Morgan Stanley Research analysts Michelle Weaver, Chris Snyder
and Nik Lippmann discuss U.S.-Mexico trade and the future of
reshoring and near-shoring under the Trump administration.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, U.S. Thematic and Equity Strategist
at Morgan Stanley.
Christopher Snyder: I’m Chris Snyder, US
Multi-Industry Analyst.
Nikolaj Lippmann: And I'm Nik Lippmann,
Chief Latin America Equity Strategist.
Michelle Weaver: On this episode of our
special mini-series covering Big Debates, we'll talk about the
U.S.-Mexico trade relationship and the key issues around
reshoring and nearshoring.
It's Friday, January 31st at 10am in New York.
The imposition of tariffs back in 2018 under the first Trump
administration and the COVID pandemic put a severe strain on
global supply chains and catalyzed reshoring and nearshoring in
North America. But with inflation and supply chain concerns no
longer front and center, investors are questioning whether the
U.S. reshoring momentum can continue.
Chris, what's your view here?
Christopher Snyder: I think it's in the
very early innings. You know, if you look at the history of U.S.
manufacturing, the country really started ceding share in about
2000 when China joined the World Trade Organization. So, it's
been going on for 25 years; we've been giving share back to the
world. I think the process of taking share back is probably
slower and ultimately is a multi-decade opportunity.
But you're absolutely right. The supply chain concerns are no
longer like they were three to four years ago. But what I think
has persevered since the pandemic is this heightened focus on
operational durability and resiliency; and really shortening
supply chains and getting closer to the end user, which I'm sure
we'll hear more from Nick about, on the Mexico side.
But, you know, if you kind of look back at global supply chains
and manufacturing, it's really been a chase to find low-cost
labor for the last 45 years. And while that's always important,
we think going forward, capital and proximity to end users will
increasingly dictate that regional allocation of CapEx. I mean,
those parameters are very supportive for the U. S.
You know, one thing I would like to kind of, you know, make sure
is known on our U.S. reshoring view is that, you know, oftentimes
it's thought of that we're shutting down a factory in China and
reopening the same factory in the United States, and that's
really a very rare example.
Our view is that the world, and very specific industries need to
add capacity. And we just simply think that the U.S. is better
positioned to get that incremental factory relative to any point
in the last 45 years, due to the combination of structural tech
diffusion, but also this focus on resiliency. And one thing that
I really do think is underappreciated is that global
manufacturing grows 4 to 5 per cent a year. In the U.S. it's been
more in the 1 to 2 percent range because we're constantly ceding
share. But even if the U.S. just stops giving back share, you
could see the growth profile of U.S. industrials double.
Michelle Weaver: How would you size the
reshoring opportunity? Do you have a dollar amount on what that
could be worth?
Christopher Snyder: Yeah, we’ve sized it at
$10 trillion. You know, and it's been a combination of the CapEx,
the fixed asset investment that's needed to build these
factories, then ultimately the production, you know, opportunity
that will come to those factories thereafter.
Michelle Weaver: And you've argued that the
U.S. reshoring flame was really lit in 2018 with the first wave
of the Trump tariffs. It seems clear that trade policies by the
new administration will continue to support reshoring. What's
your outlook there?
Christopher Snyder: Yeah, you're absolutely
right. Prior to 2018, there wasn't really a thought process. If
you need an incremental factory, you most likely just put it in
China. And I think the tariffs, back in 2018 or [20]19 really
started, or kickstarted boardroom conversations around global
supply chains. So, I think a Trump presidency absolutely adds
duration to this theme via protectionism or tariffs that the
administration will implement.
If you go back to the Trump 1.0 tariffs, supply chains reacted to
the change in cost structures very quickly. We didn't see a huge
wave of investment back into the United States. We just saw
production exit China and move to broader Asia, because the focus
was tariff avoidance.
Now, we think the focus is around building operational,
resiliency and durability which better positions the U.S. to get
that incremental factory. And one thing that I think is
underappreciated here is just how much leverage U.S. politicians
have. The U.S. is the best demand region in the world. The U.S.
accounts for about 30 per cent of global goods consumption.
That's equal to the E.U. and China combined. It's also the best
margin region in the world, not only for U.S. companies; but most
international companies do their best margins in the United
States. So, you can raise the cost to serve the U.S. market, and
no one is turning away from the region that has the best demand
and the best margins.
Michelle Weaver: So, of course, tariffs in
the pandemic have been major catalysts for U.S. reshoring. Have
there been any other drivers like tech diffusion?
Christopher Snyder: Yeah. I view the
pandemic as the catalyst, and I view tech diffusion as the
structural tailwind for U.S. manufacturing. Over time, we will
continue to figure out ways to squeeze labor out of the
manufacturing cost profile. It's hard to kind of pinpoint it, but
I think if we look out over any 5- or 10-year window, we will see
that. That's a structural talent for the United States, given the
high labor costs. And really what it will help do is just narrow
the cost delta, between low cost producing regions. I also think
as we kind of extend this tech diffusion into GenAI; I also think
what's going on is, will fuel another round of protectionism. So,
you know, kind of further keeping that cycle going.
Michelle Weaver: Nick, of course the big
question investors are asking is how will the Trump trade agenda
impact Mexico? Contrary to the prevailing market view, you've
argued that Mexico can actually win big with Trump. How's this
possible?
Nikolaj Lippmann: That's right, Michelle.
Look, we recently upgraded Mexico to equal weight, from
underweight. And while some of the news we see around the
administration seems a bit like a sequel, there are other things
that are just very different.
We're not talking about ripping apart the USMCA but actually
bringing forward renegotiations from [20]26 to [20]25. It's a
much more constructive message. It's a very young deal, and yet I
think the world we live in today is quite different from the
world of 2018. When we look at what are some of the things where
Mexico could actually end up winning big, we look at the
regionalism that appears to be a number one agenda.
We look at the – how difficult it would be for the United States
to de-risk from China. And from Mexico simultaneously. And also,
fundamentally at that integration across the border, the
industrial integration. It's clear that there's a need for
calibration. There's a need for calibration in terms of a lot of
the trade policy. There's been talks about maybe a customs union
and I think that's far out in the future. But there's a need to
try to figure out how to calibrate trade. And also, you know,
there are things that Mexican policy makers can do to deal with
the non-trade related issues, such as immigration or the cartels.
And I think frankly, it's in Mexico's interest to deal with some
of these issues.
Michelle Weaver: Where are we in the whole
Mexico as a China bridge versus China buffer debate?
Nikolaj Lippmann: Right. That's another
good question, Michelle. And one thing that we've been writing a
lot about. The key difference from where we were, in Trump 1.0
and now is just how different the relationship with China really
is. And I think one area where we've been scratching our head a
little bit with regards to the – how Mexican policymakers have
reacted after signing the USMCA deal is really just around that.
That relationship with China. Well, I think that might have –
they might have misread or underestimated just how much times
have changed.
We've seen a big increase in import from China. There have been
very specific manufacturing ecosystems. And we've also seen
increased investments by China and Mexico. Now, this has caused
Mexico's trade deficit with China to go up a lot – almost double.
And we've also seen an increase in the trade deficit between
Mexico and the United States, in Mexico's favor.
Now, that could imply that it's all the China bridge, I think
that's far from the truth. But, you know, Mexico is probably
two-third or a little more above. It's really that integration
that I think policy makers in Mexico need to understand. And then
you need to manage that these emerging elements of being a
bridge. This is not in Mexico's interest; it's not in the U.S.
interest to simply just be a bridge.
We have done a lot of surveys with corporates around the world;
and the way the European, and American companies in particular
view Mexico is completely different from the way Asian and in
particular Chinese companies view Mexico. The Chinese companies
view Mexico much more as a place of assembly – whereas Americans
think of Mexico as an integrated part of the manufacturing value
chain.
Michelle Weaver: Finally, how will the
Mexico nearshoring theme develop from here?
Nikolaj Lippmann: This is a great debate, I
think. And one that's going to be – I think we're going to be
writing a lot with Chris about, and with you guys around, about.
Also, with the U.S. policy team. We laid out in 2022 this
hypothesis that onshoring, nearshoring was about to happen. In
terms of Mexico, it would imply $150 billion over five years. And
very importantly, it was going to be – it could happen so fast
because it was brownfield.
It was more to the same. Where you already had manufacturing
ecosystems, you could add to that. We saw very little evidence
that you could do greenfield. But now that the world has evolved,
we're looking at some of these greenfield manufacturing
ecosystems that are really not present in North America, not in
the United States, not in Canada, not in Mexico, such as EV
batteries or IT hardware, some of the things that are starting to
emerge around the big chip investments.
And we're wondering what are going to be the policy objectives
pertaining to these very specific manufacturing ecosystems that
in many cases are quite important for national security. If that
is to happen, I think it's going to happen slower, much like what
Chris laid out, but it's going to be much more impactful. So, I'm
sure we're going to be working closely on these debates.
Michelle Weaver: Nick, Chris, thank you for
taking the time to talk. And to our listeners, thanks for
listening. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen to the show and share the podcast with
a friend or colleague today.
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