Politics and convenience drive Mexico to be US’s top trading partner | Business and Economy News

Before Elon Musk announced he would invest billions in building his largest Tesla factory in the industrial outpost of Monterrey, Mexico, the U.S. trade winds were already turning south.

At the end of 2022, Mexican Economy Minister Raquel Buenrostro Sánchez said 400 companies had expressed interest in relocating from Asia to Mexico. New industrial parks were springing up, many thanks to Asian money, and investments were pouring in. As of June 2023, some $13 billion in investments had been secured, according to Mexico's Secretary of Finance and Public Credit, most of it to automakers or auto parts makers.

New figures from last week's U.S. Census indicate that Mexico is the United States' largest trading partner. In 2023, the United States traded $798 billion with Mexico, as the goods it purchased from its southern neighbor surpassed China and Canada. The rise of nearshoring – a catchy term that describes bringing businesses closer to their preferred market, in this case the United States – has helped bring Mexico to this position.

“It’s not cyclical, it’s new,” said Andrew Hupert, a trade expert who has lived in China and now lives in Mexico.

“What I see is a diversification of the manufacturing sector. The calls started coming from companies saying, 'I don't want all my eggs in one basket,'” said Joshua Rubin, vice president of business development for the Javid Group, a company based in Nogales, S.A. Arizona, which helps businesses get started. in Mexico.

Mexico overtook Canada for the first time in early 2023, according to the Federal Reserve Bank of Dallas, with bilateral trade between the neighbors totaling $263 billion in the first four months, while China's figures continued their decline. By the end of the year, the United States had purchased $475 billion worth of Mexican goods, compared to $421 billion from Canada and $427 billion from China, which saw their numbers decline by 20% compared to to 2022.

The nearshoring boom is not exclusive to Mexico. A 2022 report by the Inter-American Development Bank (IDB) suggested that all of Latin America and the Caribbean was poised to reap the benefits, with up to $78 billion in exports in the near future. Countries like Argentina, Brazil and Colombia are expected to make considerable progress. But they were all dwarfed by Mexico, which accounted for almost half of the growth in offshoring predicted by the IDB. This attracted the attention of the Canadian auto parts lobby, which began expressing concerns that Chinese investments in Mexico would ultimately reduce jobs in Canada.

How Mexico found itself in this position is as much a result of its own initiatives and growth as it is of geopolitical forces beyond its control. And experts suggest it's only just beginning.

“It’s a world of opportunity now,” said Marco Villarreal, who helped Hisun Motors, a Chinese ATV and UTV manufacturer, open manufacturing facilities in Saltillo, a city on the outskirts of Monterrey.

Villarreal, who had a long career at General Motors and Caterpillar, remembers visiting industrial parks in the Monterrey-Saltillo region in late 2020, and the head of Hisun's U.S. operations saying he was surprised at the extent of manufacturing power before him.

“Marco, what’s happening in Mexico is what happened in China 30 or 40 years ago, when we started a manufacturing expansion,” Villarreal remembers the owner.

“There is growing interest in Asia to establish a presence in Mexico,” recognizes Alfredo Nolasco, business development specialist and founder of the Mexican consulting firm Spyral.

What explains the boom?

Mexico has long carved out a place as a manufacturing hub for the United States, thanks to tariff and duty-free programs that have allowed companies to create so-called “maquiladoras” – such as factories were called in the 1990s – to assemble products exclusively for industry. export. The North American Free Trade Agreement, and its revamped cousin known as the United States-Mexico-Canada Agreement, were another boon for the Southern partner.

Mexico has programs to make products like cars exclusively for export [File: Jorge Duenes/Reuters]

But a confluence of new factors converged to create the surge we are seeing today. The trade war between China and the United States is the one that is most often highlighted by experts on both sides of the Mexico-U.S. border. It started during the administration of former U.S. President Donald Trump and really took off under President Joe Biden, Hupert said.

Hupert has been warning for years about dwindling gains in China, saying compliance costs would outweigh savings.

“Complying with Chinese and U.S. regulations simultaneously is more or less impossible,” Hupert said. “In many areas, the United States is requesting information that the Chinese could at any time consider to be state secrets. »

Then there was the COVID-19 pandemic, which highlighted a logistical risk that had never really been considered in a globalized economy. Companies have been forced to swallow some tough supply chain pills as the cost of moving containers of goods to North America from China skyrocketed. This killed businesses that were unable to get their products to their markets or put Mexico in a much-needed position, as was the case for medical supplies entering the United States during the lockdowns.

That said, it's not that companies are completely abandoning China or neighboring countries, Hupert said, but that they are setting up branches or expanding their presence in Mexico.

“The pandemic left us a very important lesson that moved us from the globalization of production to the regionalization of production,” said Claudia Esteves, general director of the Mexican Association of Private Industrial Parks. “It practically kills globalization.”

The war in Ukraine is an additional factor that has pushed European interests to reconsider their industrial outposts in countries like Poland, she added.

“Our luck comes from our geographic location,” she said. “That's because we share a 2,000 mile radius [3,218km] border with the largest market in the world.

As a result, the demand for industrial parks has also exploded. Some 50 new industrial parks were under construction in Mexico in 2023 – almost half by Chinese investors and 20% by Korean investors, Esteves said. In 2019, there were 2 million square meters (21.5 million square feet) of occupied industrial park space. By mid-2023, this area increased to 4.3 million square meters (46 million square feet). “It’s historic,” she said.

Growth that has been accelerating for decades

Although this offshoring boom is largely in the manufacturing sector, the growth in trade is broader than that.

Mexico's agricultural sector has seen an “astronomical” boom in recent years [File: Carlos Jasso/Reuters]

Jamie Chamberlain, president of the Greater Nogales Santa Cruz County Port Authority, sees this as part of a trajectory going back decades. He remembers visiting rural farms in Mexico as a child with his parents, who began importing fruits and vegetables in 1971.

In the agricultural sector, growth has been “astronomical”: when he started in this sector in 1987, the importation of products extended from November to May. “Now we are a pretty much year-round industry that imports from every state in Mexico,” he said. “The small fruit sector is the largest growth sector and is entirely for export to the United States.”

It is not just demand that has greased the economic wheel. This involves forward thinking. In Nogales, for example, the Port Authority began planning to expand its port of entry to handle the growing flow of trucks, as 900 to 1,000 transited into the United States each day. Today, it’s about double that, in each direction.

“Infrastructure preparation is very important,” he said.

Cartels and currency

Hupert identifies two potential obstacles to this upward trajectory: instability caused by drug cartels and currency. “The peso is just too strong,” he said. “That and inflation wipe out Mexico’s cost advantage.”

This is not only a cost advantage, but also a labor supply advantage, Villarreal said. The United States does not have the skilled workforce that many American companies demand and that Mexico has spent decades developing. It now has over 50 years of automotive manufacturing experience, meaning it has a workforce capable of handling technical assembly and more than qualified for less demanding tasks, such as furnishings, he noted.

And where gaps exist, market forces are already working to fill them. Nolasco, the business development specialist, remembers a client who came to him looking for suppliers of nuts, bolts and washers.

“Even though Mexico is a power, we realized that for these kinds of simple problems, there weren't enough of them,” he said. As demand increases, this labor supply problem could be resolved.

“This presents a great opportunity to develop joint ventures with Mexico and other partners around the world.”

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