Head Economist, Grupo Bursátil Mexicano, Mexico
Amid a New Economic Integration, Mexico is the Nearshore Nexus
It is undeniable that the economic integration of global markets is changing, and regionalization will be the name of the game from now on. Nearshoring, reshoring, and friend shoring would benefit many countries, particularly Mexico, which is in pole position to be one of the main winners.
To answer the question of why Mexico is the Nearshore Nexus, I would like to plant the idea that Nearshoring is nothing but another Mexican moment, and possibly the most important thus far.
Mexico has lived three major economic moments:
The first came with the signing of the North American Free Trade Agreement in 1994. At that time, everyone was talking about Mexico, but it is important to recall that China had not yet appeared on the trade scene. The signing of the treaty meant for Mexico its entry to developed economies. Of course, it was a turning point for the Mexican economy, and the treaty had a positive impact, but the process was complex. Back then, Mexico had capital needs that it couldn’t meet. At that time, most of the population was under 15 years of age, so it was impossible to have a high savings rate that would generate sufficient investment volumes. Moreover, with the entry of China to the World Trade Organization in 2000, Mexico had to face a bigger competitor than it had anticipated, which was detrimental not only to Mexico but also to the United States.
The second Mexican moment came in 2013 with the structural reforms. These included the energy reform, which prompted a peak of US$46 billion in foreign investment in that year alone.
Lastly, we arrive at the third economic moment, which is happening now with the nearshoring.
For many reasons, nearshoring is the best Mexican moment so far:
Ally-shoring. Mexico is now a geopolitical ally to the United States and Canada, while North America is one of the most important regions in the world, with almost 30% of the total GDP, which is the largest production share in the world, even ahead of China and the European Union. The glue binding is the USMCA, a treaty that gives the three countries preferential treatment as commercial partners. Worth to recall that Mexico is one of the most open nations in the world, with twelve trade agreements with fifty-two different countries.
Mexico is a manufacturing powerhouse. Due to its multiple free trade agreements, Mexico's exports have grown by twenty-four times over the past forty years. The Mexican economy has gone from being a predominant oil exporter to a specialized manufacturing powerhouse.
Mexico is now in a better demographic and macroeconomic position than thirty years ago. Of the potential nearshoring winners, Mexico has the best demographic bonus, with the largest population aged between 20 and 64. Meanwhile, its main trading competitors, like Vietnam or China, are undergoing a demographic decline that was not in place three decades earlier.
Therefore, Mexico has a better savings capacity and a bigger capital market. Indeed, the assets under management held by Mexican pension funds have increased from 5% in 2003 to almost 20% in 2023.
Other competitive edges: As for other competitive edges, Mexico has one of the most skilled workforces, while the average monthly income in Mexico remains very competitive compared to Asian countries.
Thus, with all these advantages, Mexico emerges as a natural contender for nearshoring.
Has nearshoring already landed in Mexico?
Short answer, yes. The most evident impact is seen in foreign trade data. In 2022, China continued to have the highest share of U.S. imports; however, six months later, Mexico became the main supplier of the United States, beating China and Canada. Besides the latter, Mexico’s production capacity is in expansion. The participation of the manufacturing sector in México’s GDP has increased, while employment in the activity has maintained a steady uptrend. Moreover, the industrial real estate started to record some of the biggest rental price increments in history. These dynamics have been mostly seen in the north of Mexico due to the proximity to the United States. However, recently, encouraging signs indicate that both the Central and Bajio regions have also started to reap benefits because of their appeal to consumer-centric businesses seeking proximity to metropolitan hubs.
In sum, Mexico is just commencing this enormous opportunity led by the change in global economic integration. At this point, only one thing is for sure: it is not a matter of if or when, but how big. And while there is still a long way to go, with the proper efforts, the sky is the limit.
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