Even before Elon Musk announced he would spend billions of dollars to build his company's largest Tesla factory in the industrial hub of Monterrey, Mexico, the U.S. trade winds were already heading south.
At the end of 2022, Mexico's Economy Minister Raquel Buenrostro Sánchez said that 400 companies have expressed interest in relocating to Mexico from Asia. Investment rained down as new industrial parks sprang up, much of it driven by Asian money. According to Mexico's Secretary of Finance and Public Credit, about $13 billion in investments have been secured through June 2023, most of which went to auto or auto parts manufacturers.
New numbers from last week's U.S. Census show Mexico is the United States' largest trading partner. In 2023, the United States had $798 billion in trade with Mexico, with the goods it bought from its southern neighbor soaring, surpassing China and Canada. The boom around nearshoring (a catchy term for moving companies closer to a priority market, in this case the United States) helped push Mexico into this position.
“This is not cyclical, it's new,” said Andrew Hupert, a trade expert who used to live in China and now lives in Mexico.
“What I'm seeing is a diversification of manufacturing. We're starting to get calls from companies saying, 'We don't want to put all our eggs in one basket,'” said Nogales, Ariz.-based , said Joshua Rubin, vice president of business development at Javid Group, a company that helps companies get started. In Mexico.
According to the Dallas Fed, Mexico surpassed Canada for the first time in early 2023, bringing total bilateral trade between the neighbors to $263 billion in the first four months, even as China's numbers continued to fall. By the end of the year, the United States had purchased $475 billion worth of Mexican goods, $421 billion from Canada and $427 billion from China, a 20 percent decrease from 2022.
The nearshoring boom is not limited to Mexico. A 2022 report from the Inter-American Development Bank (IDB) suggested that the entire Latin American and Caribbean region is poised to reap the benefits, with exports expected to reach up to $78 billion in the near future. Countries such as Argentina, Brazil, and Colombia could potentially benefit significantly. But all of that dwarfed Mexico, which accounts for nearly half of the IDB's projected nearshoring growth. This has caught the attention of Canada's auto parts lobby, which has begun to voice concerns that Chinese investment in Mexico will ultimately hurt Canadian jobs.
How Mexico reached this position is as much a result of its own efforts and growth as it is of geopolitical forces outside of its control. And experts suggest it's just the beginning.
“It's a world of opportunity right now,” said Marco Villarreal, who helped China-based ATV and UTV manufacturer Hisun Motors open a manufacturing facility in Saltillo, a city outside Monterrey.
Villarreal, who had a long career with General Motors and Caterpillar, recalled touring an industrial park in the Monterrey-Saltillo region at the end of 2020, and Hesun's head of U.S. operations was amazed at the scale of the manufacturing industry in front of him. expressed.
“Marco, what's happening in Mexico is the same thing that happened in China 30 or 40 years ago when we started expanding manufacturing,” Villarreal recalled the owner telling him.
Alfredo Nolasco, a business development specialist who founded the Mexican consultancy Spiral, agreed: “There is growing interest from Asia in locating in Mexico.”
What explains the boom?
Mexico has long carved out space as a manufacturing hub for the United States through tariff and exemption programs. This allowed companies, which in the 1990s referred to their factories as “maquiladoras,” to assemble products exclusively for the United States. export. The North American Free Trade Agreement and its improved cousin, the United States-Mexico-Canada Agreement, were another boon for southern partners.
But new factors came together to create the surge we're seeing today. Most often highlighted by experts on both sides of the Mexico-US border is the trade war between China and the US. Hupert said this started under the administration of former US President Donald Trump and really took off under President Joe Biden.
For years, Mr. Huppert has warned of declining profits in China and argued that compliance costs would outweigh the savings.
“It's more or less impossible to comply with Chinese regulations and U.S. regulations at the same time,” Huppert said. “The United States wants information in many industries that China could always consider state secrets.”
Then the coronavirus pandemic hit, exposing logistics risks that had never been considered in a globalized economy. As the cost of shipping containers to transport goods from China to North America soars, companies have been forced to swallow a tough supply chain pill. As was the case with medical supplies imported into the United States during the lockdown, companies that were unable to get their products to market died or Mexico was left in an essential position.
However, Huppert said companies are not completely abandoning China and neighboring countries and are opening branches and expanding their footprint in Mexico.
“The pandemic has left us with very important lessons that lead us from the globalization of production to the regionalization of production,” said Claudia Estevez, executive director of the Mexican Association of Private Industrial Parks. “It's effectively destroying globalization.”
He added that the Ukraine war was a further factor that caused European countries to reconsider manufacturing locations in countries such as Poland.
“Our good fortune is due to our geographic location,” she said. “That's because we share 2,000 miles.” [3,218km] It borders the world's largest market. ”
As a result, demand for industrial parks has increased explosively. According to Estevez, about 50 new industrial parks are being built in Mexico in 2023, with Chinese investors accounting for almost half of them and Korean investors for the remaining 20%. In 2019, the occupied area of the industrial park was 2 million square meters (21.5 million square feet). By mid-2023, its area had soared to 4.3 million square meters (46 million square feet). “It's historic,” she said.
Growth that has accelerated for decades
While this nearshoring boom is primarily related to manufacturing, the growth in trade is broader than that.
Jamie Chamberlain, chairman of the Greater Nogales-Santa Cruz County Port Authority, sees this as part of a trajectory that goes back decades. He recalls going to a farm in rural Mexico as a child with his parents, who started importing fruits and vegetables in 1971.
In the agricultural sector, the growth has been “astronomical”. When he started this business in his 1987, importing agricultural products was a business that spanned from November to May. “Currently, we are a nearly year-round industry that imports from every state within Mexico,” he said. “The berry sector is the biggest growth sector, and it’s all for export to the United States.”
Demand isn't the only thing oiling the wheels of this economy. There is a positive mindset involved. In Nogales, for example, between 900 and 1,000 vehicles were entering the United States every day, so the Port Authority began a port of entry expansion plan to manage the increasing flow of trucks. It is now approximately twice as large in each direction.
“Infrastructure readiness is critical,” he said.
cartels and currencies
Huppert points to two clouds underlying this upward trajectory: instability caused by drug cartels and the currency. “The peso is too strong,” he said. “That and inflation will erode Mexico's cost advantage.”
Villarreal said this is not only a cost advantage, but also a labor supply advantage. The United States lacks the skilled workers that many American companies covet and that Mexico has spent decades developing. The company has now been manufacturing cars for more than 50 years and has a workforce that can handle technical assemblages and is well suited for less demanding roles such as furniture, he said. pointed out.
And where gaps exist, market forces are already working to fill them. Nolasco, a business development specialist, recalled one customer who came to him looking for a supplier of nuts, bolts and washers.
“We realized that while Mexico is a big country, we are not big enough for simple problems like this,” he says. If demand increases, the labor supply problem may be solved.
“This is a great opportunity to develop joint ventures with other partners in Mexico and around the world.”