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The Path to Customs Union © COPYRIGHT by Inveer Barbee 2012 ALL RIGHTS RESERVED For my parents THE PATH TO CUSTOMS UNION: THE EUROPEAN EXPERIENCE AND NORTH AMERICAN INTEGRATION BY Inveer Barbee ABSTRACT This paper seeks to explore the possibility for the formation of a customs union between Canada, Mexico and the United States to enhance the economic recovery, increase the region’s competitiveness and pave the way for a new chapter in U.S. foreign relations. The analysis is developed through a comparative regional study, which examines the European effort that culminated in the Treaty of Rome in 1957 and the completion of a customs union among the Six founding members in 1968. The purpose is not to replicate the European model, but rather to draw the most important themes and lessons from the European experience to help guide and inform North American integration. ii ACKNOWLEDGMENTS Through the course of this project, I have been grateful for the assistance of several individuals. My advisors, Robert Pastor and Mireya Solis, have provided indispensible guidance, encouragement and support. Their enthusiasm and willingness to ask tough questions has remained a constant source of inspiration. I am also very thankful for input and suggestions provided by Manuel Suarez and Michelle Egan who have helped me develop a more nuanced understanding of the subject matter. I would like to generally thank all those individuals who helped to identify key issues for analysis, provided assistance on technical questions or data acquisition—you have each played an important role in filling in the missing pieces of the puzzle. I am also grateful for the support of my family and friends, whose positivity and optimism is contagious. Lastly, I would like to thank my husband, Peter, who probably has learned more about this topic than he ever intended. This project would have been impossible without you. iii TABLE OF CONTENTS ABSTRACT.................................................................................................................................... ii ACKNOWLEDGMENTS ............................................................................................................. iii LIST OF TABLES.......................................................................................................................... v LIST OF FIGURES ....................................................................................................................... vi CHAPTER 1: INTRODUCTION....................................................................................... 7 CHAPTER 2: EUROPE AND THE CUSTOMS UNION ISSUE: LAYING THE FOUNDATION FOR INTEGRATION ........................................................................... 19 Experimenting with Customs Unions................................................................... 20 An Idea Reborn and Reformed ............................................................................. 25 Preferences, Bargaining and the Road to Rome ................................................... 35 The Impact of Interest Groups: A Closer Look at Inter-State Bargaining............ 41 The European Economic Community................................................................... 46 The Formation of a Region................................................................................... 52 CHAPTER 3: THE CUSTOMS UNION: FORMATION, OBSTACLES, AND PERFORMANCE............................................................................................................. 55 Implementation of the Customs Union................................................................. 56 Challenges with the Common External Tariff...................................................... 63 The Role of Community Law and the European Court of Justice........................ 68 Evaluating the EEC Customs Union..................................................................... 74 Reflections on the Customs Union ....................................................................... 83 CHAPTER 4: PROSPECTS AND CHALLENGES FOR NORTH AMERICAN INTEGRATION ............................................................................................................... 89 The Origins of North American Integration ......................................................... 90 Negotiating the North American Free Trade Agreement ..................................... 93 Evaluating NAFTA: Objectives, Institutions, and what was Left Behind............ 98 A North American Region.................................................................................. 107 The Path to Customs Union: A Possibility for North American Integration...... 111 CHAPTER 5: CONCLUSION ....................................................................................... 131 APPENDIX A IRB APPROVAL: EXEMPTION NOTICE ......................................... 135 BIBLIOGRAPHY....................................................................................................................... 136 iv LIST OF TABLES Table Table 1. Distribution of Exports by Destination, Pre-EEC........................................................... 37 Table 2. Intra-Community Trade 1957-1959................................................................................ 61 Table 3. Percentage of national duties and corresponding duties in CET .................................... 67 Table 4. The Impact of Customs Unions ...................................................................................... 75 Table 5. Effects on Exports, by Country (1959-1965 and 1965-1970) ........................................ 80 Table 6. Extra-EEC Trade with the World, Exports & Imports ................................................... 82 Table 7. Free Trade Agreements of NAFTA Members.............................................................. 120 Table 8. Revenue from Import Duties, FY 2011 ........................................................................ 126 v LIST OF FIGURES Figure 1. Merchandise Exports by Regional Destination, 2010 ................................................. 101 Figure 2. U.S. Exports and Imports with Canada and Mexico, 1994-2011................................ 103 Figure 3. Labor Productivity per Person Engaged, 1994-2010 .................................................. 105 vi CHAPTER 1 INTRODUCTION In the first decade of the 21st century, the United States has come face to face with a crisis of legitimacy. Memories of the ostentatious unilateralism of the Bush administration still cause a stir, and as the wars in Iraq and Afghanistan come to an end, a restrained and more calculating superpower has emerged. However, the 2008 financial crisis and subsequent recession have not only dampened spirits, but also lead to serious questions about the future of the U.S. role in the world and its ability to remain pre-eminent. The Occupy Wall Street movement exemplifies this problem well; income inequality, a topic that was almost taboo, questions the sustainability of a political and economic system that has left so many disenfranchised. Furthermore, the Supreme Court ruling of Citizens United, giving corporations the status of people and money the equivalence of speech has paved the way for a system of campaign finance that seems more suited for a plutocracy than a democracy. All these domestic challenges serve to tarnish the image of the U.S. abroad and in doing so diminish the soft power that has made the U.S. so successful as a global leader. Yet this is not the end, as crisis often leads to opportunity. The U.S. faces a crucial decision in the immediate future: to go on as it has until it is no longer that city upon a hill, or adapt to the changing realities of power and dominance, and transcend the self-imposed limits on its success. The system itself has not failed, but its leaders have. They have failed to be innovative, imaginative, and daring, instead protecting the interests of the few over the prosperity of the many. Such resistance to change is at the heart of America’s current dilemma, and its resolution 7 hinges on a critical choice. The question is no longer whether the U.S. chooses to be isolationist or a crusader, but rather whether it will learn to cooperate. Where this will be tested most is not in its relations with Europe, or the rising powers of India or China, but instead on its doorstep to the north and south. Canada and Mexico are the largest markets for U.S. exports, and also the largest suppliers of energy to the United States. The economic relationship between these three countries is the largest in the world, but since 2001 it has been severely neglected and has suffered as a result. The thickening of the border and protectionist policies has limited the North American economic relationship from realizing its full potential. President Obama’s ‘Buy America’ provision in the 2009 jobs bill illustrates a strong lack of understanding of economic and trade patterns, and the all important production chains. The three economies are inextricably linked with roughly 75% of both Canadian and Mexican exports going to the U.S. market. If the U.S. market suffers, so do its neighbors. In order to get out of the current slump the U.S. has to be bold. The first task is jump- starting the economy, which requires thinking beyond protectionist trade policies, bailouts and quantitative easing. The frustration on the street, the lamentations in the Sunday newspapers and the criticisms from academics far and wide stem from the same problem— the loss of U.S. economic strength.
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