Recent headlines like Tesla opening the world’s largest EV factory in Mexico or fashion giant SHEIN moving production to northern Mexico have brought to light a new trend that could fundamentally reshape the global economy: the renaissance of manufacturing in Mexico. Both American and Chinese companies have been pouring capital into opening factories in Mexico, and this influx of foreign capital has spurred a boom in manufacturing in the country.
Nor is this manufacturing based on low-value and low-quality products, but instead, often in high-value-added and sophisticated sectors like automobiles, aerospace, medical devices, and such, along with more basic stuff like furniture and textiles. The automotive industry alone now employs a million people, and Mexico has quickly grown to become the sixth-largest car manufacturer in the world.
With China nearing saturation and the global system, the country has deftly positioned itself as an economic beacon of both the North American and Latin American worlds. Factors like robust Intellectual Property protections (a deficiency for which China is notorious), strong institutional frameworks, and a large number of free trade deals do play a role, but Mexico also has some unique advantages that it is leveraging, such as the Maquila system, recent political-economic trends, and geography.
The Maquila System
This foreign manufacturing in the country mostly happens under the ‘maquiladora’ system (maquila for short). Concentrated in Northern cities like Tijuana, Mexicali, Ciudad Juárez, Monterrey, and Mexico City, the maquila system sees foreign suppliers, mostly American, outsource production to take advantage of cheaper labour costs and compliances. While the exact model may vary from subcontracting production to a local firm, opening a subsidiary, or a shelter company, the maquila model has seen unprecedented economic integration between the two countries, to the point where it is difficult to classify whether a car was produced in Texas or Mexico.
These maquilas are the largest source of foreign exchange for Mexico and the second largest sector overall, only behind the petroleum industry. More than 3000 of these maquilas dot the US-Mexico border, employing more than a million workers and providing a unique employment opportunity for women. These factors have made them an indispensable part of the Mexican economic landscape and a primary engine for the ongoing boom in manufacturing in the country.
The Advent of ‘Nearshoring’
A factor prompting the boom of manufacturing in Mexico is the recent supply chain crisis. The combination of the zero-COVID policy in China and clogged ports has exposed the risks of outsourcing production to Asia. This has prompted a new trend known as ‘nearshoring’, where countries and businesses relocate production to places closer to them, both geographically and politically. The nation, in particular, has certain key advantages that make it an attractive destination for American manufacturers, as well as foreign players looking to access the lucrative American consumer market. This has led it to become the prime beneficiary of this ‘nearshoring’ trend.
First and foremost is cost. It has a large labour force with wages that are now, in certain places, lower than in China, as well as a large and educated pool of engineers, technicians, and other high-skilled jobs. This has led it to become a competitor to China on production costs, and with China becoming more expensive by the year, Mexico only gets more attractive as a destination for FDI.
Mexico is Evolving Into America’s Closest Economic Partner
Mexico has also entered the USMCA (or NAFTA 2.0) trade agreement with the United States and Canada, giving it preferential tariffs and treatment. Trade between the USA and Mexico originally boomed in the 90s after the first NAFTA, and the USMCA has continued that trend, with Mexico now being the United State’s second-largest trading partner, totalling $677 billion in 2019. Growth of US-Mexico trade has also been robust, meaning that Mexico is likely to become America’s largest trading partner soon, a position it is likely to maintain for the rest of the decade.
There are also deep and intimate people-to-people contacts between Mexico and the USA. No matter how much Mexican migration to the USA gets criticised, it is an undeniable fact that the Spanish language and Mexican culture have been embedded deep into the American consciousness. The regular and daily contact between Americans and Mexicans further contributes to the exchange of goods, services, and ideas between them.
Finally, there is the simple fact of geography. Mexico being a neighbour of the USA, with a wide-open border and several road and rail links, means that logistical costs are much lower between the countries than between, say, China and the USA. Not only are the costs lower and distances shorter but there are also multiple road links, reducing the risk of supply chain shutdowns due to a single blockage, as happened due to over-usage of the Port of Los Angeles in 2021 and 2022.
Trucks and freighters regularly ply the route between Northern Mexican cities to the Southern United States multiple times a day, the journey often taking just a few hours, and it is hard to beat that kind of access and synergy with the world’s largest consumer market. Trade deals, culture, economic policies, labour costs, and myriad other factors might play a part, but the proximity between the States and Mexico is the single biggest factor in the recent boom.
Of course, all is not as rosy as it may seem. The boom of manufacturing in Mexico is heavily skewed to the North and Central parts of the country, while the South is still mostly neglected. This inequality between regions might lead to social conflict down the line. Mexico also does not have as business-friendly and entrepreneurial a culture as some Asian powerhouses, as demonstrated by the popular support for the leftist policies of President Obrador (AMLO).
There are also a few other issues, such as the increasing influence and violence of the infamous drug cartels, continued xenophobia in the USA, and security issues from Central America, but overall the future looks quite rosy. Of course, the advantages of China are hard to beat, but people are slowly recognising the unique benefits of manufacturing in Mexico too. With every day bringing fresh headlines of new factories in Mexico, the next two decades should see Mexico entering a historic era of prosperity and growth.