Shannon O’Neil grew up in a small town in Ohio, not anywhere near the border. She was enthralled by stories shared by her grandmother and a great aunt who traveled the world, which inspired O’Neil’s desire to work internationally. Today, she is the vice president, deputy director of studies, and Nelson and David Rockefeller senior fellow for Latin America studies at the Council on Foreign Relations. She was the keynote speaker at NAIOP’s Nearshoring/Onshoring Summit held this week in Scottsdale, Arizona.
O’Neil began exploring the commercial ties that cross borders more than a decade ago, observing that supply chains weren’t being talked about enough given all that they can influence. Although known for having commercial and profit margin effects, supply chains weren’t yet assumed to have big geopolitical effects.
All that changed in 2020-2021 when supply chains around the world were suddenly pinched by a global pandemic that changed everything.
There are globalization myths, O’Neil said, that have been accepted over the last 40 years. The first is that everyone is affected by globalization. Only 25 countries in the world saw trade double or more between 1980 and today; in contrast, 89 countries saw trade stay the same or decrease. In short: Globalization is not a juggernaut that affects everyone.
A second myth is that when companies, money and ideas and went abroad, they went far away. More likely than not, they went close by. Statistics show that the average good that moves abroad goes less than 4,500 miles away. These short-distance relocations have created regionalization in three major areas: Asia, Europe and North America. Today, these regions compose roughly 90% of all trade. Areas like South America, the Middle East and South Asia (including India) are only around 10% of global trade.
About two-thirds of trade that happens in Europe stays within its regional supply chains. Asian countries have around 60% of inter-regional trade as well. That means then when people talk about the U.S. competing with China, it’s not entirely accurate. So much of what is manufactured in China is done so with high-quality, yet inexpensive parts sourced from across Asia.
In North America, about 40% of trade happens between the U.S., Mexico and Canada, down from a peak of 50% in the 1990s after the signing of the North American Free Trade Agreement. This percentage is high when compared to South Africa or the Middle East where typically less than 15% of trade is done with neighboring countries, but the lowest among the three regionalization blocks. This is a challenge for North America – and there’s huge opportunity in the power of proximity.
O’Neil said she’s never seen a bigger opportunity for North America in the last generation. For a few decades, market forces mostly drove sourcing decisions – labor, the price of logistics, and sale prices. That has changed in the last four years, and the single biggest factor across most sectors is policies, either geopolitics or industrial policies. This isn’t exclusive to the U.S., with similar policies being put in place in Europe, China, India, Brazil and elsewhere.
U.S.-China distancing that has been happening for the last four years is projected to continue, illustrated by trade numbers. In 2018, trade between the U.S. and China was around 24% of all U.S. imports; today, it’s less than 14% and has dipped below 10% in some months. This downward trajectory is expected to continue, and maybe accelerate.
This means that companies that are producing for the U.S. market are going to need sourcing from somewhere other than China. This huge opportunity for Mexico, Vietnam, Thailand and India, with Mexico expected to be the biggest winner given its location, deep ecosystem of suppliers and industrial base, and benefits of the U.S.-Mexico-Canada trade agreement.
The “big four” industries moving to Mexico – automotive, aerospace, medical and electronics – are well-established, but there’s a lot of space for expansion. Goods assembled in Mexico are much more likely to have materials sourced from the U.S. than those manufactured in China, where materials largely come from Korea or Taiwan.
One challenge for Mexico is attracting new clients and industries; the country hasn’t been as proactive with marketing and appealing to different sectors compared to other global manufacturing giants, but this could change with a new political administration in Mexico.
O’Neil pointed out that the U.S. doesn’t have a lot of free trade agreements; those that exist are only with 10% of the globe’s gross domestic product (GDP). Conversely, Mexico has 40 free trade agreements that cover 60% of GDP. There are no expectations of a huge free trade agenda happening in the next presidential administration, so Mexico has opportunity to be a platform to Latin America and other counties, including Europe.
In closing, O’Neil said it’s reasonable to assume a rocky relationship between new presidential administrations on both sides of the border, but expectations of Mexico’s commercial dependency on the U.S. means that it will do all it can to come to the table and continue this important relationship.
