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 Mexico
2
Four factors of production: goods, services, capital and labour
3
Source: Building a North American Community by Council on Foreign Relations
http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf
4
Source: Building a North American Community by Council on Foreign Relations
http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf
5
Definition: output increases at a proportionately higher rate than the increase in costs per unit
6
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).

1
 Firas A. (ISM IB2-A)

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
Canada’s 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 530
8
Source: Matt McGee (2004) “Economics, In terms of the good, the bad and the economist” Page 530

2
 Firas A. (ISM IB2-A)

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 author’s 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.