“The future is not what it used to be…” (Yogi Berra, baseball player)
This phrase encompasses the vertiginous pace in which the world is evolving in the recent years: a pandemic, trade wars, global warming, consumer pattern changes, de-globalization trends, and economic nationalism.
For the supply chains of many industries in North America means a shift in paradigms: the mandate is no longer the lowest cost on the supply chain, but the more resilient and flexible and less risky at the same time. Recent developments such as the shortage of electronic components for the automotive sector are proof of such risks.
There are calls across the North American industrial sector to take action in the forms of re-shoring, near-shoring, or in-shoring. All of them have in common one thing: to have less dependency on those supply chains residing in more “volatile” environments. However, is not easy to reshape entire supply chains that for many years industries have carved and maintained highly competitive.
This is where the concept of “Ally-Shoring” comes into the scene. A framework originally developed by Elaine Dezenski (Managing Partner at LumiRisk LLC) and John Austin (Director, Michigan Economic Center) for the US – Mexico Foundation, (a binational organization that aims to foster competitiveness in both countries, among others). Ally-Shoring is defined as “the process by which countries rework critical supply chains and source essential materials, goods, and services among and between trusted democratic partners and allies, with a focus on investing in the short and long-term relationships that protect and enhance joint economic and national security.”
For the United States, the most formidable challenge at hand is the technological race with Asian countries. So, who better to rely upon, than its closest allies? The US should take advantage of proximity, cultural affinity, a sound legal framework for business, and safe borders achieved along with its partners of the north and the south. The new US administration is very aware of these new possibilities and started tendering new bridges with its neighbors.
Mexico, in particular, has been weaving a very interdependent relationship with the USA for the last 30 years, to the degree that 40% of the goods exported to the US from Mexico have US original components, not to mention that more than 5 million jobs in the US depend on export trade with Mexico.
The Ally-Shoring initiative aims to expand this collaboration by enhancing bi-national efforts to create and reinforce supply chains that support advanced manufacturing, research & development, and smart borders, hence the improvement of skills of the workforce on both sides of the border.
Why the Ally-Shoring concept is a good idea?
First of all, it reduces the dependence on suppliers from Asian countries, by reinforcing the actual supply chains, turning them less vulnerable to trade risks. Has also the power to mitigate and fast recover from the effect of the Pandemic crisis, with the joint production of medicines and medical devices. Finally, fostering the creation of technologically advanced job positions on both sides of the border, and the creation of strategic infrastructure for trade and security can contribute to the economic and political welfare of both countries.
What are the benefits of Ally-Shoring to US companies and governments?
US companies and governments can benefit from Mexico being a reliable supply partner to the US, not to mention that Mexico has still a cost structure similar to other low-cost countries, with added advantages of proximity: fast transportation times and cheaper costs.
This means improved market responsiveness for highly customized demands in low volume and high mix production modalities. US companies can also use a well-developed network of business support organizations (known as “shelters“) to quickly enable US companies to set up complementary manufacturing operations.
In terms of technological competitiveness, Ally-shoring with Mexico can foster a bi-national innovation infrastructure, taking advantage of Mexico’s demographic bonus and the eagerness of Mexican young generations to become more “tech-savvy”. In parallel, enforcement of US Intellectual property in Mexico as a trusted partner is easier given the trade agreements in place such as USMCA.
Finally, is in the US long-term national security interest the improvement of economic and political stability conditions in Mexico, easing pressures and concerns about migration, border issues, and US safety and proximity. In the end, the re-engagement in broader trade and Foreign Direct Investment (FDI) relationships, as well as to leverage current USMCA trade framework can be a fantastic catalyzer to integrate a strong economic region in all North America to face the trade challenges in front of us.
Putting together a joint collaboration agenda is paramount for both governments and corporations in order to address the interests of its own constituencies. Under the new normal, is imperative to emerge much better than we were before. Indeed, the future is not what it used to be, we have the capacity to make it better.