The Pandemic Depression
The Global Economy Will Never Be the Same
If there is broad bipartisan agreement on anything in Washington today, it is that the United States has become dangerously dependent on Chinese production. N-95 masks, essential drugs, components for lifesaving technologies, and even smartphones are all at least partially made in China. COVID-19 laid bare the vulnerability of these sprawling and unaccountable supply chains: when vital products or components are needed most, there is no guarantee that Chinese companies will make them available.
But if COVID-19 has revealed China’s disconcerting influence over the U.S. economy, the administration of U.S. President Donald Trump has steered the United States no closer to a solution. Trump has threatened to “decouple” the supply relationships connecting the Chinese and U.S. economies and promised to bring manufacturing back to U.S. shores. But moving production to the United States from a region such as Asia, where manufacturing costs are lower, would be economically inefficient—assuming it is even possible. The United States’ higher labor costs would make U.S. industries uncompetitive in global markets.
There is, however, a practical alternative that would not come at the expense of U.S. competitiveness: a more economically integrated North America. On July 1, the Trump administration took a step toward expanding North American supply chains by implementing the U.S.-Mexico-Canada Agreement (USMCA), a delayed but necessary twenty-first-century version of the North American Free Trade Agreement (NAFTA). The USMCA does not go far enough in its effort to facilitate North American economic integration, but it does provide an important framework for a new era of expanded trade and deeper economic cooperation among the three countries—not only as a bulwark against China’s increasing ambitions but as part of a broader effort to build a more inclusive and resilient U.S. economy.
But over the last three and a half years, the Trump administration has undercut its ability to build on the USMCA and to construct an efficient and economically viable alternative to Chinese production chains. It has taken a heavy-handed approach to Canada and Mexico, repeatedly threatening both countries with exorbitant tariffs whenever they fail to do the United States’ bidding. Trump’s consistent alienation of the leaders and citizens of Canada and Mexico has cost his administration its credibility in North America. Repairing that damage requires new U.S. leadership and a reinvigorated commitment to the North American project.
North American leaders have long sought to integrate their economies in order to enhance the region’s competitiveness and dynamism. NAFTA, which was signed in 1994 and regarded by many as a down payment on this vision of North American economic integration, lifted tariffs and reduced other barriers to trade. But in the decades after the agreement entered into force, commitment to an integrated North American market waned, and in the United States in particular, it became a political hot potato.
NAFTA faced political headwinds in the United States in part because of the perception that Canada and Mexico benefited disproportionately from the agreement. NAFTA granted both countries unfettered access to the U.S. market and spurred rapid growth in their exports. Gains were substantial in the United States, too, but they were not broadly distributed across the population. U.S. policymakers’ unwillingness to invest in training, research and development, and infrastructure meant that the communities that suffered dislocations due to NAFTA had few good economic alternatives. In other words, these communities struggled because of the failure of U.S. policymakers to adapt to economic integration, not because of NAFTA itself. All three countries failed to adequately invest in regulatory coordination and in border infrastructure and security, but in many respects, the shortcomings were greatest in the United States.
Decades of U.S. policy missteps at home created an opening in 2016 for Trump to paint NAFTA as a failure and to promise on the campaign trail to tear it up completely. True to his word, his administration replaced the 25-year-old pact with the USMCA—a much-needed update to NAFTA, but one that introduced new limitations on integration. Among other shortcomings, the new agreement confuses the process of dispute resolution for businesses by establishing three different sets of rules. It also replaces NAFTA’s mechanism for resolving agricultural disputes with a less effective working group that will “discuss” issues as they arise. And the USMCA includes a sunset clause of just 16 years, signaling the three countries’ limited commitment to the project of integration.
USMCA is an attractive alternative to the possibility of having no trade agreement at all
But the USMCA framework—flaws and all—is an attractive alternative to the possibility of having no trade agreement at all linking North America. Canada, Mexico, and the United States should use the agreement to revitalize North American cooperation in the face of China’s economic rise. Building on the base of the USMCA, North American leaders should deepen integration to compete with Chinese supply chains and to reduce reliance on Chinese manufacturing. They can further strengthen the mutually beneficial trade relationship that saw overall trade between Canada, Mexico, and the United States grow from $290 billion in 1993 to more than $1.1 trillion in 2016. Additional investment in a lower-cost market such as Mexico will enhance the competitiveness of American and Canadian industries. It will also create jobs and growth in Mexico, which will mean a more promising market for U.S. exports—a win-win scenario so long as the United States makes the necessary investments to support its own domestic renewal.
But North American supply chains will not succeed without consistent, high-level coordination. The United States should lead the effort to establish a decision-making body that can plan and fund coordinated border infrastructure and security projects. Such a body would ensure the smooth functioning of integrated supply chains during moments of crises and foster significant political commitments from all three governments to the North American community. Reinvigorated North American supply chains, bolstered by a trilateral commitment to modernize shared infrastructure, would support a more globally competitive, secure, and stable continent.
The unambitious USMCA should have been a floor for North American economic cooperation, but because of the Trump administration’s hostility toward Canada and Mexico, it has become a ceiling. Take, for example, Mexican President Andrés Manuel López Obrador’s July 7 trip to Washington, an official visit that was more notable for what was missing than what was accomplished. López Obrador and Trump issued a joint declaration that was stunning for its lack of substance. The two leaders left the pressing issues of migration and security cooperation off the agenda altogether and papered over their disagreements on necessary pandemic-related cooperation with platitudes about bilateral coordination. Their economic discussions began and ended with USMCA-related high-fives. Justin Trudeau, the Canadian prime minister, was invited but did not attend the meeting at all. At this point, the U.S.-Canadian relationship has become so strained that Trudeau scores political points at home by staying there.
USMCA should have been a floor for North American economic cooperation, but it has become a ceiling
The ramifications of these diplomatic failures are profound. Through its constant antagonism of Canada and Mexico, the Trump administration has squandered its ability to influence decision-making in those countries and to spur further economic integration. As a result, there has been no coordinated trilateral push to bring supply chains to North America. Instead of celebrating a new era of continental cooperation with the implementation of the USMCA, North Americans must lament another wasted opportunity—and another gift to Beijing.
The United States cannot prevent China’s rise, but a capable administration can shape the international environment around China, in part by fostering deeper North American integration. U.S. policymakers can begin by addressing the structural weaknesses of the U.S. economy that have made it so hard for too many Americans to enjoy the benefits of globalization. Should a new administration take over in January, it must also immediately begin repairing the United States’ fractured relations with its neighbors. Four years under Trump cannot completely sever the ties that bind the United States to its most natural partners. Canada and Mexico are also hoping for the return of stable, sober, American leadership. But to restore the full cooperation and support of these countries, the United States needs a leader who builds bridges rather than walls.