This record is a partial extract of the original cable. The full text of the original cable is not available.

281556Z Jan 05

UNCLAS SECTION 01 OF 03 OTTAWA 000268 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CAN - BREESE AND HOLST 
 
WHITE HOUSE/NSC - SHIRZAD 
 
STATE PASS USTR FOR CHANDLER 
 
USDOC FOR 4320/OFFICE OF NAFTA/GWORD/TFOX; 
3134/OIO/WESTERN HEMISPHERE 
 
TREASURY FOR IMI 
 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ETRD EINV CA
SUBJECT:  PLACING A NEW NORTH AMERICAN INITIATIVE 
       IN ITS ECONOMIC POLICY CONTEXT 
 
REF:  (A) 04 Ottawa 3431  (Regulatory agenda) 
 
      (B) 04 Ottawa 066   (Canadian trade policy) 
 
 
SUMMARY/INTRODUCTION 
-------------------- 
 
¶1. THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR 
DISTRIBUTION OUTSIDE USG CHANNELS. 
 
¶2.    (SBU) An incremental and pragmatic package of tasks 
for a new North American Initiative (NAI) will likely gain 
the most support among Canadian policymakers.  Our research 
leads us to conclude that such a package should tackle both 
"security" and "prosperity" goals.  This fits the 
recommendations of Canadian economists who have assessed the 
options for continental integration.  While in principle 
many of them support more ambitious integration goals, like 
a customs union/single market and/or single currency, most 
believe the incremental approach is most appropriate at this 
time, and all agree that it helps pave the way to these 
goals if and when North Americans choose to pursue them. 
 
¶3.    (SBU) The economic payoff of the prospective North 
American initiative - in terms of higher incomes and greater 
competitiveness - is available, but its size and timing are 
unpredictable, so it should not be oversold.  Still, a 
respectable economic case has been made for such an 
initiative, and this message spells it out.  We believe 
that, given growing Canadian concern about "border risk" and 
its effects on investment, a focus on the "security" side 
could also produce the most substantial economic/trade 
benefits. 
 
END SUMMARY/INTRODUCTION 
 
 
CANADIAN ECONOMIC PERSPECTIVE 
----------------------------- 
 
¶4.   (SBU) Canadian economists in business, academia and 
government have given extensive thought to the possible 
options for further North American integration.  Nearly all 
of this work assumes that each of the three countries is 
pursuing standard economic policy goals - growth, 
productivity and competitiveness (rather than more specific 
concerns raised by Mexican analysts such as migration 
management, regional development, or environmental 
protection).  Since 9/11, Canadian economists working in 
this area have generally endorsed a comprehensive initiative 
with the United States on security, trade, and immigration. 
Following is our summary of the professional consensus: 
 
PROCESS:  At this time, an "incremental" approach to 
integration is probably better than a "big deal" 
approach.  However, governments should focus on 
choosing their objectives, and not on choosing a 
process. 
 
BORDER VS. PERIMETER:  Even with zero tariffs, our land 
borders have strong commercial effects.  Some of these 
effects are positive (such as law enforcement and data 
gathering), so our governments may always want to keep 
some kind of land border in place.  Canada and the 
United States already share a security perimeter to 
some degree; it is just a question of how strong we 
want to make it. 
 
BORDER RISK:  The risk that business will be obstructed 
at the border by discretionary U.S. actions, such as 
measures to defend against terrorism or infectious 
disease, in addition to growing congestion, have become 
major risks to the economy, inhibiting investment in 
Canada.  For small businesses, the complexities of 
navigating the border are apparently even more 
intimidating than the actual costs.  Reducing this risk 
is Canada's top motive for pursuing further 
integration. 
 
LABOR MARKETS:  Many Canadian economists point to labor 
markets - both within and among countries - as the 
factor market where more liberalization would deliver 
the greatest economic benefits for all three countries. 
They advocate freeing up professional licensing laws, 
and developing a quick, simple, low-cost work permit 
system, at least for U.S. and Canadian citizens. 
 
REGULATION:  Canadian economists agree that Canadian 
regulations (if not their standards, then their 
complexity) are needlessly restricting foreign 
investment and impeding food, communications and other 
industries.  (Inter-provincial differences are 
important here, since Canada's federal government does 
not have the benefit of a U.S.-style "interstate 
commerce" clause).  While much of the problem is 
domestic in nature, an international initiative could 
help to catalyze change. 
 
CUSTOMS UNION:  A common external tariff, or a customs 
union which eliminated NAFTA's rules of origin (ROO), 
is economically desirable.  NAFTA's ROO are so 
restrictive that importers often prefer to pay the 
tariff rather than try to prove North American origin. 
However, economists differ on the size of the benefits 
available and on whether these would justify the effort 
of negotiation.  One study estimated that a full 
customs union which eliminated ROO would only raise 
national income by about one percent. 
 
CURRENCY UNION:  Canadian economists are split on 
whether a return to a fixed exchange rate, or adopting 
the U.S. dollar, would benefit Canada in current 
circumstances.  (Canada last tied its dollar to the 
U.S. dollar from 1962 to 1970).  The central bank 
governor has taken the position that "monetary union is 
an issue that should be considered once we have made 
more progress towards establishing a single market." 
 
 
NORTH AMERICAN INTEGRATION:  WHAT WE KNOW 
----------------------------------------- 
 
¶5. (SBU) Past integration (not just NAFTA but also many 
bilateral and unilateral steps) has increased trade, 
economic growth, and productivity.  Studies suggest 
that border efficiency and transportation improvements 
(such as the lower cost and increased use of air 
freight) have been a huge part of this picture. 
Indeed, they may have been more important to our 
growing prosperity over the past decade than NAFTA's 
tariff reductions.  Freight and passenger aviation are 
critically important to our continent's 
competitiveness, and businesses are very sensitive to 
the timing, security, and reliability of deliveries - 
hence the "border risk" which so concerns Canadian 
policymakers. 
 
¶6. (SBU) A stronger continental "security perimeter" 
can strengthen economic performance, mainly by 
improving efficiency at land borders and airports.  It 
could also facilitate future steps toward trilateral 
economic integration, such as a common external tariff 
or a customs union, if and when our three countries 
chose to pursue them.  Paradoxically, the security and 
law enforcement aspects of the envisioned initiative 
could hold as much - or more - potential for broad 
economic benefits than the economic dimension. 
WHERE'S THE UPSIDE? 
------------------- 
¶7. (SBU) Some international economic initiatives (such 
as FTAs) produce across-the-board measures that 
generate broad benefits for a country's industries and 
consumers on a known time-line.  This was true of NAFTA 
but it is less likely to be true of the economic 
aspects of the NAI.  Non-tariff barriers such as 
standards and regulations generally must be tackled one- 
by-one.  This is a piecemeal process and the ratio of 
payoff to effort is likely to be lower than with across- 
the-board measures.  Governments naturally focus on 
resolving the problems which their firms or citizens 
bring to their attention.  While this approach has 
merits, it tends to deliver the payoffs toward 
particular interests.  If there are hidden costs, there 
might be little impact on national performance.  As we 
move toward a list of barriers to tackle, it will 
remain important to balance those interests.  For 
example, some Canadian economists have suggested that 
NAFTA fell short of expectations with respect to 
increasing consumer choice in Canada; that may be a 
theme we should stress as efforts to promote further 
integration take shape. 
 
¶8. (SBU) In contrast, cooperative measures on the 
"security" side, a critical focus of current bilateral 
efforts,  can deliver substantial, early, and 
widespread economic benefits.  Security and law 
enforcement within North America have evolved rapidly 
since 9/11, leading to many less-than-perfect processes 
for handling legitimate international traffic. 
Collaboration to improve these processes could yield 
efficiency improvements which would automatically be 
spread widely across the economy, leading to general 
gains in trade, productivity, and incomes. 
 
 
A NOTE OF CAUTION 
----------------- 
 
¶9. (SBU) There is little basis on which to estimate the 
size of the "upside" gains from an integration 
initiative concentrating on non-tariff barriers of the 
kind contained in NAI.  For this reason, we cannot make 
claims about how large the benefits might be on a 
national or continental scale.  When advocating NAI, it 
would be better to highlight specific gains to 
individual firms, industries or travelers, and 
especially consumers. 
 
CELLUCCI