Advancing Regionalization for Global Economic Leadership

– Karina Fernandez-Stark and Penny Bamber How North America can turn today’s turbulent economic environment into a competitive advantage. In today’s turbulent economic environment, the world’s understanding of global manufacturing competitiveness is being redefined from one based on profit to one founded in resiliency, quality, and sustainability. North America is poised to influence this to its advantage, and in doing so reinvigorate its global leadership. While much of the current debate on this issue in the United States has focused on reshoring to North America to reduce dependence on Asia, there are limits to this strategy—ranging from the cost and size of the labor pool to a convergence of capabilities in the region. Regional integration across the Americas would combine the high-value leadership of North America with the powerhouse supply of raw materials in the Southern Cone of South America, a large and growing low-cost labor force, broad diversity in development levels, and abundant green energy. Together, they would create more enduring advantages for global industries. While NAFTA provided excellent terms for North America’s leadership in the early stages of globalization, the continuous, dynamic rise of other regional groups has exposed shortcomings in the region’s long-term competitiveness. The past few years have demonstrated that global value chains—where the different manufacturing stages are located in different countries—are an integral part of the world’s economy. Today, most industries, from automotive and clothing to aerospace and medical devices, are organized in these cross-border networks of goods and services, which account for an important share of global trade and employment. Now a widely adopted business model, global value chains have fragmented industries, with activities spanning multiple countries and firms around the world. This has ushered in prosperity in a large range of countries, which can now participate in international trade without needing to develop the full range of industrial capabilities. At their core, these global networks leverage each location for its relative competitive advantage. Usually, developing countries offer low labor costs and raw materials, and focus on lower-value operations, such as assembly and production. Meanwhile, developed countries with highly educated talent focus on their core strengths in R&D, innovation, branding, and sales. The Eroding Competitiveness of the North American Trade Bloc For the past three decades, this globalization of production has been shaped and led by North America—comprising the United States, Canada, and Mexico—which has heavily influenced what, how, and where goods are produced around the world. Since its signing in 1994, the regional North American Free Trade Agreement, or NAFTA, has made North America the world’s largest trade bloc , with more than $1 trillion in goods and services being exchanged. The region is home to major firms, carries out the highest-value activities with their chains, and exercises power and influence over global standard setting in virtually every industry. The success of this regional partnership is due to the complementarities in comparative advantages across the three countries. The US, the world’s largest economy, leads these chains by providing high-value services and advanced manufacturing, while Canada and Mexico have key roles supplying raw materials, parts and components, and producing final products to the US. US-lead firms, from Apple to Microsoft and Nike, are household names around the world. The US has been supported by Canada—as a natural resource provider and niche high-value manufacturer—and Mexico, whose original role was as a large, low-value assembly provider with large-scale maquilas (factories) along the border with the US. However, since the turn of the century, faced with high competition from lower-cost locations in Asia, Mexico has been pushed to become an advanced manufacturing hub. The automotive, aerospace, and electronics industries, along with medical devices and pharmaceuticals, now account for close to half its exports. Unable to compete with Asia on cost, Mexico left behind its role as the low-cost partner within this regional agreement; in doing so, it has reshaped North America’s global competitiveness. As a region, North America no longer has a low-cost supplier and has grown increasingly dependent on Asia for this supply. North America’s failure to engage in more comprehensive regional economic initiatives has strengthened the trade relationship between South America and Asia. While NAFTA provided excellent terms for North America’s leadership in the early stages of globalization, the continuous, dynamic rise of other regional groups has exposed shortcomings in the region’s long-term potential to maintain and upgrade its competitiveness in global value chains. A basic comparative review of how the United States–Mexico–Canada Trade Agreement (USMCA)—NAFTA 2.0—stands up to the evolving trade blocs of […]

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