Mexico’s Nearshoring Narrative in an Election Year

Mexico has benefited from nearshoring for many years. The shared border with the United States, the biggest market in the world, has always been a polarized story of tensions and mutual trade dependency that ranges from friendship to walls, from cheap labor to trade tariffs or tourism to all kinds of illegal trafficking across the busiest border in the world.

So, what changed in the last few years to put nearshoring at the top of the conversation and thus, the political debate? Two things: a growing conflict between China and the United States over ideology and trade, and a pandemic that changed the rules of manufacturing and supply chain flow across the world. One night at dinner in Monterrey, the epicenter of the nearshoring frenzy, I heard someone say, “Mexico moved from being on the wrong side of the river to being on the right side of the ocean,” which pretty much explained the mood I felt in a city with exploding real estate values, manufacturing plant scarcity and the urgent need for qualified labor to meet the demand of companies trying to move to northern Mexico. From an economics point of view, this is one of Mexico’s best opportunities to strengthen its position on the global agenda and fight the biggest of its problems: inequality. But the opportunity may not reach its full potential because of politics and in an election year, the biggest in Mexico’s democratic history, nearshoring will not only be a campaign token, but it will also highlight the radical positions the current government has toward businesses in general and foreign companies in particular. In a recent meeting with an economic internationalist in our Mexico City office, the focus of the conversation addressed three things:

1. Energy: Mexico’s government is obsessed with holding a monopoly of energy supply through PEMEX for refined oil derivatives and through CFE for electricity – a company that  may not meet the environmental standards that multinational firms need to compete in a global economy and may not comply not only with the market’s rules but even with its internal ESG commitments. Mexico needs to open to renewable energies through a stronger political thrust.

2. Rule of law: Companies need certainty on safety, free distribution routes, legal stability, and a friendly, competitive environment to operate. The government's excess of control through the militarization of certain key areas like customs, airports, and transport, plus the political angle regarding plant closings, forcing certain services like passenger trains and the permit obstruction regarding  clean electricity or fuel service stations, will not render the right conditions for companies to determine that investing here makes sense.

3. Competition: While the private sector in Mexico is pushing for the integration of international trade and the seizing of nearshoring’s unique opportunity, it seems like other countries are facing an easier path in terms of government support. Vietnam is capitalizing on the manufacturing of textiles and garments that could easily be produced in Puebla or Leon, and Colombia has a faster regulatory process for pharmaceuticals that could lure companies to a quicker start, despite a higher cost of delivery to the United States. 

So, what can we expect in terms of the narrative around nearshoring in the upcoming presidential and local campaigns? Again, inequality and polarization may be the main players. On one side, we have the position of the official candidate who, most probably, will ride the wave of the current president's popularity with a continuation of his left-wing focus on the poor, who  have benefited from government grants of all sorts, and who are far from really understanding the importance of a thriving economy on growth and job creation that contrast with short-term benefits. Given the narrative of the defense of “the people” against the “power mafia” of corrupt politicians from the past, private entrepreneurs and media may still prove fruitful in a country divided between the developed north and the struggling south. On the other side, the opposition hasn't been able to articulate a joint narrative around a candidate who may be a good product but who has the burden of having the endorsement of three decaying brands. As an entrepreneurial star herself, with an amazing story about the merit of coming from very humble, and even violent, beginnings and having the support of the private sector, we have yet to see if that is enough to counterbalance a communications genius like Mexico’s president turned campaign chief strategist.

The good news is that the weight of the private sector is close to 90% of the economy, which allows businesses to profit on the internal market and the closeness to the United States, and for the first time Mexico will have a woman president. Both candidates are also engineers, so they might better understand the dynamics of energy, businesses, and Mexico’s strategic geographical position. The opportunity is there, investment and trade are moving forward, and maybe the next government's position will provide a more favorable business environment to seize the opportunity.