The RESCO Electronics Blog

The Future of Sourcing from Mexico...Perhaps Not So Bleak

Posted by David Copenhaver on Jan 18, 2017, 9:10:00 AM

Ever since Donald Trump’s unexpected win last November I have been inundated with questions about the future of NAFTA (North American Free Trade Agreement) and Mexico as atrade1.jpg manufacturing supply source for the United States.  There is no doubt that the rhetoric used during the campaign and reiterated since the election is decidedly anti-NAFTA.  Trump has left no question about his feeling on NAFTA; famously stating that it was “the worst trade deal in history”.  All this being said, I think it premature to pen NAFTA’s obituary.

Now before I go further I must admit to not having a crystal ball or for that matter inside knowledge of where the Trump Administration is likely to take us on trade with Mexico.  I also need to disclose a bias in that RESCO has manufacturing operations in both the US and Mexico…in fact RESCO employees about an equal number of US and Mexican citizens.   So perhaps the balance of this blog is wishful thinking on my part; I will let you be the judge.

So here is what I think:

I believe that aspects of NAFTA will be renegotiated but that the overall effect to trade between Mexico, Canada, and the United States will be small.   

I have four main reasons for this belief and they are:

  1. The economies of Mexico, Canada, and the US are so interdependent and interlinked that killing NAFTA altogether or substantially altering it would be highly destabilizing to the economies of each country.
  2. Strategically speaking, Mexican manufacturing makes US manufacturing more competitive.
  3. The Republican led Congress will have a moderating influence.
  4. Our new administration will ultimately make the right decisions.

 So let me explain each of these in a bit more detail.

 

The Economies of Mexico, Canada, and the US are Interdependent and Interlinked    

To begin, the economies of Mexico, Canada, and the United States are highly dependent on one another.  In the two decades since NAFTA was enacted trade between the member countries has increased four-fold and exceeded $1.1 trillion in 2016.  According to Geronimo Gutierrez, a managing director of the North American Development Bank, trade between the US and Mexico exceeded $500 billion in 2015 alone.  This makes Mexico one of the US’s largest importers of US products…larger than Brazil, Russia, India, and China (the BRIC countries) combined.  The US Chamber of Commerce estimates that six million US jobs depend on trade with Mexico.  These and scads of other statistics clearly show how interdependent the economies of NAFTA have become.

Next, the supply chains of our countries are so interlinked as to appear to be one.  According to the Wilson Center, a DC based organization focused on research on global issues, 40 cents of every dollar imported from Mexico originated in the US.  In other words, American companies staffed with American workers are manufacturing 40% of the content that gets imported from Mexico back to the US.  Or stated yet another way, production of many goods starts in the US (basic inputs and components), moves to Mexico (sub-assemblies), and back to the US (final assembly).  The supply chains in NAFTA are about as interlinked as exist in the world today.

If NAFTA was scrapped and trade barriers erected, over a trillion dollars of trade would be affected, supply chains disrupted and huge numbers of jobs in the US put at risk.  Almost certainly the effect would be a net loss of US jobs and recession for the economies of each NAFTA member country.   

 

Mexican Manufacturing Makes US Manufacturing More Competitive

In a blog that I posted last May (“Mexican Manufacturing: Good for American Jobs”), I made the point that access to cheaper Mexican labor has facilitated US manufacturers competitiveness in the world economy.  Simply stated, US manufactures are able to source relatively inexpensive inputs (i.e. sub-assemblies) from Mexico that help hold down the cost of the finished goods that are assembled in the US (i.e. cars and medical equipment). 

The reality is that Mexico, Canada, and the US make perhaps the most effective trading bloc in the world.  We are much more players on the same team than we are competitors…and we make a damn fine team!  Our economies are not only interconnected but will succeed or falter as one.

 

Congress will be a Moderating Influence

It turns out that a number of states economies are highly dependent on trade with Mexico.  Not surprisingly border states like Arizona, Texas, and California are big beneficiaries but also industrial states like Michigan and Illinois are dependent on the flow of trade with Mexico (see the chart below).  For the most part, these are states with large populations and large congressional delegations.

 

States with Large Trade with Mexico

(Source: www.stratfor.com)

State

Trade with Mexico (millions)

Percent of States Global Trade

Arizona

$16,760

39.7%

California

$71,889

12.5%

Illinois

$22,195

12.0%

Michigan

$55,009

31.0%

Texas

$177,997

35.4%

 

It is not likely that these large and powerful delegations are going to sit on the sidelines while NAFTA gets scrapped and trade barriers erected.  In fact, just the opposite will most certainly occur.  In a bipartisan fashion these and other states will rally against any major changes to NAFTA.

 

Trump will do the Right Thing

Here is where I ask you to take a leap of faith.  Faced with the reality that NAFTA has not been as bad for the US as political rhetoric might lead one to believe and that scrapping it will likely bring on a (Presidential) term limiting recession, I expect that the Trump Administration will not dismantle NAFTA after all.  That said, something must become of the many promises made by Mr. Trump during the campaign or there will be a political price to be paid for lack of action too. 

So how to change NAFTA without killing it…and the economies of its member countries.  On this point, Stratfor, the geopolitical intelligence and consulting firm, suggests a way forward where Trump can have his cake and eat it too.  They propose that the Trump Administration engage Mexico in a discussion about the NAFTA’s regional value content stipulations with the goal of increasing the value from member countries.  These value content stipulations in NAFTA dictate the amount of content from each member country that goods under the agreement must contain.  According to Stratfor, if all three countries agreed to increase the regional value content on certain high-value products such as autos, the US would certainly benefit and in a fairly visible fashion.  But from Mexico’s perspective, this would be a small concession to otherwise keep NAFTA intact. 

Whether Stratfor has it right or not, I suspect that Mr. Trump and his team can find many ways to re-negotiate NAFTA without putting the core agreement in jeopardy.   They are as aware of the economic importance of NAFTA as anyone and, I think at the end of the day, will do the right thing. 

 

electro-mechanical-contractor

 

About the Author

DavidCopenhaverDavid Copenhaver is President of RESCO Electronics, a Baltimore based manufacturer electronic assemblies and value added reseller of auto ID equipment to original equipment manufacturers. Before joining RESCO in 2003, David was the Senior Vice President of Operations and member of the Board of Directors for US Office Products, a publicly traded distributor of office products that is now part of Staples. Beginning in 1989, David co-owned and managed The Smith-Wilson Co., an Orlando based distributor of office products that was sold to US Office Products in 1996.

David has a Bachelor of Science in Electrical Engineering and a Masters in Business Administration both from the University of Virginia. He is married and lives in Arlington, Virginia with his wife and three sons.

Topics: Manufacturing in Mexico