Strength in supply chains requires an increase in infrastructure investments

North American trade is dominated by trade in intermediate goods and services used in supply chains. As Figure 4 shows, for Mexico and Canada, roughly half of those imports—from within the bloc—are intermediate goods, while for the U.S. about 60 percent of imports from Canada and Mexico are intermediate goods. Given the importance of supply chains in regional trade, gross trade numbers fail to capture the extent of economic integrations and distribution of gains. For example, approximately 40 percent of Mexico’s goods exports to the U.S. contain U.S. valueadded.16

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Growth in North American supply chains—alongside the information and communications technology (ICT) revolution—has been driven by NAFTA, which reduced trade barriers and provided assurance to businesses that tariffs and other trade restrictions would not increase. Lower tariffs are particularly important for supply chains where products cross borders multiple times during different stages of production.17 Supply chains can provide a number of benefits. For one, trade along supply chains is associated with greater gains as it allows for more specialized participation and exploitation of comparative advantage.18 This is also true at the firm level where supply chains have been shown to deliver greater income gains and productivity growth.19 The case for strengthening and expanding supply chains is about increasing these benefits, strengthening resilience to shocks such as pandemics, and providing opportunities to build a more inclusive digital North American economy. Success in these areas can also reduce the reliance on China-situated supply chains. However, strengthening North American supply chains will require infrastructure investments, built-in redundancies and stockpiling inventory, and seamless information flows among participants in supply chains to better respond to shocks. To further bolster supply chains and increase resiliency as well as support the transition to digital supply chains, the U.S., Mexico, and Canada need to work together and use USMCA to support increased investment in new supply chains such as batteries for electric vehicles (EVs) (see Box 1), data and digital technologies such as AI and blockchains, and opportunities for SMEs.