By Beatrice E. Rangel
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 apparel; 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 speak for themselves: China is the world's 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 U.S. 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 U.S. 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 fail 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 U.S. was up until the 19th century and Australia to the early 20th century. Accordingly, Brazil could become China's breadbasket.
And from that position Brazil 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 comes a culture of political fractiousness. There are in Brazil 31 registered political parties and at least 15 more un-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 U.S. 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 remain as countries of the future.Beatrice Rangel is President & CEO of the AMLA Consulting Group, which provides growth and partnership opportunities in US and Hispanic markets. AMLA identifies the best potential partner for businesses which are eager to exploit the growing buying power of the US Hispanic market and for US Corporations seeking to find investment partners in Latin America. Previously, she was Chief of Staff for Venezuela President Carlos Andres Perez as well as Chief Strategist for the Cisneros Group of Companies.
For her work throughout Latin America, Rangel has been honored with the Order of Merit of May from Argentina, the Condor of the Andes Order from Bolivia, the Bernardo O'Higgins Order by Chile, the Order of Boyaca from Colombia, and the National Order of Jose Matías Delgado from El Salvador.
You can follow her on twitter @BEPA2009 or contact her directly at BRangel@amlaconsulting.com.