As the Biden administration accelerates the decoupling from the Chinese supply chain, Mexico is rapidly emerging as a new global manufacturing hub to replace China. The manufacturing boom is happening in major cities in Mexico as foreign investments targeting the U.S. market continue, and the value of the Mexican peso is also on the rise.
According to the U.S. Department of Commerce and CNN on April 30th (local time), the Mexican economy is reaping the benefits of nearshoring as global companies like Tesla and Foxconn continue to establish new factories in Mexico, which is adjacent to the U.S. Exports to the U.S. have also significantly increased, Mexico took first place among the exporters to the U.S. by accounting for 15.4% of U.S. imports last year, surpassing China’s 13.9%.
Alberto Ramos, head of the Latin America Economic Research team at Goldman Sachs, stated, “As nearshoring continues and the global supply chain is restructured, Mexico’s manufacturing industry has the opportunity for long-term success. Mexico and China have been competing for the U.S. market for years, but due to changes in U.S.-China relations, Mexico is now expected to take the lead.”
The recent shift of global companies to Mexico is due to its geological proximity to the U.S. and lower labor costs. Moreover, Mexico is considered the optimal location as a gateway for exports to the world’s largest consumer market, the U.S., as the U.S. imposes low tariffs on Mexico based on the United States-Mexico-Canada Agreement (USMCA). CNN analyzed that Mexico is attractive to companies that experienced supply chain disruptions during the COVID-19 pandemic or want to reduce geopolitical risks amid U.S.-China tensions.
Mexico has shown impressive growth in the automotive manufacturing sector. As major U.S. and European manufacturers move their factories to Mexico, Mexico has become the world’s fifth-largest car exporter. There are more than 12 car manufacturing plants in Mexico, including General Motors, Ford, and Stellantis, and electric vehicle companies such as Tesla and BYD have also announced plans to establish factories in Mexico. CNN reported, “Virtually all U.S. car manufacturers depend on Mexican parts because they are much cheaper than those made in the U.S.”
It’s not just American or European companies heading to Mexico. According to the Wall Street Journal, Foxconn, the world’s largest IT product consignment manufacturer, along with Pegatron, Wistron, Quanta, Compal, and Inventec, is establishing production bases in Mexico. This trend is due to their U.S. client companies’ efforts to keep production bases as close to home as possible.
As money pours into Mexico for investment, the value of the Mexican peso is also on the rise. The monetary value of the peso is currently maintained at around 17 pesos per dollar, which is considered a reasonable line. This contrasts sharply with the situation where the value of Asian currencies is plummeting due to the strong dollar. The rise in wages due to persistent U.S. inflation and the increase in remittances from Mexican immigrants in the U.S. are also cited as reasons for the strong peso. According to the Central Bank of Mexico, the remittances received by Mexico last year set a new record at $63.13 billion.
While Mexico is reaping the benefits of the global supply chain reconstruction, the fact that the U.S. focuses on Mexico as a bypass route from China is expected to be a variable in bilateral relations. There is a growing perception in the U.S. that Chinese companies are using Mexico as a route to avoid U.S. tariffs, which is at issue in the November presidential elections. Accordingly, the Mexican government is taking steps conscious of the U.S., such as announcing its independent regulations to prevent the circumvention of steel and aluminum exports to the U.S. market and keeping a distance from Chinese companies. The Mexican government has even informed officials from Chinese electric vehicle manufacturer BYD, who plan to build a factory in Mexico, that they will not provide investment benefits such as discounted land prices and tax breaks.
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