The US-China trade war, the COVID-19 pandemic and the Russia-Ukraine war have made many companies turn to Mexico as a nearshoring destination. Although the opportunities are many, there is a clear difference between what the country would like to happen and what is possible.
Mexico has “a unique opportunity” to reduce risks, time and costs for suppliers, as companies start to move their entire production chain, or only a part of it, closer to the end consumer, writes Grupo Bursatil Mexicano (GBM) in its Nearshoring report. Nearshoring is not new. But the trend has stood out in Mexico since 2021 due to its potential impact and the logistical and legislative advantages the country offers over the rest of Latin America.
Additionally, in 2018, trade tensions arose between China and the US, resulting in the imposition of tariffs that cost over US$700 billion. In 2020, the pandemic caused the closure of several borders, which interfered with global trade, causing a 10 percent annual drop in trade flows. Finally, following Russia’s invasion of Ukraine, some trade routes were modified, and so were costs. The prices of raw materials, such as oil and wheat, were affected.
These issues have led transportation costs from Asia to the US to increase 5.5 times between 2019 and 2022, according to GBM. Therefore, foreign companies are now seeking to relocate factories and production centers to Mexico, which, as US’s neighbor can offer lower costs and transportation times. In March 2022, taking a container from China to the US cost over US$16,000, while from Mexico to the US, it cost only US$800.
Mexico’s advantages include its 14 free trade agreements with 50 countries, including the US and Canada. The country also offers skilled labor at competitive costs, as between 2014 and 2021, the country’s real wage increased by 0.2 percent on average, while in China it increased by 6.1 percent and in Vietnam by 5.9 percent.
Mexico has an opportunity equal to the number of competitors the country can replace. For every 5 percent of exports in which Mexico replaces Asian countries, the Latin American country’s Gross Domestic Product (GDP) will grow by 2 percent, reads the report. Mexico’s ten most relevant export categories are: electrical machinery, durable goods, vehicles and auto parts, furniture, clothing, clothing accessories, footwear, fossil fuels, stone and cement products, wood and coal.
Governments and organizations have taken action to boost exports, starting with the Mexican government through the Manufacturing, Maquiladora and Export Service Industries (IMMEX) program, which allows US companies to temporarily import materials that will be transformed and re-exported without incurring taxes. Groups such as Enterprise Singapore and the Singapore-Mexico Chamber of Commerce are also seeking to connect companies interested in moving their operations.
While opportunities abound, Mexico continues to hit a wall due to issues ranging from the legal framework to infrastructure. According to data from Consultancy, Marketing and Real Estate Services (CBRE) within the GBM report, real estate has increased fivefold between 2019 and 2022.