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The Mexican and Costa Rican economic recovery, as well as that of the Dominican Republic in the Caribbean, will depend upon the ability of these three nations to “reconnect their supply chains”, as their important trading partners, the US and China, return to normal.
This is the perspective that was presented in a report that was recently released by the Economic Commission for Latin America and the Caribbean (ECLAC).
In a possible restructuring of global value chains in the coming years, the report states that “in general, the countries that seem best positioned to benefit from a future reconfiguration of international trade and supply chains are those that are already embedded in various US-centric international production networks, such as Costa Rica, Mexico, and the Dominican Republic.”
The report presented in Santiago, Chile by the ECLAC Executive Secretary Alicia Bárcena adds that “in particular, these countries could benefit from the advent of new investment and the expansion of existing investments in the medical device manufacturing sector. This is due to the interest expressed by the United States Government in reducing its dependence on China for this class of product”.
The annual report of the United Nations (UN) agency notes that the Costa Rican economic recovery, and that of the region in its entirety, also “depends on how countries move from a quarantine situation to a lower health risk stance and pandemic control.”
To illustrate the size of the challenge, the report mentions that during the second quarter of 2020 there was a contraction of 32 percent of the US economy, a destination for more than 80% of Costa Rican and Mexican exports.
Free trade in North America
The new Free Trade Agreement between Mexico, the US, and Canada (USMCA), which entered into force in July 2020, “contains several mechanisms that discourage trade and productive integration between its members and Chinese interests,” ECLAC points out.
Indeed, a new provision included in the USMCA, that was included by negotiators for the US, “empowers any of its members to terminate the treaty if any other member enters into a trade agreement with a non-market economy.”
The USMCA also contains ‘stricter rules of origin’ in various activities that include the automotive, textile, and chemical sectors, among others, than its predecessor NAFTA. The NAFTA was in force from 1994 to 2020 and was phased out this past July 1.
This clause seeks to ensure greater Mexican and Canadian participation in North American value chains, “at the expense of extra-regional suppliers such as China,” ECLAC notes.
The impact of increasing tensions between China and the US has already begun to show in Latin America and the Caribbean.
If tensions between the world’s two largest economies were to escalate to move to the region it “would be very problematic,” experts point out.
The reason is that the US and China “are also the two main trading partners that will affect Costa Rican economic recovery, as well as that of Mexico and the Dominican Republic; therefore, greater regional consultation is required to avoid this situation or at least to minimize its effects.”
In particular, the ECLAC warns that “it is not clear that the recovery initiated in June represents a turning point”, especially given the emergence of renewed spikes of Covid-19 cases in Europe and the continued spread of the contagion in the US.
In this context, the supply chain reconfiguration generated by the consequences of the current pandemic would tend to exacerbate the differences between “two patterns of insertion” in international trade: “Central America and Mexico, on the one hand, and South America and most of the Caribbean, on the other”, as the main division in the regional economic space.
ECLAC defines the first group of countries “with a close link with the U.S. economy, not only through trade but also through foreign direct investment flows, migration, tourism, and remittances.” A driver of Costa Rican economic recovery, as well as that of Mexico and the Dominican Republic, will be driven, in great part, by US investment in those economies.
In particular, the subregion of Central America and Mexico and some Caribbean countries, such as the Dominican Republic, are an integral part of the US-centric manufacturing value chains of the so-called “North American factory”.
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