Nearshoring: Goldilocks Conditions for a New Mexican Export Boom

In the last couple years, world trade seemed to have reached an impasse: sanitary restrictions, geopolitical and economic disruptions caused delays in shipments, as well as historic price hikes and uncertainty across all the supply chain.

Throughout 2022, companies started rethinking their procurement and opted to transfer their operations, manufacturing and suppliers away from Asia (specifically China), which created a trend of regionalized supply chains: nearshoring.

Just as we mentioned in our previous article, this implies countless possibilities for small- and medium-sized enterprises (SMEs) to expand their reach and profitability.

But how can Mexican exporters actually leverage the trend? What are the Goldilocks conditions that need to be met in order for companies based in our country to be able to make the most out of the renewed interest of North American companies in having manufacturers and suppliers closer to home?

How can SMEs, which are barely recovering or still facing economic turmoil, create that “not too hot, not too cold” scenario in their finances and operations so they become the go-to suppliers of big American and Canadian, and even Latin American or European buyers?

The answer might lie in understanding the background and development of how we got here.

In 2019, right before COVID-19 turned the world upside down, Mexico overtook China as the largest trading partner of the US for the first time. That year, our country’s trade value with our northern neighbor reached US$614.5 billion, from which Mexican products imported in the US accounted for US$358 billion.

Since then, China, Mexico and Canada have been competing in a close race.

According to recent data from the US Census Bureau, during the first 10 months of 2022, Canada's trade with the US amounted to US$733 billion; in second place, Mexico exchanged a value of US$718.3 billion; while China’s trade with America totaled US$639 billion.

Behind these numbers lies another ongoing story that is already dramatically defining the direction of world trade: the economic and political tension between China, exacerbated after the disruptions caused by the pandemic.

During Donald Trump's administration, the US began imposing trade barriers, such as tariffs, to reduce its dependency on China. As expected, China retaliated and a trade war was unchained. 

Despite the attempt to ease the situation with a trade deal signed by Trump and China's Vice Premier Liu He in January 2020, the conflict extended and, in light of the COVID-19 pandemic, the relationship between the two biggest traders in the world only worsened.

But political barriers were not the only factor; with an economic global crisis developing and logistics operations having to hit the brakes, supply chains worldwide came to a halt. The rising costs in shipping made importing from Asia a very expensive option for companies worldwide, no matter that those suppliers knew how to comply with their requirements: price and distance were, now more than ever, decisive factors.

Navigating the most dire months of the crisis, businesses in North America began looking for recovery options to solve their procurement problems. And so, during 2022 a rising trend of supply chain regionalization emerged: a report by Capterra revealed 88% of businesses will work with suppliers closer to them, while leaders from firms like Accenture shared that around 90% of companies will invest in onshoring or nearshoring.

Additionally, Mexican President Andres Manuel Lopez Obrador reported last year that they expect US companies will invest US$40 billion in Mexico between 2022 and 2024.

With the additional benefit of the recently renewed United States-Mexico-Canada Agreement (USMCA), seasoned exporters and companies just starting to expand internationally will definitely find great opportunities. 

What do they need to take advantage of this upcoming Mexican boom? At Drip Capital, we believe the Goldilocks conditions will be met given three factors:

Smooth Sailing for USMCA

The North American Free Trade Agreement (NAFTA) enacted in 1994 wrote a whole new chapter for Mexico’s economy. When North America became a free trade zone, the US reinforced its position as our main trade partner.

Three decades later, NAFTA evolved into the USMCA and, once again, our country has a golden opportunity to boost exports. It also represents the chance to consolidate North America as a leading trade region of the world.

In that sense, just as  President Joe Biden and President Lopez Obrador remarked before their last bilateral meeting in January 2023, cooperation for development  and a strengthening of supply chains will be necessary to make the hemisphere even more competitive.

A new export boom for Mexico will only be possible if all three countries continue to  have a smooth diplomatic relationship and align their trade development plans.

Specialization of Mexican Manufacturing

In between the 1970s and 1980s, China transitioned from being an economy mostly focused on agriculture to becoming  "The World's Factory."

Not only did it stand out as a cost-effective option for manufacturing — due to lower labor costs, a more "flexible" regulatory compliance and "competitive" policies around taxes and duties — but it also spearheaded the creation of Asian business hubs for key industries like electronics, automotive and other specialized manufacturers.

Today, Mexico is the seventh-largest global passenger vehicle manufacturer, which ranks among its main exports (cars, computers, motor vehicles and their parts, as well as delivery trucks, according to the Observatory of Economic Complexity). At the same time, our biggest imports are integrated circuits, motor vehicles, refined petroleum, office machine parts and telephones  — products that reveal how Mexico is a crucial part of the supply chain for these sectors.

As Mexico becomes a relevant manufacturing country, it will become more attractive not only for its strategic location, but also by the specialization of Mexican traders that are able to deliver high quality products that follow industry standards.

Reducing the Trade Finance Gap

At Drip, we have heard several business stories on how, despite a higher demand, companies in a good position still struggle to supply. This is mostly because having more international purchase orders does not necessarily imply you’ll have the means to fulfill them. 

In other words, closing more deals does not guarantee access to working capital because international transactions usually imply credit terms of up to 90 days.

Data from the World Economic Forum reports that the trade finance gap has reached US$1.7 trillion and global SMEs are disproportionately affected. 

This is a very real situation for Mexican exporters, that even if they’re technically considered as SMEs for their size, they actually play a big role in the regional supply chain.

The export boom will only be possible if these small and medium companies have the means to expand and grow. Access to working capital to finance operations and a smarter strategy around capital to invest in their own business will make the difference and will allow our country to compete to world trade standards.

As we head toward a new Mexico export boom, government entities, banks and fintech companies must work closely for this to happen.