Global Competitiveness Scorecards

Regional Economic Integration

Regional Economic Integration as a Growth Strategy

To achieve cost efficiencies while increasing quality and staying ahead on the innovation curve, companies often rely on a mix of materials and services from suppliers around the world. As more countries have opened their economies to trade and investment, suppliers of specific components and inputs have become linked through ever-growing and evolving global supply networks.

Regional economic integration has emerged as a policy strategy to pursue growth and job creation objectives, while enabling manufacturers to better meet consumer demands. As firms leverage global differences and complementary resources, they are incentivized to focus on countries in geographic proximity. Policy arrangements like free trade agreements, investment agreements, and other forms of deeper informal or formal economic integration are intended to capture as much manufacturing value-added as possible within the region while strengthening the ability of regionally-made products to compete globally.

In this section, we analyze the approaches to macroeconomic integration in North America, the European Union, the Asia-Pacific Economic Cooperation (APEC), and the Central America Free Trade Agreement (U.S.-DR-CAFTA) to discern the impact on each region's global competitiveness.

We believe that, done right, regional economic integration promotes growth, per capita growth, global trade, and job creation – but we invite you to engage with the data and reach your own conclusions.

North America

Key Takeaways

  • Since the early 1990s, North America has been the largest free-trade region in the world.
  • Now more than ever, North Americans trade, invest, manufacture and compete together.
  • Free trade creates jobs and wealth in each of the three countries and keeps manufacturing supply chains on the North American continent.

Characteristics of North American Integration

On Jan. 1, 1994, the North American Free Trade Agreement (NAFTA) created – among the United States, Canada, and Mexico – the largest free trade region in the world. The agreement eliminated tariffs on most goods traded among the three nations. In addition to eradicating barriers to cross-border movement of goods and services, NAFTA also included standards to protect intellectual property, established dispute resolution mechanisms, and implemented labor and environmental safeguards. Importantly, NAFTA deepened economic ties without creating supranational bodies or sacrificing the sovereignty of the three nations. Unlike the European Union, NAFTA does not consolidate monetary policy, nor does it cover migration of people. Since the start of NAFTA, North American firms have expanded and leveraged efficiencies of their regional supply chains to become more productive and competitive in the global economy.

On July 1, 2020, the new United States-Mexico-Canada Agreement (USMCA) came into effect. While USMCA largely reflects the structure and spirit of NAFTA, it may be a step backwards for regional competitiveness in certain manufacturing sectors. The USMCA adds regulations to the auto sector that could generate added costs of production throughout the supply chain. It also eliminates key protections for North American investors.

By the Numbers: How Has Regional Integration Impacted the North American Economy?

The formalization of economic integration with NAFTA and USMCA has corresponded with a period of strong growth across all three North American economies. Openness to trade and integration has generated economic prosperity throughout the North American continent by way of more affordable commercial goods and sustained growth in output, employment, and productivity. Additionally, North American companies have become more competitive in the global market thanks to efficiencies generated by regional supply chains.

Between 1990 and 2018, annual exports of goods and services among the three countries more than tripled in real terms, growing from $474 billion to just under $1.5 trillion. Over the same period, North American exports of goods and services to the rest of the world increased 167 percent in real terms, rising from $798 billion to $2.13 trillion. Imports of goods and services flowing into North America from the rest of the world nearly tripled, from $991 billion to $2.95 trillion annually.

By creating the world’s largest free trade zone, NAFTA and USMCA have also made North America a more attractive destination for investment capital from around the globe. Between 1990 and 2019, the total inward stock of foreign direct investment (FDI) in the three North American countries expanded from $1.19 trillion to $11.13 trillion, an over ninefold increase in real terms. However, the newly negotiated USMCA removes some of the investment protections that spurred robust growth in Mexico and Canada. In the absence of these protections, FDI in Mexico may contract.

Since 1990, North America has created over 72 million net new jobs, a 45 percent increase. Notably, this rate of growth has outpaced North America’s population growth rate (37 percent) over the same period. GDP per capita at purchasing power parity has grown 49 percent in real terms, reaching $52,509 (in current international dollars) in 2019. North American GDP per employed person, a measure of productivity, has increased 40 percent, reaching $110,527 in 2019.1 On average, industrial production in the three North American countries has expanded by 63 percent.2

Canada

Canada is one of America’s closest economic and security partners. North American free trade is part and parcel of a long-term Canadian strategy – opening its economy to the world – that has made Canada one of the world’s foremost trading nations.

Thanks to its numerous free trade agreements and its position in North American supply chains, Canada’s annual total trade with the world outside North America has more than doubled since 1990, rising from $169 billion to $415 billion. Canada’s annual total trade with North America has also doubled, rising from $368 billion to $763 billion. Due to geographic proximity, 61 percent of Canada’s global trade occurs with the United States. However, total Canadian trade with Mexico has increased more than nine times over since 1990, rising from about $4.6 billion annually to $41.6 billion annually. Canada’s total trade with the world amounts to two-thirds of its GDP, second only to Germany among G7 nations.

Furthermore, the investor protections contained within NAFTA bolstered Canada’s ability to attract foreign direct investment (FDI) from around the world. Between 1990 and 2018, Canada’s inward stock of FDI from North America grew from $128 billion to $500 billion, almost all from the United States. At the same time, Canada’s stock of inward FDI from outside North America has more than doubled since 1990, from $71 billion to $154 billion. USMCA eliminates Canada from the North American investor-state dispute settlement (ISDS) system. While this may jeopardize future FDI flows from the U.S. into Canada, Mexican investors in Canada can use the dispute resolution mechanisms afforded by another new trade agreement (from which the U.S. is absent), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

"Since the start of NAFTA, expanded levels of foreign trade, investment, and co-production have tracked with gains in Canadian employment and economic output."

Since the start of NAFTA, expanded levels of foreign trade, investment, and co-production have tracked with gains in Canadian employment and economic output. Canada’s real GDP has increased 108 percent since 1990. Total employment has grown 45 percent, outpacing the country’s population growth of 36 percent. The private sector has created 3.8 million jobs, an increase of 45 percent. Integration has also unleashed robust growth in Canadian industrial production, which has increased 56 percent since 1990.4

Mexico

All three North American partners have benefited from integration. For Mexico, NAFTA helped accelerate the country’s natural evolution from a commodity-based economy to an industrial economy. USMCA lays the foundation for even more advancement in the country’s industrial and services sectors.

"Mexico has become one of the world's most active global traders and an attractive destination for business investments."

Since 1990, Mexico’s exports of goods and services to the rest of North America have grown an astounding 8.8 times over, rising from $46 billion to $411 billion a year. At the same time, Mexico’s exports to the world outside of North America have increased sixfold to $88 billion annually. Mexico’s imports from the rest of North America have grown more than fivefold, rising from $55 billion to $279 billion a year. Imports from outside of North America have increased a remarkable 14 times over, from about $19 billion to $274 billion a year. This growth in imports can be explained by two factors: 1) the widespread development of assembly plants in Mexico that source inputs from all over the world, and 2) the rise of a consuming middle class in Mexico. Since 1990, total Mexican trade with the entire world as a percentage of GDP has increased from 29 percent to 85 percent as Mexico has become one of the world’s most open economies and active traders.

As manufacturing and trade have assumed a more prominent role in the Mexican economy, businesses, workers, and consumers have reaped immense benefits. Since 1990, Mexico’s GDP has doubled in real terms, and its GDP per capita at purchasing power parity has increased 32 percent in real terms – reaching $20,411 (current international dollars) in 2019. Mexico’s volume of industrial production has expanded 58 percent,5 and total formal employment has risen 88 percent, even as Mexico’s population has increased only 52 percent.

In addition to lowering trade barriers, NAFTA and USMCA contain a set of commitments on treatment of foreign investment, which, in Mexico’s case, have underscored to potential investors around the world that Mexico is “open for business.” Between 1990 and 2018, Mexico’s inward stock of foreign direct investment (FDI) from North America increased from $24 billion to $249 billion. During the same period, Mexico’s inward stock of FDI from the rest of the world increased from $15 billion to $271 billion. USMCA eliminates many of the protections that helped propel Mexico’s economy forward; even though Mexican law attempts to mirror those international commitments, Mexico may see a decline in FDI now that USMCA is ratified.

While integration has undoubtedly benefited the Mexican economy, the country still faces structural impediments that prevent it from fully realizing potential gains from its North American allegiance. At $47,185, Mexico’s GDP per employed person in 2019 is less than half of Canada’s and just slightly over one-third that of the U.S.6 Furthermore, estimates indicate that Mexico loses 3 to 4 percentage points of GDP every year because 60 percent of its workers are in the informal sector, meaning they do not generate any tax revenue, accrue pension benefits, or enjoy the protections of labor market regulations.7

In order to match the success of the U.S. and Canada, Mexico must continue to reform inefficient state-run enterprises, increase productivity, strengthen the rule of law, fight corruption in public administration, and create incentives for workers to enter the formal sector of the economy.

United States

Free trade with North America and the integrated supply chains it supports have become vital for the U.S. as it competes, trades, and invests in an increasingly globalized world. However, the polarizing debate around the negotiation of the USMCA suggested that at least some Americans question the gains that the U.S. has enjoyed thanks to our relatively open economy. A dispassionate look at the data leaves no doubt that any move to pull back from open-market policies would reduce our national prosperity, undercut our global competitiveness, and inhibit our economy’s ability to create new jobs.

"North American integration has strengthened the U.S. global trading position."

In 1990, before NAFTA, the United States traded a little over $488 billion a year with its two closest trading partners, Canada and Mexico. By 2018, the United States was trading over $1.4 trillion worth of goods and services (equal to 6.8 percent of U.S. GDP) every year with its two North American partners. At the same time, U.S. trade outside North America expanded from $1.6 trillion to $4.3 trillion annually. Put another way, as our trade with our North American neighbors increased by about $932 billion, our trade with the rest of the world rose by $2.7 trillion, suggesting that integration has actually strengthened – and certainly has not reduced – our ability to compete in global markets.

Between 1990 and 2019, U.S. goods exports to either Canada or Mexico increased from $197 billion (28 percent of total U.S. goods exports) to $549 billion (33 percent of total U.S. goods exports). In fact, the U.S. exports more merchandise to Canada and Mexico than it exports to the rest of its top ten partners combined (including China, Japan, the United Kingdom, Germany, South Korea, the Netherlands, Brazil, and France).8

Deeper North American integration has also spurred growth in U.S. exports to the rest of the world. Fifty percent of U.S. goods imports from Canada and Mexico are intermediate goods, materials, or components that companies import and integrate into the production of final goods.9 Many of these final goods are then exported from the U.S. By sourcing intermediate goods from Canada and Mexico, U.S. firms benefit from comparative advantages across the continent, enabling them to create final products that are more competitive, in terms of quality and cost, in the global marketplace.

Spotlight: Manufacturing in the United States

Even though NAFTA generated broad economic activity, it is often blamed for the decline in the American manufacturing sector. However, manufacturing employment – as a share of total U.S. employment – had already fallen to 15 percent in 1993, down from a high point of 35 percent in 1948.10 Efficiency and productivity gains from technological advancement, not free trade, are the primary forces behind this decline. Moreover, the decline in manufacturing employment has not been accompanied by a decline in output. Since the start of NAFTA, the volume of U.S. industrial production has expanded 73 percent,11 exceeding Mexico’s growth during the same time span and on a much broader base.

As the composition of the U.S. workforce continues to shift, the U.S. must make the necessary investment in education to ensure that workers’ skills align with the skills required by the new types of jobs that the economy is creating. The U.S. spends only 0.1 percent of its GDP on policies to re-train workers and help them find new jobs, a percentage that is one-sixth of the OECD average. 12 With retraining and higher levels of education, workers who used to serve on the factory floor can find higher paying jobs in sectors such as technology, healthcare, and business services.

Spotlight: Trade Deficits

Critics of North American free trade fret over the prolonged U.S. trade deficits of the past few decades. However, trade deficits are not necessarily cause for concern, just as trade surpluses are not necessarily desirable. In the second half of the 1990s, rising U.S. trade deficits coincided with rising employment and falling unemployment rates, calling into question the belief that rising trade deficits will eliminate domestic jobs. Furthermore, the U.S. ran a trade surplus every year during the Great Depression of the 1930s.

"During the NAFTA era, productivity and employment grew despite the headwinds of recession."

Even in the face of downturns, most notably the Great Recession of 2007 to 2009, the U.S. economy has grown considerably since the beginning of NAFTA. Since 1990, U.S. GDP has more than doubled in real terms. GDP per capita at purchasing power parity has risen 54 percent, and GDP per employed person (a measure of productivity) has grown 51 percent. In 2019, U.S. GDP per capita reached $65,118,13 and GDP per employed person hit $133,772,14 both the highest among G7 countries. Since 1990, total employment has grown 35 percent, and private sector employment has increased by an even greater 41 percent. Total and private employment growth has outpaced U.S. population growth of 31 percent over the same time span. The position of the U.S. as the world’s top destination for foreign direct investment has only strengthened, with the country’s inward stock of FDI expanding almost tenfold since 1990 (reaching $9.5 trillion in 2019).

Spotlight: The US and Mexico

It may not come as a surprise that annual U.S. goods imports from Mexico are over six times higher now than at the beginning of NAFTA. However, trade between the two countries is hardly one-way. Annual U.S. merchandise exports to Mexico have increased almost the same percentage – from $50 billion to $256 billion – since 1990. U.S. services exports to Mexico have doubled, from $15 billion to almost $34 billion. Mexico has assumed a larger role in the U.S. export portfolio as cross-border supply chains have flourished and a middle class has emerged in Mexico. In 1990, Mexico was the destination for only 7 percent of U.S. exports. By 2018, that percentage had risen to 12 percent. Behind only Canada, Mexico is the second largest export market for the U.S., generating up to 6 million jobs for U.S. workers.15 What is more, the U.S. economy benefits when the Mexican economy grows, given that 40 percent of the material in a typical product exported from Mexico actually originates in the U.S.16

Note: Unless otherwise indicated, all monetary figures are in inflation-adjusted 2019 U.S. dollars.

Trade as a percentage of GDP, commonly called the trade openness index, adds imports and exports and divides this total by an economy's GDP. The larger the ratio, the more an economy is exposed to international trade. This ratio can exceed 100 percent, as is commonly the case for import-dependent economies and economies that function as international trade hubs.

European Union

Key Takeaways

  • The EU has pursued the deepest regional integration between countries of any trade group in the world, featuring supranational bodies, a customs union, a common currency, and free movement of goods, people, and capital.
  • EU economies depend heavily on intra-group trade – more so than diversified North American economies such as the U.S.
  • In the face of aging workforces, indebted governments, dissent with aspects of the union, and other challenges, the EU is working to preserve free trade in the region.

Characteristics of European Integration

European countries, encouraged by the United States, pioneered regional integration in the early 1950s. The European experiment arose from a belief that economic integration would foster peace and hasten reconstruction in post-war Europe. Several decades later, the prospects of joining the economic union helped catalyze crucial reforms in the Baltics and Central Europe as these countries transitioned away from communism.

Twenty-seven countries are members of the European Union (EU) today.* The EU is not just a free trade area; it is a full customs union and a single market with a single monetary policy. The EU maintains a blend of intergovernmental governance structures and supranational decision-making bodies. Integration is not complete in all areas. Some members do not participate in the single currency eurozone, and, while any EU citizen can live or work in any EU country, not all EU countries participate in the Schengen agreement, under which there are no border inspections.

One of the EU’s most difficult tests came with the global financial crisis in 2008. The crisis exposed critical weaknesses in Europe’s financial system as country-specific shocks spread quickly throughout the region. The United Kingdom’s decision to leave the union in 2016 – as well as the rise of nativist-populist political parties in Germany, France, Austria, and other EU countries – points to a certain amount of disaffection with European institutions. The recent migration of millions of refugees to Europe from places such as Syria, Iraq, and Afghanistan has further strained political and economic unity over border management issues and the sustained free movement of people in Europe. However, a recent wave of populism and protectionism in the U.S. indicates that disaffection with integration is not specific to Europe.

Nonetheless, EU leaders remain committed – at least on paper – to deeper and broader integration. The EU views itself as a constant work in progress; members prioritize further integrating services, industries, and investment – across Europe – in digital, transportation, and energy infrastructure. Given the importance of trade in boosting Europe’s GDP, the EU is aggressively pursuing free trade agreements with other countries and regions. It remains to be seen whether the EU’s commitment to deeper integration within the EU, and with the global economy, will be sustainable in the face of the rise of populist leaders and the aftermath of COVID-19.

By the Numbers: How Has Regional Integration Impacted the European Economy?

Between 1990 and 2019, the EU28’s GDP grew 68 percent to $19.5 trillion. GDP per capita for the group as a whole reached $46,8421 in 2019. At the low end were Bulgaria, Croatia, and Greece, with GDPs per capita of $24,790, $30,141, and $30,722 respectively. At the high end, Denmark had GDP per capita of $60,178, Ireland was at $88,241, and Luxembourg was at $121,293. For comparison, Mexico had GDP per capita of $20,411 in 2019, while the United States was at $65,118. Productivity per worker in the EU28 has increased 40 percent since 1990, reaching $102,5172 in 2019.

Like Japan, the EU is concerned about the strain its aging population will place on health care and pension systems, future workers, and economic growth. According to European Commission calculations, by 2070 the EU will move from four working-age people for every person over age 65 to around two working-age people.3

As many EU economies struggle with high unemployment and slow growth, attracting foreign direct investment (FDI) will be key to accelerating growth and productivity in Europe. Inward FDI stock in the EU28 was cumulatively valued at $11.1 trillion in 2019, up from $1.6 trillion in 1990.

As a percentage of GDP, the member states of the EU are much more dependent on trade, especially intra-regional trade, than the members of North America. This occurs because most EU countries are relatively small, meaning they must rely on external trade to obtain the products they need but cannot produce. Conversely, the North American economies are relatively large and diverse, meaning much of their trade is internal. Intra-EU trade crosses geographic and political boundaries that are almost as invisible as barriers to intra-U.S. trade between the states, even though intra-EU trade is counted in the international ledger rather than the domestic ledger. In 2018, total intra-EU15 trade of goods and services amounted to $4.1 trillion, a little more than half the value of the EU15’s $7.6 trillion trade with the world outside the EU15. Comparatively, intra-North American trade in 2018 amounted to $1.5 trillion, less than a third of North America’s $5.1 trillion trade with the world outside North America.

Central Europe anchors important components of Europe’s supply and production chains. Increased demand for skilled labor has enabled less developed members of the EU to move up value chains, helping GDP per capita across Europe to converge. As Central European and Baltic states have integrated into the EU, their exports to other EU members have grown extensively. In the case of Estonia, goods exports to the EU15 have grown 16 times over since 1990. While exports to the rest of the world have expanded as well, many multinationals view Central Europe as a production gateway to trade in the EU. By contrast, China and Vietnam have become manufacturing platforms not only for Asia, but also for global export. Mexico occupies an analogous position within North America. With its many free trade agreements with third parties, Mexico has climbed the manufacturing value chain, becoming both a cornerstone of manufacturing competitiveness for the U.S. and a global export platform for North American-made products.

Despite its past accomplishments, the EU’s future is uncertain. The UK’s decision to leave the EU is in large part a reflection of rising nativism across the EU and the world. Because its monetary union is not accompanied by fiscal union, the EU has few options to prevent future sovereign debt crises like the ones that have occurred in Greece and Spain. However, preserving free trade and some model of integration will be essential to the continued success of the EU.

Note: Unless otherwise indicated, all monetary figures are in 2019 U.S. dollars. Trade as a percentage of GDP, commonly called the trade openness index, adds imports and exports and divides this total by an economy's GDP. The larger the ratio, the more an economy is exposed to international trade. This ratio can exceed 100 percent, as is commonly the case for import-dependent economies and economies that function as international trade hubs.

*The 27 members of the European Union are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden. The UK officially left the European Union in January 2020. UK data is still included with EU data for years prior to 2020.

*Trade data cited above are limited to the “EU15,” which includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the UK. We chose to focus on this subset for a few reasons. Firstly, the EU15 have been part of the European Union since the beginning of NAFTA, allowing for a comparable timeline. Secondly, the EU15 includes the largest economies of the European Union, economies that are large enough and developed enough to be fairly compared to the three North American economies. Finally, in part because other members did not join the European Union joined until the early 2000s, the EU15 countries offer the most complete and accurate data – specifically, trade data – dating back to the beginning of NAFTA. Beginning with data year 2020, the UK will no longer be included in the EU15.

Asia Pacific Economic Cooperation Forum (APEC)

Key Takeaways

  • APEC has helped accelerate the transitions of China, Vietnam, and Mexico from agricultural economies to major industrial export centers.
  • Even though it is not a formal trade agreement, through voluntary commitments APEC has substantially reduced trade and investment barriers across the Asia-Pacific region.
  • New trade agreements will improve and accelerate integration in the region – the only question is whether the U.S. or China will lead the way.

Characteristics of APEC Integration

APEC is a regional economic forum, launched in 1989, to promote closer ties among Asia-Pacific economies and reduce barriers to trade and investment. The APEC concept of integration is based on exchanges of best practices, collaborative problem solving, and voluntary individual commitments so that each of the 21 economies moves toward the same goals in ways that make sense for their individual economies.

Despite a lack of formal commitments, APEC members collectively reduced average tariffs in the region from 16.9 percent in 1989 to 5.5 percent in 2016. APEC members do not, however, have legal commitments to fully liberalize trade and investment by a certain date, although that is the group’s long-term goal.

APEC is structured like the Clean Up Machine from Dr. Seuss’ The Cat in the Hat. There are arms – some stronger or longer than others, for ongoing dialogue on a variety of topics – and a body that holds it all together. Disaggregating topics enables technical experts from government, academia, and the private sector to contribute to the discussion on areas of the economy that they are directly involved with, all while housing these disparate activities under one intellectual and strategic roof. APEC members do not cede any political or policy autonomy on account of their membership. Because it is not a formal trade agreement, APEC can be flexible in how it evolves and expands its agenda.

Over the years, significant political attention has focused on using the APEC platform to “pull up” the trade group’s smaller, less-developed economies, a platform based on the recognition that doing so creates more economic opportunities throughout the region. The region’s GDP grew 146 percent between 1990 and 2019, fueled by the explosive growth of two emerging markets: China (1,294 percent) and Vietnam (582 percent).

Among APEC’s most important achievements has been its implementation of the Trade Facilitation Action Plan (TFAP) to streamline and harmonize customs procedures. TFAP is reported to have reduced border costs in the region by 5 percent, saving businesses nearly $59 billion between 2007 and 2010. Moreover, APEC has developed agendas for regulatory harmonization in priority sectors and collaborated on policies that affect digital trade. APEC has also worked cooperatively on plans to reduce the cost of doing business in the region, including making it easier to start a business, obtain credit, and apply for construction permits. In addition, APEC has a Connectivity Blueprint to improve the information technology, transportation, and physical infrastructure linking people, services, and goods throughout the region.

Thematically, APEC has work streams and activities that extend well beyond the traditional confines of trade and investment agreements. By expanding into small business assistance, electrification of rural areas, regional IT training for workers, and other areas, APEC members are seeking to support a stronger ecosystem of policies that accelerate development and contribute to competitiveness. Such efforts prepare the region for broader market opening and builds support for free trade throughout APEC societies.

By the Numbers: How Has Regional Integration Impacted the APEC Economy?

The APEC region comprises 21 diverse economies – large and small – including mature, developing, and low-income members. At $53.3 trillion, APEC’s GDP represents 61 percent of the world’s total, and merchandise trade within APEC accounts for 35 percent of the global total.

Several of the Asian economies within APEC are among the most dynamic, growing at rates that outpace the rest of the world. However, APEC’s GDP per capita, at $25,226,1 is still just about half those of North America ($52,509) and the EU28 ($46,761). APEC includes economies with very high GDPs per capita, such as Singapore ($101,3762), as well as poorer countries such as Papua New Guinea ($4,5483) and the Philippines ($9,2774). For APEC as a whole, GDP per capita has risen 123 percent since the beginning of the forum, lifting millions of people out of poverty and into the middle class. Productivity per worker varies widely among the APEC economies, which hold a combined 2.9 billion people. Among the large economies, U.S. productivity leads the way at $133,772 per worker; China lags at $31,392 per worker.5 For the region as a whole, productivity has increased 112 percent since 1990.

A major part of the APEC story is the transition of developing economies away from agriculture and toward industry and services. In 1991, 60 percent of Chinese workers were employed in agriculture; today, just 25 percent are. For APEC as a whole, 20 percent of workers are employed in agriculture, compared to just 4 percent of workers in North America and the EU, where this transition took place a century or more ago. Notably, within North America, Mexico is still undergoing this transition; 13 percent of its workers are employed in agriculture, down from 26 percent in 1991.

Over the past two decades, the APEC region has attracted the lion’s share of the world’s foreign direct investment (FDI), with a cumulative stock of about $19.6 trillion in 2019. Nearly half of this amount ($9.5 trillion) is in the United States, which leads the world in attracting FDI.

APEC members exported $11.7 trillion worth of goods and services in 2019.6 Notably, 31 percent of these exports came from North America, 23 percent came from China, and 46 percent came from the rest of APEC.

Exports of merchandise within the APEC region amounted to $6.6 trillion in 2019, compared with $2.9 trillion in exports directed outside the region to non-APEC markets. Since 1990, APEC’s intra-region goods trade has more than quadrupled, driven by the exceptional export growth of China (approximately 1,800 percent), Vietnam (approximately 11,000 percent) and Peru (approximately 950 percent). These economies went through significant market reforms over the past two decades – motivated primarily by abandonment of Communist central planning, or, in the case of Peru, abandonment of import substitution industrialization. The resulting “catch-up” growth these economies have enjoyed is unlikely to continue in the coming years, as the past few years in China have already shown.

Without exponential “catch-up” growth to rely on, regional integration will become an even more important component of economic growth strategies in the Asia-Pacific realm. Newly emerging free-trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), have the potential to spur even more growth in trade and cross-border investment. As economies remove trade barriers, harmonize regulations, and share best practices, producers and entrepreneurs will be able to extend their customer bases and experience real wealth gains.

Unfortunately, the U.S. remains withdrawn from the most promising trade agreement in the region, the CPTPP. China leads a competing, albeit overlapping, agreement known as the Regional Comprehensive Economic Partnership (RCEP). With the U.S. on the sidelines, China will likely seize the opportunity to dictate this generation’s rules of global trade.

Note: Unless otherwise indicated, all monetary figures are in inflation-adjusted 2019 U.S. dollars. Trade as a percentage of GDP, commonly called the trade openness index, adds imports and exports and divides this total by an economy's GDP. The larger the ratio, the more an economy is exposed to international trade. This ratio can exceed 100 percent, as is commonly the case for import-dependent economies and economies that function as international trade hubs.

  • 1 As of 2019, measured in current international dollars at purchasing power parity. Values for trade group aggregates were calculated using World Bank and IMF data.
  • 2 Ibid.
  • 3 Ibid.
  • 4 Ibid.
  • 5 Ibid.
  • 6 UNCTAD Statistics.

U.S.-Dominican Republic-Central America Free Trade Agreement (U.S.-DR-CAFTA)

Key Takeaways

  • U.S.-DR-CAFTA has spurred large increases in intra-regional trade and helped position Central American economies to participate more fully in global supply chains.
  • Lack of infrastructure and regulatory barriers prevent deeper integration and economic expansion in Central America.
  • Through free trade, the U.S. economy benefits when the rest of the region grows.

Characteristics of Central American Integration

Created in 1961, the Central American Common Market (CACM) was a forerunner to regional economic integration in Latin America. In its original construct, the CACM lowered barriers to intra-regional trade but maintained high barriers to imports. In the three decades that followed, efforts to implement a full customs union were hampered by macroeconomic setbacks, political upheavals and civil strife in the region.

Renewed efforts in the 1990s – under a more open, market-oriented approach – produced deeper integration in areas such as promotion of investment in the region, intellectual property protections, and harmonization of technical standards. Substantial progress was made to harmonize tariffs and reduce internal barriers to trade, exceptions for politically sensitive products notwithstanding. Between 1990 and 2006, intraregional trade as a percentage of each country’s total exports increased because of lower barriers to trade within the CACM.

Free trade negotiations between Central America and the United States ushered in a new era of regional economic integration. Ratified in 2005, the U.S.-Dominican Republic-Central America Free Trade Agreement (U.S.-DR-CAFTA) was designed to advance completion of a full customs union and promote regulatory reforms in Central America. The agreement eliminated tariffs and promoted significant regulatory and legal reforms. These reforms have helped to open sectors previously closed to private investors.

By the Numbers: How Has Regional Integration Impacted the Central American Economy?

Since implementation, U.S.-DR-CAFTA has spurred a 39 percent increase in merchandise trade between the U.S. and the other six countries in the agreement, which include Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Combined, the countries in the CAFTA-DR would represent the United States' 18th largest goods trading partner, and according to the Department of Commerce, U.S. goods exports to CAFTA-DR supported an estimated 134 thousand jobs in 20141. However, because U.S. tariffs were already low prior to the agreement, trade among the other six countries (known as CA-5+DR) has actually grown at a much faster clip. Goods trade among the CA-5+DR countries, which stood at $5.9 billion annually when the agreement went into effect in 2006, increased 72 percent in real terms to $10.1 billion annually by 2019.

Unlike North America, Central America does not yet enjoy sophistication of intra-industry trade and intertwined supply chains. Deeper integration is partially impeded by regulatory and infrastructure barriers to intraregional trade. Guatemala, Honduras, and El Salvador are working to further streamline and integrate their customs processes on the borders to reduce time and cost for shippers within CACM.

The U.S.-DR-CAFTA helped position Central American companies to participate more fully in global value chains. Such participation allows Central American companies to acquire the expertise and knowledge conducive to productivity growth. The increased presence of multinational corporations in Central America has also offered opportunities for domestic firms to adopt new technologies and practices.

Since the implementation of U.S.-DR-CAFTA, the value of inward FDI stock in the participating countries (excluding the U.S.) has increased from $37 billion to $139 billion. As a corollary benefit, the political collaboration required to negotiate and implement U.S.-DR-CAFTA was also directed toward expanding regional financial institutions with common banking standards and regulatory oversight, an initiative that attracted international banks to further develop the region’s capital markets.

Institutions such as the Secretariat for Economic Integration in Central America (SIECA), which were essential to the negotiation of U.S-DR-CAFTA, continue to convene ministerial-level coordination of fiscal and economic policies. The Central American Bank for Economic Integration (CABEI) functions as an international multilateral development finance institution to invest in projects that reduce poverty and inequality and strengthen regional integration and competitiveness. The Northern Triangle countries have pledged to facilitate greater worker mobility within the region, but they have not followed the path of the European Union which allows free movement of workers in the region under a single EU passport.

Although U.S.-DR-CAFTA has stimulated economic growth in the region, Central American economies continue to be constrained by lack of infrastructure, corruption, and weak rule of law. As these small economies struggle to compete globally, deeper integration in infrastructure, supply chains, and workforce development could help industries in the region move up the value chain.