Road to the tenth North American Leaders’ Summit
Atlantic Council.
Road to the tenth North American Leaders’ Summit: Spotlight on competitiveness and supply chains
By?María Fernanda Bozmoski, Jacob Kaufhold, and Isabel Chiriboga
Canada, Mexico, and the United States are preparing to reconvene for the tenth North American Leaders’ Summit (NALS) at a critical global moment for advancing shared priorities. A year after they relaunched NALS, it is time to take stock of the progress that has been made toward achieving deliverables announced at their last meeting and identify opportunities that could be prioritized to enhance North American collaboration on global competitiveness and supply chain resiliency.
The upcoming meeting takes place amid high expectations and great urgency. Last November, US President Joe Biden hosted the NALS, the first such convening in five years. Central to the meeting was the ongoing coronavirus pandemic and its reverberations on global economics and politics. The three countries?reaffirmed their pledge ?to “chart a new path for our partnership at a time when we face incredibly complex global challenges.”
The working agenda of the three countries spans many goals and topics. This Spotlight publication elucidates progress made and actionable ideas that could be explored to bolster North American competitiveness, with a focus on supply chains and nearshoring—one of three overarching goals of the ninth NALS. This Spotlight is the first in a series of concise briefs that will examine progress around NALS deliverables. Nearshoring got thrust into the limelight by ongoing US-China trade disputes, and supply shocks from COVID-19 and Russia’s attack on Ukraine. The fragility of North American supply chains was also brought into focus during the early days of the COVID-19 pandemic.
Different timelines of infections and understandings of what qualified as essential industries in Mexico and the United States resulted in important disruptions to the North American economy. The interdependent automotive and semiconductor industries were?two of the most affected . North American vehicle production?dropped by almost 20 percent ?in 2020-2021 compared to 2019, a major blow to one of the region’s most important sectors. North American leaders are right to recognize the urgent need for resilient supply chains as a first step to continue fostering competitiveness. However, whether North American supply-chain regionalization is an economic blip, or a geopolitical and economic reordering, largely comes down to what the United States, Mexico, and Canada do together to encourage more robust interlinkages.
Under the macro goal of fostering competitiveness and creating the conditions for equitable growth, the three partners?outlined the following commitments ?last year:
This Spotlight takes these commitments into account and examines—where relevant—progress to date. Below are four actionable recommendations for the leaders to consider as they prepare for the tenth NALS.
Fortify supply chains and seize the nearshoring momentum
While there is emerging consensus on the urgent need to develop resilient supply chains given their importance to North American competitiveness, relocating supply chains is complex, difficult, and slow. Companies are attempting to balance speed and efficiency with resilience and reliability. Supply chain disruptions are costly, and?pressure on supply chains ?has skyrocketed since the COVID-19 pandemic. Meanwhile, governments are attempting to provide the right set of conditions for growth and investment.
In alignment with the recently passed “Creating Helpful Incentives to Produce Semiconductors” (CHIPS and Science Act), and as part of a key deliverable from the ninth NALS, the United States and Mexico have established a?Supply Chain Working Group . While this working group will initially focus on semiconductors and technology, a?similar US-Canada working group ?has a much wider remit with topics including electric transportation, medical devices, and renewable energy, among others. This is an important first step for strengthening regional competitiveness, but there is more work to be done.
From the business perspective, closer-to-home supply chains offer attractive advantages such as simpler logistics, shorter transport times, reduced geopolitical risk, and common language, values, and time zones. Businesses have free-trade incentives from the USMCA which exempts products that meet rules- of-origin requirements from tariffs or duties. There are also trade disincentives to staying offshore, (especially for those depending on China for supplies), as certain goods and key components needed for advanced manufacturing are subject to tariffs up to 25 percent. These “Section 301 tariffs” were instituted by the Trump administration in an attempt to address unfair trade practices from China. NALS is convening, coincidentally, at the same time that the United States Trade Representative is?opening a comment period ?on the industry-wide impacts of Section 301 tariffs.
In other words, the Biden administration will be reconsidering a major ‘stick’ against offshoring–and fielding diverse examples of economic drag caused by tariffs–even as NALS considers mostly ‘carrots’ in the form of reducing transaction costs, leveraging the USMCA, and other factors for nearshoring. Decisive joint action is needed from the three countries to translate recent momentum around regionalization and nearshoring into self-sustaining trends toward resilient North American supply chains.
Activate the North American economic powerhouse: Set up a trilateral supply chain working group
The creation of a trilateral working group for North American supply chains should continue to remain at the top of the tenth NALS agenda. To date, there are no trilateral initiatives or mechanisms to enable a greater degree of coordination and harmonization between the three North American parties—not publicly, at least. The first order of business should be a comprehensive assessment of supply chains in the region, including quick potential wins and other long-term challenges and opportunities.
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The governments have already underscored the importance of stakeholder outreach and private sector consultations to understand the barriers to investment and other challenges. Now, as outlined last year, they should sit down and work toward more harmonized regulatory frameworks where possible.
The USMCA is a powerful framework to move this forward, though the agreement is not a silver bullet for bolstering competitiveness and making North America an attractive market. Despite the forward- looking provisions of the treaty, there are still challenges on regulatory issues in Mexico, specifically with Petróleos Mexicanos or PEMEX, the state-owned petroleum company, and Comisión Federal de or CFE, the federal electricity commission.
Seize the greater region’s demographics to address labor shortages
Central America’s demographic bonus could be an asset to North America’s goals. At the upcoming NALS, the parties could explore study-work or practical internships with universities in the region or other vocational centers that would help create a pipeline of skilled workers. The study-work idea has already been articulated by North American leaders and was an explicit commitment from the last NALS.
Canada, Mexico, and the United States could also think more ambitiously about North America’s boundaries and seek to work with Central America. Serious, action-oriented proposals of integrating Central America into the North American supply chain network and market could translate into important economic and commercial wins. One bold idea would be to work with?Dominican Republic-Central America Free Trade Agreement? (CAFTA-DR) member countries to modernize the agreement and look for opportunities to link up regional supply chains. CAFTA-DR’s concept of ‘cumulation of origin’ for some sectors—under which inputs from CAFTA parties counts as domestic input from Mexico and Canada—could provide insight into the benefits of a more formal market and production integration with North America. Taking advantage of Central America’s large workforce through temporary, non- agricultural H2B visas could help address the labor shortages in the United States and could support the creation of medium-to-high skilled job opportunities.
Additional H2B visas, while a politically thorny issue, could help address a primary reason of Central American migration—the lack of economic opportunities. For North America, a strategic integration of Central America into the supply chain network could help Mexico, Canada, and the United States to continue to specialize and upgrade their own economies.
This approach could also help the region tackle another deliverable from the ninth NALS meeting: to strengthen SME centers across North America. This goal could be?expanded to encompass Latin America ?too, where SMEs are a “primary source of job creation, comprising 99.5 percent of firms in the region, and accounting for 60 percent of employment.”
Work together to safeguard supply chains from all threats–infectious, cyber, or climate-related
Threats to supply chains come in all shapes and sizes, as the coronavirus pandemic has shown the world. Importantly, a robust supply chain network should be viewed as shared infrastructure for the region and the hemisphere. It must be protected with this in mind. Through the 2012 North American Plan for Animal and Pandemic Influenza, there is precedent on working together to combat transborder, invisible threats at the regional level. The upcoming NALS meeting is an important opportunity to advance this task and work to create a plan for twenty-first century threats, including on the cyber and climate front.
While NALS partners have not yet convened a trilateral cyber experts meeting, (one of their goals from last year’s meeting), they have made important progress. In August, the United States and Mexico convened a?Working Group on Cyber Issues , where they agreed to strengthen their cybersecurity cooperation through bilateral and multilateral avenues. Vulnerabilities in the digital space remain a major concern, especially as the USMCA seeks to further integrate the North American digital economy through its Chapter 19 provisions. High-profile incidents like the “Guacamaya”?hack? into the Mexican Secretariat of Defense ?and last year’s?ransomware attack on a United States pipeline ?confirm the necessity of deeper coordination between the three countries. The?Second International Counter Ransomware Initiative Summit , which included the NALS partners, was held just a few weeks ago. It was an excellent example of how the United States, Canada, and Mexico can work within the North America framework—and beyond—to achieve their cybersecurity and broader NALS goals. This meeting reaffirmed the commitment of the initiative’s members to defeating ransomware, sharing information, and creating coordination mechanisms, such as the?International Counter Ransomware Task Force , that can disseminate information and best practices.
Conclusion
North American competitiveness and collaboration are at an inflection point. The three leaders must take the momentum of the last meeting and continue to advance key priorities. In an increasingly complicated global context, close collaboration and partnership on all fronts are key. The full potential of North America remains to be seen. This Spotlight offers concrete recommendations to continue to foster competitiveness and build up supply chains.
About the Authors:
Maria Fernanda Bozmoski is a deputy director for programs at the Atlantic Council’s Adrienne Arsht Latin America Center. Jacob Kaufhold and Isabel Chiriboga are project assistants at the Atlantic Council’s Adrienne Arsht Latin America Center.
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