3.5- A Brief Introduction to the Economics of North America

Industrialization

Instructor's Video Links to an external site.

The geography of North America shaped industrial development and regional specializations. In the Pittsburgh-Lake Erie region abundant deposits of iron fueled steel manufacturing. Coal from Appalachia fueled industrial development in the Mid-Atlantic States. The Southern states, however,  continued to rely on agricultural production for some time, further exacerbating economic differences between the north and south.

The United States continued to industrialize and overtook the United Kingdom by the early 20th century as the global leader in industry spurring the large-scale migration we have already discussed.

Canada's industrial development was shaped by its ongoing relationship to Great Britain. As a colony it provided raw materials for the “mother country,” which would in turn export finished goods back to Canada. Canada focused on the extraction of raw materials. It wasn’t until the late 1800’s that Canada began its own Industrial Revolution.

For the past several decades, manufacturing has been declining in the United States and Canada as people have shifted to jobs in service industries, like retail and finance. Nevertheless, the US remains the world’s second largest manufacturer behind China.  The process by which manufacturing is gradually replace by a service economy is referred to as deindustrialization and is accompanied by both social and economic changes as a country shifts from heavy industry to a more service-oriented economy.

Deindustrialization

Deindustrialization usually occurs because a particular industrial activity is no longer economically viable. Due to globalization there is intense global competition leading to shrinking profits in manufacturing in North America and therefore, a decline in manufacturing.  In 1965 28% of the population of North America was employed in manufacturing; today only  8% continue to be employed in this sector.

Starting in the 1960’s, companies began moving factories to the southeastern US where labor costs were lower. By the 1980’s companies were looking farther afield to keep employment costs down and profits up. Manufacturing companies began to move to Mexico and overseas where labor costs were lower and regulation was less than anywhere in North America. Technology and automation have further contributed to declining numbers in North American manufacturing employment.

What is replacing manufacturing?

Today, 80% of Americans and 75% of Canadians work in the service sector. The service sector includes noncommercial activities, such as government, health and welfare, education, religion and charity. It includes commercial services, such as restaurants, recreation, amusement, personal care, etc.  It also includes trade, both wholesale and retail.  Transportation, communication and utilities are part of the the service sector as are financial and legal services,  including insurance, real estate, banking and investment.

The Digital Revolution is causing further changes to our economy. Economists can not neatly distinguish manufacturing from the service sector. These sectors are now locked together in ways that were previously not possible. For example,  new inkjet printers come with ink replacement subscriptions; cars come with navigation services; smart TVs come networked to stream; exercise equipment now comes with live-streamed classes. Manufactured goods are increasingly tied to services.

The knowledge economy is a growing sector within the service economy where creating, processing and communicating information is the product. There is a growing demand for processing and providing information in finance, journalism, higher education, research and development.  Aspects of health care increasingly rely on the "knowledge" economy. As a result, the economy is more and more reliant on the Internet. 88% of Americans and Canadians use the Internet regularly. This need both personally and economically to be "connected" has created the "The Digital Divide" where unequal access to the Internet can exclude portions of the population from participation.  Barriers do not just exist for the  poor but often also for those who live in rural locations.

 

 

North America: the Global Economy and Free Trade

Instructor Videos: Free Trade Pros and Cons Links to an external site.

The US and Canada are major engines of globalization through the size and technological sophistication of their economies.  Their combined economy is almost as large as that of the entire European Union. Both Canada and the United States are members of the Group of Seven  (G7), a political forum of the world’s leading industrialized countries that also includes France, Germany, Italy, Japan, the United Kingdom, and the European Union. Both are also members of the World Trade Organization (WTO), an intergovernmental organization that collectively regulates international trade.

Because Canada and the US are both wealthy and globally competitive exporters, leaders in business and government generally see tariffs and quotas as obstacles to North America's economic expansion. They advocate for trade barriers to be reduced worldwide.  Critics argue that disappearing manufacturing industries could grow again with the assistance of tariffs like the ones that rapidly growing countries, such as China, have used. Others argue that the benefits of free trade go mostly to the wealthy, to deal brokers and managers in large businesses, while many workers lose their jobs to cheaper labor overseas or see their incomes stagnate.

Despite opposition, free trade has been a major characteristic of economic relations between the US and Canada. The process of reducing trade barriers began formally with the Canada - US Free Trade Agreement of 1989. Mexico was included when the North American Free Trade Agreement (NAFTA) was created in 1994, and the agreement was renegotiated and renamed the United States-Mexico -Canada Agreement (USMCA) in 2018. The Major long-term goal of the USMCA is to increase the amount of trade between Canada, the United States, and Mexico. Today, it is the world's largest trading block in terms of the gross domestic product (GDP) of its member states.  USMCA is only 1 of 14 free trade agreements that the US and Canada have with countries around the World.

 

The Asian Link

Instructor's Video Links to an external site.

Low trade barriers with Asia have been a powerful force for globalization in North America. The endless variety of goods imported from China is made possible by China's low wages and policies. Many factories that first relocated to Mexico from the southern US later moved to China. By some estimates 2.4 million US jobs were lost between 1999 and 2011 as a result of low trade barriers with China. 

Political pressure to raise trade barriers with Asia has grown in recent years. US President Donald Trump has long accused China of unfair trading practices and intellectual property theft. In China, there is a perception that America is trying to curb China's rise as a global economic power.

Mr Trump's tariffs policy aims to encourage consumers to buy American products by making imported goods more expensive. The US has imposed tariffs on more than $360 billion of Chinese goods, and China has retaliated with tariffs on more than $110 billion of US products. Trade wars are wars and there are winners and losers. As a result of this trade war, U.S. economic growth slowed, business investment froze,  companies didn’t hire as many people, a lot of farmers went bankrupt, and the manufacturing and freight transportation sectors  hit lows not seen since the last recession.  However, some barriers may actually encourage Asian investments in North America. For example, Japanese and Korean auto makers who would like to import whole cars into North America have for decades paid tariffs and have faced other restrictions. To avoid these, they have located plants in North America, often establishing them in the rural South or in southern Canada.