Mexico's Deepening Water Crisis Poses Risks for Canadian Businesses and North American Supply Chains

A critical water crisis is unfolding across Mexico, threatening to disrupt daily life for millions and destabilize key sectors of the North American economy. Major urban centers, including the sprawling capital of Mexico City, are facing the prospect of a 'Day Zero,' a point where the water supply can no longer meet demand. This situation, driven by a combination of severe drought linked to climate change, decades of underinvestment in infrastructure, and unsustainable water extraction from dwindling aquifers, is creating a high-stakes environment for Canadian companies with significant operations in the country.

The Cutzamala water system, a network of reservoirs and canals that supplies about a quarter of the water to the Mexico City metropolitan area, is at historically low levels. Across the country, lakes are drying up and reservoirs are shrinking, forcing authorities to implement stringent water rationing. The crisis is not just an environmental issue; it is a profound economic threat that directly impacts Canadian interests in mining, manufacturing, and agriculture, testing the stability of deeply integrated cross-border supply chains.

Mining Sector Under Pressure

Mexico has long been a top destination for Canadian mining investment, with dozens of firms operating gold, silver, and copper mines across the country. However, mining is an incredibly water-intensive industry, and the current scarcity is putting immense pressure on operations. Companies like Toronto-based Torex Gold Resources and Agnico Eagle Mines, which have major assets in Mexico, are facing a dual challenge: securing enough water to maintain production while navigating complex social and political dynamics. Local communities, also facing shortages, are increasingly scrutinizing and protesting industrial water use, raising the risk of operational shutdowns and disputes. The situation mirrors the high-stakes environment faced by Canadian resource companies across Latin America, where economic policy shifts and resource nationalism can create significant uncertainty, as seen in Argentina's recent 'shock therapy' reforms.

In response, Canadian mining firms are investing heavily in water-saving technologies, such as dry-stack tailings and extensive water recycling systems. However, these measures may not be enough if the drought worsens or if the Mexican government imposes stricter regulations on water concessions for industrial users. The long-term viability of these multi-billion dollar investments could depend on their ability to innovate and negotiate access in an increasingly water-stressed environment.

Manufacturing and Automotive Supply Chains at Risk

The crisis extends to Mexico's robust manufacturing sector, a cornerstone of the North American supply chain under the Canada-United States-Mexico Agreement (CUSMA). Canadian automotive parts giant Magna International, for example, operates numerous plants in Mexico that are vital to the continental auto industry. Manufacturing processes, from parts fabrication to vehicle assembly, require significant amounts of water for cooling, processing, and cleaning. Production slowdowns or halts at Mexican facilities due to water shortages could have a cascading effect, disrupting assembly lines in Canada and the United States. This highlights the vulnerability of just-in-time supply chains to climate-related shocks. Businesses are now forced to factor water availability into their risk assessments alongside labour costs and trade logistics.

Agricultural Imports and Food Security

Canadian consumers have become accustomed to year-round availability of fresh produce like avocados, tomatoes, and berries, much of which is imported from Mexico. The agricultural sector is by far the largest consumer of water in the country, and the current crisis is devastating for farmers. Reduced water allocations are leading to lower crop yields and, in some cases, complete crop failure. This not only impacts the livelihoods of Mexican farmers but also threatens to increase food prices for Canadians and create volatility in the supply of key agricultural products. The challenge of balancing economic development with environmental sustainability is a recurring theme in the region, echoing the pressures seen in Brazil's efforts to protect the Amazon while supporting its agricultural economy.

A Test for CUSMA and North American Relations

The water crisis could become a significant issue within the CUSMA framework. The trade agreement includes provisions for environmental protection, but a systemic resource scarcity of this magnitude was not a central focus. Disputes could arise if water allocation policies are perceived as favouring domestic industries over foreign-owned operations, potentially triggering investor-state challenges. Furthermore, the crisis underscores the need for greater cross-border collaboration on climate adaptation and water management. The health of the North American integrated economy depends on the resilience of all its partners, and Mexico's water crisis is a stark reminder that environmental stability is a prerequisite for economic prosperity.

For Canada, the situation demands a multi-faceted response. The Canadian government and its trade commissioners in Mexico are likely advising businesses on mitigation strategies and monitoring regulatory developments. For their part, companies must accelerate their adoption of water-efficient technologies and engage proactively with local communities and governments to ensure their operations are sustainable. The unfolding crisis in Mexico is a clear signal that water scarcity is no longer a distant threat but an immediate and material risk to Canadian economic interests abroad.