How North American trade can restore balance with China

On Monday, the United States-Mexico-Canada Agreement (USMCA) will hold its first free trade commission ministerial meeting. The occasion will set the tone for cooperation and coordination with the U.S.’s largest trading partners —Mexico and Canada. Naturally, interested groups would like to concentrate attention on implementation issues related to compliance and potential violations of the agreement. This is, of course, critical. The key for a successful agreement is the certainty it provides to consumers, producers, services providers, investors and others, so dealing with frictions and preventing their occurrence is an essential task for the three ministers (all women for the first time: Mary Ng Canada’s Minister of Small Business, Export Promotion and International Trade; Tatiana Clouthier Mexico’s Secretary of the Economy and Ambassador Katherine Tai U.S. Trade Representative).

In fact, the manner in which the three countries deal with existing and potential disputes can be used as a significant comparative advantage in relation to other regions and trading partners. Two features distinguish North American trade: first, the fact that it is one of the few agreements around the world not only with modern, high and ambitious disciplines across a wide spectrum of issues and sectors, but also with a functioning and enforceable dispute resolution system with credible teeth.  The revamped system is thanks, in no small part, to Democrats in the U.S. Congress and Canada’s and Mexico’s willingness to adhere to the commitments under the agreement. Second, the fact that trade, service and investment frictions in the region tend to be the exception rather than the rule. It is not a coincidence that Mexico and Canada are the United States’ first and second markets in the world and that no barriers exist in the region, as they have been abolished during the last three decades.

An analysis of the United States Trade Representative’s 2021 national trade estimate and U.S. Census data indicates barriers encountered by U.S. exporters and investors for 2020, as proxy for the difficulties to trade with different countries. Results showed Canada and Mexico have the least frictions with the U.S., proportional to the enormous trade volume in the region.

The low level of frictions and the effective dispute resolution mechanism, including the rapid one for enforcement of labor rights, are a source of a regional comparative advantage. In this context, governments must serve as catalysts to deal with potential irritants promptly, in a preventive fashion, to establish panels judiciously and to comply with their rulings in order to keep and enhance the certainty guaranteed by USMCA.

This institutional framework is critical to consolidate North American competitiveness particularly vis-à-vis China, which would be the main beneficiary of growing cases and disputes, if they happened, in North America.

USMCA represents a renewed commitment to regional integration. This is more relevant than ever as the competition with China morphed from a dispute measured in terms of trade deficits, to a technological race. The deep integration that a fully implemented agreement produces, which allows partners to take advantage of market size in North America, abundant natural resources, plentiful energy, availability of talent, highly productive labor forces, free allocation of capital, complementary agricultural supply, and democratic governments, allows the global competitiveness of the U.S., Canada and Mexico to be realized.

Nearshoring and reshoring, fostered by technology development and the new industrial revolution, help to diversify exposure to risks from China and enhance competitiveness. There are significant investment flows coming to the region that previously had gone to China, that are making supply chains better integrated, stronger, more reliable, and more resilient.

Moreover, the future of USMCA is digital. Competition with China will depend not on which economic block has the absolute cost advantage, but rather on where the products of the future will be designed, and their standards set. Manufacturing will not succeed if products do not incorporate the internet of things. Competitive cars, for example, will not be electric, but rather electronic, tablets on wheels that will communicate with passengers, destination points, road infrastructure, tolls, police, energy sources, other cars, complementary transportation modes and many other digital widgets. Digital success is much more likely through deeper integration.

The result of trade frictions in North America, or misguided measures taken by governments, such as Mexico’s reluctance to promote better energy integration and renewal sources, or U.S. resistance to modifying the Jones Act to allow Canadian and Mexican vessels to operate freely, is a net benefit for China and a significant opportunity cost for North American workers and consumers. Ideally, trade ministers will use their first meeting to promote a competitive and cooperative region and prevent frictions and disputes that only help our common competitor: China.

Luis de la Calle is former undersecretary of International Business Negotiations at the Ministry of Economy in Mexico. He is an economist and consultant in México.