OPINION

PART 7

Seventh in a seven-part series

By ANDREW I. RUDMAN

Mexico is currently experiencing a boom driven by a phenomenon often interchangeably called nearshoring, friend-shoring and ally-shoring. This trend began in response to the tariffs and other trade restrictions imposed on China by the Donald Trump administration (and largely maintained by the Joe Biden administration) and picked up steam when the covid-19 pandemic exposed the considerable risks inherent in the supply chains for numerous critically important products and intermediate goods for which there was often a single supplier.

The desire to bring production back to the United States and its neighbors and allies has resulted in a dramatic increase in U.S.-Mexico bilateral trade (as well as increases with other allies and partners). Since 2019, trade between the United States and Mexico has significantly increased while U.S.–China trade has decreased. As of July 2023, U.S. year-to-date trade with Mexico reached $461.9 billion, a 24-percent increase over the July 2018 figure of $351.5 billion. During the same time period, U.S. trade with China has fallen to $322.3 billion, a small yet meaningful 13 percent decrease from $371.1 billion in July 2018.

To escape the punitive tariffs on Chinese-made goods, firms began moving operations to factories elsewhere in Asia and/or to Mexico. Doing so provided “a solution to Chinese manufacturers” and a further, lucrative source of foreign investment for Mexico’s manufacturing industry. It is worth noting that the boost in investment is not solely from China as manufacturers in other countries have also sought access to the North American market. Nevertheless, by June 2023, Mexico’s trade deficit with China reached $8.89 billion, reflecting a 40-percent increase in imports from China compared to its lowest level in 2018. This surely reflects efforts by Chinese firms to retain access to the U.S. market through final assembly in Mexico, especially in the northern part of the country. Trade between the United States and the Association of Southeast Asian Nations (which does not include China) is up 46 percent from 2018 levels, reflecting shifts in the manufacture of intermediate and finished goods away from China.

Mexico’s inherent advantages, which include, inter alia, a large internal market, an extensive network of free trade agreements and comparatively low labor costs, have contributed to the influx of nearshoring investment. Proximity to the largest consumer market in the world and its long-established commercial relationships, fostered under the North American Free Trade Agreement (NAFTA) and now the United States-Mexico-Canada Agreement (USMCA), make Mexico an attractive investment location. In addition, the interest in gaining access to this market is borne out by data related to investment in industrial parks, primarily in the north and Bajío region, with occupancy rates nearing 100 percent. In fact, in 2022, Mexico received $35.3 billion of foreign direct investment (FDI), of which more than 36 percent went toward advanced manufacturing industries such as automobiles, electronics and aerospace. The trend continued through the first half of 2023, when Mexico attracted an additional $29 billion in FDI.10 According to the Mexican Secretariat of Economy, roughly 90 percent of this sum is reinvested profits, with the remaining 10 percent split between new investment and intra-company transfers.

The challenge facing Mexico’s next president will be to ensure that the increase in nearshoring investment is not a one-off bubble but rather the start of a consistent wave of investment, greenfield and intracompany, that leads to true economic growth and greater prosperity for the country. To date, the top five state recipients of FDI account for more than half of the total and 15 states claim 83.5 percent of the total, leaving very little to Mexico’s other 17 states. Yet, the benefits of nearshoring need not be viewed as applicable solely to the northern part of the country. Concerted design and implementation of targeted policies can allow the new administration to enhance the attractiveness of investment in less prosperous areas of the country such as the south/southeastern region. A mid-July decree issued by the Andrés Manuel López Obrador administration that offers tax and administrative incentives for investment related to the Interoceanic Corridor project in southern Mexico marks the first such effort to promote investment and reduce inequality. A mid-October decree provides similar incentives countrywide in 10 key sectors.

While the potential for sustained investment exists, several issues and challenges may discourage continued investment or undermine Mexico’s comparative advantages.

Workforce

Private sector leaders often lament the lack of skilled workers. Firms are often reluctant to provide training for workers who will then move to a competitor offering a higher wage. Mexico’s maquila (in-bond assembly) sector, which could be viewed as the first wave of nearshoring, initially provided low-cost assembly of products invented elsewhere. Completion of basic, often repetitive tasks, such as vehicle or television assembly required comparatively low-level skills. The industries of the future, such as electric vehicles, renewable energy technologies (including recycling/reuse) and inputs such as semiconductors and batteries require workers able to provide more than basic assembly. Targeted training will be necessary to permit workers to operate increasingly complex machinery and to work with new technologies such as AI-driven manufacturing. Because firms are more likely to invest where the skilled workers are available rather than in areas where training would be required to create the needed talent pool, governments (federal, state and local) must develop training programs in concert with industry and academia. Absent such coordination, even those who graduate from high schools and colleges may lack immediately employable skills. Guanajuato’s State Training Institute (IECA) offers a good example of an effort to work with industry to identify necessary skills and to develop courses specifically designed to provide workers with these skills. Arizona State University’s recently announced “English Course for the Semiconductor Industry,” which was specifically developed with experts in the fields of semiconductors and teaching methodology, is another such example. The key elements of successful training programs are the direct engagement with industry to ensure that their needs are being met and an honest assessment of a state or region’s comparative advantages. Not every state can host a semiconductor fab, but efforts can be made to move production up the value chain. One concrete example would be the production of ethanol from sugar cane grown in the southeast. The joint statement following the September 2023 meeting of the U.S.-Mexico High-Level Economic Dialogue touched on the issues of workforce development for sectors including semiconductors, ICT, automotive and others.

Energy

The availability of cleaner, reliable energy is paramount for global firms as they consider where to invest. Indeed, many have noted that Mexico has not yet been able to capture the “nearshoring” opportunity because of the need for a steady supply of reliable power (see energy section). Not only do they need to be certain that a factory built today will have access to electricity in a decade or more, but this electricity must also be derived from cleaner sources. Firms with global emissions reduction commitments, for example, must offset production with “dirty” energy with clean production elsewhere. To respond to this demand, while continuing to grow its economy, Mexico will need to have a diversified baseload supply of energy available. Mexico could realize substantial gains in clean energy production, specifically as much as 28,590 GW of clean energy, more than enough to meet electrical demands. Doing so would not only enhance Mexico’s competitiveness, but also contribute to efforts to meet its Paris Climate Agreement commitments. The ongoing energy transition from fossil fuels to renewables will not occur overnight, however. As Mexico develops and installs renewable technologies, it will also be necessary to enhance the efficiency of its fossil fuel industry. This is especially important for development in the southern and southeastern portions of the country. The ample potential for renewable energy, such as hydro, cannot be fully realized unless connectivity to the national electricity grid is enhanced. Further, access to natural gas (essential for the foreseeable future despite the ongoing energy transition) will require infrastructure investment so that potential investors in the region are assured of access to reliable electricity.

Security

Mexico’s security-related challenges are well known (and addressed in greater detail in the security section). Potential investors in Mexico will be concerned about the safety and quality of life of their employees in a particular area. It is difficult to recruit senior management, whether external or internal company candidates, for positions in areas perceived to be dangerous. It is important to distinguish between issues related to drug trafficking and the smuggling of persons and goods from issues of domestic security. While organized criminal groups tend to avoid attacks on foreign-owned facilities (which would draw international attention), this nuance is not well understood within company boardrooms located in the United States, Europe or Asia. Further, as organized criminal groups expand their reach into new geographic areas previously considered safe, such as San Pedro Garza García in Nuevo Léon and new business areas not directly related to drug trafficking, the ability of legitimate business to remain profitable is significantly diminished. The rising frequency of cargo truck hijackings poses an additional impediment to increased investment. High rates of impunity for domestic crimes (e.g.: robbery, assault and murder) contribute to the image of lawlessness and undermine investor confidence. Enhanced community policing practices have proven to reduce crime and impunity in jurisdictions like the State of Mexico. They can be replicated elsewhere to improve quality of life and employee security. Further, increasing salaries for law enforcement officers will likely lead to higher professionalism and dedication within the ranks.

Infrastructure

Ensuring Mexican competitiveness into and beyond the next sexenio will require multifaceted investment in infrastructure. Bottlenecks at the U..S-Mexico border hinder the flow of goods, necessitating frequent bilateral meetings, at the federal, state and local levels, such as the U.S.-Mexico Bridges and Border Crossing Group (BBBXG). Engagement with users of these crossings — from diverse, productive sectors with unique needs such as cold storage for produce to tech-driven logistics — is crucial. Modern commercial international bridges, integrated with Logistechs (the application of exponential technologies in logistics, supply chain and transportation sectors), can revolutionize this landscape, making systems adaptive to real-time trade demands and enhancing both competitiveness and security. The use of advanced monitoring technologies like facial recognition and RFID can augment border control and traceability while U.S. and Mexican Customs continue to pursue seamless digital connectivity. Innovations such as intelligent routing systems significantly reduce commercial truck idling times, aligning with sustainability goals. This high-tech approach mitigates delays and reduces unpredictability which has driven a shift from “just in time” to “just in case” operations. Streamlining the movement of goods will preserve Mexico’s comparative advantage for production while reducing costs and boosting agility.

In the south, enhancing the region’s infrastructure will be the key to achieving durable economic growth and development. Facilitating the movement of goods from their locus of production (whether factory or field) will enhance the appeal of this region for investors considering new production facilities for domestic or export markets. Improving roads, rail and port infrastructure, perhaps through the Interoceanic Corridor, will facilitate access to markets in Mexico, North America, Europe and Asia. Improved access to the U.S. east coast has often been cited as an important incentive for greater investment in ports along the Gulf of Mexico, for example.

As noted above, access to reliable and affordable clean energy is also essential to Mexico’s ability to capitalize on the region’s potential. It is also important to note that developing a skilled workforce will take time, even if global best practices are implemented with maximum support from the government.

RECOMMENDATIONS

Creating an environment more conducive to economic growth and development in general will also allow Mexico to further capitalize on the current nearshoring trend. Hence, implementing of the following recommendations (among other policy improvements) would lead to enhanced investment, economic growth and job creation, regardless of the origin of the capital.

Workforce

Promote tripartite (government/academia/industry) training programs designed to develop required skills for industries of the future and industries in particular regions.

Revise public school curricula to include an emphasis on new and emerging technologies, including artificial intelligence (which will first require upskilling of educators).

Support state-level efforts to identify areas/industries of comparative advantage and opportunities to advance along the value chain such as a shift from sugarcane to ethanol.

Energy

Connect south/southeastern Mexico to a gas pipeline from the north and improve the state-run oil company Petróleos Mexicanos’ (Pemex’s) capacity to capture and utilize gas extracted in the south.

Integrate south/southeastern Mexico into national electricity grid to enhance power availability and reliability.

Facilitate public-private partnerships to develop renewable energy projects through appropriate public policy changes.

Work with U.S. and Canadian partners to establish a North American emissions reduction target to support Paris Agreement commitments and to respond to investor requirements for clean energy.

Security

Forcefully combat organized crime through an aggressive strategy to eliminate incursions into legitimate commercial activities.

Promote expanded community policing practices and increased law enforcement salaries and training opportunities to enhance trust and confidence in law enforcement.

Infrastructure

Enhance Mexican customs and law enforcement coordination with U.S. counterparts to ensure compatible/comparable screening technology standards and equipment to reduce delays and improve efficiency of scarce resources.

Explore use of artificial intelligence to augment human capacity to enhance the efficiency of inspections.

Consider joint development of specialized cross-border facilities (such as closed, refrigerated inspection points) at appropriate POEs to facilitate trade.

Dedicate specific resources (financial and personnel) to the comprehensive development of roads, rail and ports in the south/southeast to foster development and integration of the sub-region.

Develop integrated cross-border planning processes with the United States at federal, state and local levels to maximize impact and efficiency of investments.

The above article is part of a seven-part series first published by the Wilson Center Mexico Institute and is being republished in Pulse News Mexico with express prior permission.