Book Review

Toward a North American Community:  Lessons from the Old World for the New
By Robert A. Pastor, Institute for International Economics

Beyond NAFTA

NAFTA was only the beginning. Now, policymakers need to think of solutions that will improve the pact and create 
a North American Community, this book argues.


Ten years ago, President George Bush signed the North American Free Trade Agreement (NAFTA) - a historic trade pact with Mexico and Canada. It was one of the last major measures he took before handing over The White House to his successor Bill Clinton.

That same year, 12 European leaders signed a historic treaty of their own: The Maastricht Treaty, which deepened the European Community's goals and scope and created the European Union.

Apart from competing for world markets, the two treaties appear to have little in common. Yet, the latter can serve as a model for the former, argues Robert Pastor in a new book. Pastor, who teaches international relations at Emory University, served as Latin America advisor on President Jimmy Carter's National Security Council. In addition to close contacts with Mexico's President Vicente Fox and Foreign Minister Jorge Castaņeda (who he co-wrote a book with), Pastor spent two years researching the European Union for the book and is thus uniquely qualified to compare the two treaties.

While much of Pastor's background is that of an academic, Toward a North American Community is not your typical academic paper. Its language is clear, concise and crisp with a flow and structure that is logical and easy to follow. As a result, this is clearly a book that will appeal to businessmen and traders as much as policymakers and academics.

NAFTA created the world's largest free trade area and significantly helped boost trade between its three partners, but it failed to go beyond that to address potential problems that necessarily would arise from closer integration, according to the book. "What's wrong with NAFTA is not what it did, but what it omitted," Pastor writes.

Case in point: The December 1994 peso crash in Mexico, which the country is still recovering from. "The peso crisis was ... a metaphor for both the success and the inadequacy of NAFTA," Pastor claims.

While the expanded trade helped boost the value of the peso, it also put pressure on the Salinas government to keep it artificially high later when a political crisis started affecting its value. But the new pact, which went into effect the same month Mexico's political crisis started (January 1994), had failed to create an institutional framework for monitoring and responding to such an event, argues Pastor.

In the end, Mexico was "saved" anyway by Clinton and his team, which provided a U.S. and multilateral bailout that helped stop the bleeding. Yet, both Mexico and Clinton had to pay the price later.

Mexico's new president Ernesto Zedillo spent his six years in office largely with only one goal in mind: Macro economic stability and fiscal prudence. He achieved both, but the Mexico he inherited from Salinas (despite all the progress of that presidency) was still an under-developed country with massive poverty and in need of more than single-digit economic growth.

Meanwhile, Clinton's bailout pretty much signalled the end of his free trade campaign in the U.S. Congress. After Clinton spent valuable capital on getting NAFTA passed, the bailout was used by his critics as an argument against the treaty. Following the bailout, plans to expand NAFTA to Chile and getting "fast track" approval from Congress fell from the Administration's A-list.

And yet, there is no guarantee that it won't happen again, Pastor warns.

"NAFTA ... was defined too narrowly, and the three governments paid a price for that myopia," he writes. "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. The inescapable conclusion is that similar collective problems will emerge in the future, although in different guises, and that there is no institutional capacity to address them."

A potential new peso crash isn't the only problem looming, of course. While NAFTA abolished tariffs on most products traded between the three countries, it didn't create a totally free trade area. Each country still managed to get key sectors exempted, creating problems to this day.

Those problems include Mexican trucking into the United States. According to NAFTA, the United States and Mexico were scheduled to permit free cross-border transportation by trucks on January 1, 2000. Yet, when the date came, Clinton (under presure from the Teamsters Union) refused to implement the rule.

Despite a NAFTA arbitration panel ruling against the United States in November 2000 (and again on appeal in February 2001), the United States has still not abided. While President George W. Bush clearly wanted to open the border, his hands have been tied by a vote in the U.S. Congress last year that restricts Mexican trucks' access to the United States.

Those bilateral disputes are likely to continue under the current NAFTA regime, Pastor warns. Therefore he proposes the creation of a North American Community (NAC), partly modelled on the European Union.

"In contrast with Europe, North America is more market-driven, more resistant to bureaucratic answers, more pragmatic, and more respectful of national autonomy," Pastor rightly points out. "Despite these differences, however, North America can learn from Europe on the importance of defining goals that inspire a unity of purpose and on the necessity of establishing institutions that can hel

The NAC would deepen NAFTA and address the challenges facing the pact. Key trade issues that either weren't addressed by NAFTA or have emerged since should be analyzed by the NAC, with the goal of taking NAFTA to its next level - a customs union, argues Pastor, who also favors a common external trade policy. Today, the three NAFTA members have negotiated and are negotiating separate free trade agreements and don't even have a coordinated policy on the Free Trade Area of the Americas (FTAA).

And, following the lead from Europe, NAFTA should implement a common currency, the book proposes. That currency could either be the U.S. dollar or a new currency, the Amero. While the former would face strong resistance by Mexico and Canada, the latter would likely have little support in the United States, Pastor acknowledges. Yet, a common currency would help avert problems such as the peso crash, he argues.

Pastor ultimately favors an Amero, but - in our opinion - the most likely solution in the short term is to dollarize Mexico. While Canada is facing problems from the difference in the value between its dollar and the U.S. dollar, the most pressing challenge in North America is the risk of a new peso crash.

Mexican policymakers and many economists these days feel confident due to a strong peso. However, the fact is that another political crisis or well-orchestrated attack on the peso from speculators could lead to a new crash - with the United States not necessarily able to provide the same amount of aid as last time.

But the currency issue is not the only challenge facing NAFTA. Another key obstacle, the book rightly points out, is the lack of a coordinated infrastructure and transportation policy. And it's not just about Mexican trucks crossing the U.S. border. The growing trade has led to increased delays at the U.S. borders with both Mexico and Canada. And instead of making safety an issue whenever there's a congressional debate on Mexican trucks in the United States, the issue should be part of a NAFTA common transport policy, Pastor says.

And following the spirit of NAFTA, the three countries should create a North American Customs and Immigrations Force that would work together on the borders. Such a proposal would not only reduce paperwork and delays, but also help fight crime, Pastor believes.

While it is easy to be sceptical of the idea of joint U.S. and Mexican law enforcement teams replacing U.S.-only teams on the U.S. side, Pastor may have a point. Recent cooperation between the two countries in the fight against drug trafficking led to the March 9 capture of Benjamin Arellano Felix - one of the most significant blows to Mexican drug traffickers ever.

Yet, despite Fox's best intentions and concrete efforts to clean up and improve Mexico's law enforcement, it is still riddled with corruption at all levels (like the rest of the country).

If we compare Mexico to the European Union, the country doesn't fare too well. According to one survey, the 2001 Corruption Perception Index from Transparency International, Mexico ranks behind Greece, which had the worst record of any EU member. Greece ranked 42 and Mexico 51 on the list of 91 countries worldwide (Canada ranked 7th and the United States 16th).

The Mexican corruption doesn't take away from Pastor's proposals, of course, but serve to remind us of the challenges they would face.

The book also argues for the creation of North American energy, education and development plans (the latter partly following successful EU models). Pastor convincingly makes the argument that it's in the best interest of the United States to help reduce the equity gap in Mexico through an EU-style development plan. Thanks to EU aid, poor regions in Ireland and Spain have seen an economic boom. Needless to say, Mexico is in an even worse shape than those regions were and U.S. development aid will thus make a big difference.

The development fund is partly becoming a reality, thanks to the close ties between Fox and Bush. At the International Conference on Financing for Development held in Monterrey last month, the two presidents unveiled a concrete action plan of the Partnership for Prosperity that includes aid to poorer areas of Mexico.

But while NAFTA clearly needs an overhaul, the United States is also busy preparing for the FTAA. Pastor argues that the deepening NAFTA would not hurt progress towards an FTAA. On the contrary, the process of deepening NAFTA could serve as a model for the FTAA, he argues. An argument for NAFTA-deepening before the United States expands free trade to the rest of Latin America is the lesson from Europe, where the EU expanded its membership before deepening and now faces the complex challenges of integrating both existing and future members.

Pastor has written a clear blueprint for how NAFTA can become the beginning and not the end of a historic process that clearly has benefitted the region significantly. Some of the recommendations came from Fox before and after he assumed Mexico's presidency and so - not surprisingly - the book has been endorsed by him. But Bush and Canadian Prime Minister Jean Chrétien also would do well to pay close attention to the book's recommendations.

Pastor has clearly shown that as NAFTA approaches its tenth anniversary, it's time to take it to the next level.

Originally published in Latin Business Chronicle, April 8, 2002