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Could Mexico replace China as top global manufacturing exporter?

Nearshoring represents ‘lifetime opportunity’ to invest in Mexico, experts say

Mexican Economy Minister Raquel Buenrostro said last month over 400 companies were currently looking to move operations from Asia to Mexico. Pictured is the World Trade Bridge in Laredo, Texas. (Photo: Jim Allen/FreightWaves)

While the world economy continues to face multiple headwinds, such as the Russia-Ukraine war, lingering pandemic effects and inflationary pressures, many trade professionals remain bullish about the prospect of more companies nearshoring operations to Mexico over the next decade.

A growing number of global shippers view Mexico as an alternative sourcing location to China and other Asian nations by either relocating manufacturing operations just south of the border or choosing to expand existing production in Mexico, experts said.

Nearshoring is the relocation of production and manufacturing operations from one country to another that is closer to the final consumer.

“I think executives are starting to rethink that decision of going to China and repositioning their strategy in terms of having dual manufacturing sites,” Rosemary Coates, executive director of The Reshoring Institute, told FreightWaves. “In the past five to 10 years, regardless of the pandemic, there has been a lot of development and growth in contract manufacturing in Mexico.” 

According to Mexican Economy Minister Raquel Buenrostro, hundreds of foreign companies are currently interested in relocating to Mexico.

“More than 400 North American companies have the intention to carry out a relocation process from Asia to Mexico,” Buenrostro said at an appearance before Mexico’s Senate last month. “This is a sign of the importance of the United States-Mexico-Canada Agreement, a trade pact where ties with the U.S. and Canada have been strengthened, and where an institutional framework was established that grants legal certainty to investors, businessmen and consumers in the region.”

Carlos Capistran, Bank of America’s managing director of Canada and Mexico economics, recently said nearshoring represents a “lifetime opportunity” for companies to invest in Mexico. 

“Mexico has a lifetime opportunity with near/reshoring, the relocation of supply chains to North America, and it has started,” Capistran said in a Bank of America report published in November. 

Interest in Mexico is expanding rapidly

Joshua Rubin, vice president of the Javid Group, said in previous years his company used to get one or two calls a month from foreign firms inquiring about relocating manufacturing operations to Mexico. Lately, Javid has been receiving dozens of calls a month.

The Javid Group is a shelter company that facilitates foreign companies setting up manufacturing in Mexico. Javid is based in Nogales, Mexico, just across the border from Nogales, Arizona.

“When the USMCA went into effect in 2020, everyone expected this huge flood of companies into Mexico,” Rubin told FreightWaves. “Unfortunately, we had a pandemic going on. There were a few phone calls in 2020 but not a lot.” 

The USMCA replaced the North American Free Trade Agreement among the U.S., Mexico and Canada in July 2020.

Rubin said 2021 and 2022 “flipped the script completely” in terms of interest in Mexico as a supply chain alternative. 

“We began getting a lot of phone calls, about four or five phone calls a week, if not more, saying, ‘Hey, we want to move to Mexico,’” Rubin said. “Now in 2022, it’s a whole different story, we have definitely seen an explosion of companies interested in moving here.”

The nearshoring momentum for Mexico is also represented in some of the latest data on foreign direct investment (FDI), which has reached a record high this year in the country.

FDI in Mexico increased about 30% to $32 billion in the first nine months of 2022 compared to the same period in 2021, according to statistics from Mexico’s Economy Ministry (SE). 

About 45% of the $32 billion total was new investment, 44% was reinvestment, and 11.1% was 

financial transactions between different legal entities within the same parent company in Mexico, according to the SE.

The U.S. was the largest foreign investor in the Mexican economy between January and September at 39% of total FDI. The next biggest investors were Canada, 10%; Spain, 7%; Argentina, 5%; and Japan, 4%.

‘Nearshoring is a fad,’ China is not going away

Not all cross-border trade professionals feel that nearshoring in Mexico will have the impact that some predict it will.

“Nearshoring is a fad word,” Jorge Canavati, a principal at J. Canavati & Co., told FreightWaves.

J. Canavati & Co. is a San Antonio-based company that provides international logistics and trade consulting. Canavati is also chairman of the San Antonio chapter of the Global Chamber of Commerce.

Canavati said China will continue to be a huge part of the U.S. economy and supply chain and that there has been migration of manufacturing from China, but to India, Vietnam and other countries.

“This is where the confusion lies, what is happening in Mexico is new investment, fresh FDI from around the world,” Canavati said. “A separate issue is that companies have been moving from China to Vietnam, India. There are various reasons for this: China’s strict COVID regulations, much of which are still in place, trade issues, etc. To be clear though, China will still be a force to contend with in trade.”

Canavati said Mexico is an “extraordinary place for FDI in manufacturing,” but if the country wants to attract even more FDI in the coming years, it needs to clamp down on violence around the country, continue modernizing digital and physical infrastructure and work on more binational projects with the U.S., such as border gateway infrastructure.

Mexico also needs to resolve its USMCA disputes with the U.S., which seem to be mounting, Canavati said.

Over the last year, trade disputes over energy and genetically modified corn have emerged between Mexico and the U.S. 

“It is important to understand that the USMCA is a partnership,” Canavati said. “Making unilateral decisions like what is happening in the energy sector, the agriculture sector and other areas causes serious damage to FDI opportunities. Money scares off easily and confidence dissipates fast.”

Tariffs, transportation costs, labor and trade lanes 

In addition to the Russia-Ukraine war and the pandemic effect, other factors sending factories from Asia to North America include the ongoing U.S.-China trade war, Mexico’s large manufacturing base and Mexico’s location.

“Mexico already has a large manufacturing base that is highly integrated with the U.S. and positions the country ahead of other economies to receive more manufacturing of products for the U.S. market,” Capistran said. “Mexico is a natural candidate for firms to relocate production to serve the U.S. market, following the fragmentation of global supply chains and the ongoing reversal of the China trade shock of the early 2000s.”

Capistran also said Mexico’s labor costs are now in line with those of China. In Mexico, minimum wage is around $1 an hour, while in China it has increased to about $3 an hour.

“To the extent that Mexican low labor costs remain below the costs of Asian manufacturing production, Mexico has a cost advantage,” Capistran said.

Coates cites import tariff benefits that are available to goods manufactured in Mexico as another element in nearshoring.

“Goods coming into the U.S. directly from China are subject to a 25% tariff,” Coates said. “Manufacturing products in Mexico, with Mexican parts and labor, may qualify for duty-free importation under the USMCA.”

Greg Orr, president of truckload carrier CFI, said he sees a lot of opportunity to capitalize on freight movements from all of the production relocating from overseas to Mexico. Joplin, Missouri-based CFI provides dry van and temperature-controlled truckload services throughout North America. 

CFI’s cross-border operation accesses five major entry points, running tractors to and from the Mexican border, including its largest facility in Laredo, Texas. 

“I think with the labor rates in Mexico being competitive, versus what it is in China, minus the transportation costs that you would have coming across the Atlantic Ocean versus crossing the border, I definitely think Mexico is positioned well to partake in attracting more companies,” Orr told FreightWaves. 

Orr said he hopes that U.S. manufacturers will also bring back more jobs stateside, which would help cross-border freight movements with Mexico. 

“I’ve heard a lot of stories and rumors that there’s quite a few companies that are looking to bring stuff back into the United States, and I hope that there’s just a good balance or combination of manufacturing on both sides of the border,” Orr said. “Because truth be told, as great as it is to have the northbound freight coming [to the U.S.] from Mexico, the hard part is getting the southbound freight to [Mexico] to be able to capture that freight going north. Right now, it’s definitely a lopsided ratio. I would hate for it to become even more lopsided.”

Watch: the state of the freight industry from a logistics manager’s view.

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  1. Jamin Gladen

    Looking only at small trends in where goods are made is only looking at one piece in a massively complex puzzle. All the discussion about the shape of that single piece and how it fits into its neighboring ones of boarders and transport is very much ignoring the large elephants in the room. Minimum wage in Mexico at $1/hr doesn’t show that the normal wage has been over $3/hr for over a decade or that wages directly tie into purchasing power for consumable goods. Offshoring has always gone hand-in-hand with increases in automation, and the last 6+ years has seen a staggering growth in physically automating blue collar jobs. And this tells you nothing about the survey from 2012 that showed descreet tasks in the white collar job sector were subject to over 50% of those items being automated digitally. Enter the pandemic. Enter the working from home. Enter advances in AI tools that leverage existing human capital enormously, and a simple 60 person HR department now does the work that a 900 person group did a decade ago. Boomers are going away in the next decade and so is their buying power. Are the younger generations literate enough to avoid the psychological marketing traps of fast fashions and filling the landfills with objects planned to become obsolete? More importantly in this demographic shift away from having roubust middle class wages, do the younger generations have the buying power to need large quantities of manufactured goods if they have to buy houses as friend groups or share living spaces with older relatives, as the trends already show is happening? Professor Harari from Israel predicts the new social class emerging in the next decade (because of AI and automation) will be the “Useless Class”. Are we ready to absorb this staggering loss of consumer buying power globally or even to provide basic human needs that are already filling the US with tent town where the political will to help is weakest? I think we are in for some seriously dark times if we can’t care about each other, and the fat profits of those at the top (Rail Barrons like to keep it above 40%) is going to become rather appalling and stark in the near future.

  2. Jorge Canavati

    Mexico is an extraordinary place for Manufactuing especially that the logistics sector is growing by leaps and bounds. There are alternatives to LA/Long Beach ports such as the Panama Canal and U.S. Gulf Ports. Mexico Pacific seaports, such as the port of Lazaro Cardenas, are an extraordinary alternative because of the logistics infrastructure. I think the hostility you talk about education more e than anything else. The power of trade will bury the opinion of the elites

  3. Richard Cathcart

    Mexico would be an ideal replacement for China but two major problems (among others) could cause a delay: (1) West Coast seaports, heavily funded by politicians with investments in China make it easier for China’s exports to enter and dominate the marketplace; (2) Biden Govt.’s open southern border is meant to induce American-Canadian hostility toward Mexico and Latin America. So, bottom-line, it is the desire of elites to oppose Mexico’s growth as a significant supplier to the rest of North America.

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Noi Mahoney

Noi Mahoney is a Texas-based journalist who covers cross-border trade, logistics and supply chains for FreightWaves. He graduated from the University of Texas at Austin with a degree in English in 1998. Mahoney has more than 20 years experience as a journalist, working for newspapers in Florida, Maryland and Texas. Contact [email protected]