Toward Deeper North American Integration: A Customs Union? (1)

I. INTRODUCTION In the last few years, a public as well as an academic debate has surfaced primarily, but by no means exclusively in Canada, about the desirability of deeper North American integration. A number of officials, among them former Finance Minister John Manley (Beauchesne, 2003), former International Trade Minister Pierre Pettigrew (Pettigrew, 2003), President and CE Thomas D'Aquino of the Canadian Council of Chief Executives (D'Aquino, 2003), and Bank of Canada Governor David Dodge (Dodge, 2003), have publicly spoken in favor of deeper North American integration. In addition, the House of Commons Standing Committee on Foreign Affairs and International Trade in December, 2002 (Canada, 2002), as well as its equivalent in the Senate six months later (Canada, 2003), produced comprehensive reports on both the current state and the prospects of Canada's relations within NAFTA. Mexican President Vicente Fox issued the boldest proposal soon after his inauguration in the summer of 2000, calling for the establishment of a North American Common Market (Pastor, 2002: 92). In the United States, deeper NAFTA integration has so far not achieved any noticeable public interest. The recent attention the topic receives among Canadian public and private decision makers is fueled largely by arguments and counter-arguments advanced by Canadian and American scholars through academic think tanks, particularly the C. D. Howe Institute. (2) Much of the literature deals with the desirability and feasibility of a North American Monetary Union (NAMU); less consideration has so far been devoted to a North American Customs Union (NACU), let alone to a Common Market. (3) This debate takes place simultaneous to, but is often seen as separate from, efforts to establish a Free Trade Area of the Americas (FTAA). Contrary to the extant literature (e.g., Dobson, 2002: 7; Hufbauer and Schott, 2004: 7), I hold that the two projects are closely interrelated. The reason is that the hemispheric project is the first instance in which four pre-existing integration schemes (NAFTA; Mercosur; the Andean Community; and CARICOM) (4) would effectively be merged rather than geographically widening and institutionally deepening the same agreement over time (as in European integration). I suggest that this fact has to date been grossly underestimated in the United States where the conception of the FTAA is a NAFTA writ large, although the three "preferential trading arrangements" (PTAs) (Mansfield and Milner, 1999) in the south are customs unions, i.e. they already exhibit a deeper level of integration than the NAFTA. (5) Consequently, the concrete form of deeper NAFTA integration, including its potential absence, has a profound influence on whether or not and, if so, with what institutional structure the FTAA is likely to materialize. (6) Put differently, if a NACU were negotiated, it would make hemispheric integration more easily attainable because of greater institutional compatibility with the three PTAs in the south. I will argue in this paper that the Canadian debate needs to concentrate on customs union proposals if it is to have any practical relevance; a limited, i.e. sectoral, NACU is both economically prudent and politically feasible. Given both the selective level of economic integration within NAFTA as well as the asymmetric relationship among its member states, I maintain that this, however, cannot be said of either a common market or a monetary union. In pursuing this claim, I endeavor to strip a thus far still largely technical debate to its main points. The analysis proceeds as follows: the first section begins with a general discussion of the various levels of regional economic integration, interspersed with empirical illustrations. Its purpose is three-fold: to serve as the reference point for the relationship among the different proposals put forth for deeper North American integration; to clarify the often explicit location of the arguments vis-a-vis the European Union (EU); and to demonstrate how the latter stages of European integration already have had very practical implications for Canada, the U. …