Economic and financial stability are clearly linked to free trade. The world has become so interconnected that spill over effects are inevitable in all arenas. Currently, the world is experiencing a wave of deregulation and the removal of once prevalent tariff barriers. This political and economic regime is dedicated towards freeing up markets, creating a so called level playing field for laissez-faire economics--in essence free trade. In efforts to avoid conflict in an ever increasing interdependent world, trade rules have been established and maintained by the World Trade Organization; its job is to oversee trade disputes.
Fair trade is necessary in today's world. It is a prerequisite for enhancing global welfare. Free trade can only have positive effects on the society if behind the border issues are dealt with through regional institutions such as The North Atlantic Free Trade Agreement (NAFTA) and the European Union (EU). Through fair trade behind the border issues are dealt with such as environmental standards, labor inequalities and social problems. Behind the border issues if neglected can lead to economic and financial stability. In order to curb the negative effects of free trade the deepening of institutions is essential. While NAFTA has failed thus far to provide positive policy coordination, the EU has succeeded. The EU has addressed problems that NAFTA has failed to address. The EU has successfully incorporated fair trade into their free trade regime.
This chapter will specifically cover the economic outcomes of free trade on NAFTA and EU members, whether good or bad. Policies and multinational institutions will be analyzed in order to make the most effective policy proposals. Likewise, the question of economic integration will be addressed: Can the North American economies learn from the European Union's example of deepening in the context of global free trade via the World Trade Organization (WTO)?
The EU and NAFTA both play by the same set of global trade rules set today by the World Trade organization (WTO). The difference is that the EU has been more receptive to behind the border issues than NAFTA. It is possible, as demonstrated by the EU, to adhere to world trade rules and maintain humane social standards. In order to fully understand the cohesive measures of world trade one must first look at the history of the WTO. The General Agreement on Trade and Tariffs (GATT) and the Uruguay Round trade negations evolved into the present multinational institution, the WTO. NAFTA and EU member states are major players in the WTO, therefore following the same trade rules. This presents a common thread between the two regional institutions. What is interesting and relevant to this argument is how the EU and NAFTA deal differently with problems of economics and financial stability in the context of global free trade.
The EU has handled dilemmas such as wage distribution and social cohesion in a different manner than NAFTA thus far. This has been done primarily through the Structural Funds Program. The EU has provided financial bailouts to offset political and economic risks for individual member states. This fund which is made up of two main sectors--the Regional Development Fund (RDF) and the European Social Fund (ESF)--enhances regional efficiency. It provides a means for the redistribution of wealth and the development of human capital. The EU is a positive role model for NAFTA in dealing with behind the border problems spurred by free trade. There is a great deal to be learned from the example of the EU--they have set the stage for fair trade. NAFTA must now follow suit.
There are many supporters of free trade on a global level, especially multinational corporations. Free trade can potentially be a positive force ensuring economic and financial stability. Free trade and fair trade can exist simultaneously as proven by the EU but this is not always the case. NAFTA, for example, has free trade that is not always fair trade. Regions are responsible for integrating fair trade policies which correspond with the multi-lateral institutions such as the WTO. Therefore, the argument by Fred Berston for globalizing free-trade is not off track with fair trade conditions, in fact they are compatible: "The global approach is superior because it maximizes the number of foreign markets involved and avoids the economic distortions (and political risks) of discrimination among trading partners." (1) As a result of free-trade approximately 60% of world trade is now taking place among countries which have committed to free-trade by a certain date. (2)
The avoidance of conflict is an inevitable concern which needs constant monitoring in regards to free trade. This is where international institutions come into place. They instigate effective global trade rules which define regional arrangements and govern relations. Global free trade would eliminate the possibility of the world being divided up into particular trade blocks. Global free trade is the only way for the United States to achieve fair trade--it would level the playing field for all countries involved. However, "arguments for creating a level playing field are troublesome at best. International trade occurs precisely because of differences among nations-in resource endowments, labor skills, and consumer tastes. Nationals specialize in producing goods and services in which they are relatively most efficient. In a fundamental sense, cross-border trades are valuable because the playing field is not level." (3) This follows the line of thought by David Ricardo who projects that comparative advantage promotes free trade. Hence, if all countries were equally endowed there would be no reason for trade. In turn, comparative advantage utilizes free trade as to increased global welfare.
The effect that free trade has on nations is positive in certain areas. For example: "The sharply reduced costs of moving goods, money people, and information underlie the profound economic truth that technology has made the world markedly smaller." (4) However, smaller is not always better. Globalization inherently leads to behind the border issues, such as wage inequality and financial instability. These issues must be dealt with in order to insure fair trade through free-trade.
Prior to the implementation of NAFTA free trade was examined to determine its effects on their future regional economy. The effect of the 1989 United States free trade agreement was positive in light of US exports: "Before the [CUFTA] agreement, Canada had tariffs on the imports that were two to three times higher than those of the United States (similar to Mexico prior to the free trade agreement). After the agreement to eliminate tariffs and other barriers on all the United States-Canada trade flows and many restrictions on investment and services, US merchandise exports grew 27% between 1988 and 1992 (from $71 billion to $90 billion). US service exports to Canada increased by 78% to $17.2 billion during the same time period. Also, since the agreement, there have been numerous calls from both sides of the border to accelerate the scheduled phase out of tariffs." (5) It must also be remembered that Mexico was a former protectionist state that as a result of liberalization approached the United States for a free trade agreement. Instead of proposals to abolish free trade, this chapter will critique and improve upon it. NAFTA's foundation is sound, but the problems of downward harmonization spurred by behind the border issues must be addressed.
Social cohesion through economic and financial stability is essential. For example, downward harmonization only perpetuates the problem of wage disparity because companies seek to pay as little as possible in order to be competitive on a worldwide level. These problem areas can be offset by deeper integration of regional institutions as exemplified by the EU.
Deeper integration is not limited to regional institutions. It is also relevant to multinational institutions as illustrated by Kahler, "[d]eeper integration requires analysis of the economic and the political aspects of virtually all non-border policies and practices. Such issues have already figured prominently in negotiations over the evolution of the European Community, over the Uruguay Round of GATT negotiations, and over the North Atlantic Free Trade Agreement." (6)
The problem with deeper regional integration is that it sacrifices national autonomy. There are tensions between political sovereignty and economic integration. Cohesion between the two require a multilateral force; this is were institutions such as the World Trade Organization come into the game. Furthermore, because the WTO did not just appear from the abyss, it is necessary to include the evolution of the global trade system. The identity of the WTO was shaped by the GATT and the Uruguay Round agendas. Likewise, the importance of these international institutions in the context of this paper is that the EU and NAFTA both have evolved right along with them. Today they both are active members of the WTO. The significant difference is the way in which the EU and NAFTA handle issues of economic and financial stability while adhering to the same rules of world trade.
The General Agreement on Free Trade and Tariffs evolved from the shallow integration of the reduction of at-the-border barriers and coordination of national policies. GATT was a necessary institution in promoting world peace and order after the end of WWII; it was one of the most successful multinational institutions of its time. Likewise, it included member states of America and Europe. Specifically, the U.S. was the instigator of this regime, as it had held the most power after WWII. Europe, on the other hand, was recuperating from mass destruction, which included political and social unrest. GATT was necessary to mediate trade disputes. This helped to bring countries such as Germany back into the world economic system. GATT eventually evolved to the more prominent level of managing economic integration. Its main purpose was to resolve international trade disputes. In essence, NAFTA and the EU have common origins through GATT.
As it emerged before the Uruguay Round, GATT was only able to facilitate enforcement of agreements regarding trade disputes. In other words, as Kahler explains, "GATT before the Uruguay Round of trade negotiations remained 'a compact that establishes communication and conventions to facilitate coordination' of national policies. With the exception of the limited monitoring capabilities, GATT did not become an institution with independent enforcement power." (7) This justifies the argument of Bergsten: "The GATT article that governs regional arrangements is extremely weak, and its implementation has been even weaker: the GATT has been notified of more than 100 'free trade agreements' but none have been rejected and only two have been approved. Now that regionalism is so prevalent, the WTO needs to adopt much stronger provisions and procedures to make sure that regional arrangements evolve in an open manner." (8)
This pertains regional institutions such as the EU and NAFTA. The GATT institutions was not powerful enough to incorporate these regional agreements. That is why the evolution of the GATT into the WTO is so closely connected to these multinational institutions; it is because of the call for deeper regional integration that the GATT became outdated.
As mentioned earlier, the creation of GATT stemmed from the United States after World War II. "It was the United States which envisioned a multilateral postwar world." (9) Although the rules of the document adhered to American ideals in trade policy, the institution did not insure that the functional needs of the United States would be met. Therefore, it was not a document that insured American hegemony as it did not specially look out for the needs of Americans. In fact, "From the American perspective, the GATT had serious flaws. Central among these problems is the continued inability of GATT to liberalize trade for America's key exporters." (10) GATT was characterized as bilateral in its agenda adhering mainly to the needs of its major trading partners: the United States, Japan and the European Community. Again, this illustrates the common origins of the EU and NAFTA through GATT, a multinational institution. As the world became more global, recognizing the need to incorporate smaller countries, the GATT evolved. The GATT was also criticized for its week linkage to domestic politics which did not correspond with deeper regional integration. In the trading countries, GATT did not have the necessary connection to domestic politics that the European Union treaties had within the legal systems of the EU members. (11) There was an obvious call for reform which was initiated by the Uruguay Round in its efforts to reform trade disputes.
By the 1980's it became apparent that the issues of deeper integration dealt with at the Tokyo Round were inadequate. There was a call for a widening of GATT and the deepening in the context of behind-the-border disputes. The growing awareness of the importance of the linkage between trade and investment, as well as the "growing unilateralism in US trade policy as it fixed on the issues of 'unfair' trade'--in regards to the European Community' single-market initiative on investment centered issues and Japan's 'closed' market for manufactured goods." (12) There was an overall need for the Uruguay Round to acknowledge the problems of global investment. In the area of finance the Uruguay Round displayed a profound interest for investment rules which incorporated interdependency among nations.
The talks during the Uruguay Round are necessary in an increasingly interdependent world; there was a call for deeper integration that the Uruguay Round was perceptive of. "The Uruguay was indeed the largest and most ambitious Round ever undertaken. And the significance is worth underlining." (13) The negotiations lasted from September of 1986 to December of 1993. The outcome was an institutional design of deeper integration. "The signing of the final act of the Uruguay Round and the Agreement Establishing the WTO at Marrakesh in April of 1994 suggested that institutional characteristics of GATT had permitted this unprecedented widening of scope and strengthening of the core trade institutions." (14)
The Uruguay Round was a major player in the evolution of free-trade policies and institutions."The major new regional arrangements, particularly NAFTA and APEC, were spawned in part by missed deadlines of the Uruguay round of GATT and were intended to serve as alternatives to the global regime if needed." (15) The Uruguay Round helped and scheduled future negotiations in an array of sectors which continued its momentum of liberalization. For example in the finance sector the Uruguay round brought forth "a few modest covenants on trade related investment measures." (16) This led to the efforts of regional groupings in NAFTA, for example, who pioneered investment rules.
The Uruguay round, at its time, was the most prominent example of reduction of tariffs leading the way for regional future free trade in NAFTA and the EU. Likewise, the Uruguay Round was on a mission to address intuitional weaknesses of GATT. Enforcement and monitoring issues were of great concern and hence was the inception of the World Trade organization.
As much as it may be tempting to assume that GATT no longer exists, this is not the case. Rather, the WTO has merely expanding upon GATT. The processes of this evolution is illustrated by Kahler:
The GATT that has emerged from the Uruguay round is an institution whose trajectory has confounded the predictions of many of its critics. GATT is not 'dead', as some have argued; its scope has been enlarged, its organizational profile sharpened, and its monitoring and enforcement capabilities strengthened. Certainly its enlargement in scope is owed in part to the issues of deeper integration--the turbulent frontier of domestic policy regimes and international rules--but equally to the widening of GATT to become a genuinely global organization. The logic of the Uruguay Round and its outcomes were driven in large by conflict between the industrialized great powers as the trade regime and the emerging trading states of the developing world, increasingly dependent on uncertain access to the markets of North America, Europe, and Japan. The industrialized powers were unwilling to accept free riders on several key issues; the developing economies were insistent on dealing with the old agenda of trade protectionalism and (together with the smaller industrialized economies) intent on curbing the unilateralism of their bigger trading partners. (17)
The GATT was transformed by the Uruguay Round to what is known today as the WTO. There was a call for deeper integration from its members, particularly as pertains to this paper, from the Americas and Europe. The evolution of the WTO was interconnected, all players working and responding to one another. Clearly, there was need for reform. The Uruguay Round negotiations proved successful, implementing the WTO.
The World Trade Organization (WTO) was a result of the the Uruguay Round of multilateral trade negotiations. Through the Uruguay round trade rules were improved upon and extended in an equal fashion to most trading nations. "The WTO is key to the smooth functioning of the international trading system." (18) It oversees trade disputes among participating nations. Furthermore, it is responsible for framing future negotiations of additional reduction in trade barriers. "After all, the long term vision is there--to ultimately have a world in which trade and investment flows freely across national borders under a common set of comprehensive rules in an organization with universal membership." (19) Since fair trade is only viable through free trade this is pertinent to the overall argument of deeper regional integration within the context of multinational institutions such as the WTO. The EU and NAFTA both adhere to these global trade rules. While the EU has demonstrated both fair and free trade through deeper regional integration, NAFTA is only beginning to recognize its regional inconsistencies.
On a global level the world was calling for reform of GATT. The WTO is the key to a cohesive multilateral institution among trading nations. The WTO enhanced the status of GATT in regards to the extension to products, sectors, and conditions of trade previously not substantially covered. It also brought the participation from within each country up to par. This is not to say that the WTO is completely separate from GATT, instead it is an extension of it. It encompasses rules of GATT such as "bringing together disciplines on government practices affecting trade in goods and services and the protection of intellectual property rights under one institutional umbrella, the WTO agreement also facilitates the 'cross-retaliation' mechanism of the integrated dispute settlement and understanding." (20)
The WTO also seeks to resolve problems of "free-riding" which was overlooked by GATT. Participants of the WTO agreement, including the EU and NAFTA, must adhere to all of the Uruguay Round agreements which incorporate free-market schedules for industrial goods, agricultural goods and services. Institutional rules were also established and maintained by the WTO initiated by the Uruguay round agreements. The WTO agreement established a link between the Bretton Wood financial institutions--the World Bank and the International Monetary Fund. Again the WTO is different than the GATT Secretariat, but it was never intended to be a significantly larger institution. (21) At its inception the WTO does not intend to impede on the autonomy of its members. For example: "The WTO will not effect the sovereignty of the United States in passing its own laws, enforcing existing standards, or setting its own environmental or health standards. Only the US Congress, acting with the President, has the authority to change US laws." (22) The WTO is a multinational institution, not a global dictator. The right of each member country to maintain its sovereignty is the goal of the WTO.
Overall, Canada supports the WTO along with its other NAFTA members Mexico and The United States. Likewise, the European Union (EU) is also an active member. "East Asia and parts of Latin America, which are likely to be the two fastest growing parts of the world economy over the coming decades, would thus benefit greatly from extending to Europe the free trade commitments they have already elicited to the United States. This can be done only through a global effort in the WTO." (23)
The WTO by no means wishes to instill deeper global integration to the same extent as the EU instills deeper regional integration. Instead, its goal is to work with it, just as its evolution is interconnected. This serves as an example, and a testimony that it is possible for NAFTA to deepen its region side accords and continue to comply with the rules of the WTO.
The evolution of NAFTA itself is one of interdependency. CUFTA--the Canada-United States free trade agreement -- "represented a bilateral effort to move beyond the then-stalemated Uruguay Round agenda in GATT. In addition to complete elimination of tariffs and the prohibition or restriction of non tariff barriers, CUFTA found it easier than GATT to liberalize services in a bilateral setting." (24) In essence, CUFTA created a cooperative international regime for dealing with trade disputes. Furthermore, investment which had previously been a source of conflict between Canada and the United States, was also addressed through CUFTA. "Rather than attempting to harmonize approaches to dumping and subsidies, dispute settlement under chapter 19 was carried out by using each side's national trade laws as benchmarks." (25) The inclusion of investment policy in this agreement is significant of the economic and financial stability.
When NAFTA was ratified in 1993, it was much more liberal than CUFTA. It included free trade policies with Mexico as well. "The investment regime under NAFTA subjected most sectors to National treatment of the NAFTA investors and ended most performance requirements. Other key service sectors--telecommunications, financial services, transport--were also liberalized, once again in contrast to the final balance sheet of the Uruguay round." (26) However, as much as NAFTA seems to contrast CUFTA it is in fact just an evolution of freeing up trade by eliminating tariffs.
NAFTA's downfall is that it has failed to provide a model for positive policy coordination. NAFTA surpassed GATT by including "policy realms that had been typically divorced from trade" (27) --such as environmental and labor policies. Nonetheless, these side accords were not strong enough to deal with the problems of downward harmonization within NAFTA. Today, there is a base to build off of, but continued regional deepening is pertinent to the success of NAFTA. The acknowledgement of these behind the border issues is a start, but it is time to go a step farther. This is where the EU comes into place to serve as an example of deeper regional integration.
On a regional level the EU has dealt with behind the border issues of free trade in a positive manner that prove to be beneficial to their members welfare. The European Union's evolving institutions provide a positive role model for other regional groupings, particularly North America. Deeper integration has been a major breakthrough provided by the EU. The EU has been faced with similar problems as NAFTA it has just gone about solving them in a different way. What is intriguing is how alike these institutions are. They are playing by the same rules of the WTO, yet following different regional disciplines. It is described as more of a network among members than any other institution.
The European Union has given more power to its parliamentary system as well as the European Court. Future common policies are also continually being revised to adhere to its regional needs. Economic and monetary union is specifically addressed in the Maastricht treaty along with justice, home affairs and a common foreign security policy.
The European Union has expanded its support to all members through interconnected bargains. European institutions are far more connected to domestic needs and concerns than The WTO or NAFTA. This lends support for deeper integration.
Economic integration procedure is insured with strong institutions. Also, "the EU evidences a higher level of commitment from its members then most international institutions; it is also more centralized and institutionalized." (28) Sovereignty is pooled through an incremental process which proves to be very efficient. In the late 80's "as a result of the Single European Act, capital controls that had proved to hedge against pressures from the international financial markets were stripped away. The move toward economic and monetary union by means of gradual hardening of the exchange rate grid was portrayed by federalists as a necessary concomitant of the acceleration of economic integration after establishing a genuine common market." (29)
The EU is unique in its interdependent bargaining and domestic support. The call for policy spill over has been maximized for the good of the people. For instance, the poor are not disregarded, they are instead fit between principles of subsidiary and European competence.
Like the WTO and NAFTA, the main purpose of the EU's contemporary common market (EFTA) is to insure free trade throughout the region. EFTA insured that it would maintain sovereignty of its participating countries. EFTA deals with policy spill over in a concise manner, resolving behind the border tensions. "Among the issues it addressed were government subsidies to industries, public procurement, industrial standards, and restrictive business practices." (30) This in turn insures fair trade within a free trade region. Although EFTA has no formal structure for resolving trade disputes, it provides standards which global institutions, such as GATT can not.
NAFTA can learn from the EU's policy innovations in the areas of financial stability and wage distribution. In the global context EU's political will and its redistribution of wealth through the Structural Funds program, cohesion fund, and the European development fund are successful and up to par with the WTO.
The EU has been sensitive to regional inequalities from the beginning. Specifically it has concerned itself with the wag gap, unemployment and growth. The Structural Funds program has targeted itself to local authorities, business enterprises and individual workers. The Structural Funds program is made up of many funds, but for the purpose of this chapter two specific funds will be looked at: The European Regional Development Fund (ERDF) and the European Social Fund (ESF).
Economic and financial stability are insured through Europe's humane integration of social cohesion. "The EU Structural Funds share many of the same features with programs operated at the national level across Europe; thus their potential social effects are also quite similar. As a collection of instruments designed to redress market-generated inequalities, the funds seek to influence the distribution of life change across space." (31) Regional integration is an interesting way for the EU to solve these problems. Autonomous actors can not do this alone. Therefore, there is a large coalition for support among its members.
Financial bailout through the Structural Funds program is common. For example,
"Weaker member states like Spain, Greece, and Portugal, whose approval was required for passage of the 1992 package, received compensation through the Structural Funds to offset economic and political risks associated with the completion of the internal market." (32) In the same context with the integration of the economic and monetary union it was seen as better for the health of the region as a whole to phase in this practice. "The poorer EC members argued that once the devaluation option was taken away from them, their only means for achieving competitiveness would be through wage reductions or tight fiscal policies, which are likely to result in increased unemployment." (33)
This in turn called for an increase in Structural Funds as well s a new cohesion fund to be set up for environmental issues. However, the European system is by no means perfect. Domestic retaliation is present, especially among the richer member states such as Great Britain and Germany.
There is a criteria for aid. On the domestic level aid is granted to the under-trained and unemployed and on the regional level gross national product is taken into account along with unemployment rates, migration rates, and the economic structure of the state. In essence the structural fund is truly a fund of social cohesion and it serves its redistributive justice needs well.
In 1988 the Structural fund reached new heights. It raised its amount in funds to enhance regional efficiency and strode to distribute funds to the member states in the greatest need. Funds were approximately doubled. The five areas of reform included: (1) promote and development and structural adjustment of lagging regions, defined as those in which the GDP is 75% or less of the community average; (2) convert regional seriously affected by industrial decline; (3) combat long term unemployment; (4) facilitate the occupational integration of young people; and (5) promote the adaptation of agricultural production and the development of rural areas. (34)
The difference between the two main funds is fundamental. The ERDF's goal is to help in the construction of the core infrastructure of the region while the Social cohesion' goal is to enhance the development of human capital through higher education and vocational training. The ERDF concentrated on more complicated forms of infrastructure. For example between 1989-1993, its priority rested on capital investment projects to enhance regional diversity through economic means. The social fund on the other hand concentrated on human capital development in the small to medium sized firms with a concentration on high technology and environmental technology.
The funds automatically have a social and economic impact. The Structural Funds program provides regional stability. Likewise, specifically the European social development fund has enormous impact on the social component of society as it enhances human capital. EU's redistributive program has a plethora of positive impact on its regional society. It bolsters the welfare of the region by increasing the quality of workers through education, which attracts inward investment that in turn stabilizes the economy. The goal is to make the lesser developed member states more economically attractive on a global level. However, the Structural Funds program has its limits. It does what it can but it certainly does not provide any guarantees.
The Structural Funds program is cohesive in that it corresponds with the institutional ideals of the EU. The fund once established has given the EU a stable ground to work from. The marginal costs are relatively low, in particular in the financial, political and intellectual. Compared with other welfare measures the Structural Fund is quite efficient in relative cost terms. Although there is some resistance from member states like Great Britain and Germany, the domestic compliance is actually rather strong. "Once in place, the Structural Funds exerted a powerful interpretive feedback effect on the preferences and goals of the EU policy makers and domestic actors." (35)
The Structural Fund program of the European Union therefore brings forth an attractive policy formula which NAFTA can learn from and integrate into its own agenda. The policy is strong because it has domestic support. It is effective in solving regional adjustment problems which directly correspond with economic and social disparity. The Structural Funds program incorporates balance to the European Union; it accounts for spill over effects in a region dealing with the negative effects of free trade.
Wage disparity is accounted for through these funds. If by chance the gap between richer and poorer countries continued to rise the Structural Funds program would simply redistribute the wealth in a positive fashion by upgrading the ante. However, this spill over is by no means automatic. Political entrepreneurship is required. In the case of widening the already deep EU there may be problems. "Competition for territorial assistance and compensation will probably intensify once the EU has been widened. Even the wealthy EFTA entrants are not without distressed areas." (36)
The Structural Funds program alleviates the negative effects of free trade. The EU has set an example for dealing with behind the border problems which lead to downward harmonization. In response to this deeper integration, regional stability has been prevalent. The cost is relatively low, while the benefits are high. The prosperity of the EU region insures global competitiveness as well as economic and financial stability. These issues that the EU has dealt with and continues to deal with through the Structural Funds Program are precisely what NAFTA is being forced to address currently. This is why the example of the EU is important to take into account when writing policy proposals for an improved NAFTA. Likewise, NAFTA is also debating widening to Chile and the rest of Latin America which the EU has done as well.
This brings us into the debate of the European dilemma of deepening while widening. Should NAFTA follow suit? What are the advantages and disadvantages?
As proven earlier in this chapter the EU has continued to deepen through its institutions dealing with spillover effects through the Structural Funds program. The redistribution process of the EU has proven to be more efficient and more democratic--it has domestic support from within, in essence, social cohesion. What has yet to be addressed is the widening of the EU.
There are some main arguments against widening the EU. The removal of the East-West gap has brought up issues of further widening to less financially and politically sound members. The threat of widening to EU members is present. There fears consist of:
However real these fears may seem they are not all together accurate. For example the widening which occurred in the 80's was actually a call for deeper integration--that is institutions were deepened. This resulted in a much more integrated region. In order to join now the standards are much higher due to the deepening of the institutions. There are, of course, some who are inevitably opposed to deepening such as Great Britain. Market integration is fine with them, but behind the border issues must remain autonomous.
Similar to the NAFTA dilemmas of today there were four main assertions against the simultaneous deepening and widening the EU:
What became of this verdict is obvious: the EU both widened and deepened simultaneously with positive effects. Consequently, the EU has become more integrated and serves as an example to NAFTA and other regional institutions. Through widening there was a further call for deepening of the EU. In turn it was able to deal with behind the border problems in a redistributive, efficient manner through the Structural Funds Program. Financial and wage disparity have been dealt with at a regional, cooperative level. Domestic support has made the EU strong. NAFTA must take the good parts of this institutions as an example that a region can effectively deepen and widen at the same time. Widening fostered deepening in the EU proving that widening does not have to sacrifice social cohesion. Free Trade does not have to mean unfair trade.
The EU and NAFTA are both compatible with the rules of the WTO. However, it has been argued that regional approaches to free trade are much more expansive and in a sense deeper than multilateral agreements. Regional institutions such as the EU and NAFTA are able to be proficient in behind the border disputes and problems. While the EU has encompassed this deeper integration, NAFTA is in the midst of recognizing and resolving its welfare problems in the face of increased economic interdependence.
In regards to the financial and economic stability of these regions institutional compatibility with the WTO is key. The growth of the service industry in terms of finance has called for this. As trade and investment is linked it is necessary that all of these institutions are playing by the same rules.
The EU has continued to liberalize its financial sector in terms of investment and services. However, deregulation of the financial sector in the 80's was not inspired by the EU. It was more a a domino effect between member-states. It must not be disregarded that it did lead to momentum of the financial sector through liberation. "The EC acquis complies with existing multilateral rules and the coverage of the EC is more comprehensive than the multilateralism liberation efforts." (39) Here again, the EU comprises a role model for other regional institutions with its more effective instrument of liberalization than the traditional national treatment.
As well as being a positive role model for regional institutions, the EU has in some ways been a negative model for adhering to multilateral agreements such as GATT. "perhaps the most important example of EC reciprocity was the provision added by the SBCD. This set a precedent for reciprocity measures in all financial services directives, as well as for public services contracts." (40) There is the inherent possibility that this may be used restrictively. A reciprocal treatment was put into place when the third country did not not offer internal national treatment. "Having said this remains scope for reciprocity to be applied more generally, such as when there are no 'equivalent opportunities', but in such case the Council of Ministers and not the European Commission would have to act." (41) This is were the EU runs in to conflict with the rules of GATT.
The EU's regional interest based policies leads the opportunity for NAFTA to encompass regional and global standards therefore setting a new precedent. The dilemma is that trade and investment policy is becoming more and more intrusive on issues of national sovereignty. This includes dealing with regional as well as global institutions. Questions of autonomy seems to be the problem.
Furthermore, there have been valuable critiques of the EU system which NAFTA can learn from: "Moreover the EU frequently seems to focus so heavily on its regional agenda that it forgets its global responsibilities." (42) This is unfortunate, but true. NAFTA has an opportunity to be a global role model, working at both regional and multilateral levels while maintaining higher degrees of sovereignty. However, on the other side of the spectrum, the EU contrasts other institutions: "these new and revived free-trade areas are seldom 'supported by significant supranational institutions or elaborate mechanisms for common decision making'." This is where NAFTA has an opportunity to learn from the EU.
The EU has domestic support that NAFTA appears to be lacking. It also deals with spill over effect of free trade in an efficient manner that NAFTA has yet to accomplish. It is possible to deepen and widen at the same time which was proved by the EU. The EU had skeptics as well but continued along its path of liberalization anyway. This proved effective on a regional level by deepening institutions. Where the EU has run into problems is on a global level. It appears to think regionally at the expense of not fully complying with multilateral agreements. As much as NAFTA has to learn from the EU's regional policies, the EU will learn from NAFTA's global ones. NAFTA has the opportunity to adopt the positive policies from the EU dealing with behind the border issues while still complying with multinational institutions such as the WTO.
With increased international trade, multilateral institutions are becoming more and more important in maintaining world order. It is important to remember that an institution can be strong and not effective in a normative sense. This is why the collaboration of multinational institutions, foreign assistance, foreign trade, and better coordination of trade policies are essential for the health of North and South America.
Fair trade is necessary in an ever increasing interdependent world. Fair trade can be accomplished through the deepening of regional institutions as shown by the EU. The EU has deepened and widened while adhering to multilateral institutions such as the WTO. The EU and NAFTA were major players in the evolution of the WTO and today they active members. Even though they are both play by the same global trade rules the EU has been more receptive to behind the border issues. An example has been set by the EU which NAFTA can learn from. Through the Structural Funds Program, the EU has dealt with behind the border issues which lead to downward harmonization. Thus far, NAFTA has failed to provide positive policy coordination, while the EU has succeeded. It is possible to adhere to world trade rules while maintaining humane social standards. The EU's Structural Funds program has proven very effective. Problems that NAFTA is now dealing with, such as the growing wage disparity among members and lack of social cohesion, the EU has dealt with very effectively through the Structural Funds program. Wealth distribution and the development of human capital have both enhanced the EU's regional efficiency; economic and financial stability has been maintained. NAFTA must learn from the EU's example of fair trade through deeper integration. It is a prerequisite for the prosperity of their region. For just as a rising tide can lift all boats, the tide that slowly dissipates will leave all boat stuck ashore.
This call for policy spill over is an opportunity for NAFTA to be revised. NAFTA is in a time of flux, as the recent fast track proposal of the Clinton administration was denied. This is the time for widening NAFTA to Chile and the rest of the Latin American countries while including policy proposals within NAFTA to prevent downward harmonization. The EU has set the stage for deepening and widening of regional institutions. It is possible to deal with the negative effects of free trade through deeper integration while widening simultaneously. In the case of the EU, one helped strengthen the other. However, the EU has been criticized for thinking too regionally and sometimes disregarding the WTO. NAFTA has the opportunity to incorporate the good aspects of European policy while maintaining its rapport with the WTO. If it fails to do this by changing its commitments to the WTO, it is possible that the WTO will continue to evolve. As recalled earlier in this chapter, regional needs in an ever increasing interdependent world, transformed the GATT through the Uruguay Round negotiations into what is know today as the WTO. The world in a state of constant flux, which can be extremely liberating to regional institutions.
However, there needs to be a policy which enhances free trade through fair trade. It will incorporates free trade agreements among NAFTA and members of multinational institutions such as the WTO. This proposal will work within these limits to encompass the EU's more humane policies dealing with behind the border issues. The Structural Funds Program will be used as a base from which to work. The Structural Funds program deals with wage inequality and issues of financial stability. This unique way of working within the boundaries of free trade can only be initiated with the proper funding. I propose this funding will come from initiating a tax on financial flows--otherwise known as the Tobin tax. This tax will not be considered a 'tariff', instead it will be a means in which to enhance free-trade. This may seem to be somewhat of a paradox. But, in a nominal sense, if these behind the border issues are not dealt with free trade could crumble altogether. This Tobin tax would insure fair trade through a program modeled after the Structural Funds one of Europe. The marginal costs are relatively low, while the payoffs are high. As illustrated by Erin Hallock in previous chapters through the Mexican Peso Crisis, the United States has already spent a large sum of money bailing out the Mexican economy in order to insure regional stability. The Structural Funds Program provides a regional institution to effectively deal with problems such as the Peso crisis. The Tobin tax would provide the means for deeper and wider integration which would ensure regional economic and financial stability.