Beyond the Flat World - Part 5: The Reluctant Triangle: Why NAFTA Couldn't Fully Integrate the U.S., Canada, and Mexico

The world’s economic landscape is defined by three powerful regional hubs: Asia, Europe, and North America. While Europe forged its economic dominance through diplomatic treaty-making and supranational legal institutions, and Asia achieved its scale through flexible, corporate-led supply chains, North America’s integration followed a distinct—and ultimately less cohesive—path.

North America is the reluctant regionalist.

The modern North American economic platform, spanning the United States, Canada, and Mexico, was intentionally spurred into existence by the North American Free Trade Agreement (NAFTA), which took effect in 1994. The goal was to knit together the continent, creating a competitive bloc capable of rivaling the European common market and the emerging industrial powerhouse of East Asia.

Initially, NAFTA was a spectacular commercial success. Continental commerce quadrupled in size during the agreement’s first decade. U.S. manufacturers soon found they were buying and selling more from Canadian and Mexican producers and consumers than from any others in the world.

However, this economic collaboration was always characterized by political and institutional reluctance. Unlike Europe, North America actively opposed the creation of continental institutions, common laws, or a shared bureaucracy.

I. The NAFTA Spark: A Commercial Agreement, Not a Union

NAFTA’s structure focused heavily on commerce and investment, rather than political union or institutional harmonization, setting it apart from the European model.

An Investment Agreement as Much as a Trade Deal

NAFTA was structured as an investment agreement as much as a trade agreement:

• Protection Against Expropriation: It protected businesses expanding abroad against nationalization and expropriation by foreign governments.
• Market Access: It opened up many sectors once reserved for locals to foreign companies.
• Dispute Settlement: NAFTA set up arbitration panels where companies could appeal if they felt wronged.
• IP Protection: NAFTA was one of the first trade agreements to define and defend intellectual property (IP), safeguarding patents, trademarks, and trade secrets.

II. Industrial Integration in Practice

Despite the political hesitation, NAFTA laid the foundation for deep, specialized supply chains, proving that proximity was a powerful economic advantage, especially in manufacturing.

The Auto Alley

The manufacturing of cars, trucks, and SUVs exemplifies North American regional density. By the 1990s, North American vehicle production jumped by four million during the decade.

• Regional Supply Chains: The supply chain for a vehicle like the Ford Edge is almost entirely North American. Its seats start with foam in Tennessee and fabric from South Carolina, move to Ciudad Juarez for embellishments, Matamoros for rails, and eventually ship to Ontario for fitting.

• Foreign Investment Transformation: NAFTA’s rules encouraged foreign businesses to set up manufacturing operations in North America rather than just exporting products to it. Brands like Toyota, Honda, BMW, and Hyundai may sound foreign, but their vehicles are now profoundly North American products. Toyota’s best-selling Camry sedan has a higher proportion of U.S./Canadian content (75 percent) than even Ford’s Fusion or Chevy’s Malibu.

III. The Reluctance Intensifies: External Shocks

The economic cohesion achieved by NAFTA proved fragile when confronted with two major external shocks in the early twenty-first century: the post-9/11 focus on security and the massive competitive pressure of China’s entry into the WTO.

1. The 9/11 Security Divide

The terrorist attacks on September 11, 2001, abruptly shifted the regional agenda. Security concerns immediately bumped trade off the top of the North American agenda.

• Hardening Borders: The immediate aftermath saw the temporary shutdown of the U.S.-Mexico border. Since then, the focus on security has primarily served to divide rather than unite the continent.

2. The China Shock

The entry of China into the World Trade Organization (WTO) in 2001 presented a severe commercial challenge that the fragile North American regional structure struggled to withstand.

• Erosion of Competitive Edge: China’s WTO entry fundamentally tested North America. Global tariffs fell, narrowing NAFTA’s preferential tariff advantages.
• Job and Trade Losses: The U.S. gained 600,000 manufacturing jobs between NAFTA’s launch (1994) and 2001, but it lost nearly one million jobs after China joined the WTO. Intraregional trade, which peaked at 56.2 percent of total North American commerce in 2000, fell back to around four of every ten dollars exchanged by 2014.

IV. Modern Integration: Symbiotic Regionalism and the USMCA

Despite the setbacks of the China shock and 9/11, North American integration persisted, proving its immense value, particularly in high-tech and specialized industries.

The San Diego-Tijuana Biotech Corridor

The border metropolitan area of San Diego, California, and Tijuana, Mexico, provides a strong contemporary example of successful regional specialization.

• Clustering: San Diego is home to a massive $40 billion local life sciences industry, anchored by world-class universities and institutes like UCSD, the Salk Institute, and the Scripps Institute.

• The Symbiotic Relationship: Just 20 miles south across the border, Tijuana has evolved into a vital part of this ecosystem. Tijuana’s labs and factories employ 40,000 skilled workers and produce about $600 million worth of medical tools annually.

• Crisis Response: This symbiotic relationship proved lifesaving during the COVID-19 pandemic. When imports from China shut off, Mexican medical-manufacturing lines expanded, supplying U.S. hospitals with desperate orders for protective gear and ventilators.

V. The United States’ Best Bet: More Regionalism

Despite its inherent strengths—stable legal rules, world-class universities, dominance in digital technology, and a growing working-age population—the U.S. has often failed to fully capitalize on its regional advantages, remaining the “reluctant” partner.

Isolation Breeds Stagnation

The failure of cities like Akron, Ohio, stemmed less from globalization and more from the costly consequences of the United States’ limited regionalization. When confronted with powerful, integrated manufacturing blocs in Asia and Europe by the late 1970s, U.S. tire companies had “no partners to turn to.”

• The Cost of Protectionism: Recent attempts at isolationist policies, like tariffs, have demonstrated the cost. Tariffs on steel and aluminum caused Ford to lose $1 billion in profit and led GM to announce 14,000 layoffs. Experts calculated that protectionist steel tariffs cost U.S. consumers $900,000 for every job created.

Deepening Regional Ties Is the Path to Prosperity

The success of the three major global hubs confirms the lesson: prosperity is achieved by nations that actively engage with their geographic neighbors. The best way for the U.S. to compete with other regional manufacturing hubs is to build its own.

If the U.S. chooses to move beyond its historical reluctance and fully embrace its neighbors, it can harness the combined strength, scale, and diversity of the North American economy. This strategy of more NAFTAs and fewer America Firsts is the best bet for the United States to regain momentum, boost prosperity, and thrive in an internationally connected and competitive world.