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### Viewing cable 05OTTAWA268, PLACING A NEW NORTH AMERICAN INITIATIVE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05OTTAWA268 | 2005-01-28 15:03 | 2011-04-28 00:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa

`

    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

`