North America Must Compete Globally

Gary Clyde Hufbauer (PIIE) and Earl Anthony Wayne (Woodrow Wilson Center)
June 28, 2016

Contrary to campaign rhetoric, the integration of North America over the past quarter century has successfully grown the continental economy and enabled it to compete in global markets. And, in North America this has been done without the centralized institutions that UK voters just rejected. The June 29 North American Leaders’ Summit in Ottawa offers an opportunity to launch even smarter collaboration across Canada, Mexico, and the United States that respects the sovereignty of each partner. President Barack Obama, Prime Minister Justin Trudeau, and President Enrique Peña Nieto can approve a range of actions to make the North American economy more competitive and productive in the years ahead.

North American trade networks and continental investment ties have generated millions of jobs. North America is the best performing continent among advanced countries. But it still needs to create more and better jobs. Economic growth is too slow and productivity is far below par. An ambitious work agenda coming from the Leaders’ Summit can help boost the three economies.

Canada and Mexico touch the daily lives of more Americans than any other foreign connection.  North American ties are vital for US security, US energy future, and US prosperity. The steps that the three leaders take on June 29 may not grab headlines, but they can make it easier for US citizens to travel, do business, and compete globally.   

Trade in goods and services between the three neighbors has expanded four-fold over the past 20 years within the North American Free Trade Agreement (NAFTA). Canada and Mexico are the world’s largest buyers of US products—sales to the two neighbors account for an estimated 14 million US jobs, about 9 percent of US employment. Either Canada or Mexico is the largest export market for most US states. Stunningly, the finished products Mexico and Canada sell to the American market have by far the highest content of US-produced materials than imports from any other country in the world—an estimated 40 percent for finished manufactured goods exported from Mexico and over 20 percent from Canada. 

Continental supply chains that link Canada, the United States, and Mexico mean that much of what is produced in each country has content from its neighbors. For example, about 70 percent of the value of a CRV built in Jalisco, Mexico represents inputs from the United States and Canada. To establish these supply chains, private firms in all three countries have invested in their neighbors: US companies have invested about $386 billion in Canada and $108 billion in Mexico. Canadian firms have invested $348 billion in the United States and $11.5 billion in Mexico. Mexican companies, despite operating in a smaller economy, have invested about $19 billion in the United States and Canada.

Each of the three governments must enhance its country’s economic competitiveness by domestic reforms in areas such as education, infrastructure, and tax policy. But by cooperating, they can spur the entire North American economy. 

Cooperation is already well established. The three commerce secretaries have mapped out a North American Competitiveness Work Plan. The cabinet secretaries in charge of borders are working to speed border clearance while enhancing security. The trade ministers have updated trade practices set forth a quarter century ago in NAFTA. The energy secretaries are working to support better-integrated continental markets for oil, gas, and electricity. Environment officials are working to combat the effects of climate change and preserve our shared environment. Together, agencies are upgrading border facilities. These initiatives have produced evident progress, but the work can use some fresh ambition. We offer a few suggestions.

Set bold targets for border crossings: Commit to targets for border clearance times: for example, on average not more than 30 minutes for passengers and not more than 1 hour for trucks. Push to enact the North American Trusted Traveler Program, which leaders envisioned at their 2014 summit.

Build border infrastructure: Establish new institutions between pairs of neighbors (and within each government) to better plan new border infrastructure, set priorities consistent with trade flows, and tap private funding sources. Link this work to developing a North American Transportation Plan, as anticipated at the 2014 Leaders’ Summit.

Reduce trade friction:  Beyond the Trans-Pacific Partnership (TPP) agreement, establish the goal of common external most-favored-nation (MFN) tariffs for 95 percent or more of 6-digit Harmonized System (HS) product lines in 10 years. This would enable a waiver from NAFTA/TPP rules of origin on most commerce (apart from sensitive autos, auto parts, textiles and apparel) as there would be no motivation for “trade deflection,” namely the importation of third-country goods into the lowest-tariff country followed by trans-shipment duty free to neighbors.

Help small business: Enact higher de minimis thresholds in Mexico and Canada, below which customs declarations are simplified and imports are exempt from all taxes and tariffs. At present, the US de minimis threshold is US$800, the Canadian level is C$20, and the Mexican level is US$50. Raising the Canadian and Mexican thresholds would enhance express deliveries, support e-commerce, and spur participation by small and medium-sized enterprises (SMEs), which often export lower-value goods. The governments should create user-friendly websites for SMEs to identify potential business in North America and offer other targeted support.   

Strive for regulatory coherence: In addition to energizing trilateral regulatory talks, the three governments could agree in principle that when considering new standards or regulations, each North American regulator should first examine what the other partners have done (see US Executive Order 13609 of May 2012). Unless an existing standard or regulation is manifestly inadequate, the presumption by other partners should be to accept it. As for the existing massive body of relevant standards and regulations at the respective federal levels, the North American partners should set a bold goal such as harmonization or mutual recognition of half of them in 10 years.

Give a North American vision on energy and the environment: The leaders have an unprecedented opportunity to present a shared vision of enhanced cooperation across the continent to provide energy security and a sustainable environment for North America. The reported pledge to generate 50 percent of North America’s energy using renewables by 2025 is an ambitious goal. It should be affirmed by approving a robust set of steps to make the broader vision of collaboration a reality, including other actions and targets to implement the Paris climate accord.

Assure stakeholder involvement: Given the millions of citizens from all three countries touched by the North America agenda, the three governments should encourage significant involvement by stakeholders from the private sector and civil society.

Institutionalize tripartite work: The North American Competitiveness Agenda is work done over years (as are the security and environmental agendas). The leaders should make this collaboration a permanent feature of official business between summits.

Gary Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics. Earl Anthony Wayne is Public Affairs Fellow at the Woodrow Wilson Center and Career Ambassador (retired), with service as Ambassador Mexico among other foreign affairs postings.