SecondEconomic Integration In North America tends to inspire extreme views. Donald Trump, the most prominent recent critic, has called the continent’s original free trade agreement “probably the worst trade deal ever made”. In contrast, communicators of cross-border connections say they are making North America the most dynamic region in the world.
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Roughly equidistant between these two poles is the solid but unspectacular commercial reality of North America. Since NAFTA was signed, the continent’s trade in goods and services has quadrupled in nominal value (NAFTA) went into effect in 1994, over $7 trillion, or roughly 30% gross domestic product. But that was less than the six-fold increase in trade over the same period in the rest of the world. Intraregional trade linkages in Europe and Asia have become denser. Canada and Mexico do a lot of business with the US, but very little with each other.
Regional economies may be on the threshold of greater development. Several forces are now coming together to boost its prospects. Companies that used to rely on Chinese manufacturing are moving to other bases as tensions between the U.S. and China mount. Production disruption during the covid-19 pandemic illustrates the fragility of globally fragmented supply chains. President Joe Biden’s administration’s support for industrial policy, fueled by generous subsidies for electric vehicles (electric cars) and clean energy, there is super investment in the US. This inevitably spread to Canada and Mexico.
By 2022, the United States will trade far more with its neighbors north and south than it does with China. On March 15, US regulators approved the first major rail merger in 20 years, which will connect all three countries.And on March 23, as economist At press time, Mr. Biden will meet his Canadian counterpart, Justin Trudeau, during his first visit to Canada since taking office in 2021.
North American economic theory has been convincing. Many of the world’s largest and most innovative companies are based in the United States. Mexico offers cheap labor and land on its doorstep. Canada is rich in natural resources and has a thriving tech ecosystem. The heft of the U.S. consumer market combined with Mexico’s potential rounds out the enticing package. But in practice, the auto industry is one of the few industries that has truly embraced the cross-border model, with production networks tightly intertwined from Monterey to Ontario.
The question for North American officials and executives is whether they can pursue the same integration across a wider range of strategically important industries, from batteries to semiconductors. It is also a test of the viability of the ongoing shift from global trade to regionally concentrated commerce. Wherever North America goes, the rest of the world may follow.
mexico used to NAFTA. Those days are gone. Even under the leadership of populist nationalist Andrés Manuel López Obrador, no one questioned the US-Mexico-Canada agreement (us marine corps), NAFTAA similar-looking alternative negotiated by the Trump administration (which Trump, naturally, calls the best trade deal ever). More than three-quarters of Mexico’s exports go north of the border.American Tesla’s February decision electric car manufacturer, building a factory in the northern state of Nuevo Leon was hailed as a sign of future growth. It will start with a $1 billion investment and could grow to $10 billion.
Last year, Mexico’s economy minister said some 400 companies were interested in moving facilities from Asia to Mexico. Andrés Benavides of Daikin, a Japanese air-conditioning maker, said the company was shifting some of its production for the U.S. market from Thailand to Mexico. It plans to hire 2,000 people in Mexico over the next 18 months. The company also pulled production lines from the United States. A big draw is the availability of labor. Manufacturing wages in Mexico are much lower than in China.
Investment tends to go into established industries, especially Mexico’s main export, auto manufacturing. Many also represent expansions of companies already in Mexico. Volkswagen, BMW and Kia were among companies that announced investments last year, partly focused on shifting production to electric carSecond. Optimists believe there will soon be a flood of newcomers, too. Lorenzo Berho of industrial park builder Vesta said their demand was “unprecedented”.
Mexico’s banking institution estimates that Tesla’s investment could encourage as much as $25 billion in investments. Given concerns about fragmented production around the world, the chain reaction may be more effective than in the past. Head of Harald Gottsche BMW For a production line, the share of locally produced parts will increase “to be more resilient against supply chain disruptions,” the San Luis Potosí plant said.
But Alberto de la Fuente, head of Mexico’s Council of Global Companies, a body representing large international companies, warned that the current wave of investment remains more hopeful than real. Foreign direct investment rises to $35.3 billion in 2022, nearly 3% of global gross domestic product, the highest figure since 2015, but local analysts say it can be attributed to several big investments. Bank of Mexico Banorte estimates that the country’s exports could rise by $168 billion over the next five years, on top of current exports of about $500 billion a year, but the bank expects exports to be between $84 billion and $300 billion.
In addition to the usual issues of security and logistics, the government has added new ones. The first is energy. To protect Mexico’s ailing Enel, CFEMr. López Obrador presents reform priorities CFEof electricity, no matter how dirty or expensive its factories. This will reduce the scope for profitable investment in private power generation, which in turn will lead to possible power shortages in Mexico. It also makes it more expensive. At the same time, companies are striving to obtain the clean energy they need to meet their carbon reduction goals.
While the U.S. has stepped up its industrial policy, Mexico is sending less public money to investors. Mr López Obrador got rid of ProMéxico, the investment promotion organization. States now go out and sell themselves. Federal incentives for investment are few. Some states offer cheap land, but don’t offer tax breaks like many of their U.S. counterparts. However, this lack of support is more likely to slow the tide than stop it. An executive at a manufacturing company quipped that Mexico could benefit from nearshoring even in “autopilot” mode.
Canada doesn’t have the same luxury.Whether it’s wages, land costs or green regulations, Canada is very similar to the US, which means introducing a lot of subsidies electric cars, battery production and clean energy have the potential to shift the balance of competition between the two countries.
The budget, due on March 28, is expected to provide a package of tax credits and other subsidies as Canada responds to tough U.S. industrial policies. Canada’s economy is less than one-tenth the size of the United States, so it cannot compete on a dollar basis, but it can target specific parts of the supply chain. Without more support from the government, Canada risks capital outflows, said Dennis Darby of Canadian Manufacturers and Exporters, an industry group. He said some of the companies’ U.S. customers told them they could cut costs by moving south.
On March 13, German automaker Volkswagen announced it would build its first electric car Ontario battery plant outside of Europe. Neither the federal nor provincial governments have detailed the incentives involved, but the budget is likely to clarify them. Volkswagen’s investment also reflects the fact that at least some of the Biden administration’s policies are designed for the broader region.Buyer’s Tax Credit electric cars specifies that the content can be produced anywhere in North America.
Canada is leading the way in shifting to a cleaner growth model. Mr Trudeau’s government introduced a carbon pricing system in 2018 to push businesses to invest in more efficient facilities. Many in the industry complain that Canada’s policies amount to a big stick, while the U.S. honks its companies with a series of incentives. On closer inspection, though, Canada’s problems are sometimes not a lack of incentives but rather a shredded and disorganized carrot.The Canadian Climate Institute, a campaign group, has calculated that Alberta’s oil sector carbon capture investment subsidy, which expires in 2030, is spread across several pools but runs to C$135-275 per ton of storage, more than CTexas offers $115 per ton. Canada’s task is not to increase subsidies but to simplify the ones it already provides.
Perhaps Canada’s greatest benefit to North America is its wealth of natural resources. Canada has a relatively small share (around 3%) of the world’s known reserves of important minerals such as lithium and manganese needed for batteries, semiconductors, hydrogen fuel cells, etc. But the government believes there are more resources in the ground and is working to encourage more exploration, publishing its first critical minerals strategy in late 2022. Boston Consulting Group’s Mark Gilbert believes Canada needs to gain a foothold in the higher-value minerals segment of the industry.
Canada, like Mexico, is already heavily dependent on the United States, where three-quarters of its exports go. That number is likely to only increase if Canada ramps up production of the critical mineral. Some businesses across the continent are bullish. At his corporate headquarters in Vaughan, Ont., Rob Wildeboer of auto parts company Martinrea sits in an office displaying a bottle of premium tequila from Mexico and a large photo of a Canadian ice hockey game. He envisions a more tightly integrated North America where he can bring workers from Mexico to the U.S. and Canada for short-term work. “This will be the century in North America,” he said.
Economic data advised caution. Manufacturing in North America is worth approximately $2.5 trillion annually. In Asia, it’s closer to $7.5 trillion. China’s factory sector alone is about 20 times larger than Mexico’s. Still, it is helpful to remember that the US is not trying to lure all industries away from China. Instead, it has focused on areas such as batteries and semiconductors that it deems particularly important to its national security and economic future. not that simple. But because Canada and Mexico are working together, its chances are far better than going it alone. ■
