OPINION

By JERRY HAAR

Part of an ongoing series from the Wilson Center*

The second decade of the 21st century increasingly mirrors the world’s political and economic environment of a century before when nationalism, protectionism and isolationism occupied center stage in the global political economy. The key drivers of economic growth and development — neoliberal economic policies and free market-oriented institutional reforms — have fallen out of favor or been rejected to a great extent by a number of governments and large segments of their citizenry the world over. Not surprisingly, the animus toward “globalization” itself has increased with doom-and-gloom naysayers (including many formerly pro-globalization voices) concluding that globalization is dying, if not dead already.

Just what are the implications of these developments for North America, specifically regional economic integration as embodied in the United States-Mexico-Canada Agreement (USMCA)? What are the principal arrows in the quiver of North America that can energize its competitiveness regionally and globally?

Canada, Mexico and the United States — individually and collectively — possess assets that can contribute to a significantly more competitive North America.

To begin, the political and economic fundamentals in all three countries serve as an anchor for stability, which is vital for growing prosperity. While controversy, polarization, frustration and scandal have plagued the leaders, administrations and political parties in all three nations, dramatic — even violent — upheaval is highly unlikely as is the rejection of the basic economic model that has fueled growth for decades.

Increasing levels of inflation, with their impact on prices and debt, along with a marked rise in interest rates, will not deter the countries of North America from prudent economic policies and a pro-growth agenda. GDP in all three countries will register between 2 percent and 3 percent, and bank lending rates — vitally important for business growth — will rise to 3.5 percent in both the United States and Canada and 6.5 percent in Mexico. And while Mexico’s lending rate is nearly double that of its North American neighbors, one should keep in mind that the lending rates for its South American competitors Argentina and Brazil surpass 30 percent. Compared to the past, credit is readily available, as are the multitude of sources for accessing credit. This bodes well for small as well as larger businesses in all three countries and enhances private sector competitiveness.

Turning to human capital, if we go by test scores, the human capital base for all three countries presents a mixed picture. According to the Organization for Economic Cooperation and Development’s (OECD) PISA scores of 15-year-olds’ performance in reading and math, Mexico ranks below average and the United States and Canada score above in reading and the United States below in math. Be that as it may, averages tell us very little about the amount and quality of human capital necessary to perform at a satisfactory level.

The three nations do have the labor pool necessary to produce and excel, and all three nations have a network of vocational and technical schools that collaborate with the private sector, as well as excellent universities in engineering, computer science, business and the physical sciences. Some of the most notable are the University of Waterloo and McGill, the National Autonomous University of Mexico (UNAM) and Tec de Monterrey, and MIT and Carnegie Mellon. Additionally, there are well-funded public and private research centers and national laboratories dedicated to R&D. Important as well is the cooperation between North American universities. For example, Canada’s and Mexico’s higher education associations have formal collaborative agreements, and Arizona State University has a credit transfer partnership with four of Mexico’s top universities. More than one-third of Mexican universities have linkages to U.S. and Canadian universities and nearly 40 percent of Canadian universities have ties to U.S. and Mexican universities.

American high technology companies are also involved in developing human capital in Canada, the United States and Mexico. In 2021, Microsoft Canada announced the addition of eight post-secondary institutions to its Canada Skills Program, bringing the total to 20 schools in six provinces across Canada, and IBM has expanded its P-Tech
apprenticeship program to Mexico, committing to training 400 university students in new technologies such as artificial intelligence (AI), cloud and quantum computing. Cementos Mexicanos (Cemex) has joined forces with the UNAM and Tec de Monterrey to promote R&D projects, and Bombardier funds a broad range of research and training activities at Centennial College in Toronto.

A nation’s technological base and ecosystem of innovation and entrepreneurship are key to competitiveness. Fortunately, all three North American countries have a host of industries, such as electronics, pharmaceuticals, energy, aviation, automotive, and industrial and consumer goods manufacturing that compete effectively in the global marketplace.

Another set of assets in North America is industrial clusters. These are geographic areas that comprise co-located companies representing either a single or multiple industries. Driven by talent, location, government incentives, networks, transportation and other infrastructure. Several large firms can source talent from local universities and import and build supply networks for products and services. The auto industry is a perfect example. In all cases, major funding from the public sector, significant financial support from the private sector and extensive partnerships with universities and research organizations and industry associations comprise the winning formula for clusters to take root, grow and thrive.

One should note, too, that the attraction and retention of talent is essential. Waterloo, Ontario, is a perfect example. The city tops the CBRE list of North American emerging tech talent markets and is itself a cluster for computing, Notable too is Montreal, where Facebook launched its AI research lab in 2017 and where Microsoft plans to double the size of its AI research lab.

Canada, in fact, has gone all in embracing the cluster concept. It created 5 superclusters in 2018 with nearly $1 billion in federal funding matched dollar-for-dollar by the private sector. Those superclusters comprise: the Ocean Supercluster based in Atlantic Canada, harnessing innovation to improve competitiveness in fisheries, oil and gas, and clean energy; the SCALE AI Supercluster based in Quebec; the Advanced Manufacturing Supercluster in Ontario; the Protein Industries Supercluster based in the Canadian Prairies; and the Digital Technology Supercluster established in British Columbia.

In the case of Mexico, many clusters have formed around the in-bond maquiladora industry; and around the broader production for North American markets has exists nationwide. For example, aerospace clusters are prominent in the states of Querétaro and Sonora. Automotive clusters are well established in Chihuahua and Nuevo León. Medical devices are flourishing in the Baja California-San Diego trans-border region. And the best-known cluster — IT and electronics — in Jalisco is home to Oracle, Intel, HP and IBM, and not just in manufacturing but with R&D as well.

When it comes to the United States, one typically thinks of Silicon Valley and the Northeast’s Route 128 when mentioning clusters. But, like Mexico, the proliferation has been nationwide: Colorado (computer integrated systems and programing), Albany (nanotechnology), Pittsburgh (advanced materials and energy) and Minneapolis (cardiovascular equipment), for example. There is also a plethora of start-up and later stage communities like Austin, Salt Lake City, Boulder, Miami and Seattle that could evolve into the clusters of tomorrow.

Finally, there is the phenomenon of cross-border clusters beyond San Diego-Tijuana, mentioned above, as one finds with the Arizona-Sonora technology hub. Tech Parks, Arizona, is known as Optics Alley, since it produces cameras, lasers and sensors. University partners collaborating there are the University of Arizona, Mexico’s UNAM and Ben-Gurion University of the Negev in Israel.

In terms of consumer markets, the North American consumer market is a lucrative yet challenging one for companies, with the availability of free consumer review websites and social media accessible to shoppers. That includes “aspirational consumers” ones — those at lower income levels. The wide availability of credit cards to all income segments along with an increasing level of disposable income present expanding opportunities for firms within and outside the North American market. While the consumer behavior of the various socioeconomic classes in all three nations is quite similar, there are distinguishing features that are worth mentioning and the three governments are focused in the USMCA in expanding participation in cross continental
production and commercial networks for small and medium enterprises (SMEs), as well as to disadvantaged populations.

Looking at Mexico’s consumers, the largest age groups are the young and the elderly. These consumers are brand loyal, and the biggest factors in their purchasing decisions are quality, practicality and price. Mexicans are the fourth-biggest network users, and the country is the nation with the most e-commerce, where 85 percent of the populations buys at least one product online.

As for Canadian consumers, while affordability and quality are the most important features of their consumption decisions, what distinguishes that nation is the population’s championing of a customer-centric strategy. Canadians place an emphasis on companies that show empathy to their customers and employees
as well as other stakeholders. They highly value brands that have an authentic purpose and value diversity, inclusion and the environment.

When it comes to American consumer markets, they were strong even during the pandemic. A unique feature is a consumer base that is more diverse than ever. Among millennials, 44 percent belong to an ethnic or racial minority; and there are subsets of this group, GenX, and baby boomers. As would be expected, especially among younger shoppers, more and more purchasing is done online; and feeding this is the intense growth of live streaming (influencers, celebrities). Today, 97 percent of Americans shop online, while brick-and-mortar stores continue to decline. Another armament in North America’s arsenal of competitiveness is coproduction and its relationship to nearshoring. In the Mexican states near the U.S.-Mexico border, these manufacturing sites are known as maquiladoras. They are low-cost production facilities that produce goods mainly for export (principally to the United States). They capitalize on the cheap labor force in Mexico and the benefits of the free trade agreement between Mexico, Canada and the United States, which include imports of intermediate goods from the United States. Also, a maquiladora enjoys favorable tax treatment, such as duty-free and tariff-free imports. After the North American Free Trade Agreement (NAFTA) was passed in 1994, the numbers of plants exploded and now consist of over 3,000, producing everything from consumer electronics to aerospace.

With recovery from the global covid-19 pandemic underway, exports of nonpetroleum goods by Mexico grew by almost 27 percent in February compared to a year earlier. Grupo Financiero BASE estimates that exports will grow another 6 percent in 2022. Foreign investment for this type of production is coming back, as well. Mattel, maker of Barbie dolls and Hot Wheels toy cars, has announced that Mexico will become the site of its biggest plant in the world, investing $47 million toward consolidation and expansion. And Mexican suppliers saw a 514 percent increase from 2020 to 2021 in bids from U.S. buyers.

As for coproduction and Canada, the Canadian and U.S. steel and aluminum industries are deeply integrated and underpin continental supply chains that strengthen the global competitiveness of the North American economy. In aluminum, Canada and the United States share a highly integrated market with a combined trade of $12.3 billion in 2020. About 83 percent of Canada’s primary aluminum production is exported to the United States, where it is used as an important input for further processing into products for U.S. domestic and export markets.

Unquestionably, it is the automotive sector where coproduction is most extensive and always has been. Americans and Canadians make cars together seamlessly. In fact, this has been the case for nearly 60 years. Companies on both sides of the border routinely trade parts back and forth five or six times before a final vehicle rolls off the assembly line.

Returning to the USMCA and its predecessor (NAFTA), the accord has turned out to be neither an apocalypse nor a panacea, but a facilitative commercial framework that reflects and has supported commerce in the North American space for over half a century.

In reality, in the post-pandemic world, North American integration has been resilient — it is not falling apart. Truth be known, we are trilaterally more interdependent than ever before. And companies outside North America continue to set up shop in the region for the reasons (assets) mentioned above. South Korea is an excellent example.  There are over 2,000 companies with South Korean investment in Mexico, including Samsung, LG, Kepco, Posco, Hyundai, KIA and several other auto part manufacturers. This nearshoring saves time and money without compromising quality.

Admittedly, the USMCA is not perfect. For example, there have been disputes over dairy between the United States and Canada, and debates over biotechnology, corn and seasonality between the United States and Mexico. Great concern remains over
Mexico’s polices and regulations in the energy sector affecting U.S. and Canadian companies. And anti-competitive rules of origin requirements prove harmful to producers and consumers alike. Nonetheless, the positives do outweigh the negatives.

If, as Aristotle asserted, “the whole is greater than the sum of its parts,” then it behooves all three USMCA partners to effectively address their respective deficiencies in economic and social policy; governance; and legal, regulatory, and administrative policies, and, in so doing, boost competitiveness in North America. The foundations for expansion and growth are exceptional.

JERRY HAAR is a professor of international business at Florida International University, a global fellow of the Woodrow Wilson International Center for Scholars and a senior fellow of the Council on Competitiveness.

* The Wilson Center is offering a series of articles to take a deeper look at the potential gains of more effective collaboration across North America. Drafted and coordinated by former U.S. Ambassador to Mexico Earl Anthony Wayne, the series includes articles by experts from the three countries making the case for why such cooperation across the continent is worthwhile, despite its complexity and difficulties. This is part of that series, which is being published in Pulse News Mexico with express prior permission from the Wilson Center.