Mexico is a prime nearshoring destination for U.S. companies due to its close geographical proximity, streamlined supply chains, trade agreements, and reduced exposure to geopolitical risks. As trade tensions between the U.S. and China reach new heights, Mexico has outpaced China to become the United States’ primary trading partner.
Despite the decline in direct trade between the U.S. and China, Chinese companies are still trying to reach the U.S. consumer market. They are using Mexico as an indirect route to avoid U.S. import tariffs. Mexico is facing the challenge of maintaining good relations with both the U.S. and China, the two largest economies in the world.
The nearshoring trend offers Mexico a significant opportunity to boost its economy. Often taken for granted, Mexico’s economic growth will be closely tied to its ability to manage the economic rivalry between the U.S. and China. Mexico’s nearshoring ambitions might increasingly depend on a show of alignment as a “friendshore” partner to the U.S. in this complicated trade triangle.
60-Year History of U.S. Manufacturing in Mexico
To understand the nearshoring trend to Mexico, it’s essential to recognize that this phenomenon isn’t entirely new. The U.S. has a long history of offshoring manufacturing activities to Mexico.
U.S. companies began offshore manufacturing in Mexico six decades ago with the inception of the maquiladora laws in 1964. These regulations were introduced to entice U.S. companies to set up assembly plants in Mexico, also known as maquiladoras, benefiting from lenient ownership and import regulations.
Simultaneously, the U.S. implemented customs laws encouraging labor-intensive assembly operations in Mexico. Goods manufactured in Mexico faced minimal duties upon exportation to the U.S., allowing for the production of goods for the U.S. consumer market with cheap labor in Mexico.
The 1990s saw the negotiation and implementation of NAFTA, providing long-term stability for trade between the U.S., Mexico, and Canada. NAFTA’s complex rules of origin and additional investor protections encouraged foreign investment in Mexico and boosted trade.
The trade agreements led to the construction of manufacturing facilities mainly in the northern states of Mexico. Its proximity to the U.S. border provides quick access to the U.S. consumer market. Due to the economic activity in the region, GDP per capita in the northern states of Mexico tends to be higher than in the southern states.
Mexico’s Trade Advantage as Unified in Free Trade Agreements
Mexico has one of the most robust networks of Free Trade Agreements (FTAs) of any country worldwide. For comparison, Mexico boasts 13 FTAs for 50 countries versus 23 FTAs for China covering 26 countries. This extensive network of FTAs opens the door to preferential duties with North American, South American, Asian, and European trading partners – the USMCA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Mexico FTA, etc.
Under NAFTA, tariffs on many goods passing between North America’s three major economic powers were gradually phased out. The United States – Mexico – Canada Agreement (USMCA (formerly known as NAFTA)) replaced the NAFTA and went into effect on July 1, 2020. The amendments included revisions to the following:
- Rules of origin for the automotive industry,
- Labor and environmental concerns,
- Protection for intellectual property (IP) rights
- Dispute settlement.
One of the most significant portions of the USMCA concerns new trade regulations for automobiles and automotive parts. Under NAFTA, cars and trucks with at least 62.5% of their components manufactured in one of the three participating countries could be sold free of tariffs. The USMCA increases that minimum requirement to 75%. In addition, the USMCA requires minimum wages for workers in the automotive manufacturing process: 40-45% of the work done on eligible vehicles must be accomplished by workers earning at least $16 (USD) per hour, the so-called Labor Value Content (LVC).
The U.S. Consumer Market is the Key Driver of Nearshoring Activities
The nearshoring boom in Mexico arises from the need to optimize supply chains toward the U.S. consumer market. China and India might have larger consumer markets counted for population, but the U.S. reigns supreme by the metric for spending power referred to as final consumption expenditure (FCE). FCE is the total spending on goods and services by households, governments, and non-profit institutions serving households, intended for direct consumption.
According to the World Bank, the FCE of the U.S. reached USD 21.08 trillion in 2022. This substantial figure underscores the influence of the U.S. marketplace on global offshore activities, which aim to ensure a consistent and cost-effective supply of products. The FCE of the U.S. comprises 29% of worldwide FCE and is 1,7 times that of the European Union, the second largest market.
China is no longer the cheap manufacturing hub it once was due to rising labor costs. Additionally, Chinese consumer confidence has plummeted to record lows, as 70% of savings invested in real estate have been impacted by the collapse of the property market. Consequently, China’s FCE is 45% that of the U.S.
The U.S. consumer market ranks supreme, leading companies to improve their supply chains and minimize political risks by reducing their dependence on China. Many U.S. companies are now looking to Mexico as a beneficial alternative due to its proximity, strong diplomatic relations, and established infrastructure. The long history of offshoring manufacturing to Mexico provides for a speedy process to nearshore in Mexico.
Benefits of Nearshoring in Mexico
There are many benefits for U.S. companies to nearshore and invest in Mexico. In a questionnaire conducted by Deloitte, geographic proximity to the U.S., cheap labor costs, and a qualified labor force ranked as the top three incentives to invest in Mexico.
Geographic Proximity
Geographic proximity enables rapid and easy trade as Mexico shares a 2,000-mile border with the U.S. Goods can quickly be delivered from Mexican border cities to U.S. destinations within 24-48 hours, a significant improvement compared to the three-week journey by boat from China.
Short distances are not only quicker but also cheaper. While shipping a 40-foot container from China costs thousands of dollars in transportation fees, a full container shipped from a facility near the Mexico border to a U.S. distribution center often costs only hundreds of dollars.
Furthermore, disruptions in cargo traffic during the Covid-19 pandemic exposed the fragility of global supply chains and the just-in-time (JIT) inventory system. Moving manufacturing to Mexico enables to reduce the risks of supply chain disruptions.
Cheaper and Qualified Labor Force
Salaries in the manufacturing sector have become more favorable in Mexico compared to China. In 2000, Mexican workers earned 60% more than their Chinese counterparts illustrative of how cheap labor was in China at that moment of time.
This unique window of opportunity in China has closed as wages have risen significantly throughout the years. From a labor-cost perspective, Mexico became cheaper for manufacturing than China sometime in 2011/2012.
Furthermore, Mexico offers a well-skilled labor force, thanks to its long Maquiladora history that has equipped workers for the required tasks. Jobs that are difficult to fill in the U.S., such as welders, are plentiful in Mexico.
Better Cultural and Linguistic Fit
Spanish is the second most spoken language in the U.S., with 41.25 million people, or 13.17% of the population, speaking it as their first language at home. In comparison, there are 3.40 million Chinese speakers, making up 1.09% of the population. This facilitates easier communication with Mexican colleagues than with those from China.
The total Latin population in the U.S. for 2020 was over 65 million, comprising 19,5% of the total U.S. population. As illustrated in the map above, the concentration of Latinos is the largest in the southern states bordering Mexico.
A border might separate the two countries but they share a hybrid culture that has developed in the border areas on both sides. In 2021, the Mexican population in the U.S. was 37,2 million, making for a strong connection between the North American neighbors.
Time Zone
Being in the same time zone as Mexico streamlines communication and coordination between businesses in both countries. This synchronicity facilitates real-time collaboration and reduces delays in decision-making processes. Management can easily travel to production sites.
Potential Pitfalls for Nearshoring in Mexico
The trend of nearshoring to Mexico is almost taken for granted, running the risk that its success becomes a foregone conclusion. It is important to understand that Mexico’s nearshoring boom derives its value from the developments in the U.S. and is not a stand-alone feat.
On the 2nd of June, Mexicans went to vote for a new president which unsurprisingly became Claudia Sheinbaum. She is the successor of Andrés Manuel López Obrador, also known as AMLO, and is said to continue his legacy within the Morena party. Not considered the most business-friendly candidate, worries rose about the economic consequences of her election.
The strengthening of the Mexican peso warrants attention as Mexican exports become more expensive and less competitive globally. While it benefits Mexicans shopping in the U.S., it negatively impacts the export industry. It reduces the cost advantages that enhance the appeal of nearshoring, especially against other low-cost manufacturing hubs.
Furthermore, the U.S. consumer market, a key driver for Mexican nearshoring shows signs of financial strain. Many American consumers are maximizing their credit card usage, leading to increased household debt. This overextension could reduce consumer spending in the long term, decreasing demand for goods produced in Mexican factories.
Trade Triangle Puts Mexico in a Difficult Political Position
U.S. companies were not the only ones to recognize the potential of Mexico as a nearshoring destination. Korean, Japanese, and German companies, mainly in the automotive space, have also operated there for years. Recently, the new kid on the block is China with companies trying to establish themselves in Mexico.
They are drawn to Mexico as a nearshoring hub due to its proximity to the U.S. and the opportunity to circumvent American trade tariffs. Mexico is becoming a playing field for Chinese companies seeking loopholes to enter the U.S. consumer market via the backdoor.
Chinese automakers might exploit USMCA’s rules of origin by assembling components in Mexico, thus bypassing higher U.S. tariffs on Chinese goods. This raises the possibility that Chinese products could enter the U.S. market indirectly, labeled as Mexican origin after minimal processing.
Mexico’s official customs data does not indicate a significant increase in Chinese imports. However, container shipping between China and Mexico surged by 34.8% in 2023, compared to a 3.5% increase in 2022, according to shipping data platform Xeneta, raising questions about the final destination of these goods. Container shipments jumped 60% year-over-year in January, according to Xeneta chief analyst Peter Sand, leaving it unclear whether these products are being rerouted to the U.S. or contributing to growing Chinese investments in Mexico.
This led to concerns in Washington with The U.S. urging Mexico to address these issues, exemplified by Mexico’s recent tariffs of up to 80% on some Chinese steel imports. In February, U.S. Trade Representative Katherine Tai highlighted a “lack of transparency” regarding Mexico’s steel and aluminum imports from third countries.
U.S. Policy Pressures Mexico as Ally and Friendshore Hub
Globalization appears to have reached its peak and seems to be replaced by more regional cooperation. The U.S. is increasingly focused on reclaiming Latin America as its so-called backyard, seeking to decouple Latin American nations that aligned with China during the U.S.’s absence in the region.
The U.S. could further increase tariffs on strategic Chinese imports to protect its industries and workers. The Biden administration has already targeted $18 billion worth of imports from China, including steel, semiconductors, electric vehicles, and medical products, to counter China’s unfair trade practices.
Many Latin American countries have followed suit to protect their steel industry as can be read HERE.
New tariffs in April signal challenges for Chinese exporters as supply chains shift. Mexico introduced tariffs of 5% to 50% on 544 products, including steel, textiles, and furniture, impacting countries without free trade agreements with Mexico, like China. These tariffs aim to balance Mexico’s economic interests amid U.S. pressure over its China ties.
If Trump is re-elected in November, he may adopt an even tougher stance on Mexico due to the rising U.S. trade deficit with Mexico, which reached $152 billion in 2023. In 2026, the U.S., Mexico, and Canada must decide whether to extend the USMCA until 2042, potentially affecting nearshoring trends beneficial to Mexico. Mexico might be pressured to align itself more with the U.S. than with China.
A Challenging Political Balance Act for the New President
Claudia Sheinbaum follows in the footsteps of AMLO and is expected to uphold his leftist agenda. AMLO’s focus was mainly on domestic issues, rarely making trips abroad. He did acknowledge the huge potential of nearshoring.
Nearshoring efforts could be jeopardized by an anti-imperialistic sentiment towards the U.S., which sometimes sours relationships. AMLO mentioned during a speech that Mexico does not want to feel like a colony of the U.S. and should be able to make its own choices about trade with China.
Sheinbaum seems to be more of a number-driven technocrat compared to her predecessor who was more ideologically driven. The Mexican export markets’ reliance on the U.S. consumer market, with 84% of exports going there, compared to only 2% going to China will not be overlooked.
Better a Close Neighbor than a Faraway Friend
It stands to see how the new administration will manage the nearshoring opportunity in Mexico. Nearshoring’s immense potential for the Mexican economy is undeniable, simultaneously risking it to be taken for granted.
As U.S.-China relations keep deteriorating, Sheinbaum will increasingly come for the difficult task of managing the expectations of the U.S. and China. She might thereby take a pragmatic approach to balancing out the numbers.
This strategy might work for a while, but the 2026 USMCA negotiations will see a firmer stance from the U.S. in pressuring Mexico to pick sides. This will become a sensitive topic igniting anti-imperialist sentiments.
The Morena party rose to power to address poverty and inequality in Mexico. Maximizing the benefits of the nearshoring trend could significantly contribute to achieving this promise, even if it means becoming a friendshore partner to the U.S., thus distancing itself from alignment with China.
