The United States is in the best position of the
three NAFTA nations to weather the challenges posed by lower cost overseas
producers, according to the latest NAFTA Quarterly, released today by Scotia
Economics.
The transformation of Asia - China in particular - into an industrial
powerhouse is having a profound impact on the global economic landscape. The
region, home to 60% of the world's population and almost 40% of global GDP, is
the world's most dynamic exporter, with its productive capacity being fuelled
by massive foreign direct investment and infrastructure spending.
"These competitive pressures are expected to accelerate as Asian exports
move up the value-added ladder, from mainly labour-intensive manufactured
goods to more sophisticated products and services," says Adrienne Warren,
Senior Economist, Scotiabank. "A country's ability to raise its competitive
position is crucial to holding or gaining market share in this rapidly
changing environment."
The report looks at seven broad competitiveness measures that are likely
to influence business location decision making - labour productivity, labour
costs, non-labour business costs, human capital, innovation, technology
intensity of exports and demographics. Overall, the United States emerges as a
clear leader both within NAFTA as well as against a broad OECD average,
especially in the areas of productivity and innovation. The over-15%
depreciation in the trade-weighted U.S. dollar over the past two years has
further strengthened its competitive position, at least vis-Ga-vis the major
industrialized nations.
Canada and Mexico are close competitors, with Canada ahead in
productivity and human capital but Mexico having an obvious labour cost
advantage and more favourable demographic trends. Currency shifts recently
have tilted the balance in Mexico's favour, at least for the time being. Both
nations, however, will be challenged to improve their overall competitiveness
ranking, which appears to lie somewhere in the middle of the pack globally.
"Canada offers a fairly competitive business cost structure and a highly
educated workforce," says Warren. "At the same time, it lags in productivity
growth and innovation efforts - two areas critical to long-term
competitiveness. The low level of business-funded R&D, for one, suggests the
need for greater cooperation between private firms and the public sector."
Other major challenges include the need to diversify manufactured exports
into higher value-added goods and to address demographic change. Canada has
the oldest population and lowest fertility rate of the three NAFTA nations.
The potential to expand the skilled labour force through greater immigration
or retaining older workers should be examined.
"The United States holds a solid competitive position, with a highly
productive, innovative and educated workforce," comments Warren. "Its highly
tech-intensive export base offers another advantage." Among its key
competitive challenges, however, is the need to offset relatively high labour
and benefit costs. U.S. wages are among the lowest of the major industrialized
nations for unskilled and semi-skilled workers, but among the highest for
high-skill technical, professional and management workers. As in Canada, the
United States faces looming skill shortages in some industries as its
population ages.
Mexico has the competitive advantage of a youthful population and a
fairly tech-intensive export base. It also benefits from low labour costs,
though rapid national currency compensation growth is beginning to erode this
advantage. Yet, Mexico is possibly more exposed to low-wage competition than
its NAFTA partners due to the nation's traditional reliance on low-cost
labour. To boost its competitive position, Mexico must address its lagging
productivity performance, through capital investments and skills training, and
upgrade its infrastructure network, likely requiring extensive tax reform.
Also included in the report is a detailed economic and financial market
outlook for each of the three NAFTA nations. The strong U.S.-led global
recovery has reinvigorated industrial activity in both Canada and Mexico. The
United States is expected to top the region in growth this year, with Mexico
moving back into first place in 2005.
NAFTA Quarterly and other Scotia Economics publications are available on
www.scotiabank.com and on Bloomberg at SCOE.
Scotia Economics, part of the Scotiabank Group, provides clients with
in-depth research into the factors shaping the outlook for Canada and the
global economy, including macroeconomic developments, currency and capital
market trends, commodity and industry performance, as well as monetary, fiscal
and public policy issues.Scotia Bank:
