Workforce ‘ally-shoring’ brings benefits across borders

After a swing and a miss with the Summit of the Americas, President Biden and Mexican President Andrés Manuel López Obrador’s recent meeting at the White House was a critical opportunity to reset U.S.-Mexico relations. The Biden administration should jump on one of the topics the Mexican president raised — tapping Mexican labor markets to meet persistent worker shortages in critical occupations among U.S. employers.    

In a new report published by the U.S.-Mexico Foundation, we argue that a skilled and mobile workforce, as part of a U.S.-Mexico “ally-shoring” framework, can help address chronic vacancies in the U.S., along with the biggest inter-related problems of both countries: supply chain disruption and dependencies, spiking inflation and the need for more good-paying jobs for more people. 

As previously written, ally-shoring describes how countries can rework critical supply chains and source essential materials, goods and services among and between trusted democratic partners and allies. Addressing workforce dynamics and needs as part of an ally-shoring strategy enables mutual economic and employment benefits, supporting the availability of labor and skills to meet critical supply chains’ manufacturing and production requirements.

Ally-shoring makes sense with democratic neighbors like Mexico, with which we don’t so much “trade” as operate a tightly integrated co-production system. Fifty percent of “trade” between the U.S., Canada and Mexico is in intermediate goods, components of finished products like parts of an electric car, or the processing and packaging of agricultural goods that may cross a border several times. 

When reshoring is not viable, relocating critical U.S. supply chains in Mexico (versus China, for example) keeps technology and innovation closer to home. It also requires a readily available and skilled workforce.

Timing, as they say, is everything. Labor market dynamics in the U.S. and Mexico are working in favor of deepening bilateral engagement on workforce issues, creating an opening for business leaders and policymakers to devise a workforce ally-shoring strategy that brings value to both sides of the border.

U.S. labor shortages have been fueled by structural changes in U.S. labor market dynamics and accelerated by the impact of the pandemic. Before the pandemic, U.S. employers were already dealing with an aging workforce and critical skill shortages in key occupations, ranging from manufacturing production workers to truck drivers. The pandemic exacerbated these trends by knocking millions out of the labor force while catalyzing voluntary job quits as workers opted for retirement, remote work or wholly different occupations. These structural shifts in the labor market and supply chain bottlenecks are leading to rising pressure on wages and helping to super-charge inflation. 

But Mexico faces growing downward pressure on wages and a looming youth demographic bulge entering a labor market already thin with work opportunities. Mexico has an increasing cohort of underemployed workers looking for job opportunities. In the U.S., many job opportunities remain unfilled. Mexico also has skilled agricultural workers that boost businesses and are most productive for both U.S. and Mexican employers when they can work on both sides of the border. These complementary labor market dynamics support the concept of a more highly integrated North American co-production system. 

Reading the global tea leaves, particularly after Russia’s naked aggression in Ukraine, China is seeing that democratic countries are accelerating efforts to reduce the economic and political leverage of authoritarians like themselves. Secretary of the Treasury Janet Yellen’s promotion of “friend-shoring” in South Korea only reinforces that message.

But China is also responding, moving to recreate Chinese production capacity worldwide, including in Mexico. For example, Chinese foreign direct investment (FDI) has grown steadily over the last 15 years. It looks to be growing faster in the wake of the growing alarms and interest among Western governments and businesses in shifting some critical supply chains out of China.  

Some leaders in Latin America and elsewhere might welcome the Chinese as they expand production and businesses in their countries — appreciating more jobs for local workers. But the ally-shoring opportunity with the U.S. is a much more robust economic enabler without the dependency-building and potential authoritarian coercion from doing business with China. 

The size and scope of current and potential U.S. investment and co-production expansion in Mexico still dwarf Chinese investment. U.S. FDI in Mexico totaled $7.6 billion in the most recent year, compared with China’s growing but still very small FDI of $18.4 million. Chinese FDI is very concentrated in the Northern Mexico provinces of Chihuahua and Nuevo Leon — manufacturing export centers.

Meanwhile, trade between the U.S. and Mexico (again much in intermediate goods) is already massive and growing, doubling in the last 15 years to $30 billion. Exports from the U.S. to Mexico have also doubled from $10-$20 billion over the same timeframe. While Mexico’s trade with China has undoubtedly increased in recent years, it is still barely more than a quarter of the trade value with the U.S.

The U.S.-Mexico economic relationship surpasses today anything the Chinese can offer, but that may not always be the case. We should not miss the opportunity to devise and implement the longer-term strategies that bring economic stability and security to the U.S. and Mexico; or let Mexico, or any other neighboring country become a back door for authoritarian influence in our backyard. Ally-shoring allows us to address both under a framework of mutual benefit.

John Austin directs the Michigan Economic Center and is a nonresident senior fellow with the Brookings Institution and the Chicago Council on Global Affairs. Elaine Dezenski is senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies.