Why the U.S. might not win the global economy without Canada and Mexico

Last week, Democratic lawmakers Ro Khanna and Zach Wahls wrote an op-ed in The Economist that outlined their vision for the Democrats to win the fast-approaching midterms and other future elections: try to win back districts in the industrial heartland that were once Democratic strongholds, but have since shifted decisively to the Republican Party under Donald Trump.

"Americans in areas hit hard by deindustrailization feel abandoned by the Democratic Party," they write. "Democrats must demonstrate that we are the party that is taking action to revitalize America's factory towns."

To win over these areas, Khanna and Wahls argue that Democratic candidates should highlight their recent legislative wins, including the American Rescue Plan and the Bipartisan Infrastructure Act, which have funneled billions of dollars into distressed towns, installing broadband internet, fixing roads and bridges, and so on. Even more, they argue, Democrats "should own up to, and reverse, the disastrous trade and economic policies (adopted by both parties) that have devastated America's factory towns."

The anti-free trade sentiments expressed by Khanna and Wahls are pretty much standard in American politics these days. Once an area for bipartisan enthusiasm, free trade has become a third rail. It's no wonder why President Biden has largely followed in President Trump's protectionist footsteps: important electoral districts in America's industrial heartland feel burned by the trade policies of the past.

But in a forthcoming book, The Globalization Myth: Why Regions Matter, author Shannon O'Neil argues that it's a huge mistake for the United States to turn against free trade and try to go it alone in the global economy. Instead, she argues, for the nation to become more globally competitive and create good jobs, we must find a middle ground on trade, embracing Canada and Mexico and working with them to beef up regional supply chains and our collective productive capacity.

The North American Manufacturing Hub

Despite the popular use of the term "globalization," O'Neil argues, what we've seen more than anything else over the past four decades is regionalization. Three regional manufacturing hubs have emerged in that time: Asia, Europe, and North America. And while Asia and Europe have done lots of work to foster and invest in supply chains in their regional hubs, she argues, North America has lagged behind.

O'Neil begins her book with one of the factory towns that has been devastated by deindustrialization: Akron, Ohio. Before falling on hard times, Akron was "the Rubber Capital of the World," producing about 60% of the globe's tires. In the 1980s, however, tire companies began leaving Akron, and the community slipped into a downward spiral.

"It is easy to peg Akron as a victim of globalization," O'Neil writes. But the problem, she argues, wasn't really free trade; it was largely "the United States' limited regionalization," which damaged the economic viability of continuing to do business in Akron as the global tire market got more competitive.

With the help of the pro-trade policies of their governments, O'Neil writes, tire and other automotive companies based in Japan and Germany and France developed regional supply chains that gave them a competitive edge. The United States, she says, hadn't yet pursued the North American Free Trade Agreement, which would eventually foster the creation of a production complex spanning the United States, Canada, and Mexico. "With NAFTA negotiations still a decade away, Akron's companies had no partners to turn to in the face of burgeoning Asian and European manufacturing supply chains," O'Neil writes.

In O'Neil's telling, NAFTA, while imperfect, was exactly what US manufacturing needed to continue competing on the global stage. After it passed, trade between the US, Mexico, and Canada quadrupled and, she says, the US manufacturers that embraced regionalism thrived.

O'Neil uses the auto industry as one of her primary examples. She considers it one of the most regionally integrated industries in North America. After NAFTA brought down tariffs and made it cheaper and easier for US automakers to move parts across borders, those companies were able to construct strategic supply chains that kept them globally competitive. Sure, O'Neil says, some labor-intensive manufacturing went to Mexico, where labor is cheaper, but that helped US automakers compete against Asian and European competitors and the United States — and US workers — remained an integral part of the supply chain.

She says just look at how the Ford Edge SUV is manufactured: "Its seats start life in Tennessee, where locally made foam cushions are covered with fabric from South Carolina and embellishments from Ciudad Juarez," O'Neil says. "The seats are attached to rails molded in Matamoros, and shipped to Ontario to be fitted to metal frames. The Edge's braking system, battery, engine, and transmission all make their way to the final assembly line along similarly convoluted — but almost entirely North American — paths."

As a result of NAFTA, O'Neil says, the struggling American auto industry turned around and began booming again. Far from seeing an exodus of auto jobs, the United States saw the creation of tons of new jobs. The supply chain, diverse workforce, and access to consumers provided by the North American regional hub created an industry so vibrant that even foreign automakers, like Toyota, began outsourcing to the United States. Toyota opened up plants in places like Buffalo, West Virginia, Alabama, and Texas. "Eleven of Toyota's fifteen North American plants are in the United States," she writes.

Embracing regional trade in more sectors, and investing in infrastructure to facilitate more trade, O'Neil argues, will help the American workforce thrive in the face of competition from Asia and Europe. Even when US companies outsource some manufacturing to Canada and Mexico, many of the parts (or "intermediate goods") will continue to be made in the United States. "When US companies buy and sell within North America, more work stays at home than if they set up shop farther away," O'Neil writes. "And these jobs aren't just researchers, marketers, or headquarter managers; they are also machinists and assembly-line workers in U.S.-based supplier factories."

O'Neil writes that the average import from Mexico is "40 percent US made," meaning that 40 percent of the parts that go into the end product are still produced in the US. The average Canadian import, meanwhile, is 25 percent made in the US. "As for a product coming in from China? Just 4 percent of it was made in the USA," she writes. It's a big reason why, she argues, studies have found trade with China killed millions of American jobs and destroyed towns in the industrial heartland, yet studies of trade with Mexico and Canada "have found limited effects on jobs and communities."

"When factories open in China, Vietnam, Poland, or Romania, U.S. suppliers don't get any extra orders," O'Neil writes. "When plants open in Mexico and Canada, they buy more parts and inputs from the United States to feed into their assembly lines than from anywhere else in the world."

The way O'Neil sees it, NAFTA was a success story, and she bemoans the fact that the United States has not continued building on that success. Sure, President Trump did sign the United States-Mexico-Canada Agreement (USMCA) in 2020, which modernized NAFTA, but, O'Neil argues, the agreement has too many protectionist elements, and it doesn't go far enough to bring North America together and help it compete with the Asian and European manufacturing hubs.

"The United States continues to be less integrated with its neighbors than its European or Asian commercial rivals, as more of its trade still goes to countries outside its region than within it," she writes. She argues the United States should do more: invest in crumbling infrastructure on our borders, reduce tariffs on more sectors, cut red tape preventing greater integration, increase the numbers of workers who can work across borders, and foster friendlier relations with Canada and Mexico to develop a continental strategy.

"Exploiting the three countries' variations in capital, labor, and natural resources, in sources of information and clusters of innovation, allows North American companies to make products faster, cheaper, and better than they could in one nation alone," O'Neil writes. "Integrating North America creates a larger home market and lets U.S. suppliers benefit from Canada's and Mexico's more expansive free-trade agreements with the world. That will create and protect U.S. jobs."

O'Neil is bullish on the future of manufacturing in the United States if it remains open to the world and embraces its neighbors. She stresses that labor costs are rising in Asia and Europe, as their population growth slows and they have fewer workers to do jobs. Moreover, as machines become more and more important to production, the US technological edge over competitors will help it become an even bigger manufacturing powerhouse. "The United States can handle competition," she writes. "But it will be easier and done better with partners."

Of course, there are probably many Americans — especially in politically important factory towns dotting the industrial heartland — who won't buy O'Neil's argument, or at least, won't believe that any kind of free trade could possibly help them. Even O'Neil acknowledges the politics of implementing her regionalist vision are tricky. [Copyright 2022 NPR]