Part II

Interview with Jerry Pacheco, President of Borderland Industrial Association

on Potential Effects of Coronavirus on Supply Chains in the US-Mexico Border Region

Pacheco Explains Supply Chains:

Let’s begin with an example posed by Pacheco.  Suppose a large maquila plant in Juárez assembles computers for a well-established firm with global markets, say, in Europe, Australia, and Latin America. The demand for quick shipment to buyers requires rigorous adherence to tight time schedules.  Let us imagine this firm purchases certain plastic components from China.  Other components may come from a computer chip manufacturer, perhaps in Albuquerque; others are produced, say, in Guanajuato, Mexico, while still others are produced in India or other manufacturing centers. The firm assembles parts delivered to the plant in Juárez from warehouses in El Paso, Santa Teresa or Juárez for “just-in-time shipment” of computers on a time schedule that may have a permissible deviation of just a few minutes or hours.  And to save costs, the assembly plant may have an inventory of parts available for its computers that will last only two or three weeks in advance.

Global Pandemics as they affect a maquila in Juárez

To understand the dangers of a global pandemic, Pacheco went on, imagine that an outbreak of a new virus in China (which produces 20% of global manufacturing) causes slowdowns and delays in shipments of vital computer component parts to Juárez, as workers producing these parts in China are quarantined, refuse to go to work, etc.  There are many potential obstacles to replacing these shipments quickly.  It might take weeks or months for the firm to find a suitable supplier to replace the Chinese one.  Proprietary and other business agreements may create legal delays.  Logistical problems linking a new potential supplier to Juárez may raise transportation costs or create more delays.

The delays may have a ripple or cascading effect.  Some workers may be laid off until the supply chain is fixed.  This drop-off of workers will slow down consumer spending in Juárez and across the river in El Paso.  Business investment there will slow down.  The delays in shipping may reduce annual sales to the parent firm, and this might cause some layoffs of workers in other locations servicing different products or markets.  Thus, interruptions of one element in a supply chain for global manufacturers may create slowdowns and tensions cascading throughout the entire chain, and this may include several local economies, causing further economic declines.  Should more than one element in the supply chain be affected, say, after an outbreak of the virus in Albuquerque, this will aggravate production schedules even more.

Add another sector or two, say, television production or auto manufacturing, with interrupted supply chains caused by the virus, and the global economy begins to shrink perceptibly.  (my comment, not Pacheco's) That the stock market lost 12% of its value last week is a cold, objective, and very non-partisan assessment by very bright analysts on Wall Street of the potential risk to revenue generation in global corporate markets over the next few months, should the coronavirus situation break out into a full-scale pandemic.  Right now, Wall Street believes the chances of more bad news is high.  The World Health Organization believes the chances of coronavirus illness becoming more widespread is “very high.”

According to Pacheco, firms at Santa Teresa are closely monitoring the coronavirus issue; many are stocking up on their inventory to avoid delays, should the epidemic in China continue or get worse or spread to other areas that supply maquila plants in Juárez.

At the end of the interview Pacheco suggested that the current supply-chain regime, which is truly global in scope, might be slightly more costly, but more stable, if more regional markets, with regional rather than global supply chains were established.  For example, North America down to Panama might be a regional hub; South America might be another; Southeast Asia, Greater Europe, China, might be others.  Supply chains would be created around certain products, such as auto parts or televisions, or computers, within the region itself, not on a global scale.  While the risk of supply chain disruptions would still exist, they would be contained with one region, with possible replacement of vital elements in one regional chain by those in a different region.

As I recall, this is what was contemplated about 30 years ago, when NAFTA was designed,  This was just before China doubled the global supply of labor by opening its labor markets to global capital, providing corporations with cheap labor, and the global manufacturing rush to China began.

Pacheco also reminded me that the Swine Flu pandemic began in Veracruz, Mexico, in early 2009, and in a short time much of Mexico City had shut down.  The virus spread throughout the globe, with 11%-21% of the population of the world contracting it.  Fortunately the virus was not very lethal, with only around 200,000-300,000 fatalities. By the end of 2010 the disease had subsided.