Nearshoring in Mexico, for example, could make the economy grow 3.7% per year, after only growing 2.6% per year in the last two decades.
Nearshoring in Mexico represents an economic opportunity for the country only comparable to what was seen after the implementation of the North American Free Trade Agreement (NAFTA) in 1994 and, if well exploited, could generate the greatest economic growth since the “Mexican miracle” (1941-1982). This was the opinion of the general director of Economy, Business & Indicators (ECOBI), John Soldevilla.
According to the economist, “there is no country in the world with a better opportunity than Mexico to take advantage of this new phenomenon” known as nearshoring, which is nothing more than a business strategy to relocate part of the production and supply chains of companies to areas closer to their main target market. Tesla’s arrival in Nuevo León is a clear example of this.
While there are conditions that triggered nearshoring in Mexico and are now mitigated, such as the crisis in global supply chains and the surge in transportation rates caused by the Covid-19 pandemic, there are others that will persist in the medium term and give Mexico a unique competitive advantage in the world: the trade war between the United States and China; Russia’s war against Ukraine; and the increase in the cost of labor in Asia.
According to the economist, Mexico’s competitive advantages to position itself as a natural candidate to benefit more from nearshoring are the solid production and logistics chains developed with the United States as a result of NAFTA; shorter production and shipping processes than in other regions of the world; similar time zones with the United States, which facilitates communication between production and suppliers.
Also, the availability of skilled labor; Mexico is the country with the most trade agreements and treaties in the world; it is the largest exporter of manufactured goods in Latin America and the main commercial supplier to the United States, surpassing China.
But, just as there are advantages, there are also challenges to overcome in the country for nearshoring in Mexico to become a reality. Some of them are legal certainty for foreign investment; social problems, security, organized crime, corruption and impunity; development and modernization of more transportation logistics infrastructure, ports, airports, customs capacity, clean energy, as well as more skilled labor.
But, just as there are advantages, there are also challenges to overcome in the country for nearshoring in Mexico to become a reality. Some of them are legal certainty for foreign investment; social problems, security, organized crime, corruption and impunity; development and modernization of more transportation logistics infrastructure, ports, airports, customs capacity, clean energy, as well as more skilled labor.
The economist pointed out that the weakness of nearshoring in Mexico is that, unlike NAFTA, it is not a State policy on the part of Mexico, nor is it an agreement signed with the United States, but a product of unintended circumstances: the economic effects of the Covid-19 pandemic, the trade war between the United States and China, and Russia’s war against Ukraine.
Possible effects of nearshoring in Mexico
For the general manager of ECOBI, nearshoring in Mexico is a unique opportunity that is unlikely to be repeated in the future. And it also has an expiration date. That is, it will not be there forever, so capitalizing on all its benefits is crucial for the country. But what could those benefits be for Mexico?
John Soldevilla assured that the benefits of nearshoring could be visualized in a seven-year horizon, which was more or less the time in which NAFTA showed its main effects. In this way, the economist stated that from 2023 to 2030, if all the benefits of nearshoring are captured in Mexico, these results could be expected:
- The Mexican economy could grow 3.7% per year, after only growing 2.6% per year in the last two decades.
Manufacturing would account for 96% of total exports. - Investment would grow 7.4% per year and would be equivalent to 28.6% of GDP, its historical maximum.
- The big winner of this phenomenon would be the manufacturing sector, representing 22.4% of GDP in 2030, its historical maximum.
- Around one million new formal jobs would be generated per year.
- Exports would increase from 578 billion dollars in 2022 to 1.1 trillion dollars in 2030, going from 39% to 49% of GDP.
- Foreign investment would increase from US$36 billion in 2022 to US$87 billion in 2030, rising from 2.5% to 3.8% of GDP.
John Soldevilla considered that, unless some extraordinary internal or external phenomenon occurs, known as a black swan in economic jargon, the end of the six-year term should be orderly, without an economic or financial crisis. The probability of a crisis is low, with a moderate bias, given the presence of few risk factors in amber traffic light.
ECOBI analyzes 16 macroeconomic risk factors in our model, of which two are a source of concern this year (red traffic light): the Fed and Mexico’s rates. The rest are either green (low risk) or amber (moderate risk).
“Before 1995, most of the factors were in red and a crisis was imminent. Today, things are very different, our economy is stronger or more resilient. Our economy has better indicators than other emerging economies in the region. Therefore, Mexico’s potential is very great,” said ECOBI in a presentation to journalists.
ECOBI pointed out that, of the state economies, five states in the north of the country could benefit the most from nearshoring in Mexico, with Nuevo León leading the way. “Nuevo León is the first manufacturing entity in the country in GDP, FDI, employment and about to be the first in IMSS wages. Except for the CDMX, it is far behind the rest of the entities in terms of financing.”
“The top five places in exports correspond to entities in the north of the country, accumulating together almost 48% of the national total. Its export rate is high and its exports are mainly concentrated in transportation equipment (automotive) and electronic accessories and computer and communication equipment. The industry that could benefit most from this Nearshoring era is that of vehicles, electronics, auto parts, among others. Even construction itself.
Source: Forbes