Different indicators in the last weeks suggest that the Mexican economy has stabilized after the initial impact of Covid-19 and could perhaps begin a gradual recovery process. Indeed, month-to-month data on industrial output, retail sales, construction and employment, to mention some examples, offer some respite. Naturally, public opinion is still very much centered on whether the contraction will be more or less than 10 percent for the year and how does this figure compares to that other countries, if the Mexican government’s recently 2021 budget plan is based on extremely optimistic assumptions or if the government should be doing more on the fiscal front to shore up the economy.
To be sure, these are all relevant questions, and any realistic scenario is quite difficult for Mexico as for most Latin American countries. The specter of another “lost decade” for the region is loose again so to speak. Mexico, nevertheless, should probably devote more time to think hard beyond the immediate problems –and short-term political gains– and focus on the policies that could get the economy back in sustainable long-term growth path.
Clearly, there are many things that are needed, several of them in the purely domestic front and plenty has been written about them. I want to focus on the opportunity created by the reorganization of supply chains, due to trade tensions between the United States and China, as well the effects of Covid-19.
This past June, after roughly three years of negotiations and legislative maneuvering, the United States, Mexico and Canada Agreement (USMCA) went into effect. The final provisions did not leave anybody fully satisfied, something that conceivably reflects that this was the only deal possible. For some, USMCA is nothing more than a washed-out NAFTA that in effect restricts trade, and still for others it is a panacea that will right all wrongs and set a precedent for the future world trade system. The truth, as it usually happens, is more complex and lies somewhere in the middle.
USMCA, I am sure, has plenty shortcomings, but these are a small price to pay in order to keep alive the North American idea, paraphrasing the late professor Robert Pastor. The agreement not only shows that the economic integration of North America has been extremely resilient, but it also provides a platform from which Mexico can take advantage of the way that world supply chains are restructuring.
The accession of China into the World Trade Organization twenty years ago was a game-changer on several fronts, not unlike the present trade war and geopolitical tensions between China and the United States. Mexico was always uncertain about having China in the WTO. From a general perspective, since the late 1980s, both countries followed development models highly dependent on exports and, to be more specific, they still often compete in the world market.
Politics should never be underestimated and, therefore, the political coalition that made USMCA possible really matters. On the Mexico side and to his credit, Andrés Manuel López Obrador, now a President with legislative majorities and unprecedented popular support, turned from someone skeptical –to put it mildly– about NAFTA and free trade in general, into a strong USMCA believer and advocate. This is one of the few cases in which a policy from the so-called “neoliberal period” has not been bashed by the new administration in Mexico. On the U.S. side, Republicans and moderate democrats –including now candidate Joe Biden– supported the agreement in a rare bipartisan manner. Recent work by the Pew Research Center shows that unfavorable views of China have climbed rapidly among both parties to levels of 83 percent among Republicans and 68 for Democrats.
As a recent special report by The Economist states, the pandemic will not end globalization, but it will reshape it, and has made supply chains a “CEO and board level topic”. The report cites a McKinsey survey (May 2020) which points that up to 93 percent of the firms reported plans to make supply chains more resilient. The pandemic has also shown how health-care systems are so heavily depend on trade. In this same vein, the notion of interdependence between the Mexican and U.S. economies became evident and very clear when dealing with Covid-19 implications such as basic health protocols, the definition of essential industries or the synchronicity needed to restart operations precisely due to supply chains. Mexico should also look in particular at the implications for the U.S. defense industrial base, where people are looking carefully at weaknesses of the nation’s supply chains and thinking about re-shoring or at least near-shoring.
In sum, the conflict between China and the U.S. had already put global players on alert. The pandemic made stronger the case for diversifying China risk and Mexico should decisively –albeit carefully– take advantage of this and attract investment.
After reading these ideas people will say “easier said than done” and they are probably right. This brings me to a couple of last comments. Chapter 26 of USMCA might provide and interesting track to work on some of these issues along with our Canadian friends. A North American Competitiveness Committee was created to promote further economic integration, enhance competitiveness, and discuss collective action against market-distorting practices by other countries that affect North America. The Committee must develop a work plan and has not yet met. In the end, USMCA is not only about how much the partners trade and invest between them, but about how they become more efficient and stronger while producing together.
Finally, even before the pandemic, the Mexican economy was already weak and investment sharply in decline. No strategy to leverage Mexico’s trade and geopolitical position will be sufficient if it does not provide a stable, clear, and attractive business climate. Global firms view Mexico as an opportunity and, in many cases, have cash in hand to invest. Yet, they are also increasingly savvy and even cold when making investment decisions. Mexico will serve itself well not losing track of this fact.
* Gerónimo Gutiérrez Fernández is senior advisor at Covington and Burling, LLP and partner at BEEL Infrastructure. Twitter: @GERONIMO_GF