THE THEORY OF TRANSBORDER, INTERPROVINCIAL FREE TRADE AREAS1 Summary The theory of Free Trade Areas is quite well developed. In general however the theory has been applied only to entire countries entering into such agreements. There have been notable exceptions, e.g. the post WW-II European Coal and Steel Community. The Canadian economist Robert Mundell, in h s article on "Optimum Currency Areas", also raised the notion that national boundaries are not necessarily coterminous with optimum trade areas, suggesting that in large countries like the United States and the Soviet Union economic efficiency might be increased by introducing regional currencies. Combining the Mundel concept of multiple regions within one nation enjoying considerable economic autonomy with the ECSC experience in extending such autonomy across national boundaries, one can conceive of of a Free Trade Zone limited to adjoining provinces of nations in which accidents of history have resulted in borders dividing natural economic regions. Not only would such unification benefit the participating provinces, but the added efficiency would also benefit the non-participating regions of the nations to which these provinces belong -- another example showing that the operations of a free economy are a positive-sum game. * * * * * * Certain natural economic regions have been artifically divided by national frontiers as the result of such irrational happenings as wars, folk migrations, and dynastic marriages. Economic pressures to reunite such natural regions are enormous, though usually ignored by Economists and negated by the concerns of politicians who do not recognize the essentially positive source of such pressures, confusing them with disaffection and/or attempts at financial shenanigans on the part of traders and businessmen. The union, most commonly by conquest, of entire previously sovereign nations into Common Markets, or Free Trade Areas, has until recently been the only recognized method of rejoining such natural economic regions. Examples include the unification of Germany under Prussia following the Franco-German War; Bismark's earlier Zollverein initiative; and Garibaldi's conquest of Italy under the banner of the Kingdom of Piedmont. The European Iron and Steel Community Example Following the Second World War, a historic breakthrough occurred when Germany, Belgium, and France voluntarily permitted adjoining provinces in the Ruhr/Saar natural economic zone to join a European Iron and Steel Community without committing any of the three nations to economic fusion. This rejoining of an artifically divided economic region was so successful that it provided a shining example for the later European Common Market, which at the end of a protracted process will, in 1992, result in the effective fusion of the economies of its twelve member countries. 1 Published in emended form in The Foreign Service Journal in 1986 with copies sent to all Senators and Congressmen. The Journal edited the piece to remove all references to the proposal that the Mexican and American border states be empowered to negotiate an agreement suitable to their needs and desires, instead extending the notion to include both entire nations -- making it an argument in support of the North American Free Trade Area (NAFTA), despite the author's arugment that most of Mexico was not ready for inclusion in such a treaty -- a prescient anticipation of the meltdown of the peso within a few months of the ratification of NAFTA. In recent years, the success of the EC has so impressed the world that the example of permitting mere adjoining provinces, or, indeed, limited sectors or industries, to undertake special relations which do not involve entire nations has all but been forgotten. But in economic theory there is no reason to insist on sovereign nations joining together where otherwise politically or economically contraindicated, just to resolve the probelms of certains provinces or product lines. Nor, on the other hand, should it be necessary for adjoining provinces within a natural economic region to forego the benefits of cooperation just because the rest of the homeland or homelands is or are unready for such a major step. Illustrative of the power of this new recognition of the possibility of disaggregated economic policy, Belgium has just enacted legislation to devolve control over economic policy, foreign trade, roads, ports, and communications to its two language regions, with the central government reserving control only over foreign affairs, defense, justice, social security and monetary policy. A not-dissimilar situation, though moving towards centralization across national borders instead of decentralization within a single nation of certain powers, is taking place in what was known before WW I as "Middle Europe" -- essentially the old Austro-Hungarian Empire. Today this natural economic region is divided among five sovereign nations: Austria, Italy, Czechoslovakia, Hungary, and Yugoslavia. This natural trade area has, since the break up of the Austro-Hungarian Empire found great difficulty in developing satisfactory trade relations with the new homelands into which it was divided as a result of the Versailles Treaty. Trieste, formerly the main port of Austria has lost most of its shipping to Italian ports closer to the industrial regions of Genoa and Rome. Styria, Carinthia, and Burgenland, formerly prosperous regions of Austria now on the borders of Socialist Yugoslavia and Hungary, have been losing population to areas adjacent to more prosperous Free Market Switzerland and Germany. A new political movement called Alpe-Adria (from the Alps to the Adriatic) has recently arisen, counting among its membership the cross-border provinces of Burgenland, Carinthia, Styria, and Upper Austria (all in Austria); Croatia and Slovenia (each republics of Yugoslavia), and Friuli-Venezia Giulia, Trentino-Alto Adige and Veneto (provinces of Italy). Associate members are Austria's Salzburg, Hungary's two western regions of Gyor-Sopron and Vas, Italy's Lombardy, and the West German state of Bavaria. Taking into account the troubled political history of its Middle-Europe/Balkan past and the enormous socio-economic differences of the nation states to which these member regions belong today, it can be seen that the Alpe-Adria movement presents an even more striking example of the economic forces at work trying to rationalize production and trade within a natural economic region fractured by illogical national boundaries than the California/Baja, Sonora/Arizona, and Nuevo Leon/Texas examples given below. While the forces at work on the eastern side may be primarily symbolic -- an attempt to rejoin the rest of Europe, the London Economist, in an analytic article in its December 26, 1987 issue, sees the objectives of the western members of the movement as more practical: an attempt to redress regional economic balance now being lost to more advantageously placed provinces near the dynamic markets of West Germany and Italy. A New Possibility for Interprovincial Economic Cooperation A promising possibility of permitting adjoining provinces of nations as yet unprepared to move towards a Free Trade Area or Common Market involving entire nations can be found in the American Southwest, where the States of Texas and Nueva Leon, Mexico; Chihuahua and Texas/New Mexico; Arizona/Sonora; and California/Baja California have much more in common from an economic perspective than the political, cultural, and linguistic differences which separate them across a national border. The problem is to find a way in which such a trans-border, inter-provincial Free Trade area could be created. One major preoccupation in the American Southwest is concern over illegal immigration. Switzerland provides some hints as to how the problem might be approached. Almost twenty-per cent of the Swiss workforce is constituted of temporary immigrant labor. In the Swiss Federation, virtually all immigration and citizenship questions are left to cantonal policy. It is much more difficult for a foreigner to be accepted for residence in certain cantons than in others. And only after a canton accepts one for citizenship is Federation citizenship accorded. The United States has taken the opposite approach. But it would appear possible, by special act of Congress (and by concurrent action by the Mexican Camara de Diputados ) to enable the specific states mentioned to undertake treaty negotiations to determine the nature of the Free Trade Area desired. By ratification of the resulting treaty it would be given status superceding the Co stitutions of both countries. Thus those closest to and most interested in the economic and social problems involved would be enabled to find solutions to them. Sonora is one of the more economically advanced states of Mexico. With 2% of the population and 20% of the national territory, Sonora produces two and a half times the national share of GDP per capita. There are few families on either side of the border without close friends or family members on the other side. Were residence and state citizenship questions left to the transborder states, members of the new Free Trade Area, much of the illegal immigration problems of both countries might readily be resolved. Nor would it appear difficult for the US Immigration and Naturalization Service to establish its border monitoring points on the Utah/Colorado/Oklahoma borders to prevent those crossing the national frontier from proceding past the limits of the states participating in the treaty. Indeed, the job of the INS would be enormously lightened since relatively few "indocumentados" have strong interest in traveling beyond the borders of the natural economic region already described. Potential Political Problems in Achieving a Regional Free Trade Area This is not to say there would not be problems getting such enabling legislation through either the American Congress or the Mexican Camara de Diputados. Few politicians recognize the border problem as the economic problem it is, preferring to see it as a political issue -- which it largely is not. As with the "Norteno" problem the "Guachos" of the Distrito Federal in Mexico perceive with regard to Sonorans, the distrust of Ottawa over the separatist tendencies of Alberta and British Columbia would prevent Canada from participating in such an economically logical solution to the divided natural economic region of British Columbia/Washington State or Alberta/Idaho/Montana. And the concern of Washington politicians over unwanted entry of Mexicans into the American Southwest (which from all logic should be a local issue) will present problems in approving such legislation. Similarly, Alpe-Adria members have been forced to be ultra-discreet to avoid offending national capitols or giving the impression they seek the restoration of the Habsburg Empire. A Polish party newspaper has attacked "the myth of Mitteleuropa". And following the October 1987 meeting of Alpe-Adria in Bled, the Belgrade magazine Duga published a critical article entitled "The Charms of Yodelling Together". Apparently fearing a new Germanic subjugation, a Serbian paper has recent y called, as an alternative, for the creation of a new Balkan confederation (shades of the Balkan wars of the 1800's). Nevertheless, Alpe-Adria appears to have surmounted the problem, and the battle to win approval for such legislation in Mexico, D.F. and Washington, D.C. does not appear to be impossible. Looking at the current European attempt at rationalizing one of its artificially divided natural regions, the London Economist reports, "Those who dream of some new Central European confederation by the year 2000 are sure to be disappointed. But if ever the post-1945 division of Europe looks like coming to an end, Alpe-Adria is ready and waiting. And one might add, "Notwithstanding the illogical borders imposed by roaming medieval tribes and the accidents of military conquest, the pressure of economic forces and the gradual evolution of economic theory might yet make it possible for natural economic regions to be unified even across national borders, as was done with the ECSC. An Important Reason to Look Closely at Rejoining the Divided Southwest Economic Region Few who have been close to the scene believe that the Immigration Reform and Control Act of 1986 has come close to solving the problem of illegal immigration. Perhaps the real solution is to leave matters in the hands of those closest to the scene. A cross-border, interstate Free Trade area along the lines proposed would bring essential farm labor into the United States and permit badly needed capital investment in Sonora, Chihuahua, Nuevo Leon, and Baja California, improving manufacturing and tourist facilities enormously and bringing benefits to state economies on both sides of the border -- in turn benefitting the national economies of the participating nations as did the ECSC in post-war Europe. Given time, who knows, the beneficial results might yet bring Mexico to participate in the greater North American Free Trade Area which the parliaments of the US and Canada are presently considering.