Will Mexico Remain a Top Nearshoring Destination in 2025

After a tumultuous 2024, companies operating in Mexico are entering another disruptive year. Economic slowdown, uncertain US-Mexico relations, and a rapidly changing domestic landscape will impact business strategy. How can businesses analyze this complex and multifaceted outlook and make decisions about their strategy in the market? A SWOT analysis of Mexico’s operating environment helps us with a nuanced and comprehensive view of the challenges and opportunities ahead, enabling executives to take a well-informed approach to decision-making. 

Strengths

Geography is destiny. Despite the threats from a second Donald Trump administration, geography remains one of Mexico’s main advantages given the synergy of the Mexican and the US economies. Between 1994 and 2024, bilateral trade flows expanded at an annual average of 8%. As of December 2024, Mexico remained the US’s largest trading partner, accounting for 16% of total US trade. Both Mexico and the United States have enormously benefited from their complementary economies, as reflected by the growing flow of goods and services, including labor. 

This trend of economic integration may continue in the medium and long term, outweighing nationalistic and nativistic hardliners in both countries. As the adage says, “geography is destiny,” and in this case, it is a good one. 

Trade network. Thanks to Mexico’s trade policies from the last three decades, the country boasts 14 free trade agreements (FTAs) with 50 countries. This has helped Mexico to become a manufacturing hub, and while the country has been unable to diversify its trade economic reliance on the United States, its network of FTAs is an asset for companies seeking global market access.

Macroeconomic fundamentals. Even amid the economic slowdown — we are forecasting economic growth of 1.2% in 2025 relative to 1.3% in 2024 and 3.2% in 2023 — the Mexican market may continue benefiting from the stability experienced over the last two decades. Banxico managed monetary policy effectively during the highly inflationary period of 2022-2024. In 2025, inflation is likely to average 3.6%, falling within Banxico’s target range. Moreover, despite the ongoing political headwinds, the exchange rate is relatively stable. In 2H24, amid Morena’s unexpected legislative supermajority, its controversial judiciary reforms, and Trump’s victory, the MXN depreciated by 21%. However, with this fall, it returned to its 2022 levels — the norm before the exceptional rise of the “Superpeso.”  

Weaknesses

Governance, rule of law, and security weigh heavily on Mexico’s business environment. Insufficient public services and limited government control in some regions continue to hinder market connectivity and economic growth. These structural weaknesses will prevail in 2025 and beyond. 

While, in the medium term, the Claudia Sheinbaum administration could reduce the levels of violence, the rule of law is less likely to improve after the new judiciary reform, which allows the popular election of judges, magistrates, and ministers. The reform risks politicizing the judiciary and eroding checks and balances.

The fiscal deficit has reached levels unprecedented in decades. This has called the attention of rating agencies, which are relatively close to downgrading Mexico and removing its “investment grade.” In practice, this means the government needs to cut spending or raise taxes. With this aim, the federal government’s 2025 budget marked a 3.6% YOY decline, limiting the reach of Sheinbaum’s policies and injecting fewer resources into the economy. Sheinbaum may also submit a fiscal reform in late 2025 or early 2026, despite her reluctance to publicly talk about tax increases.

Insufficient energy, water, and transport infrastructure also cap Mexico’s nearshoring potential. Mexico is uniquely positioned to attract supply chain relocalization investments, but it will remain constrained by insufficient infrastructure. The electric energy and water infrastructure landscapes are particularly challenging. The Executive Opinion Survey from the World Economic Forum’s 2025 Global Risks Report places water and energy supply shortages as the first and third largest risks for Mexico. Given that most nearshoring activity is in the north and the Valley of Mexico, which are either dry or densely populated regions, water management and electric energy will remain as key obstacles. 

Opportunities

The Sheinbaum administration could bring new opportunities. While Sheinbaum supported the disruptive constitutional reforms, her administration is signaling a commitment to work with the private sector and extend the USMCA, a cornerstone of Mexico’s economic opportunity. One example of this is the recently launched Plan Mexico, which sets long-term development goals through public-private collaboration. Some of the objectives include increasing investment to 25% of GDP, providing fiscal incentives to boost nearshoring, and substituting imports, particularly from China. 

Further, Sheinbaum appears to be skillfully managing her relationship with Trump, finely balancing Mexico’s sovereignty and its economic integration with North America. Trump recently declared at the Davos World Economic Forum that the United States “is dealing with Mexico very well,” suggesting that Sheinbaum’s tactics could be working.

Geopolitical tensions, particularly the US-China rivalry, could present opportunities for Mexico. A deterioration of Washington’s relationship with Beijing increases Mexico’s attractiveness as a trade partner and business destination. The yearly “China Business Climate Survey Report,” conducted by AmCham, shows that rising US-China tensions have been considered the main challenge for companies since at least 2021. The same document highlights that in 2024, 17% of companies were relocating manufacturing or sourcing outside China, compared to only 7% in 2020. This trend has positioned Mexico as a friendlier and geopolitically safer destination. Moreover, US-China relations may deteriorate under Trump, with both countries on the brink of a trade war. 

Other geopolitical tensions, like those in Eastern Europe and the Middle East, could strengthen the argument for nearshoring in Mexico.

MANAGE, or Making North America Great and Equitable, could be another opportunity. These days, sentiment leans toward economic risks; however, there is a possibility of a pragmatic Trump-Sheinbaum relationship strengthening North American supply chains. After all, geopolitical forces are favoring further economic integration, and both governments share protectionist views. Over the last weeks, the Sheinbaum administration has emphasized import substitutions from Asia as one of its trade priorities. Perhaps North America can balance regional supply chain integration, protectionism from China, and national sovereignty. As Mauricio Doehner Cobián, Cemex’s executive vice president recently declared, “Make North America great again!” 

Threats

A radical Trump administration is the main risk for Mexico’s operating landscape in 2025. The generalized and prolonged imposition of tariffs coupled with a confrontational bilateral relationship would be disastrous for growth. Frontierview estimates that 25% tariffs on all Mexican imports would cause an economic contraction of 1.9%, provoke a significant depreciation, and erode investor confidence. Fortunately, we think this scenario is unlikely.

Additionally, the designation of criminal organizations as terrorist groups and a potentially fractious security relationship could be impactful for the private sector, increasing affiliation risks.

The implementation of Morena’s constitutional reforms is another big risk for the business environment. The judiciary and autonomous institutes reforms, enacted in late 2024, provoked a political, institutional, and investor-confidence crisis. The implementation phase, including the judiciary elections in June 2025, could reignite a political crisis and FX volatility. However, it is in the medium and long term when the effects of these reforms will be truly felt. The judiciary reform is a structural change that could politicize and deteriorate the rule of law. If this happens, companies will need to navigate a more unpredictable legal environment, increasing compliance costs and exposure to arbitrary rulings.

Is Mexico nearing the bottom of the business cycle? The economy is emerging from an expansionary post-pandemic recovery phase, reaching GDP growth of 3.9% in 2022 and 3.2% in 2023. This doubled the average rate of 1.7% between 2008 and 2019. In contrast, GDP grew close to 1.3% in 2024 and will expand 1.2% in 2025. Therefore, Mexico has clearly passed the expansionary period of the current economic cycle. The big question is whether Mexico has reached the trough or if there is still a way to go. In our base case scenario, we see a slight recovery of growth of 1.8% in 2026. This means that 2025 will be a year with fewer business opportunities than the last three years, even if some remain.

The potential loss of investment grade looms over Mexico. As explained in the weaknesses section, the large fiscal deficit will constrain policymaking and economic growth. In addition, failure to reduce the deficit may lead to the loss of the investment grade, which in turn, would depreciate the MXN, boost borrowing costs, and harm capital inflows.

Therefore, Mexico’s business landscape presents a mix of opportunities and challenges. While its geostrategic location, trade agreements, and macroeconomic fundamentals provide a competitive edge, persistent governance, security, and infrastructure issues remain key constraints. Moreover, the second Trump administration brings key risks for the private sector. To find strategic opportunities, companies must continuously monitor the external environment and reassess their positioning and priorities.