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The Covid-19 pandemic changed a lot in the world but in particular it highlighted the shortcomings of the world’s globalised supply chain which had concentrated in China over the previous decades. In response, global multinationals have sought to bring it back to domestic manufacturing or, at the very least, nearshore operations closest to the biggest consumer markets in North America. The biggest benefactor from this trend has been Mexico which has seen a surge in exports to the US and record receipts of foreign investment. ABSI this week will investigate the growth of an industrialised Mexico. 

It is important to appreciate that the concept of nearshoring isn’t new, it was first popularised in the early 1990s after the implementation of the North American Free Trade Agreement (NAFTA). NAFTA created a trilateral trade bloc between the U.S., Mexico, and Canada, drastically reducing tariffs and simplifying trade processes. By eliminating most of the trade barriers between these countries, NAFTA incentivised American manufacturers to move operations to Mexico for lower labour costs, while still maintaining proximity to the U.S. market.

However, while NAFTA did lead to substantial growth in Mexico’s manufacturing exports, it did not result in the massive boom many predicted. The stumbling block was China which had much lower labour costs, superior government support and investment in infrastructure, and its inclusion into the World Trade Organisation (WTO) which provided greater access to global markets, solidifying it as the “world’s factory”. 

Then the Covid pandemic hit and changed everything.

Source: Business Insider

The year 2020 also saw the implementation of the U.S.-Mexico-Canada Agreement (USMCA), updating many NAFTA provisions for today’s trade environment. USMCA reinforced trade ties with the tri-nations and further encouraged the nearshoring trend to Mexico by modernising labor regulations and strengthening protections for intellectual property.

The result; in 2023 the US imported more goods from Mexico than from China for the first time in 20 years. The total value of U.S. imports from Mexico reached over US$475 billion, marking a 5% increase from 2022, while imports from China declined by 20% to US$427 billion. Unsurprisingly, truck crossings from Mexico into the US have increased from 5.7m in 2019 to 7.4m in 2023. In terms of foreign direct investment (FDI), Mexico attracted ~US$35 billion in 2023 and this growth trajectory is set to continue with ~US$20 billion reported to be invested in the first quarter of 2024. 

Source: Overhaul

It’s not all sunshine and rainbows though for Mexico which is still grappling with law & order and organised crime issues that are holding many companies back from making major investments. Overhaul estimates ~21k cargo jackings on Mexican highways in 2023 costing millions of dollars in damages. 

The global push for supply chain resilience in the form of nearshoring manufacturing has played into Mexican hands due to its proximity to one of the biggest consumer markets in the world. But while Mexico's proximity, labor costs, and growing infrastructure make it an attractive option, challenges such as crime cannot be ignored. Nevertheless, with continued investment in security, infrastructure, and trade policies, the nearshoring trend between the US and Mexico is set to continue resulting in the economic development of the country. 

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