Good afternoon. I would like to thank Adam Posen and his colleagues at the Peterson Institute for putting together this superb and timely event. With the US being Mexico’s main trading partner, and Mexico being the US’s second largest export destination and third largest trade partner, we sometimes take each other for granted. After all, NAFTA has been in force for over twenty years, and as Gary Hufbauer and Lindsay Oldensky showed earlier today, it has clearly been a boon for all countries involved.
However, we cannot afford to take each other for granted precisely because of our high degree of interdependence and the great potential that still lies ahead. When I was asked by Adam to share my vision for North American economic integration, I immediately thought of the late Bob Pastor, a friend of many of us here and of the Peterson Institute. As Bob noted in The North American Idea, “A vision is an aspiration, a picture of a future that can cause people to want to work to attain it.”
I envision North America, quite simply, as the most competitive region in the world. We have the strongest combination of geography, demographics, resources and capabilities to turn that vision into a reality. So while this vision is still a dream, it is certainly not a pipe dream.
PricewaterhouseCoopers estimates that in 2050, the five largest economies in the world will be China, the United States, India, Brazil, and Japan. Mexico will be the 7th, just after Russia, and the US and Canada will be the top two countries in the world in 2050 in terms of per capita GDP, while Mexico will be the top Latin American country in that regard.
The dramatic increase of trade and investment in North America over the past two decades, which Gary mentioned, was partly the result of the clear and stable rules established by NAFTA, but more importantly by the decisions taken by businesses.
But the past is not necessarily prologue. If we are to take North American economic integration and competitiveness to the next level, we will need to have much stronger and proactive engagement between the public and private sectors, and to truly think and act as a region.
The world economy has changed radically over the last two decades: services loom much larger now, as does e-commerce. And advanced manufacturing (including 3-D printing) means that a highly skilled workforce, streamlined regulations and vastly improved infrastructure and logistics, both at border crossings and throughout North America, will be critically important to take full advantage of our economic complementarity.
Mexico has done its homework
Since President Peña took office in December 2012, he has spearheaded a flurry of reforms encompassing labor, education, financial services, fiscal policy, competition policy, telecommunications and, of course, energy. The common aim behind these reforms is to increase the productivity of the economy, a significant challenge that was addressed this morning when the McKinsey report was discussed. Taken together, these reforms set the basis for sustained high rates of growth of the Mexican economy.
According to UN estimates, in 2050 China could have 1.3 billion inhabitants. But China’s one-child policy could translate into a slowdown in its working-age population, and its deteriorating demographics could trim its annual economic growth rate. China may grow old before it becomes rich.
In 2050, the North American region will have over 600 million inhabitants. Mexico and the US, though, will have a lower dependency ratio than China in 2050: 35.4 for the US and 31.3 for Mexico. In demographics, North America has one of its strongest assets.
Rules governing trade and investment
The rules established by NAFTA, which have served us well in creating an expanded and secure market for goods and services, in establishing clear and mutually advantageous rules governing trade, and ensuring a predictable commercial framework for business planning and investment, which is exactly what we set out to do as set out in the NAFTA preamble.
And while the goal of NAFTA was the establishment of a free trade area, something more significant has happened—North America has become a region of shared production. We are jointly producing goods through the deeply integrated production and supply chains that have developed as the result of the clear, stable and transparent rules established by NAFTA, and are increasingly engaging with the global economy as one region.
The paradigmatic example of North American production is the auto industry, but aerospace production is also becoming increasingly regional. Bombardier, the Canadian aerospace company, is a good example of an integrated North American operation where design and manufacturing are shared among the three countries. Bombardier Aerospace manufactures the fuselage and cockpit of the Learjet 85 business jet in Querétaro, which uses Pratt & Whitney turbines made in Québec, and final assembly takes place in Wichita, Kansas.
Growing intra-regional investment can be seen in the percentage of US value-added in US imports: it is 2% from Japan and from the European Union, 3% for imports from Brazil, and 4% for Chinese imports. It is 25% for imports from Canada and 40% for imports from Mexico. That is to say, US imports from Mexico have ten times more US value-added than US imports from China.
While NAFTA rules were state of the art in the early 1990’s, we need to take into account transformations in technology, production and trade over the past decades to ensure that North American economic governance and infrastructure keep up with economic realities. As a former US Assistant Secretary of Commerce put it, we have a 19th Century infrastructure, with 20th Century rules, to deal with a 21st Century economy.
One way to update rules is through the TPP, as was shown by Jeff Schott. It is also of paramount importance to ensure that TTIP rules do not result in new transaction costs for North American production, or for trade and investment flows between North America and the European Union.
Infrastructure, logistics and regulations
More than twenty years since the onset of NAFTA, significant transaction costs to cross-border trade and investment still remain. We need to streamline customs procedures and invest in infrastructure to reduce border wait times, which cost us billions of dollars per year. We must also work with the private sector to develop world-class logistics that reduce the costly friction of cross-border trade and boost the competitiveness of the region, and we must prioritize correctly. We should not simply increase the number of border crossings by fiat, but focus on improving the efficiency of crossing where trade flows are concentrated and trade volumes warrant improved infrastructure, more personnel and longer operating hours.
Through the Mexico-US High-level Economic Dialogue (HLED), which was launched during President Obama’s visit to Mexico City in May 2013, we are pursuing initiatives in areas such as transportation, telecommunications, strategic logistics corridors, and customs and border master plans, which will increase the competitiveness of the region. We are also fostering economic growth and entrepreneurship through joint investment promotion, advanced manufacturing, and deepening regulatory cooperation.
Though the North American Leaders Summit, which President Peña Nieto hosted last February in Toluca, we are now aiming to take what we began through the HLED from the bilateral level to the trilateral level.
Energy was largely left out of NAFTA, especially insofar as liberalization of foreign investment rules in the Mexican hydrocarbons sector was concerned. Now, we are in the midst of an unconventional energy revolution in North America just as Mexico is finalizing its most far-reaching energy reform in over seventy-five years.
According to the latest BP Energy Outlook, by 2035, North America will be a net oil exporter, accounting for 6% of global energy exports, and by 2017 the region will become a net exporter of natural gas.
North America will be the only region of the world over that period that moves from being a net energy importer to a net exporter. So while China and Europe become more dependent on energy imports, North America is becoming self-sufficient.
North America thus has all the necessary energy resources to fuel its economic growth for a long time, and reliable and affordable energy will be a key component in ensuring a very competitive North American manufacturing base.
But there are challenges that we need to address to turn our energy potential into a reality, including infrastructure, regulatory issues and addressing the severe shortage of skilled workers in the industry.
In addition to the HLED, in May 2013 Presidents Peña Nieto and Obama agreed to create the Bilateral Forum on Higher Education, Innovation and Research (FOBESII, for its Spanish acronym). Through FOBESII we are developing a shared vision for educational cooperation, with a view to expanding economic opportunities in both countries, and developing a workforce attuned to the needs of the 21st century economy. Further increases in productivity in the automobile and aerospace industries and across the value chain of the energy sector will require skilled North American workers that can meet the demands of the 21st Century economy.
With the right vision and the proper initiative, we can turn North America into the most competitive region in the world. I look forward to hearing Mack McLarty’s ideas in this regard, and to engaging in a lively discussion with Adam and all of you.