GCI Mexico Presentation on Metro North American Competitiveness

On Thursday, November 14, the Global Cities Initiative brought together leaders from the private, public, and philanthropic sectors from throughout Central Mexico to discuss efforts boost North American trade, productivity, and competitiveness. In his presentation, Bruce Katz explained how the world is evolving as a network of trading cities, especially in North America.

Thank you Mayor Daley for that introduction and your leadership, and to JPMorgan Chase, our strong partner in the Global Cities Initiative.

I am particularly grateful to Juan Pardinas and IMCO for co-hosting this forum today—their advice and collaboration have been invaluable.

A special thanks to Pablo Gonzalez for his guidance on our work here in Mexico and for his leadership in Brookings’ International Advisory Council.

This has been an extraordinary week for our American delegation of mayors and business, civic, and university leaders – which included my boss, Strobe Talbott, the President of the Brookings Institution.

Our purpose here is simple and straightforward: convene local and state leaders from across North America to strengthen our links on trade and commerce and share innovative policies and practices that enhance competitiveness. 

We started on Tuesday in Querétaro, meeting with political and business leaders including Governor Calzada in this rapidly growing production center.

We toured the Bombardier facility, seeing first hand the incredibly advanced, higher value manufacturing that is representative of Mexico’s economic future.

We visited the Aeronautic University of Querétaro, which is a model for all of North America, training a workforce locally to ensure the industry competes globally.

Yesterday we convened sub-national leaders from Mexico, the United States, and Canada for a rich dialogue about how local investments in innovation and human capital are strengthening advanced industries across the continent.

Our forum occurs during an auspicious moment for North American trade – the approaching 20th anniversary of NAFTA, the recently launched US-Mexico High Level Economic Dialogue, and Mexico’s ascendancy in the global economy.

Against this backdrop, today I will make three main points:

First, North America is a uniquely competitive continental platform for production and trade.

Second, our North American economy is powered by a network of cities and metropolitan areas that act as our economic engines and centers of trade and investment.

Finally, city, metro, and state leaders in all three countries must play a central role in trade and investment to spur the competitiveness of their own communities as well as the competitiveness of the continent as a whole.

First, why the focus on North America?

20 years after NAFTA, and through a period of continued economic integration, the quantity and quality of trade within North America is truly distinct.

North American trade accounts for nearly one quarter of all U.S. trade. In 2011, the United States exchanged nearly $1.2 trillion worth of goods and services with Canada and Mexico, the country’s first- and third-largest trading partners, respectively. This is roughly the same as total U.S. trade with Japan, Korea, and the BRICS nations (Brazil, Russia, India, China, South Africa) combined.

It’s not just quantity that defines our continental trade. Integrated value chains have united North America as one economic market that not only trades finished goods but also shares in their production. And at least a quarter of what we import from Mexico and Canada is actually American-made content; for China and Europe, that number is under five percent

These value chains are critical for what we call advanced industries—high-value engineering- and R&D-intensive sectors such as aerospace, automotive, electronics, and precision instruments.

Advanced industries have an outsized impact on national and regional economies. They account for disproportionately high shares of growth, trade, and research and development. And their innovations have a multiplier effect that spreads, through supply chains, to other industries, and into our daily lives.

For our purpose here, advanced industries are a large part of what we trade with each other, accounting for 47 percent of total goods trade between the U.S. and Canada and Mexico.

Perhaps more importantly, however, these industries are a large part of what we export together to the rest of the world. Led by electronics, transportation equipment, and heavy machinery, advanced industries account for nearly 1/3 of all North American exports.

This represents where we are today, but recent dynamics – from rising labor costs abroad to new energy sources and technologies at home to favorable demographic trends in both our countries – present new comparative advantages that could further strengthen the North American trade platform.

Given this potential, we need to better understand how and where trade occurs in North America, which national trade statistics obscure.

Metro North America, a report co-written by my colleagues Alan Berube and Joe Parilla, and which is being presented for the first time today, offers a new perspective on production and trade across our continent. It finds that North America is not merely the sum of our three national economies, but is instead powered by a network of metropolitan economies that produce and trade together.

This leads to my second point: metros are the engines of the North American economy and the centers for goods trade on the continent.

But before we get too far lets clarify one thing: what is a metro?

What is a Metro?

Across North America, there are 432 metro areas with at least 100,000 residents. Together they account for 77 percent of continental population but generate 86 percent of continental economic output.

Metro areas in North America contribute even greater shares of their nations’ output in advanced industries, concentrating the skilled workers, capital, and advanced research assets these firms require, from 80 percent in automotive to 91 percent in aerospace.

Different advanced industry sectors concentrate in different parts of the continent. The automotive sector—a classically integrated North American industry—is shared relatively equally across the three countries’ metro economies. In aerospace, by contrast, the U.S. and Canada dominate with over 90 percent of total production.

As metros lead on advanced industries production, they also lead on trade. 85 percent of the value for all goods trade between the U.S. and Canada and Mexico either starts or ends in a metro area, revealing their role as both powerful producers and critical consumers. Looking at only our six key advanced industries, the metro share of trade rises to an incredible 97 percent.

So, it’s clear that trade doesn’t occur simply between countries; rather, trade is based on relationships between cities, characterized by distinctive clusters of firms and specialized expertise.

So where exactly is trade occurring within the continent? Let’s take the automotive industry as an example. When people think of auto production, they tend to think of this Great Lakes region, and for good reason.

A legacy of free trade that dates back to the 1960s has created intense trading relationships between Detroit and a select group of metros in southern Ontario. 

Yet, this geography of production only tells part of the continental story. As global competition forced the auto industry to seek out a lower cost environment, auto clusters emerged in Mexican cities like Puebla, Monterrey and Aguascalientes.

Detroit anchors what economists have labeled “auto alley”, the geographic strip stretching from Ontario to central Mexico.

Both large firms and smaller suppliers integrated Mexican and Canadian clusters with Detroit and smaller metros like Columbus, Kansas City, Evansville, Lexington, and Nashville. 

Looking at the aerospace industry, a different metro geography emerges.

Seattle and Montreal dominate these trading relationships; other major hubs include Los Angeles and Wichita. Mexico’s emerging aerospace clusters in cities like Guaymas, Chihuahua, and Queretaro focus on manufacturing component parts.

Despite the fact that Seattle and Montreal are home to major aerospace competitors—Boeing and Bombardier—the two metros have cultivated world-class supplier ecosystems that fuel trade. Korry Electronics in Seattle supplies the cockpit panels for Bombardier. Precision SF Tech in Montreal exports components to Seattle for Boeing’s 777. And Bombardier is a major consumer of Washington-based Royell Manufacturing’s precision assemblies.

Beyond industry footprints, our data also allow individual metro areas in each country to understand their distinct niche within the North American economy. 

Take Mexico City, for example. This global metropolis accounts for $56 billion in total trade with the United States, highest among Mexican metro areas. Top trading partners include large U.S. cities like Houston, Los Angeles, and Chicago. Your second-largest trading relationship is with San Jose and California’s Silicon Valley.

That relationship reflects significant trade in electronics, which at over $13 billion is your largest advanced industry trade flow.  

In that industry, San Jose is Mexico City’s number 1 trading partner. The metro area maintains strong electronics trade relationships with LA, Dallas and Chicago.  

Metros like Mexico City are clearly at the heart of the most critical trade and production relationships in North America. And now, each metro can know where it fits into the new map of North American trade.

This leads to our final finding: cities and metros must play a central role in trade and investment.

That runs counter to how we have typically thought about trade and competitiveness policies, which have been seen as the responsibility of national governments. And there are four key areas in which national actors in Mexico, Canada, and the United States remain essential to setting the platform for greater North American trade and competitiveness:

First, they must enable goods movement across our borders with smart infrastructure investments.

Second, they should finalize trade negotiations like the Trans-Pacific Partnership (TPP).

Third, they should align and streamline regulations and customs procedures.

And fourth, the three countries should establish a coordinated approach to foreign direct investment, because co-production means that each country benefits when new plants open anywhere in North America.

City, metropolitan, and state leaders in all three countries must be strong advocates for these platform-setting national activities. But subnational leaders also play a critical role in shaping their own economies and positioning themselves for success in advanced industries trade. They must execute a three-part strategy.

First, set a vision. At the city and metropolitan levels, networks of leaders – across government, industry, and civil society – should set a vision for their economies and develop market-driven approaches that take into account their place’s distinctive advantages.

Over the past year, Brookings has worked closely with leaders in over ten U.S. metropolitan areas to invent and pilot actionable business plans.

The elements of business plans are fairly simple and straight forward: Each metropolis does a market assessment of its unique economic profile and potential…and then a consortium of corporate, government, university and civic institutions devise, implement, and measure a tailored economic strategy based on that distinctive starting point.

Let me give you an example of how these business plans are helping metros grow jobs and restructure their economies. The Phoenix-Mesa metropolitan area, represented today by Mesa Mayor Scott Smith, is undertaking its own business plan. Their goal: grow exports by supporting key competitive industry clusters—aerospace and defense, electronics, and IT services. Unlike previous fragmented economic development initiatives, the Business Plan has broad support, from partners like Arizona State University, the Greater Phoenix Economic Council and the cities of Mesa and Phoenix. This is what it means to collaborate to compete.

Subnational leaders must then act in the service of that vision by investing in what matters for economic competitiveness and growth. Investments in three critical inputs—innovation, human capital, and infrastructure—should all be attuned to the particular economic specialties of a place.

On innovation, Ontario’s Collaboration Voucher program is connecting private firms with public R&D institutions in four distinct areas: innovation, to increase new product developments; commercialization, to bring economic benefits to public-sector discoveries; E-business to link small businesses with IT resources at public institutions; and Industry Associations, to bring together public and private stakeholders to solve sector-wide innovation challenges.

On human capital, our delegation just toured a terrific example of purposeful workforce development in Queretaro. The National Aeronautic University of Queretaro—UNAQ—is working actively with industry partners to educate and train local students and workers for a whole continuum of aerospace jobs that are now flooding into the region.

And in Portland, after completing a regional export planning process, local leaders initiated a freight survey, focusing on the infrastructure needs of their biggest exporters. What they found was a major bottleneck on a highway between the tech cluster in Hillsboro and the airport to the East. From this survey, metro leaders have now identified several targeted, actionable, and affordable interventions to connect their region’s most critical companies to global markets. This is how you invest in what matters.

By investing strategically in innovation, human capital, and infrastructure, subnational leaders can position themselves and their North American trading partners for greater success in the global marketplace.

Finally, metropolitan leaders should network with their peers in North America to strengthen trade and coproduction relationships for mutual benefit.  Later today, we will see this in action, as Mayor Emmanuel of Chicago and Mayor Mancera of Mexico City set a new standard for international city-to-city economic cooperation.

Their actions remind us of a central economic insight made by Jane Jacobs 50 years ago “the foundation of cities has been trade.”  Watch this:

A New Silk Road

Let me end where I began:

The world is evolving as a network of trading cities, seamlessly integrating the exchange of people, goods, services, energy, capital, ideas, and culture.

And nowhere is this more apparent than on our shared continent.

Brookings and JP hope that today’s forum catalyzes a new wave of city to city trading relationships … that spark innovation, create jobs and ensure that our economies and our people achieve their fullest potential

Thank You