By Marc Lanthemann
The 20th
anniversary of NAFTA's implementation on Jan. 1 has revived some of the
perennial arguments that have surrounded the bloc since its inception.
The general consensus has been that the trade deal was a mixed bag, a
generally positive yet disappointing economic experiment.
That
consensus may not be wrong. The history of the North American Free Trade
Agreement as an institution has been one of piecemeal, often reluctant,
integration of three countries with a long tradition of protectionism
and fierce defense of economic national sovereignty. While NAFTA was a
boon for certain sectors of the economy, particularly the U.S.
agriculture industry, the net effect of the world's second-largest trade
bloc remains somewhat unknown.
The
debate over NAFTA can, however, obscure some fundamental realities about
the future of North America and its three major countries. While the
formation of the trading bloc represented a remarkable political
achievement, NAFTA has remained a facilitating institution whose success
has mirrored the ebb and flow in the slow but inevitable economic
integration of the United States, Mexico and Canada. What lies ahead for
the three countries will not so much be the result of NAFTA as NAFTA
will be the result of the strong geopolitical imperative binding the
three together. Washington, Mexico City and Ottawa are tied into major
global and regional trends that Stratfor has been following over the
years, trends that continue to point to a comparatively bright future
for the North American triad.
Core North America
North
America proper extends from the Arctic reaches of Canada to the Darien
Gap, a thin, swampy strip of land linking Panama with South America. But
given the idiosyncratic and fundamentally different geopolitical
realities of the Central American isthmus -- encompassing Belize, Costa
Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama -- a
simpler and more appropriate definition of North America would be the
continental landmass from the Arctic to the southern Yucatan Peninsula
in Mexico.
There is
little question that North America, by this definition, has been blessed
by geography. There are only three countries in an area more than twice
the size of Europe. Each of them enjoys a coastline on both of the
globe's major oceans, providing critical buffers and serving as
jumping-off points for domestic and international trade. Natural
resources are abundant, as are overall arable lands, all facilitated by
naturally integrated river transport networks at the heart of the
continent.
The
overwhelming beneficiary of these geographic advantages has, of course, been the United States,
but its meteoric rise as a global hegemon was also in great part due to
the fact that neither of its neighbors has posed a threat. The wealth
of the United States, combined with the physical barriers of the three
northern Mexican deserts and to a lesser degree the Great Lakes, ensured
that America's military power could preserve the borders dividing the
three countries -- yet those boundaries are not so insurmountable as to
hinder trade. The definition of those borders with Canada and Mexico
during the 19th century allowed Washington to concentrate on dominating
the world's oceans, eventually giving it control over most of the
world's trade and the ability to deploy its power to any corner of the
globe.
Canada
was not always a friendly neighbor. During the War of 1812, Canada was
the launching pad for a British military campaign that resulted in,
among other things, the burning of the White House. This stance changed
definitively in the aftermath of World War II, when the British Empire
-- Canada's previous patron -- began its decline in earnest and Ottawa
had to become more integrated with and dependent on the booming U.S.
economy. By the time the United States and Canada signed a bilateral
free trade agreement in 1988, the two countries had been each other's
largest trade partners for decades. Today, China is Canada's
second-largest export destination, and yet China takes just 6 percent of
the goods that the United States does.
Mexico's
role and history in North America are a bit more complex. The country
controlled the largest territory and had been the dominant economic and
military power on the continent for centuries under the aegis of the
Spanish Empire. But the Mexican War of Independence fragmented the
already-weakening country and shifted the balance of power in favor of
the United States. With the United States having received Florida from
Spain earlier in the 19th century, the Texas War of
Independence and the Mexican-American War allowed Washington to gain the
vast swath of land between Louisiana and the Pacific Ocean -- including
the strategic ports of California and the approach to the Mississippi
River. With the border settled (figuratively and literally), the two
countries finally began economic cooperation in earnest.
With its
large pool of cheap labor and its geographic proximity to the United
States, Mexico became a vital economic variable for Washington. Setbacks
did occur over time, in particular Mexico's expropriation and
nationalization of its oil industry in 1938 and the immigrant
repatriation crisis of the 1930s. But
geography and the economic complementarity
between the world's largest consumer market and its neighboring low-end
manufacturing economy continued to make the relationship inevitable.
Today, Mexico exports about $1 billion worth of goods per day to the
United States, making it the United States' single-largest source of
imports and its third-largest trading partner. Issues do remain,
particularly over the question of immigration, legal or otherwise, with
both countries trying to find a balance between competitive growth and
stable domestic employment.
Key Geopolitical Trends
The three
North American countries find themselves at the epicenter of key
geopolitical trends, which outline a relatively bright future for the
group. Many of these trends have been playing out for decades, while
others have been set in motion only in the past few years.
Stratfor has identified three major pillars that
defined the global system following the Cold War.
The first was the integration of Europe into the massive supranational
entity known as the European Union. The second was the emergence of
China as the center of global industrial growth. And the third was the
uncontested U.S. position as the world's only superpower.
Since
2008, two of these pillars have become increasingly fragile. The
European Union continues to be mired in an existential economic,
political and social crisis. It is unable to harmonize the divergent
interests within itself, yet it also is unwilling to pay the price of
rupture. The European Union has in fact become a cautionary tale for the
proponents of a beefed up, more organized version of NAFTA.
Meanwhile,
China has all but accepted that the time of double-digit growth rates
based on cheap labor is gone. Beijing is now focusing on the delicate
task of transitioning a 1.3 billion-strong nation with staggering
economic disparities to a more sustainable model.
The
United States, battered by the 2008 crisis, continues to recover
economically and remains the strongest of the three pillars. It also
remains the world's overwhelmingly dominant military power. But
Washington has also begun adopting a more nuanced (and cost-effective)
foreign policy that shies away from direct entanglement in favor of
creating balances of power to stabilize strategic regions of the world,
particularly the Middle East, which has consumed U.S. attention for much
of the past decade. It remains a near certainty that the United States
will continue to dominate the global system for the foreseeable future, a
position that will benefit its two neighbors as they continue to be
tightly integrated with the American economy.
But while
the United States' continued global pre-eminence is a key provider of
stability for North America, one must look south for the continent's
source of dynamism in the decades ahead.
Mexico's Bright Future
Mexico's
demographic profile is among the world's most promising. Its labor pool
has been expected to grow by 58 percent between 2000 and 2030 while
China's is slated to decrease by 3 percent over the same period.
From
aerospace engineering in Queretaro to footwear assembly in Guanajuato,
Mexico is shaping up to be a competitive and flexible manufacturer.
Mexico's geographic proximity to the United States and high levels of
internal wage and skill disparity made its manufacturing sector more
competitive than China's after 2012. Yet Mexico also seems to have found
a way to avoid the Chinese curse of depending on low-cost
manufacturing. High-tech exports accounted for 17 percent of Mexican
gross domestic product in 2012, while cars amounted to a quarter of all
Mexican exports that same year. The high tariffs on high-tech products
manufactured outside of NAFTA give Mexico a notable advantage.
Particularly noteworthy is Mexico's booming aerospace industry. This
sector has received the most foreign direct investment in the global
industry for the past four years thanks in great part to the
construction of a massive manufacturing plant by the Canadian company
Bombardier in the central highlands of Mexico.
Challenges
do remain for Mexico. Income disparity is a double-edged sword, and
while the middle class grows at a slow pace, the country's poor
education system continues to create a shortage of skilled labor for
high value-added manufacturers considering a shift to Mexico. Organized
crime continues to be a high-visibility issue that slows foreign
investment, even as the current Mexican administration seems to have
toned down some of its predecessor's more aggressive policies.
Still,
progress seems to be on the horizon. In a rare display of political
unity, the Mexican government passed a host of constitutional reforms in
2013 that may begin to address some of the country's systemic issues,
particularly those in the education, fiscal and energy sectors.
The
importance of the last one cannot be overstated: Since the
nationalization of oil in 1938, Mexico has been blighted by a steadily
ossifying energy sector. The Mexican Constitution made it nearly
impossible for foreign companies to participate in any part of the
country's energy supply chain, leading to technological stagnation and
decreasing production and efficiency levels. The constitutional reforms
passed in late 2013 are one of the first concrete signs that Mexico may
be on the eve of a much-needed revitalization of its hydrocarbon sector
-- boosting the country's competitiveness in the global arena. U.S.
companies are likely to be deeply involved in this process, especially
since they command the best technical expertise for the deep-water
offshore and unconventional onshore production that Mexico will need
most -- yet again reinforcing formal and informal ties between the two
countries.
Meanwhile,
though Mexico's energy revolution may still be some time away, energy
revolutions are in full swing in its two northern neighbors. Canada is
the sixth-largest global oil producer after its decadelong process of
unlocking its unconventional oil sands deposits. Close to two-thirds of
Canada's oil production is exported via pipeline to the United States,
making it by far the largest supplier of crude to the United States. As
for the United States, the story of the shale revolution is well known.
Advanced extractive techniques have revitalized mature fields and opened
up unconventional plays at an astounding rate over the past five years.
While revitalized oil production has served to shore up some U.S.
energy trade balances, the greatest boon has been the tapping of immense
natural gas reserves that have driven down domestic prices of the
commodity (a helpful tailwind for the recovering economy) and put the
United States on the path to becoming a global exporter of liquefied
natural gas.
There
are, however, limits to the benefits of such an energy boom. True energy
independence, even on a North American scale, is unlikely to take place
anytime soon. The Unites States will continue to depend on a reduced
but still significant volume of oil imports from potentially volatile
regions, particularly if Canada begins to export additional oil to the
more lucrative Asian markets. In addition, any potential overseas
hydrocarbon exports by either the United States or Canada would tie the
two countries deeper into the global commodity market. The true benefits
to the United States and Canada will be, as they have been so far,
economic rather than geopolitical. Trade balances are likely to improve,
yet again boosting the interlinked economies of the three North
American nations.
Twenty
years after its formation, NAFTA remains a useful, if incomplete,
expression of the economic ties between these three countries. It has
not been, and will not be, on par with the establishment of NATO and the
1803 Louisiana Purchase as one of the fulcrums of U.S. history, despite
Al Gore's hyperbolic claim in 1993.
The true
bonds between the three countries are their aligned and complementary
interests born of their shared geopolitical fate. Though the future of
the United States, Mexico and Canada is by no means set in stone, there
are strong indicators that the triad has what it takes to be both a
stable and dynamic geopolitical grouping in the long term -- something
that currently seems out of reach anywhere else in the world.
Editor's Note: Writing in George Friedman's stead this week is Marc Lanthemann, a geopolitical analyst at Stratfor.
Original Link: http://www.stratfor.com/weekly/nafta-and-future-canada-mexico-and-united-states
