Nearshoring in Mexico

Everything you need to know

A container ship full of containers at an industrial port with a large city behind it

The future is looking bright for Mexico. The 15th largest economy in the world and largest trade partner with the United States is riding on a wave that could yield enormous growth and better living conditions for millions. That is, the growing trend of nearshing. Through this practice, Mexico—a long time ally of the United States—has positioned itself as a crucial partner for the future of international commerce. As the developed world seeks to detangle supply chains away from China, its close proximity to the United States, as well as its established record in global commerce make it a perfect destination for multinational companies to set up shop. In the words of Bloomberg, we are living through Mexico’s moment. But what does this actually mean and why is Mexico benefiting over other nations?

Why is it Mexico’s moment?

In great part, Mexico is riding on a global trend responding to years of globalization. Across the latter part of the 20th century, companies began offshoring parts of their supply chains to other countries, relying on complex trade routes that could take days to deliver goods. This, in great part, was a result of companies seeking lower labor costs and favorable regulation. 

But, by pursuing a globalized world, companies became susceptible to potential trade disruptions such as droughts in the Panama Canal—a global artery for international commerce—or rebel attacks to vessels heading close to Israel, just to name two modern examples. By building parts of a product so far away from its intended market, they risk significant delays and, not to mention, potential shifts in global tariffs or drastic changes in trade regulation. This has fueled companies to seek for countries closer to them with strong manufacturing capabilities in a practice now referred to as nearshoring.

Mexico’s moment can be explained precisely through the rise of nearshoring as the United States questions its preexisting relationship with China. Over the last 20 years, American commerce set its eyes on China as a potential partner, offering low labor costs, and efficient manufacturing. But, most recently, the relationship between this growing market and the United States became fraught with friction, as the Trump administration began a trade war with Chinese authorities and the COVID-19 put into question the resiliency of existing supply chains. In this tense context, Mexico became a promising alternative, offering a close proximity to the United States that could lower transportation costs and lessen potential disruptions. As a result, Chinese imports to the United States and other western nations began a steady decline while Mexico became a key ally in the world of commerce.

Mexico’s moment can be explained precisely through the rise of nearshoring as the United States questions its preexisting relationship with China. 

A containership arriving to an industrial port with various large cranes. The boat is full of containers and so is the port. Behind them, the landscape of a city.

Why is Mexico good for nearshoring?

You can sum up Mexico’s success in nearshoring using three characteristics: its relationship and proximity with the US, low labor costs, and a large network of trade deals.

While Mexico is the current star for nearshoring in Latin America, it is not evident why it would surpass other countries in the region such as Brazil or Colombia, as well as distant allies to the United States like India. Yet closer inspection will reveal why the country is ideal for this trend. In particular, one can sum up Mexico’s success in nearshoring using three characteristics: its relationship and proximity with the US, low labor costs, and a large network of trade deals. All of which, we now look to in turn.

I. The US-Mexico relationship

Perhaps the most important argument as to why Mexico is the ideal destination for nearshoring comes from its close proximity to the United States both physically and metaphorically. The countries share a joint border of over 1,900 miles, making trade between the two far easier than compared to China. On average, it is estimated that cargo from China takes 26.5 days to reach most major cities in the United States, whereas, Frontier has estimated that, cargo from Mexico can cover the distance in between 0.3 and 3,5 days.

Average transportation time to major US cities from Mexico

A series of bar graphs showing the average transportation time from Mexico's most important cities to Chicago, Houston, LA, and New York.
(Data from Frontier)

But trade between the countries is not just a theoretical scenario, but rather one of a long history. The United States and Mexico already share one of the most ambitious and comprehensive free trade agreements in the world with the neighboring country of Canada: the USMCA (formerly known as THE North American Free Trade Agreement). Just in 2022, the United States estimated its total trade with the countries in the agreement to total 1.8 trillion USD—a considerable number considering the country’s GDP for that year equaled little over 25.4 trillion USD.

Furthermore, it is estimated that up to 37.4 million people in the United States identify as Mexican, creating a strong connection between the countries. While companies often spend enormous resources in comprehending local dynamics, the United States already has a long history of interacting with Mexico that could bring such costs close to zero. 

II. Low labor costs

At least in theory, when companies considered the possibility of offshoring part of their supply, they did so by looking at the cheapest possible labor costs combined with optimal production capabilities. As such, critics of nearshoring might hold that in relocating a factory, a company could lose low labor costs in return for transportation costs. But in the case of Mexico, labor costs are noticeably lower than those found in China.

The above is not a new fact. Research by Statista showed that between 2016 and 2020, Mexico’s average manufacturing wages were at least 1 USD/hr below those in China. Thus, by relocating factories to Mexico, U.S. companies formerly based in China would not only increase profits through shorter transportation times, but also through lower labor costs.

Hourly Manufacturing Wages in Mexico and China (2016-2020)

A line graph showing the difference in hourly wages in manufacturing for Mexico and China between 2016 and 2020.
(Data from Statista)

III. Accessing international markets 

Finally, it is worth noting that Mexico offers a unique opportunity to access global markets without significant costs. Most notoriously, the country is a member of the USMCA (formerly NAFTA) which connects North America economically, and puts Mexico close contact with two of the major economies in the Western Hemisphere: the United States, and Canada. But Mexico also has another 11 free trade agreements with nations around the world, be it Israel, and Japan, or Chile, and Colombia—not to mention an existing treaty with the EU and being a member of APEC. 

In total, Mexico has 12 free trade agreements, including the USMCA, membership in APEC, and agreements with the EU, Japan, Chile, and many others.

What is the impact of nearshoring in Mexico?

Experts believe that nearshoring could potentially transform the entire Mexican economy, although predictions vary. Morgan Stanley, for instances, believes exports can increase by up to 155 billion USD in five years (roughly a 10% increase to Mexico’s GDP). The IDB, for its part, estimates the impact to be around 64 billion USD, while Mexico’s Secretary of the Treasury currently has records of 400 foreign companies with intentions of bringing factories to Mexico.

 But impact from nearshoring in Mexico can already be felt in two metrics. On the one hand, Foreign Direct Investment (FDI) in the country has remained relatively high, reaching 32.9 billion USD in 2023. On the other hand, Mexico has recently overtaken China as the United States’ largest trade partner, a clear indication of shifting interests from U.S. companies

US Imports from China and Mexico in Billions of USD

A line graph showing the monetary value of US imports from China and Mexico between 2021 and the present day
(Data from U.S. Census Bureau

Although current numbers are promising, much remains to be seen about nearshoring in Mexico and its true impact. Regardless, it does seem to be, as Bloomberg put it, the beginning of Mexico’s moment.