I don't understand reshoring

Investment Analysis Clubs Macro Economic Trends and Risks
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I don’t understand why Mexico has such problems with corruption and illegal activity. The country is blessed with resources, population and size. It should be as peaceful and prosperous as the US and Canada.

Simply by having a different currency Mexico, and all of Latin America, have more financial risk. And a poorer, shallower, less “innovative” capital market. This is heavily about the banking.

However Latin America does generally have more free and open economies than east Asia,
which subsidized and pegged to extents never before seen in economic history.

One exception - we may need more Asian cars to crush this crazy auto inflation of the past several years.

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Wait a minute doesn’t the new Inflation Reduction Act in effect place a tariff on non US produced EVs as they are not eligible for a tax rebate?

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You inspired me to look up some numbers.

2021 GDP in Billions US$:
US 22996
Canada 1991
Brazil 1609
Mexico 1293
Argentina 491
Chile 317

Steve

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The CEO of Ford Motor tossed out some interesting data, a few years ago. Ford was, at that time, intending to offer the third generation Focus compact in the US. Their initial intention was to build it in Mexico. Then, management changed it’s mind and decided to import the cars from China, even though Chinese built cars would cost more than Mexican built ones. The reason being that they were going to build the Focus in China for that market anyway. Setting up a line in Mexico, to produce for the US and Canada, would cost half a Billion for tooling. The direct costs of building in China and shipping to the US were higher than building in Mexico, but avoided the tooling costs of setting up the Mexican line made the Chinese cars cheaper overall.

Another tidbit I picked up along the way. Mexico, and Canada, seem to have better trade relations with the EU than the US does. Mexican built cars, for instance, are welcome in the EU, while US built cars would be taxed heavily. So, if you want to export to more countries, you would want to locate in Mexico, not the US.

Steve

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25

The consumer, who else?

The Captain

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Yes but I do not have the specifics on it either. The main thing is economic efficiencies of scale. We wont be backing off getting there. The US needs to export a deflationary force through manufactured goods with Mexico on the lower valued goods.

Yes Captain and this was less expensive when China was exporting a deflationary force of manufactured goods. Those days are over with and as I am saying the US needs to step it up. And we are stepping it up.

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Many (most?) US-produced EVs are also not eligible (price, origin of materials, etc). For example, the very popular Tesla model 3 is not eligible. And many (most?) typical EV purchasers aren’t eligible for the credit (income 75k/150k).

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28

Special interest groups give billions of dollars to U.S. politicians on both sides of the aisle.

In Mexico, it’s called a culture of corruption.

In the USA, it’s called free speech.

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Agreed we are corrupt here with respect to socialized hand-outs to corporations who in turn espouse capitalism. But, as a friend who spent years in Argentina tells me, as corrupt as the US is, we are amateurs compared to others.

With respect to chips, all of this is reminding me of my time at Texas Instruments in the early to mid 1990s. When I joined in mid-1989 we were the only remaining American supplier of DRAMs. We lost money doing it (we blamed the Japanese for dumping DRAMs below cost to the market). But we did it because TI believed that the country needed at least one American supplier of such a critical component, and if nobody else was going to do the right thing, at least TI would. I still admire that line of thinking in them.

I don’t have any problem with the CHIPS Act and the subsidies given to lure hi-tech chip manufacturing to our shores in greater numbers. It has to happen. New chip fabs are so expensive that it is hard to grasp. I’ve heard several years back that bleeding edge fabs are so expensive that only Intel, TSMC and Samsung can afford them. Soon, only Samsung will be able to afford them (due to gov’t backing).

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An industrial plan with faster GDP growth and the future declines in the federal debt load will be a welcome relief.

No industrial plan, slow GDP growth and $31 tr in debt is corruption while China produced the goods.

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It’s not that hard to understand, but it’s situationally dependent. There are some things which are crucial to an economy. You lose control of them, you lose your economy. OPEC showed an example of this in the 70’s, when they decided, for political reasons, to embargo oil and sent the US economy into a tailspin.

Here’s a recent example: TSMC has a 54% market share of computer chip production, including nearly all of the capability of the most advanced chips. They are located mainly in Taiwan, but have subsidiaries in China and small production facilities in Washington state. (Arizona in process.) In second place: China. Third: Korea. Next, with just 7%: US.

Now recall that nearly every advanced military weapon: planes, smart bombs, laser sights, etc. requires chips — not to mention a significant part of the US economy (remember how “chip shortage” hobbled auto production?)

So even at some cost, it is strategically vital for the US to control its own destiny, and not be subject to the whims of international trade, international politics, or wars we do not control.

Great Britain kept the US a vassal state in the 1700’s by prohibiting the manufacture of finished goods. (After 1790 the US returned the favor, disallowing British imports.) If batteries and EVs are the future, should we not control our own rare earths, necessary for their production, or should we cede that to foreign governments as well?

We watched as the Japanese hollowed out US industries in the 70’s with their own subsidies of steel manufacture and auto production. Good for us - for a while, as we got cheaper prices. Maybe not so good as great swathes of industrial America fell into disrepair and production capabilities were lost.

I will just mention there was a period of 20 years or so where the US had no “heavy lift” capability for putting satellites into orbit; we had to rent space aboard Soviet rockets. Would that be a good idea today, given the current world situation? I can imagine the Soviets closing that door as abruptly as we tried closing their oil spigots, and then where would we be? (Yes, , let’s tell the CIA we have to wait for the Soviets to grant us space for our next spy satellite over Iran or the Ukraine.)

This is a tricky business. Not everything is vital or strategic, and with industry capture I’m sure many (so-called) capitalists will hector the government for funds to re-shore their business - but there are some things which obviously are. We were lucky that rocketry evolved to give us options - but chips (for example) haven’t.

People want their stuff cheap, and complain about the government spending money on these sorts of things - until the spit hits the fan and the precious free market stops working, and then they get delirious.

We’ve used the strategic petroleum reserve many times to smooth the market when bad actors have tried to manipulate it. “Re-shoring” is a different flavor of the same thing: it’s insurance against artificial disruption that lies outside the US boundaries.

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32

Too true. US corporations know to bribe those who man the wheels of power. They don’t bother with low level officials.

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33

I agree with everything you wrote.
The question is: who should pay for it? It’s less profitable…until the fit hits the shan. Which is unpredictable and not attractive to shareholders.
Wendy

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34

I think we understand that over dependence of any one nation to supply a critical resource is a risk. Russia natural gas. Taiwan semiconductors. China rare earths, battery grade lithium, solar panels. The list goes on and on.

Diversification of sources is good policy and can make the pain of the unexpected less painful. Of course costs are involved. How do you cover those costs. One major interruption will make you glad you did. Remember face masks during Covid. We survived but it was a struggle. Remember ventilators during Covid? It took a while to get cranked up but we did it.

Some items like semiconductors take longer. Battery grade lithium or rare earths is mostly about taking the risk.

Lets hope companies are savvy enough to have alternative plans in place.

Imagine a Southwest Airlines coming up with a weather plan that let them keep flying when major hubs are shut down. Planning is a good idea. Not difficult until it requires investment.

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I am most familiar with Peru as I have a friend here in the states that immigrated from Peru.
My friend has been involved obtaining official recognition of his divorce. It is costing him hundreds of soules and is dragging on. I asked-“Is she fighting the divorce?” He replied “no mi Amigo, the official just has to stamp some papers.” “What!” I say. “Why so much & why so long.” He replied that is how it is done." I believe you Norte Americanos have an expression: You can’t fight city hall. That applies to the Peruvian government.

hospitals and poor education quality. Corruption also distorts the way governments use resources and undermines the public’s confidence in institutions.

Bribing, embezzlement, nepotism, and traffic of influence in decision-making processes are some of the typical manifestations of this form of bad government.

In addition, corruption is regressive, hitting the poor hardest. According to studies carried out by the World Bank, there is evidence that poorer Peruvians dedicate a higher percentage of their income to pay bribes in exchange for accessing basic services to which they are entitled by law (up to 14%, compared with 1% for richer citizens).

Since 1990 all Peruvian presidents have bee removed from office mostly due to corruption.

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Corruption in the US goes on at the highest levels. Sam Bankman-Fried has 4 meetings with White House advisors.

Sam Bankman-Fried, once a fixture in Washington, is now facing criminal charges for his role in the collapse of his crypto empire that’s left investors facing billions of dollars in potential losses.

While Bankman-Fried, or SBF as he’s known, lived in the Bahamas, he made frequent trips to Washington — testifying before Congress and meeting with key regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, as well as with White House officials.

The former billionaire often espoused the need for greater regulation for crypto and touted himself and his companies as ethical actors in the space.
LOL

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Yeah but SBF’s angle was, “this is all crazy. We need to get organized regulation in this industry”. SBF was totally correct. A few of the others like Coinbase went in with organized controls in place. SBF the boy wonder was too childish to think any of it applied to him.

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Simply meeting someone is a low bar to prove corruption, don’t you think?

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There is a new well written and interesting book on this topic called “chip wars” that covers the history and importance of electronics to warfare. Taiwan and Korea have captured this resource due to significant subsidizes from their governments. One way to get it back is to match those subsidizes in the US. It has become clear that Russia is losing the war in Ukraine in part due to their backward technology.
Alan

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Simple question: Which expenses of business and govt are NOT paid by customers/taxpayers?

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