How to Strengthen NAFTA’s Next 20 Years

Next week, President Obama will make his third trip to Mexico in as many years to attend the North American Leaders’ Summit alongside Canadian Prime Minister Harper and Mexican President Peña Nieto. Amidst a flurry of retrospectives on the 20th anniversary of the North American Free Trade Agreement (NAFTA), the summit offers a timely opportunity to ask two questions: 1) What is the current state of North American trade? and 2) What can the three countries do together to position the continent for success in the global economy over the next 20 years?

Our recent report, Metro North America, offers some answers to the first question. Trade volumes between the United States and Canada and Mexico are massive and growing, due in no small part to the fact that manufacturers now treat the continent as one seamless market for research, design, production, and distribution. Firms—both large multinationals like Bombardier and Volkswagen and smaller firms like 3D Robotics and Vitro—stretch their supply chains across North America to maximize product quality and minimize product cost.  As a result, the three countries now make technologically advanced products in a globally distinct trilateral partnership.

Whether in the United States, Canada, or Mexico, advanced manufacturing firms tend to concentrate in cities and metropolitan areas to take advantage of dense clusters of workers, research institutions, and suppliers. This geography of production has created networks of cities that trade with one another via dense supply chains. Obama, Harper, and Peña Nieto will gather in Toluca, a center of Mexico’s automotive industry (home to two major Chrysler plants) located just outside Mexico City, a metro area that traded $9.3 billion with the United States in 2010. Its leading U.S. metro trading partner was Detroit, reflecting both the importance of North American trade in advanced industries—automotive, aerospace, electronics, machinery, pharmaceuticals, and precision instruments—and the degree to which that trade extends well beyond the border.

This integrated, urban-centric production network affords North America a competitive advantage in manufacturing compared to other major global regions. Yet despite the impressive growth rate of intra-continental trade, North America’s share of world exports has actually fallen from 19 percent to 13 percent since the signing of NAFTA.  

To regain North America’s momentum in world export markets and grow jobs and incomes continent-wide, the three leaders should discuss strategies to deepen economic integration and make the continent’s co-produced products and services more globally competitive.

For the United States, three federal priorities stand out.

First, better enable goods movement along North American corridors that link major clusters of production. Congestion at the border remains a serious hindrance; production sharing requires goods to be shipped back and forth across the border multiple times before final completion, exacerbating the cost of delay. Therefore, expanded border crossings, customs staff, and more streamlined preclearance systems are required to minimize congestion at the busiest crossings.

Second, finalize ongoing trade negotiations like the Trans-Pacific Partnership (TPP) to open new markets for North American exports in rising East Asian countries. If done correctly, TPP can address next-generation trade rules on such thorny issues as intellectual property protection, services trade liberalization, and treatment of state-owned enterprises.

Third, use the federal government’s convening abilities and small incentive programs to empower businesses, civic actors, and local and state officials in their efforts to collaborate continentally to compete globally.

New cross-continental partnerships are already underway. In November, Chicago and Mexico City inked a new economic partnership to undertake a series of joint initiatives in trade, innovation, and education. In 2012, the Pacific Northwest Aerospace Alliance and Aéro Montréal, representing two of the world’s largest aerospace clusters, signed an agreement to help connect their supplier bases to opportunities within the other’s supply chain.

Sensing the momentum, federal actors are beginning to offer their own support. The Mexico-U.S. Entrepreneurship and Innovation Council’s iCluster initiative is supporting efforts to develop bi-national innovation clusters in Tijuana/San Diego and Monterrey/Saltillo/Southern Texas. The U.S. State Department helped facilitate a trade partnership between George Mason University and the Autonomous University of Nuevo Leon to conduct joint research, exchange faculty, and connect small businesses to their respective markets.

Next week’s summit presents an important opportunity for the three North American leaders to reaffirm their commitment to the continent’s unique economic partnership and to take steps to bolster the metropolitan hubs that help all three countries prosper together in a competitive global economy.