The Geopolitics of Industrial Redeployment and Latin America’s Next Development Chapter
As most experts seem to forecast covid 19 is bound to redraw the boundaries of industrial development Indeed, the pandemic has had the virtue of revealing to the world the flaws of a development model that totally relies on the productivity gains of other countries while resisting at home fundamental reforms in the areas of human resource investment such as education and health care.
This has led the totality of manufacturing to move to China the place where human resources are naturally more efficient and the political regime is far less concerned with protecting its natural and human resources since the priority is to become the first economy in world as soon as possible. The outcome could not be more obvious: 100% of vaccines are made in China; 60% of apparels; 70% of medicines and China is far more advanced in 5G telecom than anyone in the West.
Further, according to McKinsey’s World Exposure Index “China’s exposure to the world in trade, technology, and capital has fallen in relative terms. Conversely, the world’s exposure to China has increased. This reflects the rebalancing of the Chinese economy toward domestic consumption”
These numbers talk for themselves: China is the world factory. Should anything go wrong in China like it did with the Covid 19 induced pandemic, the rest of the world will experience a shock that depending on the strength of each country’s institutional framework could topple or hurt the economic system in place. This realization is already triggering risk mitigation strategies that aim at diversifying the locus of manufacturing efforts by spreading them throughout emerging markets.
This trend will intensify during the US presidential campaign which will become the set to launch the fiercest nationalistic attacks against China so as to cater to radical isolationist audiences that mobilize the best when going after a foreign culprit. From the Chinese perspective brisk growth in consumer demand will nullify industrial withdrawal from western companies
In this scenario of industrial redeployment several Latin American nations stand to gain . These most likely are Brazil and Mexico. But Colombia, Peru and Paraguay could stand to benefit too . Mexico could and should absorb a significant proportion of manufacturing, of consumer durables, apparel and electronic components. Its down stream linkages to US industries spanning from agriculture to electronics makes Mexico an attractive destination for redeployment of manufacturing activities currently performed in China. Also labor costs in Mexico are lower than in China, given that the Asian giant shifted its development model to favor the growth of domestic aggregate demand.
FDI could thus skyrocket and a very interesting economic triangle could surface; US-Mexico-China. This could of course fall to materialize should the president of Mexico insist on devoting investment resources to national pride infused projects au lieu of profitable and future oriented projects. The Mexican Business community could also be a party popper in so far as they adhere to their century long practices on sealing out competition from the Mexican market in order to be able to milk the Mexican consumer. But should Mr Lopez Obrador continue to engage in losing projects and the Mexican businessmen in consumer mining the strength of the upcoming economic transformation could put them both out of business.
Brazil is an agricultural behemoth very much like the US was up to the XIX century and Australia to the early XX century. Accordingly , it could become China’s breadbasket. And from that position it could modernize manufacturing, boost innovation and leapfrog development. But will the South American giant be up to the challenge? For one thing it would need to join the Belt and Road initiative to finance the necessary infrastructure. Even if Brazil could double its agricultural output today it would be practically impossible to place this production in the international markets at competitive prices for lack of appropriate infrastructure.
Then it comes a culture of political fractiousness . There are in Brazil 31 registered political parties and at least 15 non registered . And while the largest and strongest are the PT , the Partido social Liberal and the PMDB none can secure governance without allying with several smaller parties. Under such circumstances it will be very difficult to pull Brazil together in one direction to benefit from this wave of international industrial redeployment.
Mexico and Brazil’s entry into the development circle is fundamental to the US as these countries would secure China’s engagement to a restructured international system that adapts the 1945 architecture to the demands of the digital economy and those of risk mitigation imposed by geopolitics. But maybe they will rather prefer to continue to be the countries of the future.
Published by laht.com May 11, 2020
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