U.S. Should Look South for Better Supply Chains
(Bloomberg Opinion) -- (The second article in a series on Latin America’s response to pressing global challenges. For the first, see “How Climate Change Can Bring Latin America Back.”)
Rising geopolitical tensions with China and the pandemic’s economic disruptions are prompting the U.S. government to shorten supply chains and bring manufacturing closer to home. In this quest to promote the U.S. can have few better partners than its southern neighbors, which enjoy long-standing bilateral alliances, geographic proximity, preferential trading rules, and bounteous natural resources. Latin America would reap massive rewards by forging new supply chain links. By the same token, if the region misses this generational opportunity, it risks being pushed further to the global economy’s sidelines.
Once home to a set of laissez-faire economic policies dubbed the Washington Consensus, the U.S. has caught the industrial policy bug. The administration of President Joe Biden hopes to use government policies and pressures to rejigger whole industries in hopes of enhancing national security, promoting domestic equity, maintaining a technological edge and protecting Americans from future pandemics. In June, the White House “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth,” a 250-page blueprint to transform four critical sectors: Semiconductors, large capacity batteries (for electric vehicles and clean energy), critical minerals and pharmaceuticals.
Latin America should be at the core of any such effort. Politically, its nations have long been U.S. allies. Brazil and Mexico fought with the Allies in WWII; Argentina sent warships to the Persian Gulf in the first Iraq war; Salvadoran, Honduran, and Nicaraguan troops joined on the ground in the second. The region is home to a significant number of the world’s democracies, sharing with the U.S. a system of government and its values and aspirations.
Geographically, the nations of the Western hemisphere provide a Goldilocks middle for resilient supply chains: not too close and not too far. The new weaknesses in supply chains revealed by Covid-19 highlighted the benefits such positioning. As the virus spread, ports slowed or closed, planes were grounded and transportation costs skyrocketed. The dislocations continue today, with shipping fees at record highs. As strategic and economic rivalries escalate, and other nations seek to secure their own interests through industrial policies, more tariffs, sanctions and boycotts threaten to disrupt far-flung cross-border supply lines. China hawks worry, for instance, that its control of rare earths and polysilicon will enable it to curtail supplies as surely as any tsunami.
Yet geographic concentration, even at home, brings its own risks. For months after Hurricane Maria hit in September 2017, saline bags, blood thinners and cholesterol medication were in hospitals across the continental United States; medical manufacturers clustered in Puerto Rico were struggling to get back up and running. A February 2021 Texas freeze not only crippled power grids but also led to nationwide shortages of fuel tanks, telecom cables, oxygen masks, and dozens of other plastic goods as the Lone Star state’s factories closed down.
The proximity of Latin American nations lowers transportation costs and the chance of potential disruptions from afar. They also provide the geographic distance and diversification that make output more secure.
Preferential trade access makes the region attractive for strategic commercial sectors as well. The U.S. has relatively few free trade agreements, covering less than 10% of the globe’s GDP. They cluster in the Western Hemisphere: USMCA (Canada and Mexico), CAFTA-DR (El Salvador, Guatemala, Nicaragua, Costa Rica, Dominican Republic and Honduras), and bilateral agreements with Peru, Colombia, Chile, and Panama. These ground rules provide intellectual property protections, free market guarantees and lower costs for importing and exporting to and from the U.S. Add in Latin America’s low-carbon electricity and energy grids, and manufacturers can meet climate pledges, create more geopolitically secure supply chains and turn a profit.
Moreover, Latin America’s potential shines in at least two of the areas of most concern to U.S. policymakers, starting with its mineral and raw material bounty. The so-called lithium triangle of Argentina, Bolivia, and Chile holds just over half the world’s reserves, while Mexico, Brazil, and Peru have their own deposits of this crucial ingredient for so many of today and tomorrow’s technologies. Substantial quantities of copper, cobalt, nickel, graphite and many other “critical minerals” on the U.S. Department of Defense list are plentiful throughout the region.
On the medical front, the region has a supply-chain head-start over other U.S. allies. The U.S. already imports more pharmaceuticals from Mexico and Canada than from China, with room to grow. Mexico also makes thermometers, ventilators and many other essential medical devices prescribed for national stockpiles and demanded by U.S. hospitals. Further to the south, U.S. trade partners have substantial capacity to make penicillin, aspirin, morphine and many other basic medicines no longer manufactured in the U.S. A number of nations are ramping up vaccine manufacturing, boosting the hemisphere’s capacity to ease this and future pandemics.
The region has much to gain by capturing a part of internationally shifting production. Latin America has long been on the edges of global supply chains, providing raw materials for others to transform and buying the finished products. By tightening their links to U.S. markets, nations are likely to attract advanced manufacturing and skill-based work. Working with the U.S. to realize its national security objectives can also help these countries climb both the socioeconomic and technological ladders.
The region’s politics present the biggest barrier. Mexico is already missing much of the industrial switch underway. Misplaced infrastructure investments, the coddling of state-controlled commodity providers, dirtying of electricity grids, and reversal of many market-friendly policies have squeezed a potential wave of relocations down to more of a trickle. Central America’s turmoil too makes it a hard sell for many supply-chain managers. Instability and political upheaval in Colombia, Peru and Chile add a significant dimension of political risk. And overlaid on all of this is a surge of COVID-19 infections, hospitalizations, and deaths that has yet to crest in many nations.
Still, the opportunity is real. The U.S. national security imperatives to secure production of critical goods and services won’t end anytime soon. Allies across the Atlantic and Pacific are just too far away to hold emergency stockpiles or ensure access to many critical parts in times of crisis. The lack of favorable trade rules of the road adds to the complexities and costs of sourcing from many European and Asian nations.
But these opportunities won’t just fall into Latin America’s lap. Its nations will need to prove themselves reliable U.S. allies and commercially attractive destinations for U.S. companies hoping to please both policymakers and shareholders. If they do, both halves of the hemisphere stand to gain, and the distant and much-heralded promise of regional integration will take a giant step closer to reality.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shannon O'Neil is a senior fellow for Latin America Studies at the Council on Foreign Relations in New York.
©2021 Bloomberg L.P.