Achieving greater global competitiveness and better livelihoods for North America
by Dany Bahar, NCF24 Fellow; Director of Migration, Displacement, and Humanitarian Policy, Center for Global Development
The conventional wisdom of evaluating a free trade agreement often tells us to look at the extent to which trade flows within the bloc have increased. But an increase in trade flows within the bloc should not be an end in itself, but rather a means to achieve greater both greater welfare for consumers at home, and –importantly– greater global competitiveness of the bloc as a whole to achieve greater opportunities for producers.
In this context, the purpose of this brief is to analyze the case of North America and answer the following questions: Is it possible to claim that North America as an integrated economic unit has been successful in becoming more competitive in the global stage, and what can be done to achieve greater global competitiveness as a region?
To answer the first question, Figure 1 presents the evolution of combined exports for countries making up each one of four main trade blocs (NAFTA/USMCA, European Union, MERCOSUR, and ASEAN) as share of global trade, using data from the World Bank’s World Development Indicators. The figure also includes China as a standalone country given its importance in global trade. The left panel presents nominal values whereas the right panel normalizes all values to be 1 in 1994, the year NAFTA was introduced.
A few main patterns are revealed in the figure. First and foremost: the growth of China as a global player. As of today, China represents about 10% of global trade, compared to roughly above 1% in 1985, a tenfold increase. The right panel shows that China has been able to increase its exports share in the globe by a factor of more than 6 between 1994 and 2022.
Second, as opposed to China, the main free trade blocs plotted in the data have roughly maintained their share of global exports throughout the period. Exports from the European Union represented about 35% of global trade up until the early 2000s when it came down to about 30% and has remained there ever since. A similar pattern happened for countries in North America: From about 18% in the late 1980s, to about 20% by 2000, and then down to below 15% in recent years. Mercosur and ASEAN countries, which started at much lower levels, have maintained and even increased their share of global exports between 1994 and today. Clearly, the entrance of China in the WTO and its fast capturing of the global markets comes at the expense of these other blocs reducing their share in global trade.
So, all in all, the competitiveness of North America according to this metric does not particularly stand out as compared to other free trade blocs. But it is also important to mention that this comparison is somewhat unfair. The European Union, for instance, is much more than a free trade deal: It represents a much deeper level of integration that includes free labor mobility, and for most of the countries, a currency union, too. Blocs such as MERCOSUR and ASEAN are composed by countries that are much more similar to each other in terms of their economic development when compared to Mexico and the United States and Mexico and Canada.
This leads us to our second question: What are the possible avenues through which the block can gain more global competitiveness?
Ultimately, the process of achieving higher global competitiveness goes by productivity increases. Figure 2 presents the evolution of the Total Factor Productivity of both Mexico and Canada with respect to the United States. What the figure shows is that over the past 35 years, there has been a divergence of productivity levels within the bloc, with the case of Mexico being particularly worrisome. In 2019, Mexico’s total factor productivity levels were approximately 60% of the productivity in the United States, compared to approximately 85 percent in 1990.
The underperformance of Mexico in terms of productivity has much more to do with long standing structural issues: The existence of large and widespread informal labor markets coexisting with deep market and institutional failures (Levy, 2018). And in a sense, as long as these structural issues are not taken care of –for instance, as long as the majority of Mexican workers participate in the economy through informal firms, which by definition do not participate in international trade - we should not expect USMCA to do what NAFTA did not.
In the context of trade, the question that arises is the following: Is there more space for further trade integration that could facilitate productivity growth even at the margins and despite the structural problems mentioned above?
In essence, the existence of strong, resilient, supply chains within the region can help producers of final goods to improve competitiveness in their exports, helping the North American bloc to capture a higher share of global markets. Whether this is possible or not and what it would actually mean is hard to say, but looking at some data can help us with some initial answers.
Figure 4 shows the evolution of exports of goods for Canada, Mexico, and the United States within the North American block. The left panel presents nominal export values (in $US billions), whereas the right panel presents the same values as a share of global trade (a value of, say, 0.8 for Mexico implies that 80% of Mexico’s exports go to either the US or Canada).
The figure shows two interesting trends. First, nominal exports have indeed increased significantly for the past 25 years, a trend that continued after the implementation of NAFTA. Although it is impossible from this figure to attribute to what extent the trends were affected by freer trade, many rigorous academic studies show that there were gains for the three countries due to increased trade flows after the trade agreement (most notably see Caliendo and Parro (2014).
However, the right panel of the figure shows another interesting, stylized fact: Whereas exports from each country to its North American partners increased post-94 as a share of global trade, they went down for all three countries -particularly for US exports - in the 2000s, after China entered the WTO. In other words, intra-bloc trade relative to global trade reached its peak in the early 2000s (for Canada and Mexico, exports to the bloc reached more than 90% of their global exports), but it has declined ever since.
A deeper understanding of the interdependence of the countries in the region in terms of trade of goods is obtained by looking in more detail at their supply chains. Figure 4 below is an attempt to visualize such information. In it, I plot for all three countries in the North American bloc the share of all imports in intermediate goods and final goods coming from the bloc itself and from the rest of the world (ROW) for years 2005, 2010, 2015 and 2020.
The figure reveals that trends for Canada and Mexico are quite similar. Imports by Mexico and Canada from within the bloc are about over half of all global imports. In addition, roughly half of the imports from the bloc are intermediate goods. For the United States, however, the picture is somewhat different: Imports from the North American bloc is a smaller share of all imports, at about 25 percent. Yet, US imports from its neighbors are mostly of intermediate goods: Of all imports from Mexico and Canada, about 60% or more are intermediate goods.
It is important to note, however, that it would be incorrect to conclude from these plots that the United States reliance on its neighbors’ is limited. This is because the United States productive structure is much more diverse than that of its neighbors, and its trade basket is much more diversified in terms of geographic partners. What we take from this information, however, is that to the extent that countries like Mexico and Canada could compete with trading partners of the US in terms of intermediate goods, there is important opportunities for supply chains to grow within the region.
In that sense, especially after the disruption of global supply chains following the COVID- 19 pandemic, an important focus of policymakers in three nations would be how to facilitate a more robust trade of intermediate goods within the bloc that could facilitate productivity growth for firms in all three nations.
As such, the setting up the conditions for the process of “allyshoring” makes sense, especially as a mean to achieve a greater goal –which should be the main goal of integration in the region– which is to enjoy from greater global competitiveness to provide better livelihoods to the people of North America.
References
Caliendo, Lorenzo, and Fernando Parro. “Estimates of the Trade and Welfare Effects of NAFTA.” The Review of Economic Studies 82, 1: (2014) 1–44. https://doi.org/10. 1093/restud/rdu035.
Levy, Santiago. Under-Rewarded Efforts: The Elusive Quest for Prosperity in Mexico. Wash- ington, D.C.: Inter-American Development Bank, 2018. https://publications.iadb. org/handle/11319/8826. Licensed under Creative Commons IGO 3.0 BY-NC-ND.
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