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Analysis

Aerospace Under Biden: Direction Change?

By Alicia Arizpe | Mon, 11/23/2020 - 09:09

For decades, Mexico’s relationship with the US has been key for the development of numerous economic sectors, including the aerospace industry. While Mexico has built a robust aerospace sector that now exports to numerous countries including France, Spain and Germany, most of the sector’s exports head towards the US. For that reason, governmental changes north of the border could have deep implications in the development of Mexico’s aerospace industry if policy and trade relations were to change. The US is now Mexico’s largest trade partner but this could change were the northern country improved its relations with other nations.

The contentious race for the White House came to a close last week when numerous media outlets called former Vice President Joe Biden the winner of the 2020 US election. As the country prepares its government transition, questions abound on what the future of the US’ internal and foreign policy will look like and what will this mean for the status quo.

Over the past couple of decades, Mexico built a strong manufacturing arm for the aerospace industry. The country now has more than 300 aerospace companies spread throughout the country, mainly clustered in five states, and manufactures components for most commercial airplanes thanks to the presence of giants like Safran, Rolls-Royce, Honeywell, Textron Aviation, Latécoère and Daher Aerospace. The country has significant potential to expand its manufacturing footprint still, according to industry leaders. “[Mexico] has tremendous potential for Boeing’s three sectors: commercial aviation, supply chain and, lastly, defense, space and security,” said Donna Hrinak, Vice President of Boeing and President of Boeing Latin America, to MBN.

The country’s aerospace exports reached US$9.5 billion in 2019, according to FEMIA, and the vast majority of these exports are headed north of the border. The association explains that 80.7 percent of Mexico´s aerospace products are exported to the US and the remaining head to Canada, France and Germany, among other countries. For that reason, the relationship between the US and Mexico is key to the local aerospace industry.

During his four years at the White House, President Donald Trump vowed to put the needs of the US ahead of international concerns, eventually leading the US to pull out of several international treaties including the Paris Agreement and the CPTPP. He also heavily criticized NAFTA and championed its renegotiation into USMCA. During his time in office, Trump also lamented the US’ trade deficit and imposed tariffs to goods from several allies, eventually starting a trade war with its largest trade partner: China. While the trade war was criticized by Trump’s opposition back home in the US, it had an unlikely winner: Mexico.

“Trump’s trade war with China was beneficial for Mexico’s aerospace industry. When Trump started imposing tariffs on raw materials, such as steel and aluminum, it created large opportunities for Mexico,” said Carlos Robles, Vice President of the Central Region at FEMIA, to MBN. Trump’s tariffs on Chinese products eventually helped Mexico to increase its exports to the US and gradually become the latter’s main trade partner.

As Biden prepares to enter office, some question whether he will be willing to continue the US-China trade war. “He seems more of a negotiator, meaning he will be smarter in getting benefits for the US and not start a war just because he wants to,” says Robles. During his campaign, Biden did not specify whether he would uphold Trump’s tariffs towards China, which his allies are pushing for, and his position in trade might not be straightforward as his “Made in All of America” platform criticizes China, while promising to create jobs in the US. “If we make smart investments in manufacturing and technology, give our workers and companies the tools they need to compete, use taxpayer dollars to buy American and spark American innovation, stand up to the Chinese government’s abuses, insist on fair trade and extend opportunity to all Americans, many of the products that are being made abroad could be made here today.”

During his administration, President Trump also imposed tariffs to products from numerous other countries, including Mexico. In 2018, the US imposed a 25 percent tariff on steel and a 10 percent tariff on aluminum, which were lifted for Mexico in May 2019. However, later on President Trump warned that he would pursue a 5 percent tariff on all imports from Mexico that would gradually increase until illegal immigration stopped. These tariffs did not materialize but they created uncertainty among both countries. “Under Trump’s administration, there was always uncertainty as we did not know what he would do next,” says Robles. With Biden at the head of the US government, trade relations between both countries are expected to relax. “We expect that under the new administration, we will not have this uncertainty and risks will reduce for investors,” he adds.

Another point of interest is USMCA, which Biden claimed was better than NAFTA, according to the NY Post. The treaty builds up on NAFTA provisions on several sectors but many of its changes are focused on production, standards and sales in the automotive industry, reported MBN. For the aerospace sector, not being mentioned in the USMCA’s discussion meant business as usual. “Companies in Canada and the US will increasingly turn toward Mexico as USMCA will not affect the aerospace industry,” said René Espinosa, President of Chihuahua Aerospace Cluster, to MBN.

While Biden has not indicated a desire to modify the treaty, some believe there are opportunities to improve it for the benefit of both countries. “USMCA contains few provisions regarding the aerospace sector in comparison to the automotive industry. Eventually, these regulations will come as the aerospace industry needs more incentives regarding taxes of raw materials and other matters,” says Robles.

So far, Biden has not clarified his foreign trade policies but there is little indication that he is interested in drastically changing the road paved by the Trump administration, at least as far the aerospace industry is concerned. This may mean stability for investors and business as usual, but there are also opportunities to continue strengthening relationships between Mexico and the US. “Having operations closer to home will help the US avoid risks from having them across the globe, lowering its overall costs and allowing it to react faster if there is a second or third wave of the COVID-19 outbreak,” says Robles. Another area of opportunity lays in strengthening the aerospace industry within the North American bloc through increased cooperation among all three countries. “The aerospace industries in the US, Mexico and Canada have worked isolated for many years, which is understandable as we were at different stages. But now, Mexico has grown enough to be included at the table,” he added.

Alicia Arizpe Alicia Arizpe Senior Writer