In the semiconductor competition between China and the United States, can Mexico become the backyard of the US supply chain?

The Peterson Institute for International Economics (PIIE) and the Center for Strategic and International Studies (CSIS) released a collection of research briefs in October 2021, exploring the opportunities and challenges of relocating U.S. supply chains to Mexico. Some scholars expressed their views on the impact of the resumption of dialogue between the United States and Mexico on cooperation between the two countries.

Earl Anthony (Tony) Wayne is a distinguished diplomat and scholar who has served at American University, the Wilson Center, CSIS and other institutions. He believes that the resumption of dialogue between the United States and Mexico will strengthen economic cooperation between the two countries. Here are his views.

In order to restore the economic relationship between the United States and Mexico and enhance the competitiveness of the two countries against China, the leaders of the United States and Mexico launched a new cooperation plan and decided to restart the cabinet-level High-Level Economic Dialogue (HLED) that had been suspended since 2017. To highlight this initiative, U.S. Vice President Harris hosted a meeting at the White House on September 9 attended by the U.S. Secretary of State, Secretary of Commerce, Secretary of Land and Natural Resources, and the Mexican Minister of Foreign Affairs and Secretary of Commerce.

If the dialogue goes well, and as Mexico further improves its investment climate, HLED could encourage more nearshoring of manufacturing and other businesses to Mexico, contributing to a more resilient supply chain. The two working groups are working to identify goals and actions, and plan to report on progress in early November.

HLED aims to pursue economic opportunities beyond the United States-Mexico-Canada Agreement (USMCA), which came into effect in 2020. The USMCA calls for new consultations on trade rules for auto production, respect for labor rights, and trade barriers for agricultural products. To complement the new dialogue, HLED will also help strengthen value chains and effective nearshoring in key sectors, creating good jobs on both sides of the border.

HLED was a productive bilateral cabinet-level working mechanism from 2013 to 2016, but was later abandoned by the Trump administration, resulting in the postponement of important matters, including border modernization, with significant adverse effects on economic efficiency and growth.

With the implementation of the USMCA and expectations of increased cross-border cooperation after the pandemic lockdowns, both President Biden and Mexican President Lopez Obrador see the potential benefits of working together to better manage cross-border supply chains and trade, address cyber threats that affect that trade, and increase investment in workers. They also agree that promoting targeted economic growth in southern Mexico and Central America can be part of a larger effort to reduce migration.

The restarted HLED dialogue believes that the economic recession caused by the pandemic has exposed weaknesses in the management of cross-border supply chains between the United States and Mexico and border trade flows in key industries such as automobiles, medical supplies, electronics, and aerospace.

The COVID-19 pandemic has also highlighted the costs and risks of relying on long supply chains to Asia, while shorter value chains with Mexico could provide greater security in future crises, while establishing supply chains with Mexico could improve supply chain efficiency in areas such as semiconductors, medical devices and pharmaceuticals.

If the U.S. and Mexican border states were grouped together, they would equal the world’s third-largest economy. Better trade facilitation, investment, and development on both sides of the border would attract more nearshoring investment, jobs, and benefits to cross-border production areas that already benefit from the U.S. and Mexico.

The United States and Mexico are working to manage immigration through Mexico and to establish a more reasonable, humane and efficient system to process these immigrants. The two governments also agree on the need to promote investment and economic development in or near the regions where these immigrants are from so that these regions can provide good job opportunities, thereby reducing the factors that "pull" these immigrants to the United States.

The September 9 White House meeting proposed four pillars for HLED's initial work agenda.

The first pillar is "Rebuilding Together." It could include steps to create more resilient and efficient supply chains and plan for future disruptions like those that have occurred over the past 18 months. This work will modernize the U.S.-Mexico border for the 21st century by improving the efficiency of the flow of goods and people across the border and ensuring the security of processes and facilities. The two ministers agreed to start by making the semiconductor supply chain more resilient and helping Mexico fill valuable gaps. Supply chains for electric vehicles, medical devices, and pharmaceuticals also have the potential to reduce vulnerability, attract near-shoring trade investment, and improve competitiveness. Experts also suggested green technology and climate change adaptation as good areas for cooperation.

Such industry reviews should involve private sector stakeholders and allow them to voice their views on market strengths and weaknesses and on promoting investment and cross-border flows. The focus on border management efficiency and infrastructure, which has been largely set aside during the Trump administration, should be renewed. Many studies have highlighted how increased investment in customs agencies, new technology applications, and new border infrastructure can improve competitiveness. Regular and better organized cooperation between the two governments, the private sector, states, and cities will make progress more likely.

The second pillar of HLED is to “promote sustainable economic and social development in southern Mexico and Central America.” Figuring out the right mix of economic, financial, and development tools and programs to increase investment is no easy task. Despite years of development efforts by the United States, there is no perfect plan. For example, there are many thorny issues surrounding a U.S. proposal to allow individuals from these regions different types of temporary work visas; two Mexican programs to support reforestation and provide youth apprenticeship opportunities have been criticized as ineffective. Mexico’s economy minister also mentioned potential supply chain investments in southern Mexico, while private sector players believe that investment in roads, ports, railways, and energy infrastructure is critical.

The third pillar will focus on "tools to ensure future prosperity," including further strengthening of cybersecurity cooperation and managing the evolution of information technology networks that are increasingly important for the development of trade in North America. Similarly, improved intergovernmental dialogue needs to involve the private sector in the discussion.

The fourth pillar, “Investing in our People,” focuses on workforce development. Workers in industries that connect the United States and Mexico will benefit from improved skills. A skilled workforce is needed to keep pace with new technologies in the increasingly important cross-border provision of services. These efforts will also encourage nearshoring of trade and investment. Mexico and the United States should also align on certification of worker-earned credentials and educational programs, a step that could increase wages and worker mobility. Such collaboration could include professional and vocational training, as well as targeted assistance to specific groups, such as women or disadvantaged communities. Focusing these efforts on small and medium-sized businesses to bring them into the USMCA economy and promoting basic skills training in southern Mexico and Central America would help attract investment. There are many examples of successful U.S.-Mexico collaborations on workforce development that have brought together actors at all levels, which could provide valuable inspiration for pilot projects.

The most encouraging aspect of HLED is its collaboration through organizing stakeholder dialogue. For example, HLED could consider managing the U.S.-Mexico border “as a whole,” rather than by geographic region or involving only federal agencies. More regular bilateral border community communication mechanisms, such as scheduling an annual border summit to assess progress, may uncover new ways to promote shared prosperity in Mexico and the United States.