Competitiveness

See CFR Senior Fellow and Renewing America Director Edward Alden's accompanying blog post here. In looking abroad to promote economic growth, the United States need go no further than its two closest neighbors, Canada and Mexico. But the three governments have failed to pursue collaborative efforts to address a new generation of issues that were not anticipated by the 1994 North American Free Trade Agreement (NAFTA). Instead of tackling new transnational problems such as regulatory harmonization together, the United States and its neighbors reverted to old habits of bilateral, ad hoc negotiations. Instead of forging a unified competitiveness strategy toward the European Union and East Asia, each government has negotiated on its own. The three North American governments should create a seamless market, one in which it is as easy and cheap for a Chicago merchant to sell products in Monterrey as in San Francisco. This requires negotiating a common external tariff, eliminating restrictions on transportation and services, funding new continental infrastructure, and fostering a sense of community among the publics of the three countries that will also enhance the region's influence in negotiations with Asia and Europe. One estimate suggests that the benefits to the three countries would exceed $400 billion. The Case For a North American Market With rising competitive pressures from overseas and weak growth at home, the quickest external route to economic recovery and enhanced competitiveness is to stretch the U.S. market to include 113 million Mexicans and 34 million Canadians. The Obama administration has made it a priority to complete the Trans-Pacific Partnership (TPP) with Asia and has announced its intention to launch a new U.S.-European Union Transatlantic Trade and Investment Partnership. But the administration has neglected its two neighbors despite the fact that their combined product is more than six times that of other TPP countries and that U.S. exports to them exceed those to the EU. Mexico and Canada are already the United States' two largest export markets, its two largest sources of energy imports, and in the case of Mexico, the largest source of immigrants. The three countries also make products together. Unlike U.S. trade with most other countries, roughly 25 to 40 percent of the value of U.S. imports from Canada and Mexico comes from components made in the United States, and then assembled into finished goods in one of the two countries. Closer integration would translate into a more efficient supply chain and improved competitiveness. With labor costs in China rising to those in Mexico, and the cost of transportation across the Pacific increasing, a North American supply chain is not only more efficient than an Asian route, but it could also become a strong export platform to Asia. Moreover, if the United States seeks a unified approach to trade negotiations with Mexico and Canada, Asia and Europe will recognize that Washington has other options, and prospects for concluding transpacific and transatlantic trade deals would likely improve. For example, in the 1990s, world trade talks were stalemated until NAFTA was signed. Where NAFTA Went Astray North America was on track to create a competitive market in the 1990s. The most rapid job expansion in recent U.S. history occurred between 1993 and 2001. This coincided with the onset of NAFTA and the end of most trade and investment barriers between the United States, Canada, and Mexico. Trade tripled and foreign direct investment grew fivefold. But 2001 proved to be a turning point for North America just as the outlines of a continental market were becoming visible. Growth in trade has since declined by two-thirds and foreign investment by half. There are multiple causes for the decline. China entered the World Trade Organization (WTO) and rapidly expanded its exports to all three countries in North America. Post-9/11 restrictions significantly raised the cost of moving products back and forth across North American borders. There has been little investment in common infrastructure, resulting in long wait times at borders and slower movement of commercial goods. But the main cause was simply the failure of leaders in the three countries to build on NAFTA's foundation and create a seamless market. Deepening North American integration is more productive than widening it to add more free trade agreements (FTAs), but it will require the United States to address numerous domestic issues with its neighbors. Regulatory requirements should be meshed so as to eliminate trade protection while also ensuring safety and environmental concerns. National infrastructure grids—roads, railroads, electricity, and natural gas pipelines—should be built and connected. Repetitive and unnecessary border inspections should be eliminated. Labor market needs should be addressed on a continental basis. Toward a Seamless North American Market To invigorate the three economies and forge a higher level of competitiveness, the North American governments should undertake the following measures: Build public support for a shared vision. North American leaders should say clearly that economic progress depends on closer collaboration. The three leaders should speak often of the common North American vision and community and bring it to life with symbolic steps—such as a "Buy North American" ad campaign, instead of "Buy American." There should be more educational exchanges and support for North American research centers. Negotiate a common external tariff. This would permit products to cross North American borders without any customs forms, inspection, or duty. Current "rules of origin" requirements mandate that goods must contain a certain level of North American content to qualify for NAFTA tariff preferences, which slows commerce and costs consumers billions of dollars. Review and eliminate all restrictions in transportation and services. The U.S. government violated NAFTA for more than fifteen years by prohibiting Mexican trucks from entering the United States. Although the U.S. government finally relented last year after WTO rulings, Mexican shippers are reluctant to upgrade their equipment without assurance that these barriers are gone for good. Other barriers include cabotage, which prevents trucks from depositing and acquiring cargo at different points on long journeys, and the Jones Act, which subsidizes American maritime transportation. In addition, while the exchange of services (e.g., banking, engineering, consulting, and health care) is increasingly important, professional certification and parochial regulations retard their growth. All these restrictions should be eliminated. Forge a continental plan for transportation and infrastructure. Led by each country's minister of transportation, the countries should build new trade corridors, improve railroads and ports, and construct a new highway that stretches from Canada to southern Mexico. Funding for the infrastructure could come from the common tariff, which should yield about $45 billion annually. These funds would be managed by a North American Investment Fund, which could be administered by the World Bank with decision-making in the hands of the three governments. Create a single North American working group on regulatory issues with a comprehensive strategy. Currently there are two separate bilateral working groups—U.S.-Canada and U.S.-Mexico—that negotiate individual regulations, but they have failed to agree on a single one. A merged working group should aim for across-the-board regulatory convergence. This means that pharmaceuticals should be subject to uniform high standards and would not need to be retested in each country, that food imports should be tested just once by North American inspectors, and that regulations on the size, weight, and fuel efficiency of trucks should be the same in all three countries. Adapt immigration policies to a wider labor market. The United States and Canada should permit their citizens to work freely in either country. This step is not possible with Mexico until the income gap narrows, but other steps should be taken. NAFTA visas for professionals should be easier to obtain and extend longer for Mexicans. An expanded guest-worker program for Mexicans should be included in comprehensive immigration reform, and to prevent abuse, biometric identification should be required for hiring all employees. For the United States and Canada, negotiate a new energy framework. The framework should balance the region's need for energy security with the necessity of curbing carbon emissions. The two countries should also develop ways to reduce the multiple-approval process for hydroelectricity transfers and negotiate a plan for future oil and natural gas pipelines. Mexico should be invited to participate but will probably wait until it completes domestic energy reforms. Make antitrust policies continental. In a continental market, national efforts to break up corporate monopolies will be needlessly duplicative and, as in the case of the telecom monopoly in Mexico, ineffective. A concerted trinational effort would strengthen the capacity of each government to keep North America competitive. The Need for Leadership There is no better path to stimulate the U.S. economy, increase U.S. competitiveness, and bolster U.S. influence in emerging markets in Asia and Europe than by deepening integration with Canada and Mexico. The three countries already trade more than $1 trillion in goods and services each year. A small but vocal group in the United States opposes any further integration, but by and large the public supports freer trade in North America. Leadership is needed from President Barack Obama, the U.S. business community, and border states and communities. Mexico's new president has already expressed support for bolder initiatives to integrate the continent. Canada is more reluctant, but would not want to be left out if there was clear leadership from its neighbors. The place to start is the next North American Leaders Summit, which Mexico will host this year. The three leaders should articulate a clear vision and pledge to create a single continental market of mostly harmonized regulations in which nearly all products, produce, and services would transit borders without impediment.

Overview Latino immigrant entrepreneurs are making important yet largely overlooked contributions to the U.S. economy. With expanding Latino markets at home and abroad, their economic impact is set to grow. But roadblocks stand in the way. Policy changes--including visa reform, improving access to credit, and a more ambitious trade agenda with Latin American countries--would help the United States unlock the full potential of its Latino immigrant entrepreneurs. See CFR Senior Fellow and Renewing America Director Edward Alden's accompanying blog post here.

Overview No state was struck harder by the loss of manufacturing employment than North Carolina. But while some parts of the state were able to shift into more competitive sectors, others have been unable to rebound. The reasons why, and their connection to policy, offer important lessons for regions across the United States grappling with how to respond to this new era of growing international competition. See CFR Senior Fellow and Renewing America Director Edward Alden's accompanying blog post here.

The United States needs to develop a comprehensive strategy for the Arctic. Melting sea ice is generating an emerging Arctic economy. Nations bordering the Arctic are drilling for oil and gas, and mining, shipping, and cruising in the region. Russia, Canada, and Norway are growing their icebreaker fleets and shore-based infrastructure to support these enterprises. For the United States, the economic potential from the energy and mineral resources is in the trillions of dollars—based upon estimates that the Alaskan Arctic is the home to 30 billion barrels of oil, more than 220 trillion cubic feet of natural gas, rare earth minerals, and massive renewable wind, tidal, and geothermal energy. However, the U.S. government is unprepared to harness the potential that the Arctic offers. The United States lacks the capacity to deal with potential regional conflicts and seaborne disasters, and it has been on the sidelines when it comes to developing new governance mechanisms for the Arctic. To advance U.S. economic and security interests and avert potential environmental and human disasters, the United States should ratify the UN Law of the Sea Convention (LOSC), take the lead in developing mandatory international standards for operating in Arctic waters, and acquire icebreakers, aircraft, and infrastructure for Arctic operations. Regional Flashpoints Threaten Security Like the United States, the Arctic nations of Russia, Canada, Norway, and Denmark have geographical claims to the Arctic. Unlike the United States, however, they have each sought to exploit economic and strategic opportunities in the region by developing businesses, infrastructure, and cities in the Arctic. They have also renewed military exercises of years past, and as each nation learns of the others' activities, suspicion and competition increase. When the Russians sailed a submarine in 2007 to plant a titanium flag on the "north pole," they were seen as provocateurs, not explorers. The continental shelf is a particular point of contention. Russia claims that deep underwater ridges on the sea floor, over two hundred miles from the Russian continent, are part of Russia and are legally Russia's to exploit. Denmark and Canada also claim those ridges. Whichever state prevails in that debate will have exclusive extraction rights to the resources, which, based on current continental shelf hydrocarbon lease sales, could be worth billions of dollars. Debates also continue regarding freedom of navigation and sovereignty over waters in the region. Russia claims sovereignty over the Northern Sea Route (NSR), which winds over the top of Russia and Alaska and will be a commercially viable route through the region within the next decade. The United States contends the NSR is an international waterway, free to any nation to transit. The United States also has laid claim to portions of the Beaufort Sea that Canada says are Canadian, and the United States rejects Canada's claim that its Northwest Passage from the Atlantic to the Pacific is its internal waters, as opposed to an international strait. Canada and Denmark also have a boundary dispute in Baffin Bay. Norway and Russia disagree about fishing rights in waters around the Spitsbergen/Svalbard Archipelago. U.S. Capacity in the Arctic Is Lacking Traffic and commercial activity are increasing in the region. The NSR was not navigable for years because of heavy ice, but it now consists of water with floating ice during the summer months. As the icebergs decrease in the coming years, it will become a commercially profitable route, because it reduces the maritime journey between East Asia and Western Europe from about thirteen thousand miles through the Suez Canal to eight thousand miles, cutting transit time by ten to fifteen days. Russian and German oil tankers are already beginning to ply those waters in the summer months. Approximately 150,000 tons of oil, 400,000 tons of gas condensate, and 600,000 tons of iron ore were shipped via the NSR in 2011. Oil, gas, and mineral drilling, as well as fisheries and tourism, are becoming more common in the high latitudes and are inherently dangerous, because icebergs and storms can shear apart even large tankers, offshore drilling units, fishing vessels, and cruise ships. As a result, human and environmental disasters are extremely likely. Despite the dangerous conditions, the Arctic has no mandatory requirements for those operating in or passing through the region. There are no designated shipping lanes, requirements for ice-strengthened hulls to withstand the extreme environment, ice navigation training for ships' masters, or even production and carriage of updated navigation and ice charts. Keeping the Arctic safe with the increased activity and lack of regulations presents a daunting task. The U.S. government is further hindered by the lack of ships, aircraft, and infrastructure to enforce sovereignty and criminal laws, and to protect people and the marine environment from catastrophic incidents. In the lower forty-eight states, response time to an oil spill or capsized vessel is measured in hours. In Alaska, it could take days or weeks to get the right people and resources on scene. The nearest major port is in the Aleutian Islands, thirteen hundred miles from Point Barrow, and response aircraft are more than one thousand miles south in Kodiak, blocked by a mountain range and hazardous flying conditions. The Arctic shores lack infrastructure to launch any type of disaster response, or to support the growing commercial development in the region. U.S. Leadership in Arctic Governance Is Lacking Governance in the Arctic requires leadership. The United States is uniquely positioned to provide such leadership, but it is hampered by its reliance on the eight-nation Arctic Council. However, more than 160 countries view the LSOC as the critical instrument defining conduct at sea and maritime obligations. The convention also addresses resource division, maritime traffic, and pollution regulation, and is relied upon for dispute resolution. The LOSC is particularly important in the Arctic, because it stipulates that the region beyond each country's exclusive economic zone (EEZ) be divided between bordering nations that can prove their underwater continental shelves extend directly from their land borders. Nations will have exclusive economic rights to the oil, gas, and mineral resources extracted from those outer continental shelves, making the convention's determinations substantial. According to geologists, the U.S. portion is projected to be the world's largest underwater extension of land—over 3.3 million square miles—bigger than the lower forty-eight states combined. In addition to global credibility and protection of Arctic shelf claims, the convention is important because it sets international pollution standards and requires signatories to protect the marine environment. Critics argue that the LOSC cedes American sovereignty to the United Nations. But the failure to ratify it has the opposite effect: it leaves the United States less able to protect its interests in the Arctic and elsewhere. The diminished influence is particularly evident at the International Maritime Organization (IMO), the international body that "operationalizes" the LOSC through its international port and shipping rules. By remaining a nonparty, the United States lacks the credibility to promote U.S. interests in the Arctic, such as by transforming U.S. recommendations into binding international laws. A Comprehensive U.S. Strategy for the Arctic The United States needs a comprehensive strategy for the Arctic. The current National/Homeland Security Presidential Directive (NSPD-66 / HSPD-25) is only a broad policy statement. An effective Arctic strategy would address both governance and capacity questions. To generate effective governance in the Arctic the United States should ratify LOSC and take the lead in advocating the adoption of Arctic shipping requirements. The IMO recently proposed a voluntary Polar Code, and the United States should work to make it mandatory. The code sets structural classifications and standards for ships operating in the Arctic as well as specific navigation and emergency training for those operating in or around ice-covered waters. The United States should also support Automated Identification System (AIS) carriage for all ships transiting the Arctic. Because the Arctic is a vast region with no ability for those on land to see the ships offshore, electronic identification and tracking is the only way to know what ships are operating in or transiting the region. An AIS transmitter (costing as little as $800) sends a signal that provides vessel identity and location at all times to those in command centers around the world and is currently mandated for ships over sixteen hundred gross tons. The United States and other Arctic nations track AIS ships and are able to respond to emergencies based on its signals. For this reason, mandating AIS for all vessels in the Arctic is needed. The U.S. government also needs to work with Russia to impose a traffic separation scheme in the Bering Strait, where chances for a collision are high. Finally, the United States should push for compulsory tandem sailing for all passenger vessels operating in the Arctic. Tandem sailing for cruise ships and smaller excursion boats will avert another disaster like RMS Titanic. To enhance the Arctic's economic potential, the United States should also develop its capacity to enable commercial entities to operate safely in the region. The U.S. government should invest in icebreakers, aircraft, and shore-based infrastructure. A ten-year plan should include the building of at least two heavy icebreakers, at a cost of approximately $1 billion apiece, and an air station in Point Barrow, Alaska, with at least three helicopters. Such an air station would cost less than $20 million, with operating, maintenance, and personnel costs comparable to other northern military facilities. Finally, developing a deepwater port with response presence and infrastructure is critical. A base at Dutch Harbor in the Aleutian Islands, where ships and fishing vessels resupply and refuel, would only cost a few million dollars per year to operate. Washington could finance the cost of its capacity-building efforts by using offshore lease proceeds and federal taxes on the oil and gas extracted from the Arctic region. In 2008, the United States collected $2.6 billion from offshore lease sales in the Beaufort and Chukchi Seas (off Alaska's north coast), and the offshore royalty tax rate in the region is 19 percent, which would cover operation and maintenance of these facilities down the road. The United States needs an Arctic governance and acquisition strategy to take full advantage of all the region has to offer and to protect the people operating in the region and the maritime environment. Neglecting the Arctic reduces the United States' ability to reap tremendous economic benefits and could harm U.S. national security interests.