The Future of North American Trade Scenarios and Economic Implications 02 The Future of North American Trade | A Scenario Approach

Scenario Thinking 04 Critical Uncertainties 06 Four Possible Scenarios for the Future 08 Economic Impact 12 Conclusions and Outlook 14 Methodology 16 Contacts 18

03 04 The Future of North American Trade | A Scenario Approach

Scenario Thinking A Glimpse into the Future of North American Trade

The North American Free Trade Agreement The challenge is to capture the complex ways Following the Breakdown of NAFTA in our (NAFTA) between Canada, Mexico, and the in which North America’s economic and third scenario, Mexico intensified its alliance United States is facing great uncertainty. political set-up may evolve. This will help to with Latin America to emerge from recession Political change, protectionist agendas, and a identify each country’s risk exposure and and foster the region’s socio-economic growing row over the agreement’s imbalance develop suitable strategic options on the development. Canada strengthened its ties to of benefits endanger its continued existence. basis of robust needs for action. the EU to compensate for its small domestic At the same time, disruptive technologies, market, while the US has isolated itself both new digital business models, and changing Scenario design provides the basis for politically and economically. social values also question the validity of the decision-making in the context of great existing trade agreement. uncertainty by analyzing and structuring In the North American Union scenario, drivers into critical uncertainties that could political, economic, and social integration has While the US administration contemplates the impact the future. Scenarios are narratives of united the NAFTA members into a strong agreement’s modification, Canada and alternative futures that provide a sound basis economic union that collaborates on key Mexico will probably strive to enhance NAFTA for developing future-proof strategies for political issues and the elimination of trade and tie renegotiations to complementary anybody with ties to North American trade. barriers. A lack of technological advancement topics such as immigration and regional forces each country to specialize in its security. Thus, the questions that need to be We have developed four scenarios to comparative advantages to support its answered are: what will the trade illustrate what trade could look like in North neighbors. relationships between North American America in 2030. countries look like in 2030, and what will the All of these scenarios demonstrate how impact on their respective economies be? In the Beyond Success scenario, digital differently a new set of North American trade entrepreneurship in North America is rules could play out. Let’s explore each Clearly, NAFTA renegotiations are likely to booming. A modernized NAFTA provides the scenario in more detail to better understand have far-reaching consequences for the ideal framework conditions for digital the implications. economic and political landscape in North businesses to take off. Universal internet America, as well as for the current trade access, e-governments, and a fully open- partners. Threats to cross-border value chains source approach make the movement of Enjoy the ride, arise from potential legal divergences and goods, services, and capital much easier, Your trade barriers. Closed borders could lead to along with creating new businesses. Labor economic recession, political instability, and and migration reforms have enabled NAFTA social unrest. However, intensified economic to realign toward highly skilled employment. integration or new trade ties could also open up new opportunities. In Digital Crusaders, the isolation of the US following the abolishment of NAFTA allowed In order to navigate the changing Mexico to catch up to US competitiveness by environments and respond to opportunities absorbing foreign talent and know-how. While and threats at an early stage, an Canada established deep trade integration understanding of possible North American with Europe, Mexico fostered its ties with trade models is required. China and South America, thanks to their interest in its new capabilities.

05 Critical Uncertainties

Drivers That Will Shape North American Trade

At the outset of our exercise, we developed a On the other hand, the future of North holistic list of drivers that have the potential to American trade is highly dependent on the affect North American trade relations in impact of digital diffusion. Advances in future. This was done with the help of expert technology and digitalization have led to the interviews and AI-based natural language rise of new business models that disrupt processing algorithms. The drivers identified incumbent industries. For instance, were then clustered into social, technological, automation and artificial intelligence continue economic, environmental, and political factors to replace an increasing number of jobs, while and rated in view of their degree of e-commerce makes conventional retail uncertainty and their impact on North business models obsolete. American trade relationships. The resulting list of prioritized drivers formed the basis of our Nevertheless, the success of digitalization is scenario analysis, since it enabled the not guaranteed. Regulations must establish determination of the most critical the framework conditions to enable digital uncertainties in the context of NAFTA data flows and cross-border trade, while new renegotiations. skills are required to accommodate the continued development and implementation According to our experts’ ranking, the first of technological innovations. Cyber security critical uncertainty that will determine the must also ensure the safety of data, systems, future of North American trade is the degree and applications. of future cross-border collaboration between Canada, Mexico, and the United In addition, the evenness of technological States. Collaboration can either increase in diffusion across multiple nations determines terms of deeper economic and political the magnitude of digitalization’s impact on integration or decrease as countries take competitiveness. An asymmetrical distribution more nationalist and protectionist positions, would provide significant competitive edge such as a return to WTO rules. The diverging over less developed nations or industries, views on the desired trade model also reflect while a more uniform distribution would the heterogeneous agendas that each balance and dissolve competitive benefits. country pursues. As a result, the second critical uncertainty of The drivers underlying this critical uncertainty our scenario framework is represented by the include the degree of cross-border impact of digitalization on competitiveness interrelations, the ideological divide, and which can either be decisive or insignificant. corruption, and also the development of global trade blocs and power structures. In The combination of both critical uncertainties addition, employee mobility and regional results in four plausible but highly distinct security represent two of the underlying visions of the future which are illustrated in drivers that have received particular attention figure 1. in the context of NAFTA renegotiations.

06 The Future of North American Trade | A Scenario Approach

Fig. 1 – Scenario matrix to describe the future of North American trade

Stronger cross-border collaboration

North American Union Beyond Success

Digitali- Impact of digitalization Impact of digitalization Every- zation is thing is ilimited digital Degree of cross-border collaboration

Breakdown Weaker cross-border Digital Crusaders collaboration

07 Four Possible Scenarios for the Future

North American Trade in 2030

Beyond Success In this world, digital entrepreneurship in people to meet regional labor demands. North America is booming. The However, the imbalance of employment has modernization of NAFTA, e-governments, and led to disparity and social unrest, while the universal internet access have made the digitalized economies also experienced a rise movement of goods, services, capital, and in cyber-attacks from hostile nations and people much easier, along with creating new terrorist groups. businesses. A fully open-source approach Stronger cross-border means that what used to be proprietary collaboration and knowledge becomes freely available to the public within the NAFTA region and benefits everything is digital mutual improvement and country-based specialization. Mexico has become a strong low-cost manufacturer of robots and car parts, while Canada and the US focus on developing technology and new IP. As automation replaced more and more jobs, North America had to realign toward highly skilled employment. Labor and migration reforms have enabled the movement of

08 The Future of North American Trade | A Scenario Approach

Digital Crusaders In this scenario, Mexico has caught up with capabilities could bring some long-awaited the US in terms of competitiveness. After the opportunities such as new trade markets or abolishment of NAFTA and a decade of Foreign Direct Investments. isolation in the US, economic growth and technological advancement came to a halt. Immigration restrictions deterred highly qualified specialists from entering the country. Weaker cross-broder Seizing the opportunity, Mexico absorbed collaboration and foreign talent to increase the competitiveness of its national tech hubs. Moreover, the lack of everything is digital international cooperation led to a rise in regional piracy and black markets. Know-how from the US and Canada has been transferred to Mexico, resulting in significant advances in its technological capabilities – although inequality has increased as well. However, Mexico’s attempts to diversify its exports have not been as successful as Canada’s, which established deep trade integration with Europe after CETA was signed in 2018. However, growing interest from China and South America in Mexico’s new

09 North American Trade in 2030

Breakdown In this world, Mexico has intensified its America focusing on labor-intensive jobs, the political alliances with Latin America to goal is to balance and foster the socio- emerge from recession. Following the economic development of the southern breakdown of NAFTA, Mexico’s politics, region in a joint effort. economy, and people were paralyzed by Mexico is set to become Latin America’s growing uncertainty. While Canada worked on economic powerhouse. intensifying its ties to the EU, the US isolated Weaker cross-border itself both politically and economically. collaboration and limited Increasing trade barriers and the return to local manufacturing have increased costs digitalization across all major sectors. Its innovative power is in decline as technology has failed to demonstrate its significance. As its northern neighbors are struggling as well, Mexico is taking the lead in creating a new bloc to the south to take advantage of economies of scale and revolutionize the Latin American Integration Association. With Mexico specializing in highly skilled services and Latin

10 The Future of North American Trade | A Scenario Approach

North American Union In this scenario, political, economic, and social While the three economies thrive as part of integration has united Canada, Mexico, and the NAU, they have become highly the United States into the North American interdependent. As new regional blocs Union (NAU) which collaborates closely on key emerge and shift global power structures, the political issues. Joint institutions such as the NAU’s continued economic superiority is put North American Immigration Agency illustrate under pressure. Stronger cross-border this perfectly. The elimination of tariff and non-tariff trade barriers has greatly benefited collaboration and limited the region’s highly entangled value chains, digitalization resulting in smoother operations, increased trade volumes, and higher returns on the bottom line. Since automation did not advance as much as expected, each country specializes in its comparative advantages to support its neighbors and balance the region’s overall development. For instance, the growth of labor-intensive industries in Mexico has led to increases in its productivity and GDP.

11 12 The Future of North American Trade | A Scenario Approach

Economic Impact Estimating the Implications for North America

Our scenarios provide a glimpse into four technology in the Digital Crusaders scenario, An effective improvement in technology possible future economic worlds. NAFTA is where Canadian GDP grows just 1% per year. results in faster global growth and more important to all three economies in different Mexico’s growth remains relatively strong, demand for Canadian raw materials and ways, so their futures would likely see very although the Breakdown scenario sees manufactured products. Mexico’s trade different levels of economic growth, inflation growth falling to just 2.5% on average. balance remains close to zero in three of the (consumer price index, CPI), and trade. To four scenarios, but the country would determine just how large the impact might be, Consumer price index experience a large trade deficit (of 3.8%) in we asked a panel of Deloitte economists from the Breakdown scenario. The growth in the three countries to estimate the size of the The Canadian and Mexican teams assumed exports to NAFTA countries would be halved impact. The diagrams show the recent history that the Bank of Canada and the Bank of in that scenario, with fewer overall and our panel’s judgement about what these Mexico would be able to keep long-term opportunities for Mexican companies. measures would look like in each of the inflation close to current targets. This may alternative futures. entail a cost in GDP growth in both countries, In summary, these numbers paint a general although much depends on other picture of possible economic futures under The figures in each diagram represent the macroeconomic drivers, such as currency each of the four scenarios. There are many informed opinion of Deloitte economists who movements. By contrast, the US team additional factors that our panel was not able have been observing the North American thought that the Federal Reserve would be to consider in this brief exercise, and actual economies for many years. They are not the more accommodating, possibly with a lower outcomes could vary depending on any result of a comprehensive modeling exercise cost to GDP – but perhaps therefore allowing number of assumptions. In their overall range, examining the interindustry and financial some acceleration in inflation. however, the scenarios tell a story in which impacts of these scenarios. inflation is relatively unchanged, GDP growth Trade deficit is higher when technological advances are The growth of the potential labor force will successful and trade is freer, and in which slow in all three countries, so their growth The US team assumed a relatively small trade balances may not be a good guide to acceleration will be hampered in all scenarios. impact on the trade balance. This might seem success or failure. This reflects our panel’s In addition, productivity growth has also been odd, but the assumption is that the dollar long experience in observing and forecasting unusually slow across North America in the would remain the global currency. It is almost the North American economy. recent past. A key distinguishing factor in impossible to create a scenario where this these scenarios is whether the promise of would not be the case, so that assumption technology results in a return to faster will drive the trade deficit for the US in all productivity growth, which is reflected in the cases. Global demand for dollars is therefore GDP projections. what drives the US trade balance. In scenarios where the trade balance might improve (for GDP growth example, in the Digital Crusaders scenario, where US leadership in technology might be In the US, GDP growth accelerates in three of very important), the US dollar would likely the scenarios, although not by a great deal in appreciate, making the country less the North American Union scenario, which competitive. That would provide the dollars assumes that the impact of technology demanded by global trade. Canada, by remains modest. Canada’s GDP growth is set contrast, experiences a wider range of to decelerate substantially because of very possibilities: its trade balance is heavily low labor force growth in all four scenarios. dependent on the technology story. Additionally, the trade impact on Canada is large enough to offset the positive impact of

13 Conclusions and Outlook

The Future of North American Trade Will Have Manifold Implications

Looking at the final set of scenarios, Nevertheless, it is important to highlight three hand, major costs would result from the what may strike the reader first is how distinct conclusions that can be drawn from reversal of cross-border investments, the divergently the futures of Canada, our scenario exercise. disaggregation of previously integrated value Mexico, and the US may play out as a chains, as well as the identification of result of NAFTA renegotiations. First, the degree of cross-border collaboration alternative sourcing locations. will have a particularly strong impact on the The various ways in which economies and highly entangled cross-border value chains of The second conclusion that can be drawn societies will re-align result in a wide range of North America. Specifically, the consumer from our scenarios is the special role of trade models that may be adopted in future. goods and automotive industries will be digitalization, or rather the trade in The willingness to compromise between the significantly affected in the event of tariff or intangibles. three parties will determine the nature of non-tariff trade barriers being reintroduced The implications are twofold. future relations and thus the ultimate degree between Canada, Mexico, and the United of impact of NAFTA renegotiations. States. On the one hand, limited market First, knowledge, data, and information can be access could lead to decreasing trade traded across borders even in the case of volumes and reduced FDI inflows in view of trade barriers. To avoid the risk of black lower location attractiveness. On the other markets or regional piracy, regulations for The Future of North American Trade | A Scenario Approach

intangibles must be developed and The last conclusion is represented by cross- In summary, our scenarios share a common introduced separately from tangible goods as border labor mobility as a lever for NAFTA theme: foresight and strategic vision will be they have the potential to be traded via digital renegotiations. The degree of free movement required to navigate changing business channels. In this context, cybersecurity plays will have a direct effect on a nation’s talent environments. The risk potential for each an increasingly important role in securing pool, innovation power, and economic force. industry, business sector, and function must national borders from cyber-attacks, data At the same time, free movement of persons be analyzed separately in order to develop theft, and espionage. fosters the cultural and socio-economic appropriate strategic options. exchange, resulting in a reduced potential for Second, the impact of digitalization on conflict and more balanced regional competitiveness is largely dependent on the development. Restrictions on movement and population’s access to technology and its border controls could significantly affect all ability to adopt digital skills. In this context, three countries, as each draws on foreign demographics may play a prominent role in labor. the race to achieve a competitive edge. If true, this would give an advantage to Mexico, due to its relatively young population.

15 Methodology

Introduction to scenario design and In order to determine this study’s long list of In our study, the two critical uncertainties are methodology drivers, we primarily made use of interviews reflected by the degree of cross-border with selected Deloitte experts and also our AI- collaboration between North American This study on the future of North American based research tool, CLV Deep View. Deep countries as well as the impact of trade relationships is based on the seven-step View uses proprietary natural language digitalization on competitiveness. scenario design methodology of the Center processing algorithms to read through for the Long View (CLV) which applies the millions of data sets with the aim of identifying Having established the scenario matrix, we guiding scientific principles of objectivity, patterns between key words, phrases, people, develop scenario narratives in a fifth step. reliability, and validity, as illustrated in figure 5. companies, or institutions. This allows us to Scenario narratives define the framework This study is the outcome of a series of get a holistic understanding of highly complex conditions and atmosphere of each scenario workshops involving selected economic, issues and interrelationships as well as to within the context of a story. By using the political, and industry experts from the global identify global trends. It also helps to avoid previously identified drivers to reverse- Deloitte network as well as experienced the bias of traditional approaches that often engineer the milestones that would lead to scenario practitioners from the CLV. have a built-in tendency based on the each future, we can determine the key character, mood, or preference of the elements for each scenario. Our scenario design methodology starts with scenarists. the formulation of a focal question in order to Then, in a sixth step, we make use of these determine the project’s scope and strategic In a third step, we prioritize and cluster the scenario narratives to derive resulting direction. The focal question for this study identified drivers into critical uncertainties. implications for the stakeholders involved. In was the following: what will the trade This is necessary as not all driving forces are our study, we analyzed the four scenarios relationships of the countries in North uncertain. Some may be predictable and with regard to their implications for each America look like in 2030, and what will be the unlikely to vary significantly in any of the nation’s social, political, and economic impact on their respective economies? Our scenarios. Thus, critical uncertainties must environment and also its industries. study thus aimed to analyze two distinct fulfill two criteria: first, they must have a high issues: first, potential trade models between impact on the outcome of the focal question, In a seventh and final step, we define key Canada, Mexico, and the United States in and second they must be highly uncertain or indicators for each of the four scenarios to 2030, and second, the resulting impact on volatile. Initially, all uncertainties appear enable the monitoring of trend each nation’s economy. unique, however, by analyzing the developments. The aim of this step is to comprehensiveness and correlation of each observe which scenario is most likely to As scenarios are a way of understanding the critical uncertainty we can establish the materialize. dynamics that shape the future, the second building blocks for our scenario framework. step of our methodological approach represents the identification of driving forces The scenario framework is developed in the that have the potential to impact the outcome fourth step of our scenario design approach. of the focal question. These drivers can be The critical uncertainties determined serve as grouped into five categories, known as STEEP axes that are combined into a matrix, forces, consisting of social, technological, resulting in four highly divergent but plausible economic, environmental, and political scenarios. factors.

16 The Future of North American Trade | A Scenario Approach

Fig. 5 – Seven step scenario development approach

Monitoring 7 1 Focal Question

6 Implications & Options Seven Step 2 Driving Forces Scenario Development Approach

Critical Scenario 3 5 Uncertainties Narratives

4 Scenario Frameworks

17 Contacts

Eduardo Pacheco Froylan Campos Dr. Florian Klein Partner Partner Head of the Center for the Long View Head of Strategy & Operations Strategy & Operations Monitor Deloitte and Public Sector Deloitte Consulting Mexico Deloitte Consulting Germany Deloitte Consulting Mexico Tel: +52 (0)55 5080 7046 Tel: +49 (0)69 9713 7386 Tel: +52 (0)55 5080 6321 [email protected] [email protected] [email protected]

Juan Vargas Danny Bachman, Ph.D. Philip Heselmann Senior Manager Economic Forecast Center for the Long View Human Capital Deloitte Services LP Monitor Deloitte Deloitte Consulting Mexico Tel: +1 (0)202 220 2053 Deloitte Consulting Germany Tel: +52 (0)55 5080 7611 [email protected] Tel: +49 (0)211 8772 4743 [email protected] [email protected]

Special thanks to Dr. Ira Kalish, Slavi Diamandiev, Patricia A. Buckley, Ph.D., Tom Corner, Andres Graza, and Crystal Arnburg.

18 19 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/de/UeberUns for a more detailed description of DTTL and its member firms.

Deloitte provides audit, risk advisory, tax, financial advisory and consulting services to public and private clients spanning multiple industries; legal advisory services in Germany are provided by Deloitte Legal. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 244,000 professionals are committed to making an impact that matters.

This communication contains general information only not suitable for addressing the particular circumstances of any individual case and is not intended to be used as a basis for commercial decisions or decisions of any other kind. None of Deloitte Consulting GmbH or Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.