Presented by the Atlanta Fed's Americas Center and the World Affairs Council of Atlanta
April 12, 2012
Stephen Kay: Hi, I'm Steve Kay. I'm a senior economist in the research department of the Federal Reserve Bank of Atlanta and the coordinator of the Federal Reserve Bank of Atlanta's Americas Center. I'm here today with Robert Pastor, a professor of international relations and the founder and director of the Center for North American Studies at American University. Welcome, Dr. Pastor.
Dr. Robert Pastor: Good to be here, Steve.
Kay: Well, thank you for joining us today. Your new book is called The North American Idea, and I want to start out by asking you, what is The North American Idea?
Pastor: The North American Idea is recognition that the United States, Canada, and Mexico share a continent, which is more than just a geographical expression. It's actually an opportunity to rediscover North America and enhance American competitiveness, enhance the multicultural societal connections among our countries, and also to ensure the security of all of the Americas. So, in brief, The North American Idea is a new way of thinking about our neighbors.
Kay: So how far or how close would you say we are to reaching that ideal?
Dr. Robert Pastor: We have a long way to travel. I think we only rediscovered North America with the negotiations for the North American Free Trade Agreement that came into force in 1994. That began to create a continental market, but there is a long way to go to make that market seamless, and there's an even longer way to go to make our people realize that our neighbors should no longer be thought of as foreigners, but as partners.
Kay: You mentioned NAFTA. Are there institutions or dimensions to NAFTA that should be there that aren't there? What would you say is, perhaps, missing from the North American Free Trade Agreement?
Pastor: NAFTA was intended to dismantle trade and investment barriers among the three countries. And it largely accomplished that, but in doing so, it integrated the three economies and began to create a market, and there's no follow-through. There's no follow-up. There is no decision on the part of our leaders that said this should only be the foundation on which we can create a much more powerful and economically viable North America. So, by and large, we have stopped after NAFTA, and, unfortunately, the world has not stopped. We really peaked in 2001 and since then we're almost back to where we started before in terms of economic integration. The promise that we'd had with NAFTA and the tremendous success of the first seven years when in the United States we created 22 million jobs and trade tripled and foreign direct investment quintupled—that promise has faded and we have to recover it.
Kay: You mentioned the hard steps we need to take. I'm wondering if you can elaborate a little bit on what you mean by the "hard steps"?
Pastor: I think there are two steps that are essential. The first step is to move to a common external tariff among the three countries. Right now, because we each have different tariffs, we require that all of the goods that go to the border need to be inspected again, and that content of those products, which were made in another country, are taxed. So the beauty of a free trade agreement, you would think, would allow products to cross the border without even having to stop, and that's what makes it efficient. Right now that doesn't exist. We have to stop every product. If we had the same external tariff, we could let those products go through. We would save $500 billion a year by doing something like that—not just in terms of the impact of the transaction costs on the border, but because of the distorting effects on the three economies. So, that's the first step: move towards a common external tariff.
The second step would be to do a plan on North American transportation and infrastructure. Let's think of the whole continent, and let's think about what new roads are needed. In Mexico, for example, they built a road system in which everything goes through Mexico City. That's not very efficient when your best markets are in the United States and in Canada. In Canada, they built a road system in which you can go from east to west in Canada. It's not very efficient to go to the U.S. market. And the U.S. has really ignored the Canadian and Mexican dimensions. So let's now think again. Let's think about a continental market and ask ourselves, what new roads, what new plans should we have to build infrastructure and transportation lines that would really infuse this great new North American economic experiment?
Those two steps: a common external tariff [that] would eliminate rules of origin, would allow goods to go fast, and then roads that would allow our trucks to go all the way from Canada down to southern Mexico—that would have a big effect. Those are the first two steps I would take. And, if I could add, the common external tariff will then bring in money to all three that could then be used to invest in the North American plan on transportation and infrastructure. It would bring in roughly $30 billion a year, which would be a good start to build this plan.
Kay: How does trade within North America differ from trade within Asia?
Pastor: We not only trade products in North America, we make products together. Forty percent of our imports from Canada and Mexico represent our exports to them. When we buy a car in the United States, we no longer buy an American car. We buy a North American car. The parts on average have to cross the two borders at least seven times. You have manufacturing units built outside of Detroit; others built in Puebla, Mexico; other parts in Windsor, Ontario, in Canada. All together, they come together and they create a North American car, which is very efficient and very effective now.
After 9/11, however, we saw the construction of new impediments, new barriers on the borders, which turned this unique North American advantage into a disadvantage because before it was… With free trade, it was relatively easy to cross the border. In South Korea and Japan, all they need to do to send their cars into the United States is cross one border. Now our North American cars need to cross seven borders, and those borders are now harder to cross than they were before 9/11. So we need to think of ways to bring back this advantage. Instead of having three different customs forms to be filled out and to be inspected at each of the borders, why not have a single North American customs form, one manifest, that could be done electronically that could cross the border just once? If we did that, we'd recover the North American advantage and our cars would still be the most efficient.
Kay: Dr. Pastor, I want to thank you for joining us today. It's been a very interesting conversation.