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This transcript is from a CSIS podcast published on September 12, 2023. Listen to the podcast here.
Mariana Campero: Welcome to Mexico Matters, the CSIS podcast about how events occurring in Mexico can impact and more importantly matter in the United States. I am Mariana Campero, non-resident senior associate of the America's program at CSIS and the former CEO of the Mexican Council on Foreign Relations, COMEXI. Given its geographic location, size, and diversity of its labor force, vast natural resources, huge investments, technology and innovation capabilities among others that North America has been one of the biggest beneficiaries of global tensions. Nearshoring presents, however, a unique opportunity for Mexico to expand its economic role in the region to discuss their views and outlook for North America, that it is truly my pleasure to welcome Larry Fink, Chairman and CEO of BlackRock, and Evan Greenberg, Chairman and CEO of Chubb.
Ev, Larry, welcome to Mexico Matters. It is truly a pleasure to have you on the show today, and just for full disclosure, having my husband and his dear friend is more than an honor. So, Ev, let me start by asking you to give us a global perspective that is tensions between the United States and China, the economic consequences of the pandemic, the war in Ukraine, all of which are impacting global trade and transforming supply chains. What are your views about the concept of regionalization, and what do you see as the good, the bad, and the ugly of such a framework? Can the US strengthened supply chains without falling into protectionism?
Evan Greenberg: First, Mariana, thank you for inviting me to do this podcast with you. What fun to do it with both of you. So first, to set the stage, I want to put a bit of a broader lens on this. The framing of globalization versus regionalization as if mutually exclusive is, in my judgment, the wrong mental model. The two coexist, and global trading conditions are not so simplistic. Three forces are driving greater Asia and North America centric regionalization, because that's what we're really talking about. One is supply chain movement, particularly out of China. The second is local regional dynamism driving intra-regional trade, and the third is protectionism, which ultimately is more nation state oriented and has the potential to damage both globalization and regionalization. Globalization of trade and goods and services is hardly dead. National economies, starting with our own, are highly dependent on the global marketplace for natural resources, goods, and services.
The notion we can simply erase globalized trade and put that back in a bottle and return to an era that frankly never existed as a fiction and we wouldn't want to anyway. Those countries that pursue a path of self-sufficiency and protected market severely impact their growth and prosperity. China comes to mind and that is hardly a model we want to emulate. In terms of supply chain and reordering, powerful forces, political, economic and security oriented are at work, and we're just at the early stages of that. On the one hand, it's motivated by the need for greater certainty and reduced dependence on a single source, think medicines and rare earths. On the other hand, there are political forces at work, incenting supply chain movement for either protectionist or industrial policy purposes. There is a fine line between these two and they're easy to conflate, and our country industrial policy should be employed with a light hand, and in the case of protectionism, it is built on the notion that trade in a more globalized economy destroys labor, the middle class and industry.
I believe that is a misdiagnosis of the reasons for labor and industry dislocation. It is not in my judgment, due to rules-based market-oriented trade, an opening of our market, which has created huge benefits, including to labor, but rather our failure to enforce trade agreements and market-oriented trade and a failure to embrace the notion of reciprocity. When it comes to opening our markets to trading partners, it's due to ineffective skills, training and STEM education for our workforce and the lack of an effective trade assistance program. Advancements in technology and innovation in America has also created tremendous dislocation. Nearshoring is a form of regionalization that is taking place. It is part of supply chain movement. North America and Asia are the most dynamic economic regions of the world, and they will be. The trend in Asia, China side is towards greater trade liberalization and the US should be participating in that, and frankly, playing a bigger role in leading. Integration in Asia is deepening and not simply between China and Asia, but between India, Japan, Korea, and ASEAN countries, capital flows, technology, people and trading goods between them all.
I am a firm believer that deepen North America integration is in our national interest. It improves our competitive profile. The US is 26% of global GDP, our vast private sector, a hot house of innovation, our rules of law, our vast consumer market, our deepen in liquid capital markets. We are uniquely attractive, along with more decidedly protectionist industrial policy-oriented legislation. We are attracting and we will attract more business to locate North America. This is part of greater regionalization. Finally, let me say, we should be more confident in our economic model and lead the world with our vision, and not withdraw and become more protectionist. Leading the world in a market-oriented, rules-based open trading system while again, enforcing those rules and embracing the notion broadly of reciprocity in terms of market access. That to me is the right path for America. I realize much of what I believe is out of fashion in many circles.
Ms. Campero: You're right. Supporting free trade is certainly out of fashion, and in rich countries it has certainly been blamed for job losses. Larry, how do you see these global readjustments and how do you foresee they will impact the United States?
Larry Fink: In time, everything's going to be fine. As Evan really suggested, we will continue to be the most innovative country in the world, and through that innovation, and if you just look at the market caps of our six largest companies, those six companies are larger than the combined almost Footsie and the DAX to give you two major equity markets. That's how large our five large companies are. I think it's just a sign of the innovation that is being created within the United States borders or hotbed of ingenuity that is not going away despite the rise of populism, despite how we are focusing on the geopolitical issues, supply chain renavigation, all of this is change, and I do believe that change we will be a better off destination. And as Evan was talking about, I think North America is going to be one of the primary beneficiaries of this reorientation of the world or reorientation of supply chains.
We have the benefit of having geography that no other place in the world has. We have two oceans to protect us, the Pacific and the Atlantic side. We have the three major countries of North America. We have mutual benefits that are vastly greater than any of the mutual benefits of anywhere else in the world. So, all of this is going to lead to probably a better future for North America. We have to embrace it; we have to fully embrace it. The new order of the world is just a modification, and I do believe this is one of the big issues that's facing leaders worldwide right now. We have transitions of where we are moving supply chains. We have an energy transition, we have a transition away from deflation to now inflation. So, all these transitions are throwing new ideas, new issues that are confronting us and some of them are going to be difficult, but as a global investor, as we see the flows of investors worldwide, the amount of interest to invest in North America today has never been larger.
We have deeper, broader conversations than ever before. As Evan has suggested, we are seeing many supply chains renavigate itself, and I think that renavigation of supply chains is a necessary outcome. When the world order was changed by the Ukraine invasion by Russia, and we've witnessed their dependencies on Russian gas throughout Europe, every boardroom, every management team had to reflect what are our dependencies, and probably in world trade, the greatest dependency has been the growth and development of China as a place of manufacturing and assembly. And I believe today, everybody's looking at it, we can't afford to have those type of dependencies, and it's obviously being aggravated by rising populism. It's rising because of protectionism, but in both of those cases, whether it's populism or protectionism, the outcome still is great for North America. And this is why I remain to be as bullish as I've ever been in the investing of North America.
Ms. Campero: Yes, no doubt the opportunity for North America appears to be amazing. But let me now bring this conversation down to Mexico and talk a little bit about competitiveness. Ev, you not only know Mexico very well, you have been in the country for years, and you have a huge business here, but you also know Asia. In fact, you do business in Vietnam and Thailand and Malaysia and Indonesia, a lot of the countries that have benefited from supply chain movement. In your view, what conditions will have to be met by Mexico in order to be able to compete with Southeast Asia and attract more of these investments?
Mr. Greenberg: Mariana, to begin with, Mexico has a huge advantage. It has the advantage of location, its proximity to the United States. As a result, over the years, a deep supply chain has been created around a number of industries. Physical infrastructure, transportation, labor, energy related infrastructure in support of these supply chains, we're deeply intertwined and it's spreading to other industries, and nearshoring is a powerful wind at Mexico's back as Larry elaborated.
On the other hand, in my judgment, Mexico has weaknesses that are and will inhibit its development, in terms of reaching its full potential, and it's not unlike many other countries. These create disadvantages relative to some other more heads up or ambitious countries. I'll name a few. Lack of whole of government policy to attract business and grow the economy, the inefficiency of bureaucracy due to the incredible loss of experienced and talented technocrats, Mexico has been known for decades for its technocratic capability, and yet there has been a hollowing out, and this inhibits the ability of foreign business to establish quickly and efficiently.
We all know protectionist energy policies that are damaging availability and affordability, which are critical to manufacturing and technology. There is a lack of skilled labor in Mexico, but finally, and maybe most important, the rule of law and insecurity, organized crime or narco organizations are a grave concern. Their size, their scale, their wealth. They in fact pose a real threat to the stability of Mexico. You can't understate it.
Ms. Campero: I agree with you. Larry, you spoke about North America being one of the greatest beneficiaries of these global tensions, and you have also spoken about how nearshoring could present a unique opportunity for Mexico. As someone that knows Mexico so well and you travel there constantly, what advice would you offer the country at this moment to capture this unique opportunity?
Mr. Fink: I think the political leadership should be standing on tables pounding and pounding with tin cans saying, "We're open for business." The greatest frustration most business leaders have is as they start reconsidering their supply chains, obviously Mexico is one of the top choices, but there is this worry that Mexico has not been open for business, that Mexico has its structural problems that Evan so vividly described. And so, Mexico is certainly growing. It's evident by the rise of the peso over the last year, we're seeing more and more investing coming into Mexico. I'm actually particularly frustrated as a believer in Mexico for years and years and years, that it is not standing up and saying, "We're open for business." And rule of law will be protected for all the businesses that are coming into Mexico, where all the manufacturing is in the northern part of Mexico, and that's where we have labor issues.
We don't have enough labor in some of the northern provinces and states of Mexico. And so all of that is leading towards, I would say a continuous under achievement, and its underachievement from its potential. Now unquestionably, Mexico is so much stronger in 2023 than it was just two years ago. But is it reaching its full potential? I don't think so. I think there's even greater and greater opportunity. And so, Mexico has an enormous amount of opportunity, and it's growing through that opportunity, but it's still underachieving its potential and it is very necessary.
My deepest frustration in Mexico is not just the political issues, but if I'm in a room of 20 leading business leaders of Mexico, I'm in a room of 20 pessimists about Mexico. I have never witnessed a country where the business leaders are pessimistic. I tend to be, when I have my dinners with a bunch of leaders in Mexico, I'm the most optimistic person in the room.
Mr. Greenberg: It's a therapy session.
Mr. Fink: It's a therapy. But Mexico is certainly a stronger country today. As Evan said, it is about location. It certainly has enormous strengths on top of its enormity of weaknesses, but Mexico in the next 10 years should continue to grow and build, but the outcome will be determined by all the risks that Evan spoke about, the rule of law, the cartels and its role, safety, all the issues that we all are aware of it.
But despite all that, the opportunities in Mexico are great. The last thing I would say, one of the great things about location from Mexico too though, it is not dependent on ports. And so, when we witnessed, especially around COVID, when all the ports of the United States had multi-day delays because the amount of goods that were coming in, you never heard about delays of goods coming in from Mexico and vice versa. And that is because the rails played a particularly important role in Mexico and in trade. And so it is those types of benefits that make Mexico and all of North America to be a beneficiary as we recalibrate how we do business, where we do business and where do we build and assemble.
Ms. Campero: Thank you, Larry. I agree with you. Sometimes Mexicans are the most pessimistic.
Ev, let me now be optimistic and change the tone a little bit. Chubb is transforming itself into a digital enterprise, and you're partnering with various technology companies from Latin America and other countries. Can you tell us how you perceive the Latin American technology ecosystem, and what could it mean for Mexico?
Mr. Greenberg: Mariana, this is a very powerful and exciting development, both in Mexico right now and in Latin America, and I think it's a undersung story. There is a growing list of well-managed, homegrown technology companies emerging in a variety of sectors. They're innovative, they're fast moving, they're dynamic, they're democratizing services. They're providing access at lower cost to the middle and lower-income classes of population. For services, for example, providing access to banking, credit, automobiles, healthcare, retail goods. They're challenging the local monopolies and the rent seeking conglomerates. So, they're moving around the system, not just head-on attacking it. They're attracting young people, they're creating jobs, they're creating competition. It really is an exciting development, I think, for the region.
And where the region is like Asia, underdeveloped historically in terms of physical infrastructure, digital infrastructure is making up for that and is actually modernizing and making a lot of the physical infrastructure obsolete. In my area of insurance, we're partnering with many of them and we're reaching now millions of people we otherwise would not have the ability to reach and the economics wouldn't allow us to reach them, and we're providing them with basic coverage and protection, they otherwise would never have access to. So, it's early days still, but it's a very powerful and optimistic force for the region and Mexico.
Ms. Campero: Yeah, no, absolutely. The impact that this technology entrepreneurs are having or could have in the region is a story that only very few sophisticated investors have actually focused on. It is not catching the headlines. And I would say that the same goes to other forms of foreign direct investments. Larry, three years ago, AT Kearney dropped Mexico from its top 25 investment destinations. Yet Mexico is a country that, besides the geographic location, free trade agreements, as we said, it's still catching the eye of investors. The country has shown fiscal discipline, it has strong internal savings, thanks to the AFOREs, and offers very attractive interest rates. What will it take in your view for Mexico to go back into that top 25 list?
Ms. Fink: First thing I would say, don't listen to them, because Mexico has been one of the top destinations of capital in the last two years, whether it's building up factories and plants and all that. But as an international investor, we are attracted to invest in countries that have a central bank that is independent, that has a finance ministry that is strong and is focusing on fiscal discipline. And also probably one big difference with many other countries that has a very strong retirement system. And the AFOREs in Mexico really gives Mexico a very unique advantage. As wealth is growing in Mexico, as savers become long-term savers and are investing more and more as a percentage of GDP in their savings for retirement through their AFOREs, that creates a foundation of equity purchases that is local. And when you are an international investor and you're trying to import capital with into the country, that is one of the first things we look at.
When we invest in infrastructure, and we've invested in many major projects and infrastructure in Mexico, the first thing we do is get co-investments within the AFORE system to get local investors investing side by side with international investors.
This is key because if there's ever a change in government or change in behaviors by government, if they're going to do something that will create harm for the investors, we want to make sure that they do that, it's harmful for all investors. And so, we've always had a policy when we invest in Mexico, especially in infrastructure, that our investors are both domestic savers through the AFOREs and international investors coming in to be a part of that. And that has given us a great ability. And then as more and more international investors get a fair, reasonable, and just return for that, for the risks they took, and they are getting the returns that they sought out when they invested or higher returns than they sought after, they're going to reallocate more and more money into Mexico. So, for any system, it requires a foundation of domestic investing side by side with international investors.
When international investors lose money investing overseas, it's generally in countries that have a very weak and shallow domestic savings market, and a very shallow and weak domestic retirement market. And these are some of the long-term issues that have to be addressed. But Mexico is a beneficiary of having that strong retirement system in the form of the AFOREs, the one thing that you framed it out, we may be an international investor, but in Mexico we're Mexican, so our office in Mexico is not a bunch of New Yorkers, but we have a incredible local staff of Mexicans that are driving our business for Mexico, in Mexico.
Ms. Campero: Thank you very much for that answer. Ev, the Mexican economy is intertwined with that of the United States. As you know, 80% of our experts go to the US market. In fact, we have now become the United States' largest trading partners. It's for this reason, right that they say that when the United States' sneezes, Mexico catches a cold. In the context of higher inflation, higher interest rates, a growing national debt, tighter credit, the US economy has proven to be incredibly resilient. Do you still believe the US is heading for our recession?
Mr. Greenberg: First, look, no one knows with certainty, and we're talking odds here. In my experience, inflation is more stubborn and takes longer detained than many imagined. The Federal Reserve has taken decisive action, and the effects have not been fully felt yet. Credit conditions are tightening and the cost of money is rising. On the other hand, from a fiscal perspective, we had one of the greatest periods of government wealth transfer to citizens ever experienced, and the government is continuing to stimulate the economy through various recently passed legislation that we all know. Labor markets are very tight. Consumer spending is robust. Demand for housing is high, and credit losses are beginning to rise. So, we're talking odds, not certainty, and to me, the odds are we slow to recessionary conditions, likely shallow before the fight against inflation is over. For me, stagflation is my mental model.
Mr. Fink: You're showing your age on that one.
Mr. Greenberg: Yeah. I think I may have shown it earlier. The first question, my answer was dinosaur like.
Ms. Campero: Larry, let me ask you the same question. How do you foresee the economic outlook for this year and for next year?
Mr. Fink: I don't see a recession in the next 16 months at all, but I do see persistently high inflation, not stagflation, but it's going to be hard to bring it down below 4% or 5%. We just have very bad governmental policies. Our immigration policies are so fixated on the migrant problem. We can't have a proper immigration policy. We have labor shortages in so many industries, and Evan spoke about it. The Biden Administration has created over $900 billion of fiscal stimulus. This fiscal stimulus is larger than any fiscal stimulus at any time in our history when there was not a pandemic or a crisis. That's the CHIPS Act, the Infrastructure Act, and the IRA. And so, at the same time, now we have job needs in so many industries. We have this J curve in some of these fiscal stimulus that are just beginning now, and it's accelerating this problem that we have related to workers and availability workers.
And so, I see we're going to have wage pressure for the coming year or year and a half. The other thing is, because we had such a persistent period of time of low interest rates, the transmission of higher interest rates, and I would say where the Fed funds are today, they're pretty high. We're back to where we were almost 20 odd years ago. But the transmission to affect the economy takes a lot longer, because most people have locked in their home mortgages, unlike other countries where you have floating debt, where the transmission of higher rates impacts immediately. So, the transmission of high interest rates is not going to be that impactful for the next 12 months. Where the transmission gets more difficult, is going to be as people want to move and they have this low mortgage, they're stuck.
They're stuck because if they now move to another house, they're going to get now a new higher mortgage. And so, the reality is what it's going to do, it's going to slow down the movement, the transmission. The positive side, it's very slow for the transmission of high rates to impact, but over time its impact could be even more severe as this pent-up occurs. Evan mentioned in the debt side that much of the corporate debt, especially in the private debt area, is more floating. That's where you're starting to see more rising defaults. And let's be clear, most people buy cars on a monthly installment, and as rates have gone up to buy a new car now, it's adding as much as $100 to $150 in higher rates, just on your payment. And so, affordability of cars is really starting to have an impact. You've witnessed now cars companies like Tesla, they have repeatedly lowered their price of their cars, because they want to provide a total cost on automobile to be virtually the same.
So, they're trying to pick up more market share. So, at the short run, they're dwindling their profit margins by lowering the cost, but they're doing more and more volume, and you're starting to see those types of behaviors. So, the economy is going to be very resilient, as Evan was talking about, innovation, AI, is going to create more resiliency. There's a possibility that AI may be the technology that elevates productivity and maybe the technology that resolves some of the labor issues because you're going to be able to use technology to substitute in some of the areas in the workforce where technology's going to substitute some workforce. And we see that in all technologies. And so, there's a lot of uncertainty about how technology is going to transform it. But I think one of the fundamental reasons why we have persistent inflation is, as we were talking about supply chains, let's be clear, most companies have been in China because it is the most efficient, cheapest destination for supply chains.
Okay. And we're moving and building new supply chains. We have not asked ourself at what costs. I think this is another issue why we have more persistent inflation. So, all of that in my mind is going to create a more elevated inflationary environment until the transmission of higher interest rates start truly biting into the economy, biting into the housing markets, biting into the car markets. And let's be clear, if the UAW has a strike against the auto companies on top of all the issues of higher interest rates, and now they have higher wage costs, getting back to the issue about not enough workers, it could put a great squeeze in corporate margins and then we could have a fall in the equity markets that would probably then exasperate any type of fall in the economy. I don't see at least for the next four quarters, a recession because of the transmission time. But could this elevated interest rate cycle create more economic problems out a year? Yes, and that's one thing that I am worried about.
Ms. Campero: Before you briefly touched upon the peso, and as you know, mainly due to carry trade expert remittances, the Mexican peso has had an amazing ride in the last few years. Today I think it's trading around 17 or 18 pesos per dollar. What do you think could reverse this trend?
Mr. Fink: A rule of law, fear, instability. Mexico has an election, what in June next year? Many issues that could reverse the trend. I tend to believe the peso rallied too much too fast. I mean, that's a big rally in six to eight months. I mean, I think 18, 19 is where it should stabilize for a while, but Mexico has lost some of its, basically, affordability by the very large rise in the peso. Look at the peso, we all know systematically has devalued for the last 15 years, and it reached a point, it stabilized around 22, got as high as maybe 25, but it really stabilized at 22. But I think from 22, it got as low as 16 in this most recent rise, is a function of how much remittance are coming in there through building out factories and plants. But I think at 16, 17 it became pretty severe. It really impacted profitability, so it's going to stabilize somewhere in between, I don't see going back to 22 or 25, unless there's really some severe challenges to the economy, and most of the challenges of the economy is going to be more governmental and rule law and-
Ms. Campero: Political.
Mr. Fink: Yeah, and political, but I don't see it going to 15 either.
Ms. Campero: Ev, let me ask you the last question of this podcast. As someone who takes and manages risk on a daily basis, what is the biggest risk you see in Mexico right now, and why should it matter to the United States?
Mr. Greenberg: Yeah, Mariana, I want to add also to Larry's about the peso. The carry trade has been very powerful. Mexican interest rates have been very attractive on a relative basis, and I'm with Larry. As US interest rates rise, I think that's going to become less attractive. Look, ultimately, we've each touched on it. We've each talked about the greatest risk, and, it is, you can't understate it. It's an existential threat. And by the way, this podcast, as I understand it, is about framing Mexico to policymakers and influencers, framing Mexico in a way that we look at it through the lens of American national interest, because Mexico is in our national interest, it's part of North America. And insecurity and the rule of law and the organized crime in the country is the greatest threat. The strength of institutions starting with the judiciary to administer and the police to enforce, the strength of those institutions are under threat. They're not strong enough, and yet the organized crime grows continuously. I can't say it any more plainly than that. It's a threat to business, it's a threat to civil society in the country.
Ms. Campero: Unfortunately, we have come to the end of this episode. I really want to thank both of you, our guest, Larry Fink, Evan Greenberg, for taking time to participate. Ev, you asked me to give you the last question, so go ahead and it's all yours.
Mr. Greenberg: My question is very simple. Larry, my favorite Springsteen album is Greetings from Asbury Park.
Mr. Fink: Really?
Mr. Greenberg: Yeah. What is your favorite?
Mr. Fink: The River.
Ms. Campero: Well, since the three of us are going to go see the concert, hopefully Springsteen will be playing those two. I'm truly grateful for such an interesting conversation. To all our audience, I am Mariana Campero. Thank you very much for listening, and thank you, Larry, thank you, Ev.
Mr. Fink: Lots of love.
Outro: If you enjoyed this podcast, check out our larger suite of CSIS podcasts, from Into Africa, The Asia Chessboard, China Power, AIDS 2020, The Trade Guys, Smart Women, Smart Power, and more. You can listen to them all on major streaming platforms like iTunes and Spotify. Visit csis.org/podcasts to see our full catalog.
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