Democratic backsliding harms the potential of a US-Mexico supply chain pivot

Mexico remains one of the United States’ most important allies and trading partners, but its engagement with the U.S. is cycling between two seemingly opposing trends: the desire to attract more U.S. investment to Mexico on the one hand and President Andres Manuel Lopez Obrador’s democratic backsliding and political distancing from the U.S. on the other. It will be difficult for the Obrador government to have it both ways. The Biden administration should pursue a refreshed economic security strategy reinforcing a democratic alliance with Mexico. 

The timing could not be better for a relationship reset. U.S.-China trade tension, overstretched supply lines, and a corporate appetite for moving supply chains closer to home could be a windfall for Mexican industry. A rejuvenated U.S.-Mexico relationship could prove to be an unexpected silver lining from the pandemic’s impact on tightly woven, just-in-time supply chains.

Mexico is a logical and, in many ways, ideal destination. It is already a hub for U.S. manufacturers, with deep transport networks, infrastructure, skilled workers, and 30 years of NAFTA-driven integration. If it can seize the moment, Mexico could reap a once-in-a-generation U.S. manufacturing, innovation, and investment infusion in semiconductor manufacturing, solar technology, and electric battery production — and a deepening of investment in legacy areas like agriculture, automotive, medical equipment, and textiles.

U.S. manufacturers like 3M, General Motors, and Aramark doubled down on producing certain goods in Mexico to offset supply chain shortages and counter pandemic-era obstacles. Amazon, The Home Depot, MGA Entertainment, and Walmart have also made substantial investments in Mexico over the last year. Similarly, chip manufacturers Intel and Texas Instruments are both considering increasing their operations in Mexico.

For U.S. manufacturers, moving from Asia to Mexico could save between 15 percent and 25 percent in labor, transportation, and tariffs costs in some industries. Much of the pivot to Mexico has been largely ad hoc, but a deliberate bilateral investment strategy in joint R&D, workforce skills, mobility, and training programs could jump-start Mexico-bound investment and benefit both countries. For Mexico, a coordinated “ally-shoring” (or “friend-shoring”) approach could increase exports by as much as $30 billion in the near term.

Broader economic and structural reforms could push these numbers even higher. Resolution of the U.S.-Mexico dispute over the Mexican energy sector and whether to allow more private investment is a sticking point. A weak energy grid in Mexico and insufficient water resources may limit manufacturing and investment. Without additional capacity for green energy production and distribution in Mexico, U.S. companies won’t be able to meet U.S.-imposed clean energy objectives and requirements under the recently passed U.S. Inflation Reduction Act.  

“Ally-shoring” to Mexico, however, is premised on the idea that Mexico is a strong ally— one that supports democratic norms at home and throughout Latin America. If we have learned anything from the recent corporate exits from Russia and China, it is that supply chains and investments are vulnerable to the capricious actions of authoritarian and non-democratic institutions.

In recent years, the weakening of democratic rights and the marginalization of civil society critics in Mexico suggests a worrying trend. President Obrador has led attacks on NGOs criticizing his government, fought to dismantle Mexico’s independent electoral body, and sought to undermine federal checks and balances on issues from human rights to freedom of information.

For Mexico to provide an appealing counterpoint to China on critical supply chains, it must not mimic China’s authoritarianism. The market increasingly will not ignore the geopolitical risks associated with fragile governing institutions, a shaky commitment to rule of law, and an unstable political environment — all of which will limit foreign direct investment and the enthusiasm of companies to reshore their supply lines. The tremendous potential of U.S.-Mexico economic partnership could thrive with a recommitment to democratic norms. 

The U.S. contribution to a deeper alliance with Mexico should also address the factors that are constraining deeper integration, starting with developing a sane immigration policy that improves economic conditions and relieves the costs upon both Mexico and southern U.S. states. That means both improved border security and improved pathways for legal immigration. Immigration pressures will also be relieved by improved economic conditions in Mexico and Central America. Undoubtedly, the U.S. must also do more to help Mexico address brazen drug cartel violence and work bilaterally and aggressively to address the illicit fentanyl trade that is destroying communities both north and south of the border.

Beyond addressing these systemic and legacy risks, the U.S. can pursue positive economic engagement, bolstering Mexico’s investment through development finance tools like the U.S. Export-Import Bank or the U.S. International Development Finance Corporation. Such efforts should be complemented by substantial bilateral investment in high-potential industries, such as critical minerals, pharmaceuticals, and semiconductors. The U.S. could help fund regional transportation infrastructure of rail, and next-generation ports that help speed up trade between the two economies. The countries could benefit from bringing business and labor regulations into greater alignment.

Investing in renewed democratic institutions and reinforcing principled bilateral collaboration will help drive economic security in North America and allow both countries to reap the tremendous benefits of an expanded U.S.-Mexican manufacturing footprint. 

Elaine Dezenski is the senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies.