In this issue:
As U.S. relations with China deteriorate and the full impact of COVID disruptions ripples throughout the world, interest grows in building stronger North American supply chains –shorter and sturdier than those currently stretching halfway around the globe. The leaders of North America met in a summit in Mexico City in January and agreed to build on President Trump’s 2020 trade agreement, the USMCA, to find new ways to integrate economies, boosting manufacturing and significantly reducing reliance on Asia. The leaders pledged to persuade workers, businesses, and public servants in the three countries that uniting the continent will boost national security and manufacturing output and employment. Now, we are seeing the three countries take further action. The U.S., Mexico, and Canada recently approved USMCA Free Trade Commission Decision No. 5 on North American Competitiveness. On Feb. 23, Katherine Tai, the U.S. Trade Representative, released this statement: The COVID-19 pandemic exposed serious gaps in our three countries’ responses to trade flow disruptions during emergencies, as well as our understandings of what constitutes critical infrastructure priorities. Our increasingly integrated supply chains depend on the shared maintenance of North American trade flows, especially in light of the supply chain disruptions caused by Russia’s unjust and unprovoked invasion of Ukraine, as well as continuing challenges posed by non-market actors. Decision No. 5 set up a Sub-Committee on Emergency Response, with members from all three countries, to coordinate North American efforts to maintain regional trade flows during emergency situations. The Decision also created a Working Group “to develop a shared understanding of what constitutes critical infrastructure priorities.” USTR is leading the coordination of both the Sub-Committee and Working Group in partnership with technical experts from U.S. government agencies. Working together under the USMCA,” said Tai, “we can build resilient supply chains and make North American even more globally competitive.” Shift of Supply Chains to Mexico Happening Faster Than Expected A FreightWaves article on Feb. 20 noted that “while the rise of near-shoring to Mexico has been steadily increasing over the past decade, the pandemic and several other recent global disruptions have kicked the trend into high gear.” The piece cited a survey by Capterra that found that “about 88% of U.S.-based small and medium-sized businesses (SMBs) will reshuffle their supply chains to utilize suppliers in the U.S. or Mexico in 2023.” The survey concluded that ‘the switch to near-shoring is happening faster than was predicted in 2021. Most industry professionals predicted this change would happen very slowly, over five or more years. But even the 2022 numbers we see in the data were stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.” FreightWaves focuses on the global freight market and is a major provider of data for the global supply chain. ‘This Continent’s Trading Bloc Is Enormous, and the U.S. Is the Main Beneficiary’ On Feb. 8, Raul Gutierrez, CEO of Grupo Deacero, a Mexico-based steel company, commented on the North American summit in a widely distributed RealClearPolicy piece. “The groundwork was laid for shortening supply chains by the USMCA, which was approved overwhelmingly in all three countries,” Gutierrez wrote. “The pact lets nearly all goods and services flow freely, without tariffs, across North American borders. “This continent’s trading bloc is enormous, and the U.S. is the main beneficiary. According to the Woodrow Wilson Center, during 2021, “a record 75% of Canadian and Mexican imports came from the United States, making both countries the US’s largest export markets.” Gutierrez quoted Sujai Shivakumar, director of the Renewing American Innovation Project at the Center for Strategic and International Studies, who wrote with two colleagues last year: The rise of an aggressive and revisionist China, a devastating global pandemic, the disruptive churn of technological advancement, and -- most recently -- Russia’s invasion of Ukraine, are prompting a dramatic rethinking of the value of lean, globally distributed supply chains. A Call for Cooperation on Green Energy Through Tax Credits That Encourage North American Steel Use As an example of new cross-border cooperation in North America, U.S. Commerce Secretary Gina Raimondo in September asked Mexico to establish incentives to bring semiconductor manufacturers and the companies that support them to North America. The U.S. and Mexico issued a joint statement promising to “work together to pursue a pilot project to determine the feasibility of near-shoring semiconductor manufacturing inputs.” In his piece, Gutierrez recommended that the U.S. “enlist Mexico’s help with the transition to green energy by allowing U.S. solar and wind developers to claim tax credits -- so long as they use North American steel in the components. The U.S. has already taken this approach with electric vehicles but not so far with the ‘domestic content bonus tax credits’ created by the Inflation Reduction Act.” Gutierrez pointed out that he knows “first-hand the benefits to the United States of shortened supply chains. I head a 70-year-old steel company, started by my family in Monterrey, in northern Mexico. Our firm, Deacero, is a global leader in making steel rod and wire. We have 800 employees across the U.S., with manufacturing plants in Houston and Poplar Bluff, Mo., where our company Mid Continent is the largest domestic steel nails manufacturer.” When Deacero bought Mid Continent in 2012, “workers at the factory…feared it was the beginning of the end,” said an article in the Chicago Tribune. “Instead, Mid Continent's factory has doubled in size since Deacero's purchase.” It’s safe to say that the U.S. would have virtually no nails manufacturing sector if a Mexican company had not bought a Missouri factory that was buffeted by Asian competition. Mexico Reacts Strongly to U.S. Senators Who Suggest Re-Imposing Steel Tariffs At the same time most policy makers seem to understand the importance of North American cooperation in near-shoring, several U.S. Senators appear bent on a different course. Thirteen lawmakers sent a letter asking Tai and Raimondo to hold “consultations” with Mexico over an alleged “surge” in Mexican steel exports in one small category, conduit. Under the 2019 agreement between the U.S. and Mexico that lifted Section 232 tariffs on Mexico in anticipation of the signing of the USMCA, “consultations” are all that are necessary for one country to re-impose 25% steel tariffs on another. But, of course, reimposition invites retaliation. Using U.S. Census and industry data, CANACERO, the Mexican steel association, has pointed out that last year, Mexican steel represented just 3.3% of U.S. consumption – an increase of just one percentage point since 2017. That tiny increase is the result of Mexican steel replacing steel from antagonistic and otherwise unreliable sources, including Russia. By contrast, U.S. steel has captured a 14.6% share of Mexican consumption. Every year, Mexican imports of U.S. steel far exceed U.S. imports of Mexican steel. Between 2017 and 2022, the total U.S. surplus in steel has been more than 6 million tons. Mexico’s Senate responded quickly to the U.S. Senators’ letter, unanimously passing a resolution on Feb. 22, which, according to Politico, sets “the stage for possible retaliation if the Biden administration decides to reimpose Section 232 tariffs on steel imports from Mexico.” Specifically, the resolution, called a Point of Agreement, asks Mexico’s Economy Ministry to start gathering information about U.S. steel exports to Mexico in order to “consider the application of retaliation measures, in the event that the United States of America decides to impose tariffs or other unjustified protectionist measures.” A point of agreement is a request from a Mexican legislator to his respective chamber to assume an institutional position regarding a non-legislative matter. CANACERO tweeted, “We extend our deep appreciation to senator Ricardo Monreal for his commitment to the Mexican steel industry, which represents 1.6% of the national GDP and generates well-being through almost 700,000 highly paid jobs and permanent support to communities.” CANACERO provided important context:
In other words, the experience of steel trade shows how supply chains can shorten and become more reliable. NY Times Podcast Highlights Near-Shoring Between U.S. and Mexico The popular New York Times podcast, “The Daily,” focused Feb. 21 on North American near-shoring. Reporter Peter Goodman explained: For decades, China was at the center of globalization. Multinational companies went pouring into China. We talked about the “China price,” which was code for the cheapest-possible price. This assumption [was] that China…essentially has a limitless supply of workers eager for factory jobs, streaming in from the countryside, and that this was just an unbeatable combination along with investments into ports and other infrastructure by the government, and the buildup of the supply chain. You could get everything in China to make just about any product that you can imagine, from top to bottom. But, said Goodman, “since the pandemic, multinational companies have come to revisit this central faith in China…. Now, we’re trying to figure out what comes next. And what comes next for many companies is figuring out how to make their products closer to their largest markets.” He continued, “Companies are looking for alternatives to factories in China…. So this takes US to Mexico, which is an obvious place if you’re looking for lower wage production and easier land transportation to the United States. Just glance at the map. You end up in Mexico.” Pete Saenz, the mayor of Laredo, Texas, which is booming, tells the podcast, “Of course, the expectation there is that it’s going to increase international commerce for everyone. I’ve even heard the word, ‘a tsunami’ of commerce, trade.” Laredo’s great partner is the northern Mexico state of Nuevo Leon, with Monterrey as its capital and factories only a couple hours from the Texas border. Goodman learns from a Mexican official that “we’ve got a whole industrial park where there’s 28 different Chinese companies that are now sinking billions of dollars into factories in Nuevo León to serve the American market.” This is the way flows of trade are changing.
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