Mexico’s Nearshoring Boom: Strategic Advantages Amid Economic Challenges
Chen Senyi, Research Executive
Mexico’s Nearshoring Boom
Mexico has emerged as a key beneficiary of nearshoring trends, particularly as it has overtaken China as the largest exporter of goods to the United States in 2023. Despite US trade hawks' concerns that Mexico may serve as a transit point for Chinese goods to evade U.S. tariffs, data suggests a more complex reality. While imports of Chinese goods to Mexico increased by 64% from $69.52 billion USD in 2016 to $114.19 billion USD in 2023, significant growth in greenfield Foreign Direct Investment (FDI) highlights Mexico's transformation into a regional manufacturing powerhouse. Greenfield FDI, which involves building entirely new facilities, provides parent companies with substantial control over operations while generating new jobs and infrastructure. Chinese greenfield FDI in Mexico rose from $267 million in 2018 to a peak of $5.6 billion in 2023, reflecting a strategic shift by Chinese firms to invest in local production capabilities.
Additionally, the total value of greenfield investments in Mexico soared from $2.055 billion USD in 2016 to $41.042 billion USD in 2022, emphasizing the country’s appeal as a destination for establishing new manufacturing facilities. However, it also carries higher risks compared to mergers and acquisitions.
This robust increase in greenfield investments highlights Mexico's growing attractiveness amid global supply chain shifts, evolving from a mere transit point for goods to a critical regional hub. This trajectory underscores Mexico's potential for sustained growth in industrial capacity and enhanced global competitiveness.
Breaking down Mexico’s attractiveness
The current nearshoring trend is driven by multiple compelling factors. Following the disruptions of the COVID-19 pandemic and ongoing geopolitical tensions, multinational corporations have increasingly sought to diversify their supply chains and reduce long-distance dependencies. Mexico offers a unique value proposition: geographical proximity to the United States, favourable trade conditions, a skilled workforce, competitive labour costs, and established manufacturing infrastructure.
Geographically, Mexico’s closeness to the United States—one of the world’s largest consumer markets and a global economic power—offers significant logistical advantages. Proximity reduces transportation times and costs, facilitates smoother coordination between operations in both countries, and mitigates value chain interruptions. These benefits are further amplified by the U.S.’s active reshoring policies, which align with Mexico’s role in the regional supply chain.
Mexico’s trade environment strengthens its appeal. The United States-Mexico-Canada Agreement (USMCA) eliminates almost all trade tariffs among the three nations, creating a seamless trade ecosystem. Additionally, Mexico’s northern and southern borders feature free zones, which offer reduced Value-Added Tax (VAT) rates of 8% (down from 16%) and income tax rates (ISR) of 20% (down from 30%). These fiscal incentives enhance Mexico’s cost competitiveness, making it a highly attractive destination for companies seeking to streamline operations while maximizing profitability.
Mexico's large labour force of approximately 60 million people offers a robust labour force essential for sustaining long-term manufacturing and industrial growth. With a median population age of 29.3 years. As of September 2024, Mexico’s nominal hourly wage in manufacturing stands at 3.80 USD, a figure that is significantly lower than that of China, where manufacturing wages have risen steadily over the years. For comparison, China’s average hourly manufacturing wage exceeds 7.50 USD, nearly doubling that of Mexico. Beyond competitive wages, Mexico is cultivating a relatively skilled workforce. Mexico has the largest pool of STEM graduates in the American continent which positions Mexico as a hub not just for labour-intensive industries but also for high-value-added sectors.
Trump’s re-election and its impacts
The re-election of Donald Trump as U.S. president signals a continuation of "America First" policies, with a renewed focus on securing the southern border from illegal immigration. Trump has characterized Mexico as a facilitator of migrant caravans entering the U.S., which he associates with rising crime rates. On November 25, 2024, he threatened to impose 25% tariffs on imports from Mexico and Canada unless these countries take decisive action to curb illegal immigration and the flow of drugs like fentanyl into the U.S. Importantly, the U.S. has indicated that these tariffs are aimed at achieving political objectives and would be removed if progress on these issues is demonstrated.
With 78.1% of Mexico's trade tied to the U.S in 2022, such tariffs pose a significant economic risk. Although Mexico's administration has threatened retaliatory tariffs, this may not be a practical strategy. Much of Mexico's imports from the U.S. consist of raw materials and industrial components, such as refined petroleum and petroleum gas, which together account for 18.7% of the $294 billion in U.S. exports to Mexico in 2022. Imposing reciprocal tariffs on these essential goods could hinder Mexico's industrial output and economic growth, making retaliation counterproductive.
Why US and Mexico need one another
For decades, the United States' industrial capacity has been eroded by financialization and outsourcing—prioritizing short-term financial gains over sustainable manufacturing growth. This has left the U.S. with a weakened industrial base, creating vulnerabilities in economic infrastructure. Rebuilding this capacity is not a short-term task; it demands a generational commitment, substantial investment, and a comprehensive policy shift. Which given Trump’s four-year term limits and bifurcated political system will be difficult nor realistic to do so.
In this context, Mexico has positioned itself as an indispensable partner in the nearshoring movement. Its geographic proximity, shared economic ecosystem, and increasingly advanced manufacturing capabilities make it an ideal alternative to distant Asian production hubs. For the U.S., this collaboration represents an opportunity to address economic vulnerabilities and reduce its reliance on China, fulfilling a principal component of Trump’s agenda: decoupling from Chinese manufacturing. Mexico offers a politically stable, geographically proximate solution that aligns with U.S. economic and security objectives. Nearshoring also addresses inflationary pressures in the U.S. Mexican manufacturing, with its competitive costs and increasing technological sophistication, provides a crucial buffer against domestic inflation rising from the tariffs on Chinese goods.
Analysis of Mexico’s state of economy
The Mexican Peso has appreciated against the USD in recent years, fuelled by optimism about Mexico's nearshoring potential. However, inflation has posed a significant challenge. To address this, Banxico, Mexico’s central bank, raised its benchmark interest rate from 4.25% in June 2021 to 11.25% by March 2023. The high interest rates were intended to curb consumer spending and business investments by making borrowing more expensive, reducing the feasibility of investments with returns below the cost of borrowing.
This monetary policy approach proved effective, as inflation began to decline after Banxico maintained elevated interest rates for nearly a year. By 2024, the annual inflation rate stabilized at around 4.5%, though it remained above the long-term target of 3%.
The elevated inflation is largely attributed to a high budget deficit and rising labour costs. Mexico's budget deficit stood at 4.27%, 4.31%, and 5.9% of GDP in 2022, 2023, and 2024, respectively. However, the newly elected government has committed to fiscal consolidation, targeting a narrower deficit of 3.5%, signalling a potential reduction in inflationary pressures linked to fiscal policy.
labour costs are another significant factor. Since 2019, wages in manufacturing and services have risen faster than worker productivity. Unit labour costs in manufacturing increased 1.8 times faster than productivity, while costs in services rose 1.5 times faster on a monthly, annual average basis. This divergence between wages and productivity has intensified inflationary pressures, presenting a challenge for Mexico’s competitiveness despite its nearshoring advantages.
Despite these dynamics, Banxico has begun cutting interest rates, viewing current levels as excessively restrictive amid signs that inflationary pressures are easing. According to BBVA Mexico, consumption recorded its steepest decline since the onset of the pandemic, contracting by -0.4% quarter-on-quarter in Q2 2024.
Investment growth has also moderated, primarily due to a reduction in public expenditure. Public investment grew by over 4.0% quarter-on-quarter from Q4 2022 to Q3 2023 but declined to just 0.4% quarter-on-quarter in Q2 2024. The non-residential construction segment has been particularly sluggish, further dragging down overall investment momentum.
Looking ahead, inflation is expected to continue its downward trajectory. Both headline and core inflation are forecasted to fall below 3.5% by the end of 2025. For 2024, they are projected to close at 4.8% and 3.8%, respectively, marking a gradual alignment with Banxico’s long-term inflation target.
Outlook
In conclusion, Mexico navigates a complex economic landscape, leveraging its nearshoring advantages while confronting significant structural challenges. A potential depreciation of the Peso may alleviate tariff pressures but could heighten imported inflation, particularly in energy. Aligning with Washington’s strict migration policies will be crucial for advancing trade negotiations, but Mexico must also tackle inflation, budget deficits, and infrastructure deficiencies to maintain stability and unlock its economic potential. With a manageable Debt-to-GDP ratio of 53%, the country has the capacity to issue long-term bonds to fund critical infrastructure investments and mitigate potential economic downturns. Additionally, scaling back aggressive welfare policies, such as large mandated minimum wage increases, could help balance labour market dynamics. Over time, addressing structural issues like crime and drug-related challenges will further enhance economic resilience. Together with calibrated monetary policies and robust foreign direct investment inflows, these efforts can position Mexico for sustained growth and deeper integration within North America’s economic framework.
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