from nafta to a north american union?

8/14/2019 From NAFTA to a North American Union?

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Firas A. (ISM IB2-A)

Economics Portfolio on International Economics

Title: Economic ties to U.S. riding super highway

The article mainly discusses how the three NAFTA1 nations are showing efforts towards

increasing the integration of their economies, with the aim of creating a common market. This

reveals their intention to allow the free movement of all the four factors of production2.

Removing barriers among the member nations in the form of technical standards, physical

borders and fiscal taxes would be necessary to ensure the freedom of movement of the four

factors of production.

There are numerous arguments for and against a North American Union. On the one hand, a

common market would increase competition and trade among member states, as NAFTA still

does not reveal the full trade potential of the member states. Reasons for this are remaining

regulatory differences among the three countries and unwieldy North American rules of

origin3. However, the fact that trade in certain sectors such as natural resources, agriculture,

and energy remains far from free trade, represents a larger source of disagreement among the

member states. Furthermore, the NAFTA partners have been unable to resolve a number of

important trade and investment disputes, which has created continuing tension in their

commercial relationships4.

Thus, the settlement of the above mentioned conflicts is very likely to result in increased trade

and competition amongst member nations. This in turn might cause inefficient companies to

suffer a loss of market share, which again could force them to close down. Hence, increased

competition does not only result in increased consumer welfare (lower prices, higher quality

and variety), but also in more efficient resource allocation. Furthermore, firms that are

efficient can now benefit from economies of scale5, due to an expanding market6. As a result

of economies of scale, lower costs and increased competitiveness, firms can expect more

overall profitability. This would ideally benefit consumers from the member states in form of

1 North American Free Trade Agreement, members: United Stats, Canada and Mexico2 Four factors of production: goods, services, capital and labour3 Source: Building a North American Community by Council on Foreign Relations

http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf4 Source: Building a North American Community by Council on Foreign Relations

http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf5 Definition: output increases at a proportionately higher rate than the increase in costs per unit6 The expansion of the market would be primarily caused by the construction of the NAFTA Super Highway and

the settlement of certain disputes (e.g. Softwood Lumber Dispute).

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lower prices (example in figure 1), more efficient providers on the market, an increased

variety and improved quality of products.

Figure 1

Increasing economic integration in North America does not only entail benefits for the

member states, however. The author expresses his concerns about the possible loss of

Canadas domestic and economic sovereignty by stating that Canada is plugging its oil and

natural gas, its water and grain, minerals and lumber, not to mention Canadian consumers,

into the North American distribution system dominated by the U.S.. In other words, the

author points towards the possibility that an increasing economic integration might be against

the interests of Canada, due to the domination of the United States. Increased harmonization

of the economies is likely to lead to profound political cooperation where centralized policy

making leads to the above mentioned outcome (less domestic and economic sovereignty).

Furthermore, difficulties in running purely domestic social policies, aiming at lowering the

social costs of goods such as tobacco and alcohol, might arise7 as a common market would

also mean the free flow of goods. Additionally, as regulations are harmonized, certain

countries with firm labor legislation and environmental rules might experience some

degradation in standards8. Such concerns are formulated by the author as follows: North

American Union which would eliminate borders and strip Canada down to U.S. non-

7 Source: Matt McGee (2004) Economics, In terms of the good, the bad and the economist Page 5308 Source: Matt McGee (2004) Economics, In terms of the good, the bad and the economist Page 530

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regulation of commerce, non-protection of the environment, less-than-minimal social safety

net and health care and a further destruction of union wages and working conditions.. Most

of the arguments put forward by the author point out the costs of a common market. However,

because of the authors protectionist attitude and general tendency towards overestimating the

possible costs of a North American Union, he fails to provide an objective and balanced

article that equally highlights benefits and costs of a common market.

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from nafta to a north american union?

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