The manufacturing sector in Mexico is emerging as a winner as US supply chains decouple from China. This trend, known as nearshoring, is attractive for companies looking to decrease reliance on trade with China amid geopolitical uncertainty and supply chain disruptions experienced during the pandemic. Mexico’s manufacturing sector has the opportunity for long-term success as global supply chains are reorganized. Mexico surpassed China as the top exporter to the US in 2023, with manufacturing comprising 40% of Mexico’s economy.
US imports from Mexico continue to rise, while Chinese exports to the US are decreasing. US Trade Representative Katherine Tai highlighted the need to create more resilience in the US economy and trade due to over-reliance on China. Both US and Chinese companies are eyeing Mexican manufacturing due to factors such as low labor costs, proximity to American markets, and the US-Mexico-Canada (USMCA) agreement, which facilitates trade in North America.
The movement of supply chains away from China can be challenging, as it may inadvertently allow China to access new markets and avoid US tariffs. Mexico’s prominence in the automotive industry, with major US companies operating plants in the country, underscores the importance of free trade agreements like USMCA. Mexico’s growing exports to the US are accompanied by a surge in Chinese exports to Mexico, possibly as a way to circumvent US tariffs on Chinese goods.
The possibility of Chinese goods avoiding US tariffs by passing through Mexico has drawn attention from lawmakers, with the Biden administration working with the Mexican government to address concerns. Tariff evasion is a significant issue that is expected to continue beyond the upcoming US presidential election, with both candidates expressing goals to grow domestic manufacturing but differing on approaches. Moving factories can be a lengthy and costly process, but companies that are investing in Mexico are creating long-term opportunities for the country’s manufacturing industry.
Despite the excitement and positive sentiment surrounding Mexican manufacturing, significant investment flows are yet to be seen. Analysts project growth in Mexico’s exports to the US over the next five years, making the country an attractive base for both US and Chinese companies. Chinese EV maker BYD announced plans for a major expansion in Mexico, positioning itself for potential access to the US market. The city of Monterrey, in particular, is experiencing growth and vibrancy as a result of the increasing focus on nearshoring to Mexico.