In 2005, the governments of the United States, Canada, and Mexico agreed to a new series of talks in various areas related to product standards and government regulations, including border security measures. The result came to be known as the Security and Prosperity Partnership (SPP), an umbrella agreement bringing together a variety of existing working groups that had started after the North American Free Trade Agreement (NAFTA) as well as recent bilateral initiatives between the United States and Canada, and the United States and Mexico.
The goal was to create more synergy between trade and border security. The catalyst for the SPP initiative was the shock resulting from the terrorist attacks of September 11, 2001, which lowered the level of predictability and stability in conducting business in North America. The post-9/11 security measures created, in effect, a “security tax” on NAFTA trade (Hufbauer and Schott, 2004). The SPP was put in place to create “an efficient border open for business but closed to terrorists” (Brooks and Kymlicka, 2007: 12).
Regrettably, owing to its low-key, pragmatic approach, the SPP also created an army of conspiracy theorists on both sides of the border.
The SPP initiative is a reflection of important mutual economic interests. In 2005, two-way trade between Canada and the United States equaled nearly $2 billion per day. Total bilateral trade between the two countries has been over $500 billion every year for the last seven years and in 2007 accounted for 18 percent of total U.S. trade (Industry Canada, 2008). Canada is the largest trading partner of 37 of the 50 U.S. states, and this trade is responsible for some 7 million American jobs.
While Canadians and Americans trade in a wide range of products and services, manufacturing trade has developed a uniquely close relationship since the post-World War II Defense Production Agreement, the 1965 Auto Pact, and the 1989 Canada-U.S. Free Trade Agreement. In essence, Canadian and American companies make things together. They have developed integrated supply chains in various sectors such as automobiles and machinery where parts cross the border numerous times until the final product is finished in either country. Canada and the United States also have large bilateral flows of foreign direct investment (FDI). In 2007, U.S. FDI in Canada formed 58 percent of total investment, while 44 percent of Canada’s FDI went to the United States.
Mexico was America’s second largest export market in 2005 and third largest import market (after China). Total trade that year was just under $300 billion. Trade among all three countries has grown strongly since passage of the 1994 NAFTA free trade agreement. With the advent of NAFTA, the U.S. began to treat Canada and Mexico in a single North American “file,” much to the chagrin of the Canadians who strongly prefer a completely separate bilateral relationship. Given that Mexico is still a developing economy, stills struggles with high levels of corruption, and has an enormous problem of illegal outflow of people into the United States, Canadian governments generally believe that they can make better progress on economic and border issues in a one-on-one format than in a three-way setting.
Similarly, many American citizens are less comfortable about negotiating security arrangements with Mexico City than with Ottawa. This is a product of decades of U.S.-Canada cooperation in the security sphere. For example, the two countries are founding members of NATO. Also, the North American Aerospace Command Agreement (which created NORAD), dates to 1958.
However, the reality is that U.S. administrations have tri-lateralized the process, partly because it is politically difficult to treat Mexico as a second-class North American partner. The SPP is the latest example of this trilateral political reality.
The SPP’s Benefits
From the start, SPP goals and methods pursued by the three governments have been pragmatic and modest. None of the governments set out to create a common external tariff or common market, let alone an EU-style North American community with supranational institutions and new legal structures, as some academics and study groups had suggested (Pastor, 2001; Council on Foreign Relations, 2005). The SPP is simply not about creating a North American economic or political union.
Instead, twenty working groups (ten on security and ten on prosperity) were set up to deal with issues such as trade expansion, border crossings, regulations and product standards, food safety, emergency preparedness, sustainable environment, and energy security (Villareal and Lake, 2007: 3). The leaders agreed to hold annual summits to review progress in these areas. Importantly, they agreed that the SPP would not be allowed to limit national action. The Western Hemisphere Travel Initiative by which the American government is phasing in passports for entry into the U.S. by Canadians is one such example.
In June 2005, cabinet officials from the three governments proposed some 300 regulatory issues for trilateral resolution in the first so-called Report to Leaders (www.spp.gov
). At the 2006 Cancun Summit, the leaders agreed to set up an advisory group composed of representatives of companies involved in cross-border business—the North American Competitiveness Council (NACC)—to winnow down the 300 issues. The NACC, identified 50 recommendations, with 15 ready for implementation in 2007 (NACC Report to Leaders, 2007). These “ready-for-action” points included support for critical infrastructure protection, pandemic emergency management, more border pre-clearance projects, liberalization of NAFTA rules of origin and certification, intellectual property rights, and measures against counterfeiting and piracy.
By 2008, the SPP had produced several modest but helpful results. For example, it produced agreements between the U.S. and Canada on the simultaneous exchange of information between national laboratory networks to deal with the spread of infectious disease, and on increasing compliance data sharing, staff exchanges, and joint training for cross-border pipelines.
SPP also finalized the harmonization of air navigation standards. Another important achievement was the liberalization of rules of origin for exporters of household appliances, precious metals, and various machinery parts so that these products can qualify as duty free. These liberalized rules were estimated to apply to $30 billion in trade by May 2006 and to another $70 billion in trade by 2008 (Emerson et al., 2007).
In short, these efficiencies are reducing export-related transaction costs, which means consumers are saving money—in the U.S., Canada and Mexico.
On the security side, Canada and the United States have led the way with a security accord on verifying vessels entering the St. Lawrence Seaway, reciprocal recognition of container security regulations used in dangerous goods transportation, an “open skies” air cargo transportation agreement, and a pilot project to share information on refugee and asylum claimants based on a comparison of fingerprint records. These small steps enhance the safety of both Americans and Canadians.
The SPP’s Critics
Despite its pragmatic approach and modest outcomes, the SPP has attracted a lot of criticism, especially in Canada and the United States.
In Canada, the SPP is opposed by economic and cultural nationalists. They allege that the SPP offers the United States a channel to encroach on Canadian sovereignty and gain access to such resources as water (Council of Canadians, 2007a; 2007b). Other Canadian critics call the SPP “a back doorway” for business to achieve deregulation by means of harmonizing Canadian standards down to American levels, a so-called “race to the bottom” (Lee and Campbell, 2006).
These allegations are false. The regular process of government decision-making also applies to SPP. If a new regulation emerges from the SPP agenda that involves a new rule in federal decision-making, it will be published in the Federal Register
in the United States or in the case of Canada in the Canada Gazette
, and there will be time for consultation before a final decision can be reached. Moreover, the objective in regulatory cooperation is to build on each other’s capacities in research, development and testing. The goal is to eliminate duplication. Rather than this leading to a “race to the bottom,” such cooperation will improve standards and procedures.
In the United States, Lou Dobbs and various bloggers have raised the specter that the SPP is a secret plan to form a North American union akin to the European Union. Rumors about a NAFTA super-highway keep surfacing, even though no part of the SPP talks or mandate includes such a project. The objectives and results of the SPP are posted on all three countries’ websites and there is no secret infrastructure, or monetary or economic union in the making. In fact, the U.S. Constitution gives Congress, not the president, the power to make this decision.
Others believe that the Bush administration used the SPP as a vehicle to normalize the inflow of illegal migrants from Mexico (Edwards, 2007). The fear that American border controls will be weakened as a result of trilateral harmonization of border procedures is understandable, but in the case of the SPP is unfounded. After all, in 2006 Bush fortified the border with Mexico.
Moreover, while there is an enormous problem of illegal entry, drug smuggling, and violent incidents on the Mexican border, there is also a large legal and orderly flow of people and goods between Mexico and the Unites States. It is the latter component of the cross-border flow that the SPP addresses, and it does so without replacing or compromising American border security measures.
Today the “SPP brand” has been marginalized. Little progress was made at the 2008 Summit in New Orleans, and the U.S. presidential election put the process on hold. However, it is likely that the issues and interests that drove the SPP will eventually return to the U.S. agenda.
It clearly is in America’s interest to continue the SPP, but it cannot be done in a trilateral format. The fact is that on many regulatory, product standards and border issues, Canada and the United States share a much closer relationship than Mexico and the United States. Therefore, the United States needs to set up separate forums. There are three reasons why the U.S. should move forward with Canada in a speedy manner.
First, with 51 percent of Canada’s total exports to the United States going out by truck, and 77 percent of imports from the United States coming in by truck in 2006, low-cost border crossing should be an integral part of our trade policy. Regulatory differences on processing customs manifests and security documents are a proven barrier to cross-border trade. Currently, commercial costs for crossing the U.S.-Canada border in terms of time losses are estimated at between 2 percent and 3 percent of the value of total two-way trade (Moens and Cust, 2008). A new bargain on lower-cost commercial flows for greater cooperation in homeland security will need to be struck.
Second, given the growth of Asian imports and the 2008 financial credit crisis, the American and Canadian manufacturing sectors have experienced a “perfect storm.” Both face the challenge of how to maintain their comparative advantage. Canada and the United States need more product standards compatibility and more regulatory convergence in order to allow greater economies of scale for our manufacturing and transportation sectors and fewer regulatory barriers. Working together, under the same regulatory roof, will make us stronger global competitors vis-à-vis Asia and Europe.
Third, Canadian energy exports to the United States rose from $50 billion in 2002 to over $90 billion in 2007 (Industry Canada). Canada supplied 16 percent of total U.S. natural gas consumption. It also supplied 18 percent of U.S crude oil products. Yet many American and Canadian politicians are considering measures to reduce carbon emissions such as a carbon cap-and-trade system. Apart from the many problems such a scheme faces in its own right, Canada is particularly sensitive to arbitrary caps on carbon set in Washington, which would directly affect Canadian oil and manufacturing exports. Any disruption in the oil trade between our countries will have a negative impact on Canada’s trade balance and will make the U.S. more dependent on Middle Eastern oil.
All of these interests point to the need for technical and sector-specific agreements between the U.S. and Canada that combine both economic and domestic security issues. The new administration would do well to consider a refined bilateral version of the SPP, albeit with more consultation with Congress from the start to remove any fears of conspiracy or secrecy.