By Ricardo Smith Nieves *
During the Covid-19 pandemic, “ally-shoring” came to the forefront as it became evident that the United States needed to reorient and improve the resilience of supply chains in critical sectors, such as medical equipment and semiconductors. This strategy seeks to achieve the dual goals of reducing the United States’ economic reliance on China and strengthening investment and trade relations with trust-worthy partners. More broadly, the Biden Administration has chosen to address geopolitical competition mainly by rebuilding confidence among traditional allies and creating international coalitions powered by U.S. leadership.
Ramping up clean energy manufacturing has emerged as a national priority in the U.S. economic agenda. President Joe Biden set a new, more ambitious, climate goal of reaching a 50-52 percent reduction in greenhouse gas emissions by 2030 and 100 percent zero-carbon electricity by 2035. Figures from Standard & Poor’s Market Intelligence suggest that to achieve these goals, the pace at which solar and wind energy is deployed must drastically accelerate: capacity additions must grow from 38 GW to 85 GW per year. The U.S. government has so far stated that it wants to ensure solar panels, wind turbines and electric vehicle components are produced domestically. However, there is no denying that leaning on reliable regional partners, such as Mexico and Canada, could complement U.S. domestic capacity, by offering components at competitive rates.
Given the current geopolitical context, the case for “ally-shoring” in manufacturing supply chains in clean energy technology has never been clearer. China is the dominant player in various stages of global manufacturing supply chains for solar PV and lithium ion batteries (core components of electric vehicles). It has a less dominant, but still crucial, role in the wind energy value chain. Furthermore, the war in Ukraine is not only impacting oil and gas prices: sanctions have affected the global supply of critical minerals for the energy transition, since Russia is a top exporter of nickel, copper and aluminum.
Mexico should play a fundamental role in building cross-border supply chains for clean energy manufacturing. Our country has been striving, for a long time, to consolidate the transformation of its manufacturing sector towards advanced, higher value-added, technology. The Mexican federal government is well-known for prioritizing oil and fossil fuel production in the national energy agenda. Although this is not expected to change in the short and medium term, Mexico should realize how much it stands to gain if it takes an active role in the integration of North American clean energy supply chains.
By providing technical assistance, encouraging finance and exchanging best practices, the United States could harness Mexico’s potential as a manufacturing partner in low-carbon technologies. In the past two years, US automotive companies Ford and General Motors launched initiatives to produce electric vehicle at manufacturing locations in Mexico, as they both strive to become leaders in the EV market. Although Mexican manufacturing capacity of solar PV modules and wind turbine components is still small relative to traditional sourcing countries in Southeast Asia and Europe, coordinated actions by the U.S. and Mexican governments could relocate investments that benefit from geographical proximity and the legal protections provided by the USMCA.
Recent bilateral talks on climate and clean energy should guide the path forward. The Mexico-United States Electric Vehicle Working Group and the U.S.-Mexico Climate and Clean Energy Working Group, launched during the U.S. Special Presidential Envoy for Climate John Kerry’s visit to Mexico last February, acknowledge the need to involve key stakeholders in academia and civil society. These initiatives should become fundamental components of Mexico’s efforts to comply with its decarbonization commitments under the Paris Agreement. Ministerial-level talks could provide periodic follow-up to high-level commitments, aiming to deliver concrete results.
Previous North American cooperation in energy suggests other useful steps. Mexico, the U.S. and Canada should take stock of their current manufacturing capacity of solar PV modules, wind turbines and EVs and map out resource availability of critical energy transition minerals in North America.
Mexico’s potential as a trusted partner of the U.S. in the context of a broader ally-shoring strategy is contingent on its capacity to preserve the Rule of Law, reduce the uncertainty generated by domestic policy decisions and, of course, on its willingness to improve its environmental and climate credentials. A major issue for solar, wind and EV supply chains has to do with the need to ensure manufacturing processes increasingly become more sustainable, in terms of energy use, water consumption and carbon emissions. By making the right choices, Mexico could not only achieve its decarbonization goals, but also become a regional manufacturing hub in technologies that will dominate the future of energy.