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NAFTA at 20
The North American Free Trade Agreement's Achievements and Challenges
By Michael J. Boskin
Hoover Institution PressCopyright © 2014 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
NAFTA: From Conception to Creation
The chief negotiators — Michael H. Wilson for Canada, Jaime Serra Puche for Mexico, and Carla A. Hills for the United States — reflect on the lengthy negotiations and political complications, interrupted by brief moments of drama, that culminated in the signing and ratification of the North American Free Trade Agreement.
Presenters: Michael H. Wilson, Jaime Serra Puche, Carla A. Hills, Mickey Kantor
Comments: George P. Shultz, Daniel Trefler, Michael J. Boskin
Michael H. Wilson: Let me put a little bit of historical context on all of this. Free trade with the United States had been a subject of discussion for probably a hundred years, on and off. We had another election, 1911, that was fought on free trade. The Liberals proposed it, Conservatives strongly opposed it, and the Conservatives won and that put the whole idea to bed for a long time because it was seen as a bit of a third rail.
We did take the first step in 1965 with the Auto Pact, a very important trade agreement between the US and Canada. It was particularly important for Canada because it allowed us to modernize our sector. What happened out of that was about 90 percent of what we produced was sold in the United States, and about 90 percent of what we consumed was bought from the United States. So it was the first sign of real integration, and the start of the so-called North American Supply Chain.
Then in the years leading up to the (Prime Minister Brian) Mulroney election in 1984, there was some talk of broadening from the Auto Pact and moving into other sectors. But it quickly became apparent that we would be taking the low-hanging fruit off the table and taking away the leverage that we would need to get a broader agreement on the much tougher issues that would become part of the overall agreement. The issue was not on the table at all in the 1984 election. The Liberal government had formed the Macdonald Commission, led by Don Macdonald, who is the foreign minister of everything in the Liberal government. He came up with a phrase which became the real talking point. He said that he thought that Canada should take a leap of faith and consider a free trade agreement with the United States.
Mulroney quickly grabbed this, and shortly after that we had the so-called Shamrock Summit in Quebec City with President Reagan and Prime Minister Mulroney agreeing to study the possibility of a free trade agreement between the two countries.
Throughout this period, President Reagan stood back from it. He did not want to be seen as being the aggressor taking the initiative. He very rightly thought that if he did that, it would attract a lot of negative attention in Canada, and he would become the focal point. He thought it would be better to have Mulroney take the initiative and the idea be seen as more of a Canadian idea, rather than something that the United States was imposing upon us.
But the underlying fear was that a free trade agreement with a country ten times the size of Canada both in terms of GDP and population would inevitably lead, directly or indirectly, to a significant erosion of our sovereignty. But in face of all of this, Mulroney, in September 1985, announced that he would propose a negotiation with the United States. President Reagan responded positively and enthusiastically.
Mulroney, though, in his announcement, was very careful to set out some of the things that he felt were the essence of Canada and would not be the subject of negotiation: our national sovereignty, our social policies, our cultural policies, the capacity to address regional disparities, our distinct linguistic character. These were the things that he focused on, understanding that these would become very significant in the concerns expressed by people opposed to the agreement.
But apart from that, he wanted the broadest package possible on the table. Inevitably, the cry went out right after that Mulroney was proposing to sell out Canada and that was something that carried through right into the subsequent election.
The key drivers in the negotiation were clear. We wanted to get access to a market ten times our size, our number one trading partner. We wanted to have access to the United States market because that would allow us to rationalize away from a very fragmented economy into an economy that was more integrated with this great big economy to our south, and allow us to specialize and focus on our areas of strength. These were very strong considerations.
Let me give you an example. I remember talking to a CEO of one of our large companies, and I said, "What would free trade do for you?" He said, "About a third of our business would be gone. Absolutely, we could not compete. Two-thirds would be OK."
I said, "One-third is quite a big piece of your company. How can you do this?" He said, "Well, that part of the company is not going to go anywhere. Our future lies in those two-thirds, and we have to see ourselves capable of rationalizing between what we should put in the United States and what we should put in Canada. A free trade agreement would give us that direction to allow us to make those investment decisions."
An agreement was also needed to reduce trade disputes, and this became the key sticking point in the negotiation with the United States. We had seen a period leading up to this when we would be subject to trade disputes with the United States, molded largely by congressional pressure. What we felt was that, if we were going to go into an agreement with a country ten times our size, we had to have a dispute settlement mechanism where disputes would be settled by impartial bodies that would be based on the facts, rather than simply driven by politics.
The dialogue that we had within Canada during this period leading up to the final agreement was a very broad dialogue. We had ITAC (International Trade Advisory Committee) and SAGIT (Sectoral Advisory Group on International Trade). These were the principle consultative bodies and were very important in the advice that the negotiators would receive. The political debate itself was on economic issues, social policy implications, and the national interest, the national sovereignty, things like that.
These were the sorts of debates that we had, and they centered on those issues that Mulroney identified in his earlier announcement. But to that, we added water. People were terrified that we would have water directed out of the Great Lakes into other parts of the United States, or that we would be forced to redirect waters in western Canada so that they would be largely serving the interests of the United States. Agriculture became very important and there were also fears that we would have a managed foreign exchange agreement with the United States, which naturally would accrue to the favor of the United States rather than Canada.
Key issues were dairy and poultry, wine, textiles and clothing, softwood lumber (which did not become part of the agreement, but continued to be a narrative between the two countries). Rules of origin were an important part of that as well.
We had a deadline, which was October 3, 1987, and that was because of the Fast Track authority, where we had an up-or-down vote in the United States. We entered into negotiations. The negotiators were having a hard time in the early stages, and it became more and more clear that there was no love lost between Simon Reisman and Peter Murphy. Things just came to a halt. I remember having some intense discussions with (then treasury secretary) Jim Baker and I said, "Jim, you have to get into this. It is not going anywhere." And he said, "Relax, Mike, we work to deadlines in this town. We will be sitting across the table from each other on October 2, and we will get this done by deadline October 3." Sure enough, we were sitting across the table. He was brought in by President Reagan, and Derek Burney and I were brought in by Prime Minister Mulroney to try and conclude the agreement.
Periodically, during those last two days, Baker would leave the room. And partway through, he told me that he went to speak to Dan Rostenkowski and Sam Gibbons, the two senior Democrats on trade agreements from their position on the House Ways and Means Committee. That was very important in giving him the confidence to be able to accept this or reject that. I was on a platform with Jim about a year ago and I reminded Jim that he was doing this and he smiled. I said, "In today's environment in the United States Congress, would you be able to do that?" And he said, "No, I couldn't." Now that is hugely significant for us as a neighbor to the United States. Some people think that all the things that are happening in the United States only matter to the United States. If we had not had that free trade agreement, our country would be a very different place than it is today. So that ability of the two parties to have a dialogue during the course of that conversation was extraordinarily important to us as a country.
George P. Shultz: I think Jim gave you a wrong answer. If he were there today, working for President Reagan in a Reagan administration, he could have done that. We have an entirely different executive now.
Wilson: Fast forward now to 6:30 on the night of October 3. We had five-and-a-half hours to the deadline, and we reached a deadlock on the dispute settlement agreement. We broke. A few of us got on the phone with the prime minister, we told him where it all was, and we said we do not think he can accept this. He agreed. He said, "You'd better go and speak to Baker and tell him that we will put it to bed. But let's try and do it in the right way. I'd like to speak to the president to put it to bed as nicely as possible."
I went to see Baker. He agreed, and he said, "Well, let's give it another try." In addition — I didn't realize it at the time — Mulroney was not able to get through to the president. But he picked up the phone and called Baker and said, "How are you going to explain to your people that you can get a nuclear arms agreement with your worst enemy, the USSR, and you can't get a goddamned free trade agreement with your best friends, the Canadians?" That, I think, was a significant factor in getting us over the top, because we did get the dispute settlement mechanism, and everything moved nicely from there.
This led right into the general election about a year later, and it was a fierce election. I had intended to step down after ten years in the Parliament. With this election coming up, with the emotions, the passion, and being right in the middle of the final stages, I thought I could not leave. But this will give you the flavor of the election. We had also talked about a goods and services tax, the value-added tax, and that never got into the election campaign. To me, it should have gotten in, because it was pretty controversial, but I just make that point that the focus was entirely on the free trade agreement. And to this day, it's called the free trade election.
Conservatives were obviously in favor, and both the opposition parties were opposed. There were the first stages of negative advertising in our country in that election, and it was a very passionate campaign. We would have the opposition politicians going into nursing homes and saying, "You are going to lose your health care. You are not going to have this nursing home." It got to be very bitter.
There are some quotes that will give you a sense that the future of the country was at stake, according to the national newspapers in Canada. "We said we are going to build a nation." The Liberals said, "You sold us out. You destroyed a 120-year-old dream called Canada. You are surrendering one by one our levers of economic independence." "Made in Ottawa, not in Washington." "It is bad for everyone. It has to be rejected."
I had one very strong supporter, and she had a house right opposite one of our major schools, which is where we were going to have a big candidates' meeting. I went to her and I said, "In the last three elections, you let me put a great big four-by-eight sign on your front lawn." She looked at me and she said, "I can't do it, Mike. You have given our country away." That was the sense that we had during that time.
We won the election. We were in third place with two weeks to go, and Mulroney was told to be a statesman. Just talk about the importance of it to the country and be a statesman. Well, we were in third place, two weeks to go, and he said, "To hell with being a statesman, we've got to fight for this thing." He just took his jacket off, very passionate, saying how important this was, that it was essential for the country to have, and we won a very strong majority. We got 171 seats in a 284-seat House. So it was a very prominent victory.
After that, things settled down, and by the time the discussion of NAFTA came, there was a pretty good acceptance of free trade. The Liberals had opposed the free trade agreement with the United States when they won the election of November 1993; but within days, they reversed their position on trade.
There are people who disagree and come up with some analysis that suggests that the free trade agreement did not do a whole lot for Canada. To the people that say that, I would say that a lot of things have happened since 1988. Whether it's globalization, the recessions that we have had, the Asian crisis, the dot-com bubble, the financial and economic crisis of 2008 — 2009, or other things that have happened, it is very hard to separate that out and identify the effect of the free trade agreement. The point that I make is, where would Canada be today if we didn't have that free trade agreement? It led to a major transformation of our economy; it is much more competitive, a much more modern economy today than it would have been. Our productivity moved up every year in the '90s. It has leveled off since, but we moved ourselves into a new level of competitiveness. We were able to balance our budget. Our overall current account deficit in trade moved to a surplus. We had current account deficits in the '80s of 4 percent of GDP. In the latter part of the '90s, it moved to a surplus. Exports during the '80s to the United States were about $100 billion a year. By the year 2000, they were $350 billion a year.
Exports as a percentage of GDP moved from about 25 percent to 40 percent, and some years even a good deal higher than that. So, if we did not have the free trade agreement, Canada would have been left with a very weak, fragmented economy, and one that I think would have a significantly lower standard of living. In addition to that, we have a much more confident business community that is looking to expand trade far outside the NAFTA parameters, and I do not think that would have happened if they had not developed the self-confidence they have of being able to be in the most competitive economy in the world.
Carla A. Hills: Let me talk about some of the challenges and opportunities that the North American Free Trade Agreement produced. I have to give credit to Jaime Serra, who raised the subject, not of the NAFTA, but of a bilateral agreement between the United States and Mexico, in Davos in January 1990. As we met in Davos,4 the US economy was not in robust circumstances. It is a fact that when the economy is down, that stokes economic nationalism. We had been through a battle with Canada over our free trade agreement with it, which almost brought the Mulroney government down.
I brought home from Davos the idea of a free trade agreement with Mexico to the president. I thought it was a good idea. I supported the notion that we expand free trade to all of North America. The president was receptive. We had extensive internal discussions with some yeas and some nays in the administration. But during the months of February and March 1990, we got primary support within the White House and among my cabinet colleagues.
However, some pointed out, are we really taking on more than we can do? We are negotiating the Uruguay Round (of the General Agreement on Tariffs and Trade), which is our top priority, and now we are talking about adding a major bilateral agreement. But in enumerating the many challenges, I would say the number one challenge was to secure Fast Track legislation prior to beginning negotiations. (Mexican) President Salinas made it very clear to President Bush that he wanted the same Fast Track procedures governing the bilateral agreement as Canada and Israel had had with the United States.
Fast Track was a law passed in 1974, signed by President Ford, that was an accommodation to deal with the separation of powers in our government. Our Congress has the power over the purse strings, tariffs, taxes, and the like. The president has the power to negotiate with foreign governments. Under the law, as it was passed, if the president decides to negotiate a trade agreement — bilateral, plurilateral, or multilateral — he must notify the Congress. After notification, the Congress has sixty legislative days in which to deny the Fast Track procedures, which require Congress to vote for or against the negotiated agreement when presented without amending it. Sixty legislative days work out to be about four or five months. So if Congress does not vote Fast Track down, the administration has that authority after the sixty legislative days have passed.
Excerpted from NAFTA at 20 by Michael J. Boskin. Copyright © 2014 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
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Table of Contents
List of Figures and Tables ix
Introduction Michael J. Boskin 1
1 NAFTA: From Conception to Creation 7
Presenters Michael H. Wilson Jaime Serra Puche Carla A. Hills Mickey Kantor
Comments George P. Shultz Daniel Trefler Michael J. Boskin
2 Mexico and Canada Before and After NAFTA 29
Presenters Stephen Haber Daniel Trefler
Comments John B. Taylor George P. Shultz Michael H. Wilson Carla A. Hills Jaime Serra Puche Michael J. Boskin Lorenzo Caliendo
3 The New North America 51
Presenter George P. Shultz
Comments Caroline Freund Michael H. Wilson Michael J. Boskin Jaime Serra Puche Mary O'Grady Carla A. Hills Brian Lippey
4 Evaluating the Effects of NAFTA 69
Presenters Lorenzo Caliendo Caroline Freund
Comments Kyle Bagwell Michael J. Boskin Jaime Serra Puche Daniel Trefler Michael H. Wilson Diego Perez Mary O'Grady Alan Sykes
5 North American Energy 99
Presenters James L. Sweeney Michael H. Wilson
Comments Thomas F. Stephenson George P. Shultz Jaime Serra Puche Mary O'Grady Michael J. Boskin Stephen Haber Daniel Trefler
6 NAFTA's Next Twenty Years and Lessons for Future Trade Liberalization 123
Presenters Jaime Serra Puche Michael H. Wilson Carla A. Hills
Comments Michael J. Boskin George P. Shultz Frank Montgomery Woods Daniel Trefler Stephen Haber Alberto Diaz-Cayeros
Appendix: Letter from President George H. W. Bush 143
About the Conference Participants 147