The ‘three amigos’, China and deglobalization

Andrés Manuel López Obrador stressed in Half way (2021), his political memories of the first half of his six-year term, the need to carry out a major continental integration project that would reduce hemispheric inequalities and asymmetries to, among other things, ease tensions between China and the United States.

Thus, it was not surprising that the Mexican president took advantage of the recent X summit of the “three friends” – formally USMCA, for the United States, Mexico and Canada – in the Mexican capital to ask Joe Biden to promote the process that, he said, should be open to all “without any distinction”.

The alternative, he warned, will be the loss by the US of more and more branches of production of goods and services due to Chinese competition. “Couldn’t we produce in America what we consume? Of course, ”he asked himself and answered himself before Biden and Justin Trudeau in the central courtyard of the National Palace.

The tripartite trade agreement includes an anti-China clause specifying that if one of the partners allies with countries that do not have market economies, the others can leave within six months and form their own bilateral pact.

distant neighbors

The priority items on the trilateral agenda were those that most concern US public opinion: immigration and security issues. No administration – Republican or Democrat – can afford to ignore them, especially in the midst of an immigration crisis at the border.

In 2022, Mexico detained 400,000 migrants – Hondurans, Cubans, Haitians… – who were heading to the border. Before traveling to Mexico, Biden stopped, for the first time as president, in the border region. In El Paso, he met with Republican Texas Gov. Greg Abbott, who has accused him of violating his constitutional obligations to defend the country from outside “invasions.”

AMLO got the message. Three days before Biden arrived, the Mexican security forces captured, in an operation that cost the lives of 10 soldiers, Ovidio Guzmán, heir to Chapo, the former head of the Sinaloa cartel who is currently serving a life sentence in a federal prison in Colorado.

Swell

Urgent matters did not distract, however, the attention of the three friends from the swell that summoned them: the integration of the North American economy as a means to compete with China. In 2000, trade between Latin America and China was around 12 billion dollars (0.6% of regional GDP). In 2021 it exceeded 445,000 million (8.5%). That year, China accounted for 18% of regional foreign trade, compared to 5% in 2005. Without Mexico it is 24%.

Between 2008 and 2019, Chinese state banks lent the region $131 billion, which will soon make the Asian giant its biggest creditor.

According to the so-called China Index of the Taiwanese Doublethink Lab, which analyzes data in nine areas –academy, politics, economy, media, technology…– from 82 countries, Beijing maintains a strategy of political, media, academic, military and economic penetration in the countries with which it is related to increase its influence in all possible areas.

Since competing with China in this field seems like a losing battle in advance, the United States has chosen to imitate, in its own way, Chinese state capitalism with an industrial policy unprecedented since the New Deal.

«The successor to the old Nafta, signed in 1993 and renegotiated in 2020, today represents 30% of world GDP»

With laws like the Inflation Reduction Act and the Chips and Science Act, Congress has passed $465 billion in public aid to boost green energy and the local semiconductor industry. The USMCA is yet another way to level the playing field. The successor to the old Nafta, signed in 1993 and renegotiated in 2020, today represents 30% of world GDP. Its production and supply chains move an annual trilateral trade of 1.5 trillion dollars.

geopolitical fissures

As Shannon O’Neil writes in Foreign AffairsFor geopolitical and geoeconomic reasons, globalization is giving way to various forms of regionalization, with one block oriented towards China and another towards the US. The integration of China in the WTO contributed to world trade today exceeding 20 trillion dollars a year, 10 times more than in 1980.

In the same period, cross-border capital flows went from 500,000 million to 4 trillion dollars. The problem is that this virtuous circle benefited above all the Asian giant, which became the world’s factory with competition practices that were not very compatible with the WTO rules.

After all, half of the goods sold globally do not travel more than 4,000 kilometers, that is, not enough to cross oceans. Washington today considers high-capacity batteries, pharmaceuticals, chips and minerals critical sectors vital to its national security. It is not weird. Taiwanese TSMC manufactures 92% of high-end semiconductors. The rest are produced in South Korea.

general retreat

The US wants to reconfigure its supply and value chains to reduce their scale and vulnerability. According to the Global Trade Alert, since 2008 the protectionist measures have tripled the opening ones in most of the countries of the world. Blocks such as the RCEP (Regional Comprehensive Economic Partnership), which regulates the foreign trade of 15 Asian countries, and other regional agreements already establish the rules for more than half of global trade.

«According to the Global Trade Alert, since 2008 protectionist measures have tripled the opening measures in most countries of the world»

Two out of every three dollars of revenue for Fortune Global 500 companies comes from their regional markets. Two thirds of the EU’s trade is between its 27 countries. In Asia, intraregional trade has risen from 45% in 1990 to 60% today, according to the Asian Development Bank.

In the Americas, Mexico is an example of this trend: between 1993 and 2007 its economy doubled thanks to the fact that Nafta quadrupled its foreign trade. One of every two dollars it has received in investments since 1994 has also come from its North American partners.

astral alignment

Under these conditions –tariff barriers, unsustainable supply chains…– the transfer of plants from distant countries to avoid geopolitical risks and reduce transport costs and climate risks –onshoring, nearshoring, friendshoring…– seems inexorable.

At the summit the stars aligned. Biden flew to the airport built by the current government and invited the Mexican president to travel with him in “la bestia”, his limousine, to the capital, a journey of almost an hour. At the opening of the summit, López Obrador recalled that John F. Kennedy’s Alliance for Progress invested in the region the equivalent of what would now be 82,000 million dollars. This time the initiative is private.

In the first three quarters of 2022, foreign direct investment increased by 30% in Mexico, most of it from the US and Canada. More than a third went to the manufacturing sector.

Mexico is the first link. A bill by Louisiana Republican Senator Bill Cassidy outlines a roadmap for hemispheric democracies that want to join the USMCA.

Relocating factories in closer countries offers several advantages: lower labor costs, inputs, energy and transportation, among other factors that facilitate and lower the cost of logistics and production processes, which explains why 80% of Mexican exports have as their final destination USA.

According to the Inter-American Development Bank, in the best scenarios, Latin America could benefit from the nearshoring with about 78,000 million dollars a year. 45% would arrive in Mexico, which in 2022 received 57,000 million dollars in remittances from the US.

virtuous circles

According to O’Neil, Mexico is the answer to many US problems. Shipping a container from China to the US takes a month, a period that has doubled and tripled during the pandemic. Between a Mexican supplier and its customers in the US, these terms rarely exceed two weeks.

In the first 10 months of last year, Mexico exported 382,000 million dollars in merchandise to the US, 20% more than in 2021. Every day some 800 million dollars worth of goods – clothing, auto parts, avocados … – pass through Laredo, the city Texas, which is today the main bridge between the US and Mexico and in which some sectors are growing at 20%-30%.

In 2021, according to the McKinsey Global Institute, US companies invested more in Mexico than in China. According to The New York Timeswhen in February 2022 Wallmart needed to buy a million dollars worth of uniforms for its employees, it did not turn to Chinese suppliers but to Preslow and Loren Buttons from the Tizayuca industrial park, an hour from the Mexican capital.

Proximity is not the only advantage. The markets to which the US has preferential access represent less than 10% of world GDP. Thanks to their agreements with third countries, Canada and Mexico have access to 1,500 million consumers in markets that represent 60% of global GDP.

Cars made in Mexico do not pay, for example, the 10% rate that the EU imposes on those from the US. That advantage reduces the price of a Ford Focus by $3,000 and that of an Audi Q5 by $5,000.