Near but not clear: Is Mexico’s nearshoring trend a mirage?

Doubts have been cast on Mexico's nearshoring trend due to uncertainty over foreign investment in the country due to potential shifts in US policy and reports from entities like the Bank for International Settlements (BIS) questioning the evidence of the phenomenon, BNamericas was told. 

Much of the nearshoring trend, which involves companies either relocating to countries that are closer to destination markets such as the US, or expanding their operations to increase production in such locations, has been driven by Asian firms looking to establish output that can be exported to the US, partly fueled by the friction in US-China trade.

“The trade war between the US and China is restructuring international trade,” Kenneth Smith Ramos, the chief negotiator for Mexico in the talks that led to the replacement of Nafta with the USMCA trade deal, told BNamericas.

“Mexico becomes an alternative to produce and supply the American market. This is not a simple trade war, it's a permanent race for economic and military supremacy. It is the 21st century Cold War that will last several decades,” he added. 

Chinese electric vehicle maker BYD and electrical appliance manufacturer Midea are examples of this situation, with both having announced plans to build factories in Mexico. This could enable them to take advantage of tariff-free trade in North America under the USMCA’s rules of origin.

Nevertheless, some analysts and officials, such as the former Mexican ambassador to China, Jesús Seade, have described nearshoring as an illusion, considering that growth of Chinese investments in Mexico is not actually that large. 

“That ‘spectacular’ growth of Chinese investments in Mexico is a mirage; the nearshoring [trend] is not something that offers as much as we would like to believe,” he was quoted as saying by daily Reforma in January 2023.

According to figures from the Mexican council for foreign trade, investment and technology (Comce) reported by paper El Economista, during the first half of 2024, Mexico recorded US$235mn of FDI from China. However, only US$10.4mn of that figure was new investments.

Smith disagrees with Seade and considers nearshoring to be a real trend that Mexico has not fully profited from. 

“The US will continue to be our main investor, but there are other countries that are investing more in Mexico. Nearshoring is real,” he said in an interview with BNamericas.

“However, the [other side of that] reality is that there are structural obstacles in terms of access to energy supply, renewable energies, infrastructure and trained labor for the industries of the future. The impact [these problems have] is that despite receiving record FDI of US$36bn per year, we should be receiving between US$50bn and US$60bn.”

In October, BIS published a report questioning the tangibility of the nearshoring trend based on the scarcity of solid evidence to support the hype. 

“Overall FDI to Mexico has underperformed peers in Asia and the Americas and has even dropped off in recent months. While FDI has not increased, its composition has changed: in 2023 reinvestment of profits was significantly larger than new investment,” the bank said in a bulletin.

“There are countries like Vietnam that have an agreement with the US, where there is also relocation of companies to Vietnam and exportation to the US. They have gained penetration of around 3 percentage points in the US market. So they're taking advantage of it,” Smith said, adding that Mexico accounts for 15.5% of all imports made by the US. 

Political uncertainty

The uncertainty regarding the US elections also plays a key part in the Mexican trend, with Donald Trump having said that he wants to renegotiate USMCA and impose tariffs on cars and other imports from Mexico, although Kamala Harris has also said she would make changes to the free trade deal.

“In terms of certainty, governing style, messages and foreign policy, a Democratic Party administration would be more favorable [to foreign investors in Mexico] in spite of the protectionism in the United States and the strong commitments that Democrats have with unions,” said Smith. 

“Trump would arrive with a very transactional position regarding free trade, meaning it is fine to export to Mexico and Canada, but wrong to import from them. If my companies invest in the US, it's a plus but if they invest in the rest of North America, it’s a loss for the US.”

Investments on hold

One of the flagship nearshoring investments in Mexico is the heralded construction of a US$5bn Tesla Gigafactory in Nuevo León state. However, the project was put on hold by the US carmaker, which is currently facing more competition from Asian EV makers and has not performed as investors would like. 

The fate of Tesla’s investment in Mexico will be defined after the US elections, according to Nuevo León governor Samuel García. 

Midea also announced that it would suspend its plan to build a plant in Coahuila state, due to the political uncertainty in Mexico and the US, newspaper Reforma reported in September. 

Meanwhile, news about BYD’s plant has gone very quiet while the company is reportedly choosing a location, a process that has already taken more than a year.