Politics and convenience push Mexico to become US’s top trading partner | Business and economic news

Before Elon Musk announced he would pump billions into building Tesla’s largest factory in the industrial park of Monterrey, Mexico, US trade winds were already turning south.

In late 2022, Mexican Economy Minister Raquel Buenrostro Sanchez said 400 companies had expressed interest in moving from Asia to Mexico. New industrial zones were springing up, many of them driven by Asian money, and investment was pouring in. By June 2023, about $13 billion in investments had been secured, according to Mexico’s Minister of Finance and Public Credit, mostly to auto or auto parts manufacturers.

New numbers released by the US Census last week indicate that Mexico is the United States’ No. 1 trading partner. In 2023, the United States traded $798 billion with Mexico, outpacing the goods it bought from its southern neighbor China and Canada. The boom surrounding domestic offshoring – the catchy term for the movement of companies closer to their preferred markets, in this case the United States – helped push Mexico into this position.

“This is not a cyclical thing, it is a new thing,” said Andrew Hubert, a trade expert who lived in China and now lives in Mexico.

“What I see is a diversification of manufacturing. Calls are starting to come from companies saying, ‘I don’t want all my eggs in one basket,’” said Joshua Rubin, vice president of business development at Javid Group, a Nogales, Arizona-based company that helps companies start operations. In Mexico.

According to the Federal Reserve Bank of Dallas, Mexico first overtook Canada at the start of 2023, with bilateral trade between the two neighbors totaling $263 billion in the first four months, with China’s numbers continuing to 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 its number decline by 20 percent from 2022.

The boom on offshore shores is not limited to Mexico. A 2022 report by the Inter-American Development Bank (IDB) noted that the entire Latin America and Caribbean region is poised to reap the benefits, with exports reaching $78 billion in the near future. Countries such as Argentina, Brazil and Colombia were able to make significant gains. But they were all dwarfed by Mexico, which accounted for nearly half of the IDB’s near-term growth forecast. It has caught the attention of the Canadian auto parts lobby, which has begun to express concern that Chinese investments in Mexico will ultimately undermine Canadian jobs.

How Mexico arrived at this position was as much a result of its own initiatives and growth as it was the result of geopolitical forces beyond its control. Experts point out that it is just beginning.

“It’s a world of opportunity now,” said Marco Villarreal, who helped Hisun Motors, a China-based maker of ATVs and UTVs, open manufacturing facilities in Saltillo, a city on the outskirts of Monterrey.

Villarreal, who had a long career at General Motors and Caterpillar, recalled touring industrial parks in the Monterrey-Saltillo region in late 2020, and the head of Hison’s U.S. operations expressing his amazement at the scale of the manufacturing powerhouse in front of him.

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

“There is increasing interest from Asia to establish a footprint in Mexico,” agrees Alfredo Nolasco, a business development specialist who founded Mexican consulting firm Spiral.

What explains the boom?

Mexico has long carved out its status as a manufacturing hub for the United States, through tariff and duty-free programs that have enabled companies to set up so-called “maquiladoras” — as factories were called in the 1990s — to assemble products exclusively for themselves. Export. The North American Free Trade Agreement, and its revised daughter known as the United States-Mexico-Canada Agreement, were another boon for the southern partner.

Newly assembled cars appear in the vehicle storage yard at Toyota automaker's Baja California plant in Tijuana, Mexico
Mexico has programs to build products such as cars intended exclusively for export (File: Jorge Duenes/Reuters)

But a set of new factors combined to create the boom we are witnessing today. The China-US trade war is the trade war most often highlighted by experts on both sides of the Mexico-US border. Hubert said that the matter began during the administration of former US President Donald Trump and actually took off during the era of President Joe Biden.

Hubert has been warning of diminishing gains in China for years, arguing that the costs of compliance will outweigh the savings.

“Complying with Chinese regulations and US regulations at the same time is somewhat impossible,” Hubert said. “The United States in many industries requests information that the Chinese could at any time consider state secrets.”

Then came the Covid-19 pandemic, which revealed logistical risks that the globalized economy had not previously taken into account. Companies have been forced to swallow hard supply chain pills as the cost of transporting containerized goods to North America from China has risen dramatically. It killed companies that were unable to get their products to their markets or moved Mexico to indispensable status, as was the case for medical supplies entering the United States during the lockdowns.

However, this does not mean that companies are abandoning China or neighboring countries completely, Hubert said, but rather it is a matter of establishing branches or expanding their presence in Mexico.

“The pandemic has left us with a very important lesson that has taken us from the globalization of production to the regionalization of production,” said Claudia Esteves, Director General of the Mexican Association of Private Industrial Parks. “It practically kills globalization.”

She added that the war in Ukraine was an additional factor that prompted European interests to reconsider their industrial sites in places such as Poland.

“Our good luck is due to our geographical location,” she said. “This is because we share a 2,000-mile (3,218-kilometer) border with the largest market in the world.”

As a result, the demand for industrial areas has increased significantly. About 50 new industrial parks are under construction in Mexico in 2023, about half of them by Chinese investors, and another 20% Korean, Esteves said. In 2019, there was 2 million square meters (21.5 million square feet) of industrial area occupied. By mid-2023, that had jumped to 4.3 million square meters (46 million square feet). “This is historic,” she said.

Growth that has been accelerating for decades

While this near-term boom is largely about manufacturing, the growth of trade is broader than that.

A farm worker picks avocados in the San Isidro orchard in Uruapan, in the state of Michoacán, Mexico.
Mexico’s agricultural sector has seen an “astronomical” boom in the past few years (File: Carlos Jasso/Reuters)

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

In the agricultural sector, growth was “astronomical” – when he started in 1987, importing produce was a job that ran from November to May. “Now, we are pretty much a year-round industry and import from every state in the country of Mexico,” he said. “The berry sector is the largest growth sector and it is all for export to the United States.”

It is not just demand that has contributed to greasing this economic wheel. There is forward thinking. In Nogales, for example, the Port Authority began planning to expand the port of entry to manage the increased flow of trucks when there were 900 to 1,000 crossing into the United States each day. Now the number is almost double that in each direction.

“Infrastructure preparedness is very important,” he said.

Cartels and currency

Hubert identifies two potential clouds in this upward trajectory: instability caused by drug cartels and currency. “The peso is very strong,” he said. “This combined with inflation eliminates Mexico’s cost advantage.”

This isn’t just a cost advantage, it’s a labor supply advantage, Villarreal said. The United States does not have the skilled labor that many American companies demand and that Mexico has spent decades developing. He noted that it now has more than 50 years of car manufacturing, meaning it has a workforce that can handle technical assembly and is more than qualified for less demanding roles, such as furniture.

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

“Although Mexico is considered a great power, we realized that there was not enough for such simple issues,” he said. As demand grows, the labor supply problem may be solved.

“It’s a great opportunity there to develop joint projects with Mexico and other partners around the world.”

(Tags for translation)Economy

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