(Bloomberg Wirtschaftswoche) – Diana Rivapalacio didn’t expect to be back on the factory floor two weeks after the pandemic broke out.
When the plant in Tijuana in Tokyo SMK Corp. Closed in April 2020, the quality control manager Rivapalacio and the company’s 800 machine operators, inspectors and administrators made their way into uncertainty. But many were back at work that same month.
They owe their quick reopening to the location of their city on the US border. Like many manufacturing companies, SMK avoided a lengthy lockdown by arguing that a tiny product – a location tracker – was essential, Rivapalacio says. It could be used to track shipments of vaccines or medical equipment, SMK told Mexican authorities.
Numerous companies across Tijuana found reasons to stay open. As did much of the rest of Baja California and other northern states, spurred on by US demand for Mexican-made goods that had been boosted by stimulus payments from the Trump and then the Biden administrations. “We do international business at the border. They depend on us and we depend on them, ”says Rivapalacio. “At first it was a crisis, but everyone has adapted.”
Other parts of Mexico have not been so lucky.
“Every sector is having a very bad time,” says Sergio Baños, mayor of Pachuca, capital of Hidalgo, a mountainous state near Mexico City where the economy is dominated by wholesale, retail and services. In Pachuca, formal employment declined 12% in the second quarter of this year since early 2020. In Tijuana it increased by 8%.
As Finance Minister Rogelio Ramírez de la O put it in a recent speech, “the economic recovery in our regions has been uneven”. According to Grupo Financiero Banorte, a Mexican bank, by July of this year northwest Mexico had far exceeded its gross domestic product from 2018, the year before the recession. The center of the country, which is significantly more dependent on domestic demand than the north, was more than four percentage points behind the 2018 level.
This is due to President Andrés Manuel López Obrador’s own policies. Unlike many other leaders, he did not push through significant spending increases to prop up households and businesses during the crisis, arguing that a lower debt burden would help the country recover faster.
Growth along the border is forecast by Bloomberg Economics to drive 5.9% economic growth across Mexico this year, after shrinking 8.2% last year. But the shape of the recovery is the opposite of what López Obrador hoped for when he took office in 2018, pledging to tackle inequality and wean Mexico off its dependence on foreign companies.
The US-China trade war initially seemed to highlight the risks of such reliance on foreign trade as the cost of sourcing foreign supplies rose from 2018, and Shipping caused further price increases in 2021.
However, Tijuana rebounded quickly as some U.S. companies struggling with tangled supply chains relocated their operations to Mexico. North American manufacturers said, “‘We have to change our business because we can’t hold a product worth millions or billions because a component didn’t come from Africa, Asia or Europe,'” said Carlos Higuera, chief executive officer of PCM Corp. ., a Tijuana-based contract manufacturing company.
Thanks to the influx of foreign capital, new factories are being built. According to Edna Patricia Hernández, CEO of Tijuana EDC, a nonprofit that supports international businesses in the city, Tijuana’s industrial enterprise area has grown the most in at least a decade over the past year.
In Pachuca, the business of José Zaragoza’s construction company Cayco Construcción has decreased by 40% compared to 2019. As the local economy recovers, bills are constantly unpaid due to a lack of liquidity. “We have few resources, an incomplete workforce or payroll, and we don’t get paid up front to produce or order or move things,” says Zaragoza.
While Tijuana’s involvement in the US helped capitalize on the country’s huge stimulus packages, Pachuca suffered from López Obrador’s decision to become more dependent on domestic demand. Don’t increase expensessays Zaragoza, the head of the local branch of the Canacintra business association. Government incentives have “not solved everything, but definitely helped companies keep their payroll up, maybe not having to close, or maybe maintain their liquidity,” he says.
Hidalgo’s economy has shrunk more than twice as much as Baja California’s last year and will only grow 2.8% in 2021, according to Banorte, while the northern state is expected to grow 8.2%.
At the same time, the poverty rate in Mexico rose by two percentage points to 43.9% from 2018 to 2020. The increase “went hand in hand with the lack of real pandemic-induced economic support for families,” says Ana Gutiérrez, an economist at the Mexican Institute for Competitiveness, a think tank.
The president’s narrow-minded policies have paid off in other ways. When López Obrador, a populist with left roots, took office, the markets panicked because he feared he might shake the country. Investors are now giving him good marks for financial honesty. Colombia’s credit was cut to scrap by two rating agencies this year, but few analysts see the risk of this happening to Mexico.
López Obrador’s unexpected pragmatic streak saw him too prioritize vaccinations in the north– although far from its voter base – in a hitherto unsuccessful attempt to persuade the US to open the border.
Mexico’s total GDP will at best return to 2018 levels before 2023, according to Banorte economist Delia Paredes. A look at Tijuana’s smaller companies shows that the recovery was not consistent there either.
Local businesses that do not want to export are brought to their knees by supply chain problems and low demand, in part because of the border closure. Juan Carlos Pérez, who has been selling styrofoam containers and paper bags from his warehouse in Tijuana for two decades, says his sales are 70% of normal. Its workforce has shrunk from seven to three.
“We managed to survive because we’ve been in business for years, but those who were just getting started didn’t have the resources to stay open,” he says.
Next read: How Mexico forgot its Covid crisis