Members and Friends:
Hope you all are well as we begin crawling out of our pandemic crisis!
First, on some breaking news, President Biden has nominated former Interior Secretary and Senator from Colorado Ken Salazar to be U.S. Ambassador to Mexico. Salazar served as co-chair of Biden’s Latino Leadership Committee, and former Democratic presidential candidate Hillary Clinton tapped him to chair her transition team in 2016. He must be confirmed by the Senate and more information will be available as he prepares for the hearings.
In our last Update, we mentioned the development of the USMCA Free Trade Commission. The first meeting with USTR Katherine Tai, Mexico’s Secretary of Economy Tatiana Clouthier, and Canada’s Minister of Small Business, Export Promotion and International Trade Mary Ng, was held on May 18. A report on the meeting from the firm of Thompson Hine is attached. There was a discussion of several issues on USMCA implementation, issues involving the environment, small and medium-sized enterprises (SMEs), the automotive industry, and labor.
Mexican elections took place on June 6 and the results were widely reported. President Lopez Obrador’s Morena party won 12 of the 15 gubernatorial races but lost about 50 seats in the Chamber of Deputies. Although Morena’s seat totals would not give it a qualified majority by itself, it is projected to reach a majority with the support of its allies, the Labor Party (PT), the Green Party (PVEM), and the Solidary Encounter Party (PES). The elections were the largest in Mexican history.
Given the COVID-19 epidemic, it is not surprising to see many analyses of supply-chain issues with companies seeking to rethink, reorganize and realign their supply chains to better meet future needs. We have four reports here. The White House just released its report, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth,” which provides six sets of recommendations that, collectively, not only will strengthen the four prioritized supply chains, but will rebuild the U.S. industrial base. It fulfills President Biden’s Executive Order (EO) 14017 titled “America’s Supply Chains” issued February 24, 2021, ordering 100-day and 1-year reviews of certain critical supply chains. The critical sectors reviewed in the report include the defense industrial base; public health and biological preparedness industrial base; information and communications technology industrial base; energy sector industrial base; transportation industrial base; and supply chains for production of agricultural commodities and food products. Each is reviewed in detail. There is a set of interrelated themes and findings identified that contribute to supply chain vulnerabilities: insufficient U.S. manufacturing capacity; misaligned Incentives and short-termism in private markets; industrial policies adopted by allied, partner, and competitor nations; geographic concentration in global sourcing; and limited international coordination. Detailed recommendations are provided as solutions to the vulnerabilities.
The Economist Intelligence Unit just released a report, “North American Supply Chains: Will Reshoring Actually Happen?” The Intelligence Unit does not expect a significant relocation of supply chains out of Asia, at least in the medium term, for four reasons:
Supply-chain diversification is on the cards, particularly within Asia, but any movements to North America will remain an exception to the rule.
Companies and investors will remain deterred by North America’s relative lack of competitiveness.
Lingering protectionism and cross-border tensions within North America will also complicate options for arbitraging production costs throughout the region
These factors will discourage the types of investment required to transform North America into a viable, self-sustaining supply-chain ecosystem.
There is a case to be made for North America, and the final element in this equation is Mexico. “The country plays an essential role in boosting the credibility of North America’s reshoring potential. Production costs are far lower than in the US and Canada and have remained stable as China’s wage levels have grown sharply in the past decade. While Mexican wages will rise in the medium term, in part owing to USMCA requirements, we expect them to stay competitive, even compared with low-cost production hubs in South-east Asia,” according to the Economist.
A new report, “The Case and Path of Development for Ally-Shoring: Mexico,” is from the U.S.-Mexico Foundation. Ally-shoring is described as “the process by which countries rework critical supply chains and source essential materials, goods, and services among and between trusted democratic partners and allies, with a focus on investing in the short and long-term relationships that protect and enhance joint economic and national security.” The rationale for Mexico was lengthy – sixteen points covering geographic, political, and economic reasoning. In terms of “What Can Be Done Now,” several points are made: COVID-19 pandemic containment and treatment; critical supply chain rework, with a focus on transformational export and emerging sectors; smart border infrastructure, trade facilitation and data-driven supply chain management and security systems; and rule of law enhancement: US-Mexico institution building and trust strengthening.
Finally on reshoring and supply chain is the 2021 annual report from ThomasNet, “State of North American Manufacturing.” Through surveys and data from industrial buyers, Thomas found an increased interest in reshoring; the possibility of a large injection into the U.S. economy if one, new, single-contract domestic supplier is found; “total cost of ownership” is the motivator for reshoring, but price is the biggest obstacle; and an increase in demand for steel, chemicals, paper, and other raw materials. Snapshots are given for aerospace and defense, agriculture, automotive, construction, energy & utilities, food & beverage, healthcare & medical, and manufacturing.
On a positive note on the U.S.-Mexico trade front, Mexico has been the U.S.’s leading trade partner for the first four months of this year, topping Canada and China. Total two-way trade between the two countries was $208.6 billion for the four months, which tops the $175.2 billion from 2020 for the same period. Total two-way trade with the three countries was very close and likely China will catch up later in the year as the supply chain issues between the U.S. and China begin to sort themselves out – especially on freight capacity, cost and shipping times.
Ralph Biedermann
Executive Director
U.S - Mexico Chamber of Commerce, Mid-America Chapter