America's True Power In The NAFTA Century

OK, I get it. Between George W. Bush and Barack Obama we have made complete fools of ourselves on the international stage, outmaneuvered by petty lunatics and crafty kleptocrats like Russia’sVladimir Putin. Some even claim we are witnessing “an erosion of world influence” equal to such failed states as the Soviet Union and the French Third Republic. “Has anyone noticed how diminished, how very Lilliputian, America has become?” my friend Tunku Varadajaran recently asked.

In reality, it’s our politicians who have gotten small, not America. In our embarrassment, we tend not to notice that our rivals are also shrinking. Take the Middle East — please. Increasingly, we don’t need it because of North America’s unparalleled resources and economic vitality.

Welcome then to the NAFTA century, in which our power is fundamentally based on developing a common economic region with our two large neighbors. Since its origins in 1994, NAFTA has emerged as the world’s largest trading bloc, linking 450 million people that produce $17 trillion in output. Foreign policy elites in both parties may focus on Europe, Asia and the Middle East, but our long-term fate lies more with Canada, Mexico and the rest of the Americas.

Nowhere is this shift in power more obvious than in the critical energy arena, the wellspring of our deep involvement in the lunatic Middle East. Massive finds have given us a new energy lifeline in places like the Gulf coast, the Alberta tar sands, the Great Plains, the Inland West, Ohio, Pennsylvania and potentially California.

And if Mexico successfully reforms its state-owned energy monopoly, PEMEX, the world energy — and economic — balance of power will likely shift more decisively to North America. Mexican President Pena Nieto’s plan, which would allow increased foreign investment in the energy sector, is projected by at least one analyst to boost Mexico’s oil output by 20% to 50% in the coming decades.

Taken together, the NAFTA countries now boast larger reserves of oil, gas (and if we want it, coal) than any other part of the world. More important, given our concerns with greenhouse gases, NAFTA countries now possess, by some estimates, more clean-burning natural gas than Russia, Iran and Qatar put together. All this at a time when U.S. energy use is declining, further eroding the leverage of these troublesome countries.

This particularly undermines the position of Putin, who has had his way with Obama but faces long-term political decline. Russia, which relies on hydrocarbons for two-thirds of its export revenues and half its budget, is being forced to cut gas prices in Europe due to a forthcoming gusher of LNG exports from the U.S. and other countries. In the end, Russia is an economic one-horse show with declining demography and a discredited political system.

In terms of the Middle East, the NAFTA century means we can disengage, when it threatens our actual strategic interests. Afraid of a shut off of oil from the Persian Gulf? Our response should be: Make my day. Energy prices will rise, but this will hurt Europe and China more than us, and also will stimulate more jobs and economic growth in much of the country, particularly the energy belts of the Gulf Coast and the Great Plains.

China and India have boosted energy imports as we decrease ours; China is expected to surpass the United States as the world’s largest oil importer this year. At the same time, in the EU, bans on fracking and over-reliance on unreliable, expensive “green” energy has driven up prices for both gas  and electricity.

These high prices have not only eroded depleted consumer spending but is leading some manufacturers, including in Germany, to look at relocating production , notably to energy-rich regions of the United States. This shift in industrial production is still nascent, but is evidenced by growing U.S. manufacturing at a time when Europe and Asia, particularly China, are facing stagnation or even declines. Europe’s industry minister recently warned of “anindustrial massacre” brought on in large part by unsustainably high energy prices.

The key beneficiaries of NAFTA’s energy surge will be energy-intensive industries such as petrochemicals — major new investments are being made in this sector along the Gulf Coast by both foreign and domestic companies. But it also can be seen in the resurgence in North American manufacturing in automobiles, steel and other key sectors. Particularly critical is Mexico’s recharged industrial boom. In 2011 roughly half of the nearly $20 billion invested in the country was for manufacturing. Increasingly companies from around the world see our southern neighbor as an ideal locale for new manufacturing plants; General Motors GM -0.96%, Audi , Honda, Perelli, Alcoa and the Swedish appliance giant Electrolux have all announced major investments.

Critically this is not so much Ross Perot’s old “sucking sound” of American jobs draining away, but about the shift in the economic balance of power away from China and East Asia. Rather than rivals, the U.S., Mexican and Canadian economies are becoming increasingly integrated, with raw materials, manufacturing goods and services traded across the borders. This integration has proceeded rapidly since NAFTA, with U.S. merchandise exports to Mexico growing from $41.6 billion in 1993 to $216.3 billion in 2012, an increase of 420%,while service exports doubled. MeanwhileU.S. imports from Mexico increased from $39.9 billion in 1993 to $277.7 billion in 2012, an increase of 596%.

At the same time, U.S. exports to Canada increased from $100.2 billion in 1993 to $291.8 billion in 2012.

Investment flows mirror this integration. As of 2011, the United States accounted for 44% of all foreign investment in Mexico, more than twice that of second-place Spain; Canada, ranking fourth, accounts for another 10%. Canada, which, according to a recent AT Kearney report, now ranks as the No. 4 destination for foreign direct investment, with the U.S. accounting for more than half the total in the country. Over 70% of Canada’s outbound investment goes to the U.S.

Our human ties to these neighbors may be even more important. (Disclaimer: my wife is a native of Quebec). Mexico, for example, accounts for nearly 30% of our foreign-born population, by far the largest group. Canada, surprisingly, is the largest source of foreign-born Americans of any country outside Asia or Latin America.

We also visit each other on a regular basis, with Canada by far the biggest sender of tourists to the U.S., more than the next nine countries combined; Mexico ranks second. The U.S., for its part, accounts for two-thirds of all visitors to Canada and the U.S. remains by far largest source of travelers to Mexico.

These interactions reflect an intimacy Americans simply do not share with such places as the Middle East (outside Israel), Russia, and China. There’s the little matter of democracy, as well as a common sharing of a continent, with rivers, lakes and mountain ranges that often don’t respect national borders. Policy-maker may prefer to look further afield but North America is our home, Mexico and Canada our natural allies for the future. Adios, Middle East and Europe; bonjour, North America.

This story originally appeared at Forbes.

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

NAFTA logo by AlexCovarrubias.