Could Mexico Replace China as the Top Global Manufacturing Exporter?

Many trade experts are still optimistic about the likelihood of more businesses nearshoring operations to Mexico over the next ten years, even though the global economy continues to be challenged by several factors, including the ongoing Russia-Ukraine conflict, the effects of the pandemic, and inflationary pressures.

More international shippers are choosing to relocate industrial operations just south of the border or increase existing production in Mexico as an alternative sourcing option to China and other Asian countries, according to experts.

The practice of nearshoring involves moving production and manufacturing processes to a nation closer to the final customer.

American manufacturers are starting to change their minds about China as a source of inexpensive manufacturing. The rising cost of labor in China, the distance to American markets, and the lingering trade disputes between the two nations are some of the causes.

Can Mexico step up as businesses consider nearshoring production and diversifying their sourcing?

Mexico as a Manufacturer Through the Years

Manufacturing has always been centered in Mexico. Since 2002, the Japanese automaker Toyota has operated a facility in Tijuana. One was inaugurated in 2010 by the American industrial behemoth Honeywell.

But the nation is progressively involving itself in higher-value procedures. It increased from 1.5% in 2010 to 3-4% of all aerospace imports into the United States today.

A Contrast to China’s Recent Woes

China’s stake, which was equal to Mexico’s a decade ago, is now just 1%, in comparison. Much of this change can be explained by American sanctions against China and tariffs on Chinese imports, as well as by China’s rising wages and the challenges of doing business there.

Recently, the tendency has picked up speed. Companies throughout the world are already thinking about reducing their supply chains due to factors like pandemic-related border closures, rising freight costs, and consumers’ desire for quick satisfaction.

Can Mexico Capitalize on the Edge?

Mexico has a fantastic opportunity here. The nation benefits from some inherent advantages, not the least of which is a lengthy land border with the US. In total, Mexico is a party to 23 free-trade agreements.

Compared to China, manufacturing wages are lower. According to a poll conducted this year by the American Chamber of Commerce in Shanghai, one in five of its members was considering relocating some of their jobs from China to Mexico.

Many Mexican businesspeople are in a positive mood in Tijuana. Recently, several sizable companies have grown. To produce cables for aerospace, Panasonic, a Japanese electronics manufacturer, constructed a facility in 2018.

Other businesses are branching out into distribution and logistics. The e-commerce behemoth Amazon constructed a warehouse there in September of this year, but the company denied that it would utilize it to service consumers in the United States.

Manufacturing of medical devices and other electronics is also expanding, in addition to aircraft. Mexico is carrying out tasks that were formerly required of Japan or Germany. With their right hands, people are operating a $1,000,000 machine, while with their left hands, they are operating another.

A Chain Reaction

As a result, the border region, which is already wealthy, is becoming increasingly wealthier. Growth rates in northern Mexico are comparable to those in Asia. However, the situation varies elsewhere. In contrast to Brazil’s 3.7% or Vietnam’s 6.2%, the FDI decreased from 3.1% of GDP in 2018 to 2.3% in 2019.

Despite being close to the United States, Mexico has its challenges. Business parks offer top-notch amenities, but the surrounding infrastructure, including the roads and ports, is of poor quality.

Businesses lament having trouble acquiring input. Numerous of the resources required by companies like Panasonic and Össur are imported. Similar to this, Össur came dangerously close to leaving Tijuana when it was unable to locate a business to use chemical treatments on its goods, which include prostheses.

Despite being close to the United States, Mexico has its challenges. Business parks offer top-notch amenities, but the surrounding infrastructure, including the roads and ports, is of poor quality.

Mexico cannot control all of the factors that contribute to its issues. When the American government uses the term “near-shoring,” it refers to onshoring. In talks with Canada and Mexico, it may be protectionist.

USMCA, the updated trade agreement reached in 2020 between the three nations, is more stringent than its predecessor, NAFTA; in fact, it was negotiated in part to protect American manufacturing jobs.

But Mexico’s populist president Andrés Manuel López Obrador, hasn’t made a difference. 2018 saw the conclusion of Enrique Pea Nieto’s administration, one of Mexico’s most pro-business (albeit corrupt) regimes. Contrarily, Mr. Lopez Obrador appears to like frightening investors.

After the workers had been digging for three years and spent at least $5 billion, he quickly canceled a new airport for Mexico City. Additionally, he canceled a $1.4 billion investment by American brewer Constellation Brands in a brand-new factory that was about to be finished in 2020.

By incorporating independent regulators within the government or cutting their funding, he has made them less effective.

Making Things Right

Additionally, Mr. López Obrador is favoring ineffective state-owned businesses while reversing his predecessor’s decision to open up the energy sector to private businesses. This not only makes electricity dirtier and less dependable, but it also sends intimidating messages to potential investors.

General Motors (GM), an American automaker, warned in November that the business would not make any investments in Mexico unless the government supported renewable energy. Earlier this year, GM announced it would spend more than $1 billion starting in 2023 to produce electric vehicles in Mexico.

Leading manufacturer of such vehicles, Tesla, last year debated building manufacturing in Mexico but decided against it in favor of Texas. Elon Musk, the company’s CEO, has complained about the Mexican government’s decision to shut down some of its suppliers’ plants during COVID-related lockdowns, despite Tesla’s lack of an explanation.

Conclusion

According to Michael Camuez, who initiated a series of meetings to strengthen the economic relationship between Mexico and the United States during Barack Obama’s presidency, Mexico runs the risk of “shooting itself in the foot” by not taking advantage of shorter supply chains.

In September, Mr. López Obrador and Mr. Biden reopened this “economic discussion.” Unfortunately, Mr. López Obrador is the one who has his finger on the trigger and is likely to pull it based on how he has previously treated foreign investment.