'Nearshoring' to Mexico, an economic promise yet to take off

Mexico is the world champion of the Google searches for the word nearshoring and by a lot. Data from the search engine shows that the country's interest in this commercial trend reaches 100, the highest rating, while the countries that follow (the Philippines, Guatemala and Costa Rica) do not even reach 30. The nearshoringwhich appears in political speeches, financial reports and even promotional advertisements, has captured the imagination of many Mexicans.

The trend refers to the transfer of companies from one country to another due to their proximity to the target market (as its name suggests: nearby close and shoring, as a synonym for strengthening). While it boomed 20 years ago when companies opted to outsource workers to Eastern Europe, the term is used today to refer to the potential of countries like India and the Philippines. In the last two years, as the so-called “trade war” between the United States and China has intensified, Mexico has emerged as an alternative for companies to move their operations to continue selling to the North American market without bothering the White House. The second economy in Latin America has labor that is comparably cheap to China's, but has the advantage of living next door.

But the impact on the Mexican economy and, therefore, on the lives of Mexicans, remains to be seen. Although foreign direct investment (FDI) reached a record of 32.9 billion dollars between January and September, according to data from the Ministry of Economy, the majority is investment from foreign companies that were already in the country. The English investment bank Barclays estimates that the nearshoring may have contributed between 0.3% and 0.4% of the Gross Domestic Product (GDP) this year.

The future of this trend will depend, in large part, on the economic performance of the United States, the largest in the world and with which Mexico is deeply integrated. Trade between both countries increased in 2023, in which Mexico replaced China as the main trading partner. When the United States does badly, Mexico can do worse, and vice versa. Analysts conducting the blue chip survey in the US, which includes leading business economists, estimate that US GDP has grown 2.6% this year. Goldman Sachs, the investment bank, expects this pace to continue in 2024, although with a slight slowdown of 2.1%. If the forecasts come true, Mexico could see the fruits of the nearshoringbut in a medium-term horizon, analysts have warned.

When reviewing the narrative of the Mexican Government since President Andrés Manuel López Obrador took power, it is evident that the bet for economic growth was always on commercial exchange with the United States. Before the term nearshoringas such, sneaked into the lexicon of Mexican businessmen, the Secretary of the Treasury spoke of the free trade agreement with the United States and Canada, the T-MEC, as the development lever with which Mexico would take off.

Maybe “T-MEC” is not as catchy a word as nearshoring, although basically it is the same promise, which has already had an impact on the exchange rate. The Mexican currency appreciated 13% against the dollar this year due to several factors, including: the inflow of foreign currency from exports, remittances and FDI, the attractive interest rate differential between Mexico and the United States and the “expectation of greater supply of dollars in the future in Mexico, due to growth in exports and foreign direct investment, given the opportunity of nearshoring”wrote Gabriela Siller, head of analysis at Banco Base, in a report to clients this week.

“The growth, although decelerated, of exports and remittances provided the basis for the sustained appreciation of the peso, but it was the expectation about the opportunity of the nearshoring which gave the greatest boost to the peso, to the point of showing the largest annual appreciation on record, since the free floating exchange rate regime was in place,” said Siller.

On the list of concerns that foreign companies have when they consider Mexico as their new destination is the water shortage in most of the national territory, as well as the electricity blackouts experienced in recent years due to a deficit in installed capacity by the parastatal company. of electricity, the Federal Electricity Commission. The lack of infrastructure has been one of the factors that has delayed the construction of a Tesla factory in the north of the country, an incident that exposes the risks that remain for the country to resolve if it wants to enjoy the fruits of the nearshoring.

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