Argument

North America: the Next Great Emerging Market?

Why the United States, Canada, and Mexico are positioned to be the global economic drivers of the 21st century.

US President Barack Obama (L) speaks with Canadian Prime Minister Stephen Harper (R) and Mexican President Enrique Pena Nieto (C) after the end of joint press conference in Toluca, Mexico, on February 19, 2014. The three leaders joined for the summit of North American Leaders focusing for talks on "a range of issues important to the daily lives of all of North America's people, including economic competitiveness, entrepreneurship, trade and investment, and citizen security." AFP PHOTO / Yuri CORTEZ        (Photo credit should read YURI CORTEZ/AFP/Getty Images)
US President Barack Obama (L) speaks with Canadian Prime Minister Stephen Harper (R) and Mexican President Enrique Pena Nieto (C) after the end of joint press conference in Toluca, Mexico, on February 19, 2014. The three leaders joined for the summit of North American Leaders focusing for talks on "a range of issues important to the daily lives of all of North America's people, including economic competitiveness, entrepreneurship, trade and investment, and citizen security." AFP PHOTO / Yuri CORTEZ (Photo credit should read YURI CORTEZ/AFP/Getty Images)

Congress at last appears set to give President Barack Obama the “fast-track” authority he needs to finish negotiating the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). But the protracted and sharp debate over the U.S. president’s trade agenda underscores growing skepticism in Washington about the value of further market integration and pessimism about the prospects for a robust global economy. The unstated question: Can America and its neighbors compete?

The answer is a resounding yes. Indeed, deep market integration, the individual strength of the three economies, and four technological revolutions are poised to make the United States, Canada, and Mexico the next great emerging market.

There is no question that we live in a period of considerable uncertainty about global markets. China is slowing, buffeted by the exhaustion of investment-led development, demographic challenges, a decade of rising labor costs, soaring debt, and endemic pollution and corruption. India, while potentially on the verge of a “Modi moment,” has yet to enact the reforms needed to develop convincing growth momentum. Brazil is sliding into recession and seems destined to remain “the country of the future.”

The story among developed countries is equally troubling. Japan has made some progress under “Abenomics,” a slate of economic reforms championed by Prime Minister Shinzo Abe, but the toughest measures — injecting competition into the economy and reforming corporate practices — are incomplete, while its demographic challenges remain profound. The eurozone is experiencing a tentative and differentiated recovery, but many of its major economies need substantial reform to put themselves on the path to solid growth.

While the traditional sources of global growth are slowing, the three North American economies are poised to accelerate. One of the core factors benefiting the three economies is their unrivaled market integration. To be sure, sweeping trade agreements like the TPP and TTIP can have issues, namely job loss in the sectors of the American economy most exposed to competition. But the record of shared prosperity under the North American Free Trade Agreement (NAFTA) — trade has tripled over 20 years, surpassing $1 trillion and supporting millions of jobs across the three countries — should be a compelling reminder of the benefits of improved economic ties.

At the individual level, the American economy possesses profound advantages, including a relatively liberalized business climate, a strong culture of innovation and entrepreneurialism, deep and agile capital markets, and small firms that can create and capitalize on technological advances. Canada’s banking system has proved to be among the soundest in the world, and its oil and gas sector remains strong, even as it has been challenged by last year’s downturn in oil prices. And Mexico has achieved a high degree of macroeconomic stability, while the current administration’s emphasis on reform means that its status as a manufacturing powerhouse is poised to grow, particularly as labor costs rise overseas.

In addition to these strengths, the three economies are benefiting from dynamism in four key sectors: energy, advanced manufacturing, life sciences, and information technology. Unleashed, these four interlocking revolutions could make North America the next great emerging market.

These transformations are synergistic. The drilling advances that have expanded reserves and lowered prices for oil and natural gas are not only leading to energy independence but enabling a resurgence of manufacturing, where advanced robotics and 3-D printing are raising engineering standards and lowering costs. Meanwhile, expanded use of IT applications — through cloud computing and big data — combined with American manufacturing and life-sciences prowess portend the emergence of the “industrial Internet” and the “health-care Internet.”

While the North American economies have natural advantages in these areas, there are a number of steps policymakers — especially those in the U.S. Congress — can take to accelerate these trends.

First and foremost, Congress needs to improve the business climate by putting its fiscal house in order. This will require reforming the United States’ entitlement programs and replacing the blunt cuts in the “sequester” with targeted cuts to carefully chosen defense and non-defense programs. These cuts would ideally be paired with a restructuring of the U.S. corporate tax code, with an eye toward stripping out loopholes to reduce complexity and the overall rate, which is among the highest in the world.

Additionally, Congress should take a series of steps to ensure that the United States remains at the forefront of innovation. Federal funding for both defense and non-defense scientific research has fallen by more than 20 percent as a share of GDP since 2009 and needs to be reprioritized. The research and development tax credit should be made permanent to support continued corporate investment in applied research. Passing legislation to combat cyberterrorism by allowing technology companies to more easily share information with the Department of Homeland Security is essential for safeguarding American leadership in the IT sector.

Reforming the education and immigration systems will help the United States develop and attract the best human capital in the world. Policymakers at the state level should adopt rigorous education standards, particularly for math, science, and reading, and encourage greater competition and choice, such as through high-quality charter and other specialized schools. Congress should pass comprehensive immigration reform to expand the H-1B visa program, implement a point system to accelerate the immigration of those with education and jobs, and create a path to permanent residency and citizenship for low-skilled workers.

To ensure that North America remains a leader in energy production, the president and Congress should approve the Keystone XL pipeline to carry oil from Canada to the United States, allow for the export of domestically produced oil, and accelerate renewable-energy development by building a robust, high-voltage transmission infrastructure to transport electricity. Giving the Environmental Protection Agency the authority to regulate hydraulic fracturing would protect the shale gas revolution by replacing the state-by-state patchwork of regulation with high-quality, uniform standards that ensure the practice is safe.

Finally, Congress should make smart investments to strengthen the nation’s physical and digital infrastructure. Creating a National Infrastructure Bank, increasing and indexing the motor-fuels tax, and setting a strategy to achieve universal broadband Internet would improve the country’s productivity.

Deep, fundamental strengths are helping the United States, Canada, and Mexico weather today’s uncertain global economic environment. But by turning policy headwinds into tailwinds, Congress can fully capitalize on today’s four interlocking revolutions and help unleash true economic dynamism for decades, ensuring that the future belongs to the United States and its North American neighbors.

The authors recently co-wrote a report from the Harvard Kennedy School’s Belfer Center for Science and International Affairs titled “The Next Great Emerging Market? Capitalizing on North America’s Four Interlocking Revolutions.”

Photo credit: Yuri Cortez/AFP/Getty Images

David Petraeus, a retired four-star general and former director of the CIA, is chairman of KKR Global Institute.
Paras D. Bhayani, a Boston-based management consultant, is a recent graduate of Harvard Business School.

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