ALLY-SHORING: A NEW CONCEPT TO CONSIDER IN REDEFINING USMCA SUPPLY CHAINS
The US and Mexico have a unique opportunity to both strengthen and deepen joint manufacturing, R&D, trade, facilitation, security and governance ties through the adoption of an ally-shoring strategy. Ally-shoring describes the process by which countries rework critical supply chains and source essential materials, goods, and services among and between trusted democratic partners and allies, with a focus on investing in the short and long-term relationships that protect and enhance joint economic and national security.
The COVID-19 pandemic laid bare the challenge of over-reliance on any one country for critical materials and products needed to protect citizens. Shortages of essential PPE and other goods needed to respond to the COVID-19 crisis set in motion new ideas for mitigating supply chain dependencies- the kind that leave countries overly reliant on any one source to ensure citizens are safe and healthy and economies continue through global shocks.
An ally-shoring strategy offers a unique framework through which the US and Mexico can build on more than thirty years of tightly woven co-production and trade, but with an eye towards the future. The two nations can expand their collaboration, enhancing bi-national efforts to create and manufacture transformational exports that support advanced manufacturing, R&D, smart borders, and the joint development of US and Mexican work force skills to meet the evolving markets of the 21st century. An ally-shoring framework further supports and enhances the goals of the USMCA.
These mutually beneficial collaborations will help both the US and Mexico to grow their economies, enhance national security, strengthen democracy, and provide renewed leadership for the open, transparent, rules-based trade and economic relations that undergird strong polities and economies here, and around the world.
The Context for Ally-shoring with Mexico.
As the US looks to retool and refocus foreign policy efforts under the new Biden Administration, a clear opportunity is emerging with respect to engaging with democratically minded allies to achieve common political and economic security objectives.
Within this context, the concept of “ally-shoring” holds tremendous promise. Ally-shoring describes a program of sourcing essential materials, goods, and services among partners and allies, reducing dependence on any particular country, particularly those that may not share the same values and long-term interests. Perhaps there is no better example of the potential for ally-shoring than the US-Mexico relationship.
As the US and its North American trade and production partners continue to seek economic development, job growth, and supply chain integration, made more urgent by the economic impact of COVID-19, the US-Mexico relationship takes on even greater meaning when it comes to building economic resilience.
The incoming Biden Administration is clearly committed to rebuilding economic and political partnerships with allies around the world. The US had already begun to identify its own critical supply chains and how to reorient them, as well as transformational technology sectors it wanted to make the focus of its own development and export orientation. These shifts open up the possibility for enhanced cross-border innovation, research and development, and IP creation, as envisioned under the USMCA.
The COVID-19 recovery and reorientation of critical supply chains presents a unique opportunity to accelerate progress on the agendas outlined in the USMCA, and to reap mutual economic and political benefits by recentering and then expanding a significant share of production and economic activity in North America.
Closer US-Mexico collaboration at this moment will not only serve to strengthen both countries’ economies, but also help to build trust and strengthen institutions that protect the rule of law in Mexico – an ongoing opportunity to enhance investment, business development, border security, and economic activity. Foreign Direct Investment in Mexico, an OECD member nation, will be bolstered by a commitment to strong political and economic institutions combined with consistent trade and investment policies that promote and underpin transparent rules of the game. Trade transparency across North America is a strategic political and economic “asset” that should be further supported and enhanced.
The bi-national business and civic leadership community is encouraging the Biden Administration to develop a comprehensive ally-shoring program, in which Mexico can be an important partner.
The Case for Ally-Shoring with Mexico.
The US and Mexico already have tightly wound co-production and supply chains in many sectors, supported by deep business-to-business relationships, business- to-government, and public-private partnerships. A robust ally-shoring program with Mexico can deliver a number of benefits consistent with mutual economic, national security, and foreign policy goals:
- Facilitate rapid containment, treatment, PPE production, access to vaccines, and therapeutics delivery to ensure full public health and economic recovery from the COVID-19 crisis.
- Decrease reliance outside of the region for critical supplies and make critical supply chains more reliable and resilient, while making them less susceptible to geopolitical vulnerabilities.
- Enhance institutions, reduce corruption, and strengthen rule of law in Mexico to promote greater FDI and US-Mexico economic integration.
- Enhance job and business growth while speeding recovery from the pandemic-induced recession on both sides of the border, developing and expanding what is already a tightly wound “co-production” system in North America in key sectors, from autos to agriculture.
- Facilitate job and business growth in emerging and transformational economic sectors including transformational export industries by co-developing, prototyping, manufacturing, and deploying a range of new products, services, and developing technologies—from water security and management systems, new automated mobility and delivery devices, clean and sustainable industrial production models, agricultural control systems, to new medical treatments and technologies.
- Drive more integrated national industrial policies and approaches that build critical infrastructure, enhance essential business operations, and enable critical supply chains. Ally-shoring can also facilitate leveraging big data from both governments regarding investment and local capabilities for a deep analysis to attract investment in both countries.
- Support the economic and political health of the US and Mexican democracies, and democracies around the world.
Many countries, Mexico among them, are eager to do business, and welcome direct investment from a range of governments and private sector partners – but may prefer US business engagements due to their transparency, and certainty about rules- based financial and business practices that support a level and fair playing field. It is in the interests of both countries to purposefully plan together and collaborate on supply chain redesign and enhanced North American sourcing and production. In addition to meeting the US’s strategic political, economic and security goals, ally-shoring yields additional benefits to US businesses and governments including:
- Predictability: With greater economic collaboration, Mexico can strengthen its geographical position as a predictable and reliable supply chain partner to the US. Transparency: Supply chains developed with Mexico can be more easily traced and monitored than with many other countries. Cost: Mexico still has a cost-structure for production in many sectors much closer to that of other low-cost producers, while offering all the advantages of proximity, reduced transportation costs, transparency, and reliability
- ROI: Production enhancement with Mexico (and Canada) is a good economic return on investment. The USMCA will deliver a high return in the form of “domestic” North American ancillary job and business growth.
- Achieve ESG goals: Supply-chain reworking can be purposefully organized to meet a variety of environmental, social and governance goals (ESG).
- Worker/Labor Rights and Conditions: Ally-shoring can enhance the development of worker’s working conditions, pay, training, and other conditions of employment—another key shared US-Mexico goal.
- Economic stability: Mexico has a relatively stable economy and currency that has remained strong during the pandemic.
- US Security: A stronger Mexican economy, providing more good-paying jobs, with low overall unemployment, is in the US’s long-term national security interest; easing both pressures and concerns about migration and immigration; defusing border issues; and related concerns about US safety and security.
- Market-Responsiveness: Consumer demands are increasingly moving towards customization, a quickening of the time from order to delivery, giving ally- shored neighbors a business advantage.
- Economic Profile: Mexico is an emerging economy, with financial, transaction, and production dynamics more akin to developing nations
- Intellectual Property: As current key sectors evolve, the need to create new products and services aligned with technological advances and market trends is another opportunity for US-Mexico collaboration.
- Innovation Infrastructure: Mexico, particularly near the US border, provides a sophisticated infrastructure of technological talent and globally engaged firms committed to forward leaning innovation; along with business-led economic development and trade organizations committed to becoming a world class region of innovation and production.
- Business Intermediaries: Mexico has a well-developed network of shelter organizations, business- led economic development and trade organizations that can be a direct bridge for quickly developing co-production relationships and suppliers.
- Shared Culture: At US-Mexico border regions, and elsewhere, US & Mexican businesses and employees enjoy a well-developed shared culture, a shared history of collaboration, and a comfortable and familiar living and working environment for US firms and their employees.
- 21st Century Border Facilitation: While border crossing and facilitation of traffic and trade speeds varies across the border, ally-shoring provides an opportunity to enhance smart border infrastructure and logistics, and border and supply chain management systems towards developing one of the world’s smartest, most efficient border and supply chain systems.
- Opportunity for Re-engagement in Broader Trade and FDI relationships: Ally-shoring with Mexico can serve as a platform for enhancing the US economic and political relationship with hemispheric partners.
This is an abstract of The Case and Path of Development for Ally-Shoring: Mexico published by The US-Mexico Foundation and prepared by Elaine K. Dezenski and John Austin