GLOBAL ECONOMICS
Patrick Grady
"A Crack in the NAFTA Piņata: How Loyal are the Three Amigos?"
Globe and Mail, June 5, 2000, p.A11.
Mexico will be celebrating Canada Day this year by entering into a free trade agreement with the European Union (MEUFTA). While offering Mexico the advantages of preferential access to EU markets, the agreement shouldn't be the cause of much celebrating in Canada or the United States coming as it does at the expense of the integrity of the North American Free Trade Agreement (NAFTA). But nobody in Canada seems to have noticed or cares.
The Canadian government needs to wake up to what is at stake here. Allowing duty-free access to the Mexican market to the EU will take back some of the market access benefits that Canada and the United States expected to gain by allowing Mexico to join them in NAFTA.
The MEUFTA has also opened the back door for European goods to sneak into Canada and the United States through Mexico. The enforcement of NAFTA's rules of origin will consequently have to be tightened to make sure that goods imported from Mexico are actually produced in Mexico. Unfortunately for all concerned, tighter means more red tape at the border.
More pressure on rules of origin and additional border controls runs counter to the direction NAFTA should headed, namely towards greater integration. The next logical step down this road would be harmonize external tariffs, leading eventually to a customs union. Mexico's accession to NAFTA had already made this process much more difficult because of its lower stage of development. The MEUFTA could be the nail in the coffin.
Alarmed at watching its share of trade with Mexico halved after the establishment of NAFTA, the EU didn't waste much time before initiating talks with Mexico in 1995. The recently signed agreement is the culmination of intensive technical negotiations that lasted a year. It is a complicated document with half as many chapters as NAFTA covering much the same ground including market access, rules of origin, technical standards, phytosanitary standards, safeguards, trade in services, government procurement, competition, intellectual property, and dispute settlement.
Mexico has agreed to eliminate tariffs on 47 per cent of EU exports of industrial goods immediately, on another 5 per cent in 2003, and on the remaining 48 per cent by 2007 with steep cuts beginning in 2003. This will put the EU in a similar position to Canada and the United States, which won't have to pay Mexico's tariffs on industrial goods starting in 2003.
Mexican agricultural tariffs on EU products are to be phased out more slowly, only reaching zero by 2010. Some products such as dairy goods, meat and grains have been left out of the agreement because of Mexican concerns about the EU's agricultural subsidies.
The MEUFTA is only the most recent, and closest-to-home, example of the EU's trade strategy of "divide and conquer." The EU has been very successful in using its awesome economic clout to obtain preferential access to other countries' markets. Its web of bilateral free trade agreements has spread so far that now only six major countries have been left out: Australia, New Zealand, Japan and Taiwan, and of course, Canada and the United States.
It's the EU trade agreements with developing countries in Africa and the Mid East that cause the most trouble for Canada and other countries on the outside looking in. These agreements have the greatest potential for trade diversion because third country tariffs are often left in the mid double-digit ranges, effectively shutting everyone but the EU out of the market. But the agreements with the EU candidates in Eastern Europe also lead to trade diversion. The EU is putting in place exactly the sort of "hub and spokes" model that scared Canada into the NAFTA negotiations except on a much grander scale.
Conrad Black has recently argued that there should be a free trade agreement between the United Kingdom and NAFTA. Could you imagine the EU standing by silently and allowing this to happen? Well, Mexico's trade agreement with the EU isn't much different from a NAFTA point of view .
What was the point of bringing Mexico into NAFTA if they're going to let the EU in through the back door? The NAFTA would be a much more meaningful agreement if all the partners had to agree before one of the partners could enter into any agreement with another country nullifying the benefits of the agreement.
Mexico isn't the only country threatening the integrity of NAFTA. Canada also wants to negotiate a free trade agreement with the EU and is currently working on developing a proposal. While the EU Trade Commissioner Pascal Lamy has indicated that he is willing to look at it when it surfaces, thankfully, he doesn't seem very enthusiastic, largely because tariffs between Canada and the EU are already low. And, just wait to see how fast he'll dismiss the proposal if it includes opening the EU's highly subsidized agricultural sector.
Given that trade with the United States under NAFTA last year accounted for over four fifth of Canada's exports and three quarters of imports, Canada should be focusing its energies on strengthening NAFTA, not weakening it. The skeletons of the institutions required for a more unified and proactive NAFTA already exist in the NAFTA Commission and the Secretariat which are responsible for overseeing the agreement. Canada should approach the United States and Mexico with a proposal to put these institutions to work to make NAFTA a greater force in the international trading arena by giving them some real institutional bargaining clout in dealing with our non-NAFTA trading partners, most notably Europe. This would mean convincing Mexico that its best interests lay in backing out of its recently concluded deal and establishing the rule that any future free trade agreements involving any of the three NAFTA amigos would require that NAFTA be a party to the agreement or at least that the other NAFTA partners give their unanimous approval. Mexican free trade with the EU is too important to Canada and the United States to be left to the Mexicans.