Building a Continental Union: An Assessment of NAFTA By Espoir Manirambona

Presented to Professor Calum Carmichael In the course PADM 4225/5225

Carleton University December 18th, 2012

Introduction Free trade is a very controversial topic. Proponents of free trade argue that liberalization benefits everyone, citizens, governments and businesses. Through free trade, firms can specialize in producing goods for which they have a comparative advantage; goods which they can produce relatively cheaper. Thus, when countries utilize their comparative advantage, exports increase, profits increase, production becomes efficient and the economy grows, so the argument goes. In reality, the results of free trade are often mixed. Cautious international trade experts warn that free trade does not necessarily benefit everyone; free trade is not Pareto efficient. They argue instead that free trade can lead to a Kaldor improvement; the benefits of free trade can be redistributed more equally through social spending and taxation. Other economists and opponents of free trade argue that free trade is actually designed specifically to benefit the interests of capital; that is remove all barriers preventing the accumulation of capital and profits, often at the expense of workers, democracy and the environment. Thus, debates over the merits of free trade can become very heated, especially in North America with regards to the North American Free Trade Agreement (NAFTA).

NAFTA is an agreement between the governments of Canada, the United States and Mexico to create a free trade area on the North American continent. Signed by all contracting parties in December of 1992, the agreement has a number of goals stated in Article 102: eliminate barriers to trade, improve the flow of goods and services, promote fair competition, establish a dispute resolution mechanism and provide a framework for more agreements to enhance cooperation between the three countries (NAFTA Secretariat, 2010). Former Prime Minister Brian Mulroney said The Free Trade Agreement and NAFTA will be regarded one hundred years from now as a

major defining moment in the evolution of Canada. (Hurtig, 2009) He may be right, the question remains, has NAFTA benefited Canada? Or has NAFTA been harmful to Canada? These questions have been answered by a number of well known Canadian activists, organizations and commentators, but they are of course hotly contested. This essay will argue that NAFTA has indeed generated a great deal of economic gains in Canada but that proponents have been wrong in claiming that everyone would benefit equally. This paper will examine the various arguments and claims brought forward by proponents and opponents of NAFTA. The first section will take a look at the arguments put forward by proponents of NAFTA and the second section will look at the case against NAFTA. Let us begin by examining the claims brought forward in support of NAFTA.

Supporters of NAFTA To proponents of NAFTA, the agreement was simply a natural extension to the Canada-United States Free Trade Agreement. Proponents of NAFTA argued that a continental free trade zone, following the model of the European Union, would greatly increase trade within North America and benefit all three countries. Although Canada and Mexico were not close trading partners, it was argued that Canada could lose out if the United States signed a bilateral trade agreement with Mexico (Chapman, 1993). If Canada was excluded from such an agreement, then the US would be the only country with preferential agreements with the other countries on the continent (Chapman, 1993). This would mean that US firms could utilize cheaper Mexican inputs while Canadian firms would not have preferential access (Chapman, 1993). As a result, proponents of NAFTA argued that this would create a disadvantage for Canadian firms competing with American firms. In addition, proponents of NAFTA were arguing that trade between Canada and

Mexico would greatly increase and that trade with the US would continue its FTA trends. Thus, as mentioned above, they believed that exports would increase greatly to Mexico and the US as a result of lower tariffs and preferential access, and that these exports would benefit Canadian companies and workers.

Now that the agreement is in effect, proponents all argue that it has been a phenomenal success for Canada and the rest of the continent. Proponents like the Canadian Council of Chief Executives argue that NAFTA has helped improve Canadas competitiveness with the other trading nations. The former head of the organization, Thomas DAquino, argued that By reducing barriers to trade, spurring investment, accelerating cross-border business cooperation and efficiencies and advancing innovation and better-paying jobs, the NAFTA has delivered concrete results (Canadian Council of Chief Executives, 2008). The CCCE argues that trade between the three countries has tripled, reaching 1 trillion dollars annually and that this was done through promoting competition in domestic markets and opening countries up to foreign direct investment (Canadian Council of Chief Executives, 2008). The former chief of the CCCE also argued that as emerging economies are gaining market share and becoming more competitiveness, it is imperative for Canada, the US and Mexico to cooperate and coordinate in order to compete (Canadian Council of Chief Executives, 2008). DAquino stated Today, North America faces a competitive challenge that is huge and without precedent. Emerging economies, some of them budding superpowers, are rapidly moving to the global front lines in trade, investment, technology, innovation and education. This requires a new level of policy cooperation and coordination among governments, businesses, workforces, and educational

institutions throughout Canada, the United States and Mexico (Canadian Council of Chief Executives, 2008).

Other organizations have also been celebrating the successes of NAFTA. According to the Macdonald-Laurier Institute for Public Policy, the NAFTA agreement created the worlds largest trading community and has been used as a prototype for other continental agreements across the globe (Macdonald-Laurier Institute for Public Policy, 2012). In addition, they believe NAFTA has given continental investors the assurance that their efforts to develop a continent wide production and distribution chain will not be impeded by national governments (MacdonaldLaurier Institute for Public Policy, 2012). The Institute also argues that although there has been much criticism of the agreement, most experts believe that the impacts have been mostly positive for Canada. One indicator for this is the level of foreign direct investment which has increased exponentially since the NAFTA agreement and the aforementioned increases in exports and trade with the US and Mexico (Macdonald-Laurier Institute for Public Policy, 2012). They also point the remarkable expansion of trade in parts and components; a sign that the continents production chains are integrating (Macdonald-Laurier Institute for Public Policy, 2012). The Institute also points to the rise in integrated energy markets, roads and highways, airline systems and even professional practices. Thus, they argue that NAFTA has lead to positive continental integration which will only get deeper and lead to the development of a regional identity with more regional coordination (Macdonald-Laurier Institute for Public Policy, 2012).

As we can see, the NAFTA agreement is highly regarded within the business community, especially with big businesses (represented by the CCCE), and has been praised by policy

institutes like Macdonald-Laurier, the Institute for Public Policy Research and the C.D. Howe Institute. The main arguments provided are that NAFTA has greatly increased trade within the continent and because Canada relies on exports for its economic growth, this can only be good. They also point to the successful easing of capital flows between borders and the removal of many government barriers. But they also argue that NAFTA is part of a bigger strategy of developing a continent wide economy and even developing a regional political identity. The next section will examine the arguments of those who opposed NAFTA then and continue to oppose it today.

Critics of NAFTA A wide variety of activists, advocacy groups, economists and academics have been opposed to NAFTA before the agreement was signed and till this day. When the Canada-US Free Trade agreement was signed, NAFTAs predecessor, some of the most vocal critics were actually within the Liberal Party. Former Liberal party leader John Turner famously said in reference to free trade with the US Well, it's more than a trade agreement, it's the Sale of Canada Act. (Hurtig, 2009). Turner goes favor in arguing that NAFTA has weakened Canadian sovereignty, stating But we conceded our energy, and have become part of a continental energy reservoir with the United States. We have conceded our ability to control investment in Canadian business. We have conceded control over our capital markets. We have weakened our ability to market in an orderly fashion our agriculture. (Hurtig, 2009) The core arguments provided in opposition to NAFTA are that the agreement only benefits corporations and the wealthy, limits the ability of citizens to legislate market forces and is part of a larger, more secretive, plan to further integrate Canada, the US and Mexico to create a continental union.

Not all economists are convinced of the virtues of NAFTA. Jim Stanford, economist with the Canadian Auto Workers Union, argues that the economic benefits of NAFTA have only been bad for most Canadians (Stanford, 2012). Stanford argues that Canadas exports in real terms are actually smaller today than they were in 2000. Before NAFTA, Canadas exports to the US represented 19% of Canadas GDP, today they still account for 19% (Stanford, 2012). Stanford believes that the promised gains in increased exports were only temporary and have been completely reversed in recent times. Productivity in Canada was forecasted to increase relative to the US rate as a result of NAFTA, but Stanford argues that productivity has actually gone down; from 80% of US levels in the mid 80s to 72% today (Stanford, 2012). The composition of exports to the US has also changed dramatically according to Stanford. Whereas in the mid 80s exports to the US consisted mainly of manufactured goods, today most exports to the US consist of unprocessed raw materials. Stanford also argues that most Canadians have not gained much in income as a result of free trade with the US and Mexico. Median family income in 2011, adjusted for inflation, was exactly the same as it was in 1980, according to Stanford. As a result, Stanford concludes that there is a little hard economic evidence that NAFTA and the FTA actually helped Canada.

Others have also had strong criticisms of NAFTA; according to a report by Robert Scott, Carlos Salas and Bruce Campbell (2006), it is clear that workers share of the gains from productivity and incomes has declined while the share of those at the top of the economic pyramid has grown considerably. They argue that not only has the share of national wealth for workers declined, but government transfers through social programs have also dramatically declined after NAFTA was

signed (Scott et al., 2006). Transfers fell from an already low 11.5% of GDP in 1994 to 7.% in 2006 (Scott et al., 2006). As a result, not only is the average worker not better off economically, but workers also have less benefits than they use to before NAFTA. Proponents argue that these changes have nothing to do with free trade and everything to do with domestic policy choices, but critics counter argue that NAFTA was designed with the intent of weakening the bargaining leverage of organized labor; through free trade, firms can more easily shift production in and out of a country without penalty (Scott et al., 2006). Scott et. al (2006) also argue that because firms have become transnational, they are better able to pressure governments to surrender to their policy demands; mainly less corporate taxes, government regulations and less protections for workers.

In addition to weakening the economic power of workers in North America, some critics of NAFTA are also arguing that the agreement is part of a larger plan by some politicians and business leaders to form a North American economic and political union similar to the European Union. One of the strongest proponents of this theory is Mel Hurtig, author of The Canadian Encyclopedia and Officer of the Order of Canada. Hurtig argues that for the last three decades, a number of politicians, business leaders and academics have been meeting in secret to work out plans to further integrate Canada with the US (Hurtig, 2009). He writes in The Truth about Canada These meetings are designed to further integrate Canada into the United States and have us adopt even more American standards, values, and policies. (Hurtig, 2009) According to Hurtig, the same people and organizations behind the FTA and NAFTA are also behind this continentalist scheme (Hurtig, 2009). Indeed, the establishment of a free trade zone in Europe was also a precursor to the formation of the European Union. Hurtig argues that a de facto North

American Union is already in effect, although secretly (Hurtig, 2009). Social, environmental, security, labor and economic policies are gradually being harmonized. If national policies are being decided behind closed doors it would undermine the ability of the Canadian people, through their legislatures, to exercise their political sovereignty.

In defending his theory, Hurtig provides evidence of a top secret meeting that took place in September 2006, between top level American, Canadian and Mexican officials which included pro-FTA and NAFTA advocates Peter Lougheed, former US Secretary of State George Shultz, and former Mexican Secretary of the Treasury Pedro Aspe (Hurtig, 2009). Other attendees included Stockwell Day, Gordon O'Connor, Anne McLellan, former General Rick Hillier, Thomas D'Aquino and a number of top corporate heads, lawyers, petroleum producers and defense officials. The agenda for the series of meetings, which were leaked to Mel Hurtig and then forwarded to Canada's major newspapers, included plans for in-depth discussions on further economic, energy, security, military and social integration (Hurtig, 2009). Hurtig describes how these accusations, although never denied, were ignored by major newspapers and that a friend of his, celebrated journalist Peter C. Newman, wrote to him saying I tried phoning people I trusted and I thought trusted me, and no one would tell me anything. If it isn't a conspiracy, they're doing their best to make it appear like one (Hurtig, 2009) The reason why this alleged continentalist scheme is important to understand and investigate in relation to NAFTA is because, as mentioned above, some of the same people advocating for NAFTA are also involved in these meetings, people like Thomas DAquino and other business heads (Hurtig, 2009). It makes sense for big business to want to form a North American union; sectors in the Canadian economy are already heavily owned and controlled by American firms, a North American union would mean

less regulatory hurdle, more harmonization of standards and the power to challenge national policies in court.

There are two chapters in particular in NAFTA that many critics argue threaten Canadian sovereignty; chapters 6 and 11. Chapter 6 states that Canada must give American firms national treatment and cannot stop supplying these firms resources like oil and water unless the country proportionally reduces its own consumption of these resources (Hurtig, 2009). Chapter 11 is also controversial because it gives American and Mexican firms the power to sue Canadian governments over legislation which could potentially decrease their profits (Hurtig, 2009).Together, many argue that these two chapters alone harm the interest of Canadians because they undermine their ability to exercise sovereignty and regulate corporations. Finally, critics argue that although foreign direct investment to Canada has increased, much of this has been used to takeover Canadian firms like the Hudsons Bay Company, Inco, Alcan, Stelco, Sleeman Breweries and many others (Hurtig, 2009).. The result is that American companies no longer need to open up plants in Canada because the market is no longer protected, they can produce elsewhere and then sell their products in Canada (Hurtig, 2009).. This may partially explain the sharp decline in manufacturing jobs in recent decades.

Conclusion The goal of this paper was to present the various arguments put forward in support and in opposition to NAFTA. Proponents have argued that the agreement has greatly expanded Canadas trading opportunities and that Canadian workers have benefited as a result. Critics argue on the other hand that Canadian exports have not increased dramatically as promised and

that Canadian workers have in fact lost ground due to NAFTA shifting economic and political power away from workers to transnational corporations. Although, some of the facts surrounding the consequences of NAFTA are themselves disputed, there is no denying that corporations have gained tremendously from the agreements; record profits, lower corporate taxes, less regulation, more freedom. There is no question however that the average worker has lost ground; Canadian salaries have been stagnating, unemployment and underemployment is high, social spending is down and collective bargaining is weak. There is also general agreement that the gap between the rich and the poor dramatically increased during the last three decades. Canadians are increasingly concerned about inequality, democracy, the environment and the harmful effects of corporate greed. It is my view that we need to continue to critically examine NAFTA and see how we can make trade in North America fairer and more geared towards meeting the needs of all North Americans. Also, Canadians should be made fully aware of any plans among politicians and business leaders to form a North American union. These are political decisions that need to be made in the public light, through the democratic process to ensure that it serves the common good and not the self-interests of some.

References Canadian Council of Chief Executives (2008). Thomas dAquino Defends The NAFTA And Calls For Stepped-up Efforts To Enhance North American Competitiveness. Retrieved December 6th, from the Canadian Council of Chief Executives Web site: http://www.ceocouncil.ca/news-item/thomas-daquino-defends-the-nafta-and-calls-for-steppedup-efforts-to-enhance-north-american-competitiveness-272

Chapman, A. (1993). North American Free Trade Agreement: Rationale and Issues. Retrieved December 2nd, from Government of Canada publications Web site: http://publications.gc.ca/Collection-R/LoPBdP/BP/bp327-e.htm

Hurtig, M. (2009). The Truth About Canada. Toronto: McClelland & Stewart.

NAFTA Secretariat (2010). Frequently Asked Questions. Retrieved December 2nd, from NAFTA Secretariat Web site: http://www.nafta-sec-alena.org/en/view.aspx?x=283#When

Macdonald-Laurier Institute for Public Policy (2012). The NAFTA Region: Work in Progress. Retrieved December 5th, from Macdonald-Laurier Institute for Public Policy Web site: http://www.macdonaldlaurier.ca/files/pdf/MLIInsidePolicy/TheNAFTARegion

Scott, R., Salas, C., Campbell, B. (2006). Revisiting NAFTA: Still not working for North Americas workers. Retrieved December 6th, from Canadian Center for Policy Alternatives Web site: http://www.policyalternatives.ca/sites/default/files/uploads/publications/National_Office_Pubs/2 006/Revisiting_NAFTA.pdf

Stanford, J. (2012). Economic effects of trade deal with U.S. have all been bad. CCPA Monitor, 19 (No.6), p. 15.