Charting the Recovery Signs in Arizona’s Trade

As the world enters the third year of COVID-19 crisis, Arizona’s trade with the world – one of key engines of economic growth – shows both troubling and encouraging developments. Based on data for 2021, we can assess the COVID-19 disruption and recovery compared to 2020 and the pre-COVID base line year 2019.[1] A comparison with the national trends adds another level of analysis and helps ascertain changes in Arizona’s trade as being above or below average recovery rates.

A Year Like No Other

Figure 1 is a reminder of an appalling trade reduction in 2020, the largest since World War II, which caught Arizonans, like the rest of the world, by a surprise.[2] Arizona ended the year 2019 with a total of $51 billion worth of traded goods with the world, and the data for first two months of 2020 signaled a continuation of an upward trend. Due to COVID-19 induced lockdowns, followed by reduction in industrial production, disturbance in chain-supply flows, and changes in consumer demand, world trade dipped below 2019 levels. Arizona’s trade remained below 2019 levels all through February 2021. Starting with a slow growth in March 2021, the trade picked up substantially in April 2021 and continued with varying growth rates through the end of the year. However, although positive and encouraging, the growth rates March-November 2021 reflect changes from the low, indeed historically low 2020 levels.

Figure 1. AZ Trade with World 2020 and 2021: % change from same month year ago

Arizona Less Impacted Early, but Lags in Recovery

To better assess the recovery, the 2021 trade is compared with the pre-pandemic levels in 2019. Figure 2 shows Arizona’s world trade on monthly basis in 2020 and 2021 as percent change from the same month in the pre-pandemic year 2019. Data for the U.S. trade are plotted as a reference for Arizona’s trend. Following the initial shock caused by COVID-19 in March of 2020, the reduction in Arizona’s trade, although dramatic, was not as deep as the reduction of trade at national level. However, as the recovery picked up in the second half of 2020 and continued through 2021, Arizona’s rates lagged behind the national trend for most part of the entire period. The two exceptions were winter months when Arizona’s rates matched or exceeded those at the national level. In contrast to the national average, Arizona's trade in the second half of 2021, although considerably above 2020 levels, was still below pre-pandemic 2019. Data for the end of the year show increase of close to 11 % above 2019 level and instill hope of better times.

Figure 2. U.S. and Arizona World Trade in 2020 and 2021 Compared to 2019

Trade with Mexico, Arizona’s Number One Trading Partner

Of Arizona’s total trade with the world in 2019, Mexico -- with $17.1 billion in traded goods-- accounted for 33.4 %, and thus continued to hold a long-standing first place among Arizona’s trading partners. Figure 3 shows a deep drop in trade caused by COVID-19 in March 2020 but rather a quick recovery in the last quarter of 2020. The following year, 2021 was marked by uneven growth from month to month as trading partners were slowly catching up with the pre-pandemic levels. Finally, the latest available data show a welcomed increase of close to 20% in November 2021 over the same month in 2019. The plotted data also suggest that changes in Arizona’s trade with Mexico were more in sync with the national trend in contrast to the pattern reflected in trade with the rest of the world.

Figure 3. U.S. and Arizona Trade with Mexico in 2020 and 2021 compared to 2019

Arizona’s Exports to Mexico: Copper Ore Surpassed Computer and Electronic Products

From January through November 2021, Arizona exported to Mexico $7.6 billion worth of goods, an overall increase of 4.2% over the same period in the pre-pandemic year 2019. As a result of uneven rate of recovery across commodities, the export composition has changed as well. In 2019, Arizona exports to Mexico were dominated by three categories: computer and electronic products (NAICS 334), minerals and ores (NAICS 212), and electrical equipment (NAICS 335). These three categories accounted for 52% of all exported goods. The remaining products in the top 10 exports were made of transportation equipment and parts (336), plastic and rubber products (326), machinery (333), chemicals (325), fabricated metal products (332), miscellaneous manufactured products (339), and agricultural products (111). As shown in Figure 4, the majority of top export commodities in 2021 were still below pre-pandemic levels of 2019 with the exception of minerals and ores (consisting mainly copper ore), machinery, and agricultural products. Production and distribution of ores and agricultural products had been generally less affected by COVID-19 than manufacturing production. A substantial increase in exports of machinery was a welcomed surprise given the fact that manufacturing production in key industries experienced deep reductions. As a result of these uneven effects of COVID-19, the 2021 rank position had been changed with minerals and ores climbing to the top of Arizona’s export to Mexico, thus leaving computer and electronic products in the second place. Further down on the list, machinery exports jumped from sixth place in 2019 to fourth place in 2021 ahead of transportation products.

Figure 4. Arizona’s Top 10 Exports to Mexico in 2019 and 2021

Top Export Commodities: Uneven Recovery to Pre-pandemic Levels

As already hinted three groups of products -- machinery (333), mineral and ores (212), and agricultural products (111) -- surpassed the 2019 export levels in 2021, thus suggesting their full recovery from COVID-19 effects on exporting activity. On the other side, the hardest hit was export of transportation equipment with 2021 levels that were almost 40% lower than in the pre-pandemic year 2019, as shown in Figure 5. A drastic reduction in automotive production in Sonora during 2020 and its slow recovery during 2021 was also related to declining exports of plastic and rubber products, together with computer and electronic products as they comprise important components in cross-border supply chain.

Figure 5. Recovery to pre-pandemic levels: Arizona’s Top Exports to Mexico in 2021

Imports from Mexico: Total Recovery Less than 1% from 2019 Levels

From January through November 2021, Arizona imported from Mexico $8.6 billion worth of goods, an overall increase of less than one percent (0.7%) over the same period in the pre-pandemic year 2019. As shown in Figure 6, the composition of Arizona’s imports from Mexico has also changed from 2019 to 2021. The two top import commodities -- agricultural products (NAICS 111) and electrical equipment (NAICS 335) -- have retained their first and second place respectively, while computer and electronic products (NAICS 334) slipped from third to fourth place. Transportation equipment (NAICS 336) climbed up to third place. Primary metal products (NAICS 331) also made a jump up the list ahead of machinery.

Figure 6. Arizona’s Top Imports from Mexico in 2019 and 2021

Top Import Commodities: Closer to Pre-pandemic Levels, and Some Surprises

As shown in Figure 7, the majority of top import commodities in 2021 were close to their pre-pandemic levels of 2019. Agricultural products, together with transportation equipment even surpassed the 2019 levels, albeit by small gains of 3.45 and 2.3%, respectively. Import of machinery, computers and electronic components, as well as miscellaneous manufacturing products was still below the pre-pandemic levels. Not included in the chart was a surge in primary metal manufacturing products, an apparent outlier with a 246% rise above 2019 level (which is not included in the chart because it would visually obscure other recovery rates). This might have been just a one-time occurrence associated with increased demand in housing construction and remodeling activity during the pandemic rather than a more permanent change in trade pattern.

Figure 7. Arizona’s Top Imports from Mexico in 2021: Recovery to Pre-pandemic Levels

Arizona’s Trade with Mexico: A Combination of Comparative Advantage and Cross-border Production Sharing

As shown earlier in Figure 4 (exports) and Figure 6 (imports), Arizona’s trade with Mexico is characterized by high share of minerals and ores (NAICS 212) in Arizona’s exports to Mexico, and high share of agricultural products (NAICS 111) in Arizona’s imports from Mexico. These two commodities reflect a more traditional trading pattern between two regions where each has an advantage based either on quantity, volume, or unit cost. Thanks to its natural endowment and historical development of copper industry, Arizona is one of the major exporters of copper ore. The northwestern Mexican states of Sinaloa and Sonora, on the other hand, have comparative advantage in production of fresh produce due to mild winters and lower labor cost. This unique characteristic of Arizona’s trade with Mexico is depicted in Figure 8.

Figure 8. Arizona-Mexico Trading in Comparative Advantage Commodities*

*Data for Jan-Nov 2019

Figure 9 shows a more complex trading pattern that characterizes exchange in manufacturing products. Arizona’s exports to and imports from Mexico fall within a range of manufacturing products within same industrial groups (NAICS). For example, computer and electronic products (NAICS 334) are in top manufacturing category in both Arizona’s exports to Mexico and Arizona’s imports from Mexico. This trade pattern reflects ongoing cross-border production-sharing model in North American manufacturing that started with the so-called maquiladora program in Mexico in the 1960s, and was substantially expanded within tri-lateral trade agreements between the U.S., Mexico, and Canada known as NAFTA of 1994 and USMCA of 2019.

Figure 9. Arizona-Mexico Trading in Production-sharing Commodities*

*Data for Jan-Nov 2019

Summary

Arizona’s recovery in trade with Mexico, its main trading partner, is faring slightly better than the recovery in the overall trade with the rest of the world. This partially reflects the specificity of Arizona-Mexico trading pattern in which comparative advantage in copper ore products (Arizona’s exports) and fresh produce (Mexico’s exports) account for a significant share of total trade. These two groups of commodities, as data suggested, were less impacted by the COVID-19 pandemic and thus each in their own way smoothed somewhat the bumpiness in trend lines during last two years. Arizona’s top manufacturing exports – computer and electronic products, electrical equipment, and transportation products – although bounced back and surpassed the pandemic 2020 levels – still, in 2021 were below the pre-pandemic levels of 2019.