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72nd Annual Summer Conference, August 7–10, 2003

Sovereignty or Standard of Living

Remarks by Robert C. Fauver 

Good morning. It is a pleasure for me to lead off this panel. I hope to set the stage for a lively discussion.

I must admit to some surprise and a little confusion at the topic for this morning’s discussion. But I am also intrigued by the title of this session – ‘Sovereignty or Standard of Living’. My first reaction was to ask why these topics are posed as an either/or choice. Why not pursue both at the same time? I wondered why some of my Canadian friends would assume that there is a clear trade-off between a country’s Sovereignty and its standard of living. Frankly I believe that both are compatible concepts. In fact, I would argue that they are complementary end products and not substitutes. Is there any reason to assume that a rise in a country’s standard of living will automatically lead to a decrease in National Sovereignty? Or, put another way, if living standards decline, what is the value of sovereignty?

What happens if a country attempts to maximize national sovereignty in a world of increasing globalization? Does it imply a movement away from the integrated world economy? If one focuses on maximizing sovereignty at the expense of integration, what happens to the country’s living standard? It seems to me that one wants to maximize both concepts.

I want to be very clear at the outset of my remarks. I fully support global economic integration. I spent more than 30 years working in the government of my country – at our Treasury Department, the State Department, the White House and the National Intelligence Council. And all of my economic work was focused on creating an environment in which trade in goods and services expanded to the maximum extent possible. Without exception my career was devoted to establishing free market economics and the liberalization of markets. Truth in advertising requires me to admit that there was a two-year period at the end of my career when I served as the India Pakistan Coordinator immediately following the nuclear testing by those two countries. My responsibility was to design and implement a set of economic sanctions against both countries in response to their nuclear weapons testing. But with that notable exception, I worked hard to open markets and to liberalize trading systems.

I deeply believe that free markets and competition maximize growth, economic development, living standards, freedom of choice and democratic institutions. Hiding behind barriers to trade and market forces has never been a successful model for development and growth or for maximizing economic and personal freedoms.

Over my career in the government, I was fortunate to be involved in a wide variety of discussions and negotiations on financial and trade issues ranging from the OECD to the Plaza Accord to the G-7/8 process to APEC to SII talks with Japan. I participated in the first bilateral discussion of financial services between major industrial nations in the early 1980s when the US and Japan undertook the Yen Dollar Talks. This experience helped formulate the approach that my government undertook in the financial services negotiations within the US Canadian FTA talks. I helped establish APEC in 1989 and while I was the US Sherpa for the G-7 summits, I helped President Clinton establish the first APEC leaders meeting at Blake Island in 1993. All of these efforts focused on increasing the interdependence and integration of economies.

It is sometimes difficult to remember the political economic environment that led to the beginning of the US Canadian FTA negotiations. The eighties were a time of major change in the global economy. We experienced the aftermath of the twin OPEC oil price shocks in the early and late 70’s. We were coming out of the period of high inflation, unemployment, and low real growth. We experienced major movements in exchange rates, including the Plaza Accord of 1985 which led to a major realignment of exchange rates and alterations in domestic macroeconomic policies. Remember when policymakers believed in the Phillips Curve that postulated a direct relationship between inflation and employment? If macro policies focused on reducing inflation then a rise in unemployment was the assumed outcome.

In the early 1980’s, trade imbalances had risen among major industrial countries. In the US, trade protectionism pressures were once again on the rise. The US-Canadian Auto Pact was under pressure in the States. The global round of multilateral trade negotiations was not moving forward. We were all facing extreme pressure from Japanese exports, corporate takeovers, and huge capital inflows – remember those days? In Canada, financial markets were segmented and essentially closed to outside investors. Very heavy foreign direct investment restrictions reduced the potential inflow of capital into Canadian manufacturing sectors.

US Goals in the US Canada FTA

The Reagan Administration in its early days worked hard to reduce inflation and rekindle domestic demand growth. During the second Reagan Administration, focus among policy makers shifted from the domestic to the international economy. USTR wanted to secure more open markets for US goods and investment flows. Our Treasury Department – coming off the experience of bilateral financial market discussion with Japan – wanted to secure national treatment for our financial services firms overseas. We recognized that Canada was by far our most important trading partner and that we were both committed to the multilateral trading system. And Canada and the US were both frustrated by the slow Uruguay Round of trade negotiations. Administration officials believed that both of our nations would benefit from a broader integration of our two economies.

Our goals for the US Canada FTA were fairly straightforward:

  • Create a Free Trade Arrangement between our two nations that would facilitate the free flow of goods and services between two major industrial countries.
  • Broaden the historic concept of free trade agreements by:
    • Including financial services negotiations into the agreement in order to integrate the two financial markets and to increase competition and efficiency in Canadian financial markets; and
    • Opening the Canadian market for direct investment flows by US investors.
  • Counter the rising negotiating force of the European Community and give the Uruguay round of negotiations a push.
  • Thwart domestic protectionist pressures in the US and preserve among other things the US-Canadian Auto Pact.

US Goals for NAFTA

After the successful completion of the US Canada FTA, US policy makers decided that the Mexican economy was a logical extension of the free trade agreement. But for the NAFTA our goals were somewhat broader – and frankly more political and geostrategic – than they were for the US Canada FTA.

Mexico – though undergoing major progress in terms of economic reforms and development – seemed to face what had become known as an ‘election cycle’ of economic progress. Each new presidential election seemed to be associated with major exchange rate and financial market crises and set backs for the domestic economy. Boom/bust cycles were timed to the presidential election cycle. Market reforms by the Mexican authorities waxed and waned with the election cycle in response to the international crises.

US authorities hoped to develop a way to strengthen the domestic reform process in the Mexican political system. And we hoped to help stabilize the political process as well. If we could negotiate a trade agreement that was broad in its coverage, then we could help the economic reform efforts, and stabilize the financial system and its institutions, increase competition in the domestic economy, and increase living standards for the Mexican people.

US officials believed and hoped that a closer integration of our economies would also strengthen domestic Mexican economic growth, create new job opportunities, and, frankly, reduce the pressures for immigration to the US. Lastly, but clearly secondary to those I have already mentioned, US officials hoped to provide pressure on the Uruguay Round to move forward to completion – largely by shaking up the Europeans.

Did our goals for these trade and economic agreements include enhancing national sovereignty, social values, and perhaps security as well?

I believe that in the case of the US Canada FTA, enhancing national sovereignty was not an immediate objective of the US government. We were focused instead of strengthening the performance of our two economies, raising living standards above what they would have otherwise been and thus strengthening national security as a bi-product. In fact, I am not sure that in the case of two industrial countries that enhancing national sovereignty should be an objective of trade negotiations. The overall goal of bilateral trade agreements is rather more focused on strengthening economic performance and thus enhancing economic well-being, job opportunities, and living standards. To the extent that those goals are indeed realized, then security is clearly strengthened in an indirect sense. Similarly, so is sovereignty, in as much as strengthened sovereignty reflects confidence of the electorate in its government to make good decisions. Strengthening social values was also not a direct goal – at least from the perspective of US officials. I am not sure that it should have been, other than in some indirect sense that social values are enhanced by stronger economic performance.

On the other hand, in the case of NAFTA, I believe that enhancing national security and sovereignty were clearly part of the broader goals of the US side. Officials believed that securing the stability of the Mexican political system by reducing or eliminating the negative economic election cycle would enhance the stability and hence the sovereignty of Mexico. Prior to NAFTA the Mexican financial system was subject to strong external pressures resulting from exchange rate and capital flight problems. This left the domestic economy vulnerable to outside pressures. Strengthening the financial system and institutions through the negotiating process of NAFTA worked to eliminate or at least reduce significantly this vulnerability. Social values were not a direct focus of US officials and policymakers.


All mainstream economic analysts have concluded that the US Canada FTA and the NAFTA have been overwhelmingly successful from an economic perspective. Enhanced economic integration among the three countries has increased the employment and real growth performance of each country. Living standards have increased for all three participants. Each nation is better off in purely economic terms than they would have been in the absence of the trade agreements. This is an important distinction. The only appropriate measure of success is a relative one of performance under the agreements compared to what might have been in the absence of the trade agreements. The relevant measure is not in terms of absolute numbers. During the 1990’s growth and employment in all three nations outperformed that of European nations significantly. And we have clearly outperformed Japan! Two way (and three way) trade flows in NAFTA grew faster than in other parts of the world.

From a US perspective, the goals that we set out for both the US Canada FTA and the NAFTA have been largely met – and have exceeded expectations in many instances. From my own financial market background perspective, the integration of our financial markets has been a true success story. Capital market efficiencies have resulted in all three nations. Money is available for investments on lower cost terms than would otherwise be the case. And consumers and investors now have a wider range of financial assets to choose from. These efficiencies result in a more optimum allocation of resources among the nations.

Future Developments

Over the past decade we have witnessed an active debate within the European Community on the topic of deepening or broadening the Union. In the wake of the breakup of the former Soviet Union and the freeing of Eastern Europe, the EU has debated the issue to a considerable extent. We have not heard much on these concepts in North America – or at least in the US.

Perhaps that is not surprising. Our approach in North America has been largely an economic one. In Europe the approach has been one of political integration as well as economic integration. The unification of Europe has been a goal from the early days of the Community.

Given the strong feelings of nationalism in all three NAFTA countries, I would not expect to see our integration move in the direction of that of the EU. I do not expect a ‘deepening’ debate to take the stage in North America. What I see instead is a broadening focus for NAFTA.

Using our NAFTA model of economic integration as a fundamental basis for increased integration in the Southern Hemisphere and into Asia is the way of the future in my view. I see the benefits of integration of the Pacific Rim into North America more fully than is now the case. One could make the case for an integration of much of APEC into the NAFTA model. Depending on the views of our Latin American friends, they too could be fully included into the NAFTA model.

I believe that is very important that we not focus exclusively on the Southern Hemisphere. The world would not benefit from the creation of regional blocs. We need to pursue actively the Asian region in our outreach and efforts towards integration. A line dividing us down the Pacific would not strengthen the global trading system and would not help us move away from protectionist tendencies.

Thank you.