Trade Corridors and North American Competitiveness

Abstract

North American economy can best be visualized in the early 21st century as a deeply integrated continental system of supply chains structured by networks linking production centers and distribution hubs across the continent. These supply chains depend on an efficient and secure physical infrastructure of rails, roads and bridges, pipelines and wires, and ports and border crossings, and on a coherent and consistent system of regulations that affect individuals, machines, firms, and goods. This North American economic system emerged mainly through a bottom-up process driven by corporate strategies and investment decisions that focus less and less on national economies. process began in the 1980s, (1) when many major U.S. companies responded to tougher international competition and falling profit margins by rationalizing their operations and reducing excess capacity tied up in Canadian (and Mexican) branch plant miniature replica operations. (2) They sought to build instead integrated North American production, marketing, and sourcing networks. Changes in North American markets drove this process as well. By the mid-1980s, because of the reduction of trade barriers in the GATT (General Agreement on Tariffs and Trade) and deregulation, distinct national markets in many sectors had begun to blur. Subsidiaries were becoming operations in Canada or Mexico rather than operations producing for Canada and Mexico, and branches that once owned national markets found themselves competing in new continental markets with other divisions in their own firms. This degree of collaboration and complementarity between countries is unprecedented. For the result--a new system with levels of integration that often surpass those of the European Union--there is no adequate social science vocabulary. Efforts to force this North American system into standard economic integration paradigms confuse more than they illuminate. A fundamental problem with the traditional trade paradigm is that it builds a model based on the exchange of finished goods across national borders. But this is not a productive way of imaging the substance of the North American economic system. What flows across our borders are not mainly finished goods. Rather, we collaborate in complex, cross-border production systems. For example, a quarter of the more than a billion and a quarter dollars of goods that cross the U.S.-Canada-Mexico borders daily is automotive. But we don't sell cars to each other. That's the key: we build them together. We also share increasingly integrated energy markets, service the same customers with an array of financial services, use the same roads and railroads to transport jointly made products to market, fly on the same integrated airline networks, and increasingly meet the same or similar standards of professional practice. This is what economists call deep or structural integration. existence of this continental network of supply chains that cross national borders is a key differentiating factor of the North American economy. In Europe even today, major economic sectors continue to be characterized by national champions. One could argue that while Europe has a much more developed superstructure of integration, the economic substructure may well be less deeply integrated than is the case in North America. This image of a continental network of supply chains that cross national borders also helps us understand the extreme vulnerability of this system. As a recent report jointly produced by the U.S. Center for Strategic and International Studies and Canada's Fraser Institute observes, The supply chains that span the U.S.-Canada border are unique in the global context. They are heavily reliant on land transportation that travels primarily through just a handful of key border crossings. Major shipments are routinely timed for handful of key border crossings. Major shipments are routinely timed for delivery within hours, and sometimes to the minute. …