Ever since the North American Free Trade Agreement (NAFTA) was signed on Jan. 1, 1994, manufacturing in the United States and Mexico have been highly integrated, particularly in the transportation and electronics sectors.

Each country’s economy depends heavily on the trades that are made as a result of NAFTA as well. The issue, however, is that the relationship between the U.S. and Mexico has never been equal — even despite the fact that the two countries make up the busiest cross-border supply chain in the world.

The imbalanced relationship is a result of “primarily unequal production (labor) costs between the U.S. and Mexico,” says Vera Pavlakovich-Kochi, senior regional scientist in the Eller College’s Economic and Business Research Center and adjunct associate professor in the Department of Geography and Regional Development at the University of Arizona. In other words, it’s far less expensive for American-owned companies to outsource production and labor to Mexico, then import the goods across the border.

“As far as ‘becoming more equal’ — this should be the final objective, but the fact is that the present relationships developed because the two sides have not been equal,” Pavlakovich-Kochi says.

The Impact of COVID-19

Then the global coronavirus pandemic hit and caused the relationship between the two countries to become even more frayed than before. This is somewhat of a result of the fact that the Trump administration has pressured Mexico to keep factories that supply the U.S. operating during the pandemic, even as outbreaks sweep the manufacturing companies.

But Mexican officials fought back and forced many of the factories to shut down in an attempt to curb the spread of COVID-19. The shutdowns caused a massive disturbance in the manufacturing supply chain between the U.S. and Mexico — a disturbance that very well could be felt for many years to come, even after the pandemic subsides.

“During the last two years, I analyzed specifically Arizona's relationship with Mexico and, based on trade data, attempted to estimate portions of Arizona's manufacturing that were dependent on cross-border trade in manufacturing products,” Pavlakovich-Kochi says. The data she analyzed from April 2020 (which, at the time of this writing, was the most recent data available) on the Nogales District — which is made up of six border ports of entry between Arizona and Mexico — was staggering.

The pandemic has caused an unprecedented decline in overall trade through the Nogales District. While it’s hard to quantify just how much of an economic impact the pandemic has had, overall exports to Mexico from the U.S. fell by 45.28% in April 2020 — or $526.3 million — compared to April 2019, while overall imports to the U.S. from Mexico were down by 24.85%, or $497.9 million. Those numbers include cross-border trade of all goods, including produce, livestock, plastics and rubber products, and others.

Manufacturing trade, however, has suffered the most from the pandemic, with three sectors — Computer and Electronic Products; Electrical Equipment, Appliances and Components; and Transportation Equipment — being hit the hardest.

Cross-Border Trade by the Numbers

• When looking at manufacturing trade in the Computer and Electronic Products sector in April 2020, exports fell by 51.01% — or $79.2 million — compared to April 2019. Imports, on the other hand, declined by 37.86%, or $70.1 million.
• For Electrical Equipment, Appliances and Components, exports were down in April 2020 by 60.16% — or $95.9 million — compared to April 2019. Imports fell by 56.63%, or $97.5 million.
• The Transportation Equipment sector sustained the biggest hit. Exports decreased in April 2020 by 87.75% — or $179.2 million — compared to April 2019. Imports dropped by 7.02% — or $35.3 million — compared to April 2019. The lower overall drop in transportation imports can be explained by the fact that many American-owned transportation companies — such as Boeing, for example — outsource production to Mexico, and any transportation-related work was deemed as essential when the pandemic began (although as cases rose in Mexico, transportation-related manufacturing was no longer deemed essential, so production decreased toward the end of April).

A number of the discrepancies in next steps can be attributed to NAFTA — the agreement’s bylaws allow each member country to decide its own course of action “in times of war or other emergency in international relations,” i.e., during a pandemic. In the beginning, persistent pressure from the Trump administration was enough to get many Mexican factories to keep operating. But as the Mexican factory workers became ill and started spreading COVID-19 to one another, Mexican officials stepped in and forced many factories to close.

As for what the future holds, not even the experts are entirely sure. “I do not believe that the U.S. administration would impose more drastic measures to substantially reduce established supply chain,” Pavlakovich-Kochi says. “Although, as we witness daily, everything is possible.”