Dear Members and Friends:
Hope you are staying well. 2022 is behind us and 2023 is beginning. What kind of year will it be for us? We have assembled a number of reports that may give us a glimpse of what to expect.
So, let’s get started.
The Three Amigos
President Biden, President Lopez Obrador, and Prime Minister Trudeau, sometimes known at the Three Amigos, met on January 9 and 10 in Mexico City, preceded by Biden’s two-day visit to the border in El Paso. The event, the 10th North American Leaders Summit (NALS), was an occasion to review the progress on the ambitious agenda approved at the November 2021 NALS and the work plan that the three leaders tasked their officials to deliver over the year ahead. The sessions included many cabinet members from all three countries and a broad set of topics.
The White House has released a number of documents on the two-day sessions. The first, “FACT SHEET: Key Deliverables for the 2023 North American Leaders’ Summit,” contains details on the major topics covered:
Drive North America’s economic competitiveness and promote inclusive growth and prosperity
Recognize the urgency for rapid, coordinated, and ambitious measures to build clean energy economies and respond to the climate crisis
Reaffirm their commitment to work together to achieve safe, orderly, and humane migration in the region
Commit to coordinate actions and strategies to combat arms and drug trafficking, as well as trafficking in persons
Commit to share information and develop public policies to protect our countries against current and future health crises
Commit to promote diverse, inclusive, equitable, and democratic societies that combat racism
Another document was also released, “Declaration of North America (DNA),” which builds on the above points and looks forward to reviewing progress at the eleventh NALS (NALS XI), to be hosted by Canada.
Under the first bulleted topic above, the leaders agreed on “Organizing the first-ever trilateral semiconductor forum with industry to adapt government policies and increase investment in semiconductor supply chains across North America. Participation will include senior industry representatives and cabinet level participation from the United States, Mexico, and Canada in early 2023.” Biden met with Andres Manuel López Obrador on January 9 in Mexico City and the two agreed to set up high-level teams to spur economic cooperation on chips and other measures. US Secretary of Commerce Gina Raimondo will be heavily involved in managing the effort of the US side.
In December, the Arizona Commerce Authority (ACA) together with the Boston Consulting Group released a report, “The National Semiconductor Economic Roadmap,” which is an industry-led initiative designed to advance semiconductor competitiveness and craft a blueprint for future-proof semiconductor manufacturing in the US. The report is a follow-up to the CHIPS and Science Act, signed into law last August 2022 and appropriating $52 billion and creating a five-year investment tax credit to support expanding the US semiconductor industry. The report focuses attention on four domains of industrial effort—infrastructure, supply chain, workforce, and entrepreneurship.
Economic Outlooks for 2023
We have assembled a number of reports that look at this year from a country, regional, and international viewpoint.
The Economics Intelligence Unit (EIU) has issued its annual report on risks, “Risk Outlook 2023: Ten risk scenarios that could reshape the global economy”:
Scenario 1: Cold winter exacerbates Europe’s energy crisis—High probability, very high impact
Scenario 2: Extreme weather adds to commodity price spikes, fueling global food insecurity—High probability, high impact
Scenario 3: Direct conflict erupts between China and Taiwan, forcing US to intervene—Moderate probability, very high impact
Scenario 4: High global inflation fuels social unrest—Very high probability, moderate impact
Scenario 5: New variant of coronavirus, or another infectious disease, sends global economy back into recession—Moderate probability, very high impact
Scenario 6: Interstate cyberwar cripples state infrastructure in major economies—Moderate probability, very high impact
Scenario 7: Further deterioration in West-China ties forces full decoupling of global economy— Moderate probability, high impact
Scenario 8: Aggressive monetary tightening leads to global recession—Moderate probability, moderate impact
Scenario 9: China’s zero-covid policy leads to severe recession—Low probability, high impact
Scenario 10: Russia-Ukraine conflict turns into global war—Very low probability, very high impact
EIU details each of these scenarios in its report. Three risks, numbers 1, 2, and 4, carry the highest risks. Of those three, two are related to the environment.
EIU also released “Latin America Outlook 2023: Spotlight on New Governments.” It finds that there will be opportunities for growth in 2023, particularly in agriculture, mining, and nearshoring. However, capturing those opportunities will depend on the success or failure of the many new governments in the region as they attempt to address the voter demands that swept them into office while grappling with serious macroeconomic dilemmas and divided legislatures. EIU feels that “the bifurcation of the world economy will present a huge opportunity for Latin American countries in the form of nearshoring” and that Mexico is in a position to compete and benefit from trends in nearshoring.
Fitch presents two reports. The first is “Global Economic Outlook—December 2022: Inflation, Interest Rate Hikes and Recessions.” On a global basis, Fitch expects global growth to fall to 1.4% next year, which would, abstracting from the pandemic in 2020, be the weakest expansion since 2008. The reasons are monetary tightening and a darkening outlook for China’s property sector. Fitch covers all regions of the world as well as the major economies with much detail for each. For the US, GDP for 2022 will end up around 1.9%. However, average annual growth in 2023 is only expected to be 0.2% with contraction in the second and third quarters. The recessionary climate in the US will have an impact on both Canada and Mexico as exports to the US of manufactured and other goods will decline. Canada’s GDP growth will be 0.6%. Mexico, which should reach 3.0% in 2022, may only reach 1.4% in 2023.
In the second report, “Key Global Macroeconomic Themes For 2023,” Fitch looks at a number of areas:
Slowdown in global growth
Inflation easing slowly but a still tight monetary policy
Fiscal policy tightening
US dollar at an inflection point?
Fragmented parliaments in a number of countries
Increasing tensions between the US and China
Global property markets coming under pressure
Unemployment rates increasing
On the recession possibilities, Fitch has the Eurozone in contraction currently and the US in the third and fourth quarters. With the global slowdown, manufacturing orders will decline, resulting in reductions in exports volumes.
Last week John Murphy, Senior Vice President for International Policy at the US Chamber of Commerce, gave an informative presentation on the “Global Trade Outlook 2023: Rebooting the American Trade Agenda.” While first considering the conditions around the world and their possible impacts including in the US, where there is the potential arrival of a recession, a divided government looking at a debt ceiling, and increasing industrial policies, the focus shifts to President Biden’s trade policy, where the key words are “caution, continuity, and change”
Some points here.
We’ve been cautionary on trade agreements with the UK, Kenya, and China
Trump’s tariffs have become Biden’s tariffs
It’s been more than a decade since we’ve added new trade partners
The EU has trade agreements with 78 countries, Canada with 54, Mexico with 50, and China with 35
Our trade-weighted average tariff rates are the highest among the major economies in the world—due to those on China
Trade policies are becoming “worker-centric”
John Murphy’s message is that we are losing competitive advantage and the “US needs to get back in the game” by selling “Made in America” products to new markets in the world.
McKinsey just released a very interesting report on “Automotive Software and Electronics 2030: Mapping the sector’s future landscape,” which details challenges to the automotive industry in the coming years. Some of the insights:
The software and electronics architecture in vehicles will see a major evolution and will outgrow the automotive market; as a result, they have become the focus of most automotive companies and their executives
Autonomous driving (AD), connected vehicles, electrification of the powertrain, and shared mobility (ACES) are mutually reinforcing developments in the automotive industry; combined, they are not only disrupting the automotive value chain and impacting all stakeholders involved but also are a significant driver of the expected 7% compound annual growth rate (CAGR) in the automotive software (SW) and electrical and electronic components (E/E) market from USD 238 billion to USD 469 billion between 2020 and 2030
New technologies are breaking up the “power dynamic” of traditional relationships between OEMs and tier 1 suppliers
Separation of hardware and software is leading to new sourcing models
New companies are entering the playing field in nontraditional and automotive areas
Maquiladoras
The Federal Reserve Bank of Dallas has been a great source of information and data concerning the border and especially the “maquiladora” industry, today known as the “Manufacturing, Maquila, and Export Service Industry Program,” or IMMEX. Their recent report, “Maquiladoras, Mexico’s Engine of Trade, Driven to Navigate Evolving Demand,” highlights the maquila’s historical role in accounting for manufacturing GDP (58% in 2021), industrial employment (48% in 2021), as well a majority of exports. Relatively low wages continue to be a reason why companies invest there. The average hourly wage was $6.57 in purchasing-power-adjusted dollars in 2021, compared to its neighbors of $25.24 in Canada and $34.74 in Canada.
The slow shift from low-skill, low-wage production to high-skill, high wage production has been evident in the high-tech industries such as automotive, aerospace, medical devices, and electronics. The transportation industry accounts for one-third of maquiladora employment and production and 3.6% of Mexico’s GDP. One area in particular, internal combustion engines, is where Mexico is a global leader—No. 7 in total world vehicle production and No. 1 in Latin America. In addition, it is the primary source of auto parts imports to the US.
However, as noted in McKinsey’s report cited above, the shift to electric vehicles will bring changes to Mexico’s leadership. In the next few years, “a large share of automotive component demand will shift toward electric powertrains, batteries, advanced driver assistance systems, sensors, infotainment and communication at the expense of conventional components such as transmissions, brakes, axles, exhaust systems, steering and fuel systems.” The new componentry, including electric vehicle batteries, is expected to bring in competition from new market entrants.