP remains a shallow agreement in terms of pooling sovereignty through the establishment of binding institutions. The TPP included important changes to some of the most controversial aspects of the NAFTA, including investment, the environment, and labour. Moreover, it added to, or went beyond, in areas the NAFTA never contemplated; customs facilitation, financial services, e-commerce, telecommunications, small business, development, and corruption.

Of course, we have yet to see any text of the U.S.-Mexican version of NAFTA2.0, and the Canada-U.S. version remains at a stalemate. However, if (and it's a BIG IF), the NAFTA2.0 remains trilateral in nature, it will be a significant step backward.

Vicente Fox, the former president of Mexico, urged Canada to get on board with the NAFTA deal, so Ottawa and Mexico City could continue to help each other when they meet "the elephant in between."https://t.co/GIWNhYN6j4

— CBC Radio (@cbcradio) September 3, 2018

One of my reservations about the TPP is that it widened the NAFTA area's participation in trade rather than deepening to take advantage of what an integrated North America can offer. It advanced the ball in some areas noted above, but one way to look at it is as having transformed a trialteral NAFTA into a 12 country pact comprised of an even more diverse set of members than the NAFTA. This would have inherently made any kind of deepening of the TPP much more difficult. In my view, the North American Idea of deepening the NAFTA area into something closer to a common perimeter economically and politically is an idea we shouldn't lose sight of. Are there enormous hurdles? Absolutely, not the least of which now is the erosion of trust Trump has facilitated.

After 9/11, security drove renewed thinking about the North American idea. It focused minds on what the North American agenda really was, most notably through the ill-fated Security and Prosperity Partnership (SPP)... but only for a short time. The SPP didn't start the demise of the North American Idea, rather it was just another stop along the way. The NAFTA left a substantial unfinished agenda for which the Agreement created a number of working groups and committees. Nearly all quickly fell into inactivity. Throughout the 1990s, North American optimists (mostly people like Robert Pastor in academia) did their best to stimulate interest in trilateralism. However, as much as the post-9/11 continental security agenda renewed thinking about North America, the lack of progress on anything other than hardening existing borders (as symbolized by the demise of the SPP) was also a sober reminder of the lack of political will to capitalize on the best elements of the North American Idea.

There's a lot of blame to be shared, but much of our political class as well as our thought leadership in academia lacked the courage to openly defend the merits of liberalism in the face of populist opposition. Moreover, that same group of people underestimated the potency of the brewing populism that was unleashed in 2016. The state assumed for too long that the concentrated negative effects of greater degrees of openness to the global economy would magically take care of themselves, "released workers" find their way into all the new areas of economic life that were being created, and that all of it would inherently facilitate a broadly, urban, liberal, and cosmopolitan view of global politics. It hasn't worked out that way. In Europe, the populist right has instilled skepticism of the state's institutions, stoked anti-immigrant sentiment, and openly challenged the postwar European Project; so much so, that Britons (narrowly, and with some buyers remorse) were willing to step into a less prosperous future outside the European Union.

We've ended up in an even more dire place in North America. America outside a TPP it championed just two years ago, and the geostrategic implications in Asia-Pacific that come with it. A "hub-and-spoke" North American economy anchored on Washington and little connectivity or trust between Ottawa and Mexico City. And the United States willfully ceding its leadership of the entire postwar order.

A requiem indeed....