Mexico as Nearshoring Hotspot
One of the beneficiaries of the ongoing U.S.-China trade war and China’s recent decline in manufacturing is Mexico, which holds the advantage of proximity to the U.S. as a near sourcing location, as well as relatively cheap and abundant labor.
A recent study, the Kearney 2021 Reshoring Index, indicated that 79% of U.S. companies with manufacturing in China have moved some of their operations back to the Americas or are planning to do so within the next three years. Mexico holds several advantages over China for American buyers: There are no tariffs; there is a smaller chance of supply chain delays; and it is in proximity to the U.S., with shorter lead times, all of which allow for just-in-time manufacturing and potentially smaller production runs with less risk of inventory overstocking.
Mexican labor costs are also lower than China’s – around $3.90/hour versus $5.50/hour. Mexico also has a large workforce of around 59 million people, with millions who are available to work. And in contrast to China’s aging demographic, Mexico has a younger population.
With a strong free trade agreement in place, Mexico is already the second largest U.S. trading partner after Canada, with almost 88% of U.S.-bound exports transported by road, with the benefit of avoiding the port congestion and supply chain delays of recent years.
Under Biden’s supply chain resilience plan, the U.S. identified four strategic sectors to mitigate supply chain risk. These include semiconductor manufacturing and advanced packaging; high-capacity batteries; critical minerals and rare earth elements; pharmaceuticals and active pharmaceutical ingredients. In the Western hemisphere, Mexico and Canada are the only two strategic partners identified by the U.S.
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Cautionary Factors
One of the considerations of shifting production to Mexico is risk to cargo from theft or extortion. Certain states in the Central/Bajio region and the manufacturing hubs of Guanajuato and Nuevo Leon account for roughly 70% of all cargo theft. The theft is targeted at higher value goods such as automotive parts.
Another consideration is infrastructure. Mexico lags China in infrastructure investment, especially in the poorer and less connected Southern regions. Most investment goes to the states bordering the U.S. or to Central Mexico, which holds an important manufacturing hub. This year, however, Mexico announced an infrastructure package which would invest $38.6 billion in road and rail infrastructure.
If these factors can be managed, potentially through great government intervention, Mexico could be a formidable alternative to China for American manufacturers. On the plus side, the U.S. government is actively supporting nearshoring initiatives. Alongside Mexico, the U.S. is encouraging cooperation with Central America with the dual aim of supporting their manufacturing and stemming the flow of illegal immigration Northwards. The CAFTA-DR free trade agreement supports trade with Central American Triangle countries including Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. These regional agreements hold the promise of building more resilient supply chains, closer to home.
Working with retailers, brands and importers headquartered in North America, Germany, Austria, Switzerland, Hong Kong, Taiwan, and China for over 20 years in 50 countries, TradeBeyond empowers buyers and suppliers by streamlining their daily efforts from product ideation to production.
This story was published in our Q4 Retail Sourcing Report. This is a quarterly initiative where we analyse trends and indicators that will incoming global sourcing and supply chains in the near term and beyond.
