North America's Globally Competitive Landscape

Executive Summary

While North America’s competitiveness has improved over the last three decades, global challenges in the areas of economics, politics, technology and communications, and society in general have impacted producers, consumers, and the public at large in a myriad of ways.



Beyond the United States-Mexico-Canada Agreement (USMCA) there are a number of dynamic factors that play a major role in shaping the business environment in North America and, therefore, competitiveness. These include competition from China; North America’s financial system; supply chains and logistics; workforce; the linkages between large and small firms; and the entrepreneurial environment in all three USMCA countries.



There are seven forces and factors that will continue to profoundly impact North America’s competitive landscape:



1 The China Factor. Members of the USMCA should focus on finding ways to cooperate on political, economic, and social matters to create advantages that help overcome challenges posed by China.



Remaining competitive in the face of the economic challenges posed by China requires significant effort from the North American region. Strengthening trade and investment flows among the three countries can help them emerge stronger and increase their competitiveness in the future. To do so, Canada, Mexico, and the United States must strive to create, develop, and integrate their commercial networks and bolster the quality of their workforces to achieve higher productivity levels. These kinds of strategies are necessary to ensure the region remains competitive vis-à-vis the economic power of China.



2 Innovation. One of the main challenges to the region’s innovation and competitiveness is funding and public spending on research and development (R&D). The translation of research and development into economic growth and wealth creation is a complex path. It is important that North America focuses on supporting research that results in the creation of new products and processes and helps alleviate issues of individuals and organizations. Both federal and local governments must set in place policies that stimulate innovation and create an environment that motivates and enables innovators to act upon their ambitions.

This requires expanding their expenditures and funding of R&D and education, along with bringing together the public and private sector into partnerships that unleash the innovation potential and set in place strategies that allow for world-class innovation.



3 Financial System. Over the past few years, North American corporate and commercial banks have experienced significant growth and have benefitted tremendously from economic tailwinds. The adverse effects of the pandemic will remain notable for the global banking industry, forcing the competitive landscape of the sector to change and slowing growth in traditional product areas, while fostering innovation in other areas—especially in the digitalization of basically every sphere of banking and capital markets.



While the USMCA is not entirely dissimilar to the North American Free Trade Agreement (NAFTA), it introduces some changes that will affect the financial sector of North America. For example, in the revised accord, parties recognize the importance of regional macroeconomic stability and agree to maintain a market-determined exchange rate regime, refrain from competitive devaluation, and strengthen economic fundamentals. Also, no party will be able to adopt or maintain measures placing limitations on: the number of financial institutions; cross-border financial service suppliers; financial service operations or number of natural persons employed; or, the total value of financial service transactions or assets.



Overall, the USMCA has created new provisions that affect the region’s financial industry in relation to macroeconomic policies, exchange rate matters, access to payment and clearing systems, transfer of information and data, and the establishment of financial institutions from other member countries and the types of services these can offer. These policies are set to add a higher level of transparency to financial organizations, liberalize cross-border financial services, and aim toward policies that add stability to the financial industry of the region.



4 Supply Chains: Structure, Organization, and Operation. The signing and ratification of NAFTA and its new version, USMCA, has made North America one of the largest trading blocs. However, moving goods across borders remains a complex task in terms of transportation, logistics, and overall supply chain effectiveness. Particularly, cross-border transportation remains difficult across the U.S.-Mexico border.



All three countries have discussed the importance of increasing resilience through technological change and safeguarding against cyber-attacks. Many companies in Canada have a high supply chain exposure due to their dependence on Chinese products. As a result, Canada has been focusing on improving the resiliency of its supply chains. Mexico has low costs and access to the United States and Canadian markets. The country’s capability to provide a nearby locus for production of goods helps companies simplify their supply chain management while reducing risks.

Like supply chains all over the world, the North American one has some important challenges to overcome. Above all, it needs to complete the reshoring of companies on North American soil. This will allow the US, Canada, and Mexico to reduce dependency on other regions, increasing their resilience and minimizing potential problems, as the pandemic has shown.



5 Workforce. As with many other regions of the world, the workforce in North America suffers from a significant skill gap that affects the region’s competitiveness and economic performance. This skill gap also creates mismatches, making it difficult for employers to recruit and hire employees who have the specific skillsets needed, and making it challenging for employees to acquire the necessary education and training needed for the jobs available in the marketplace. As a result, companies from the United States, Mexico, and Canada—despite significant investments made in technological advancements—cannot realize their full potential due to lower levels of productivity from their workforce vis-à-vis other economic powers such as China.



The main challenges for the region’s workforce surround the skills gap, quality standards of workers, best practices on work-based learning and training and lack of a common language or guidelines to validate credentials, competencies, and work experience.



Finally, the three countries have much to gain from strengthening their partnerships, focusing on increasing the competitiveness of border states, all while creating millions of jobs and increasing the well-being of the region. One possible avenue for stimulating workforce development is through public-private-academic partnerships. Dialogue between governments, educational institutions, the private sector, and other stakeholders can help explore best practices for workforce development.



6 Linkages between Large and Small Firms. As the global business environment becomes increasingly competitive, firms of all sizes are faced with new challenges and opportunities to increase profitability, growth, and market share. One way to achieve this is through linkages between large and small firms.



Backward linkages, in which small and mid-size enterprises (SMEs) act as subcontractors to large firms, traditionally have been of great interest to policymakers. In North America, this kind of linkage has become popular as many firms from Canada and the United States have outsourced part of their value chain to low-cost locations like Mexico, especially in the manufacturing sector. During the last decade or so we have also seen a significant increase in the establishment of investment funds and other programs aimed at start-ups by big corporations.



Evidence has shown the importance, and potential benefits, of linkages between large and small firms, as a way to foster investment, economic growth, technological advancements, product development, and spillovers of know-how. Thus, overcoming the obstacles to these linkages and implementing policies conducive to such linkages is essential to ensure more of these mutually beneficial partnerships are established and carried out successfully in North America.



7 Entrepreneurial Environment in North America. Entrepreneurship has become synonymous with start-ups. The term encompasses a broader range of business models and enterprises including many, many non-tech firms.



When it comes to the number of start-ups, North America has two of the world’s leading countries—the US and Canada. The United States ranks as the country with the highest number of start-ups, with approximately 71,000, while Canada ranks fourth, with around 3,300 start-ups, surpassed only by India and the United Kingdom.



Mexico, on the other hand, ranks a distant third in North America with around 565 start-ups. Despite this, Mexico has some very successful start-ups, including Bitso, a platform to buy and sell cryptocurrencies.



Overall, the entire region has seen an important increase in venture capital and other essential resources necessary for a thriving entrepreneurial ecosystem. However, it faces some challenges, as do other entrepreneurial ecosystems, such as actually growing its consumer base, finding the best talent, and adapting to the new world of work so that employees – and therefore productivity – can thrive.



The future of North American competitiveness will depend on deeper regional integration. In that regard, the USMCA, irrespective of any shortcomings, provides a sound trilateral framework, building on NAFTA, that will strengthen the competitiveness of the region and pave the way for a North America that can achieve success for its public and private sectors and citizens at large.