The integration of commercial trade within North America is moving forward, and companies are looking to take advantage of the benefits that Mexico has to offer. With the rise in labor and transportation costs in China, ongoing trade wars, the war in Ukraine and growing concerns over resiliency, many supply chains have been disrupted. As a result, nearshoring has emerged as a preferred alternative and Mexico has become a focal point for global companies. This is especially true for U.S. companies, given Mexico’s strategic location, lower costs, skilled labor force, infrastructure, wide range of free trade agreements and strong economic outlook.
As of today, Mexico is the United States’ second largest trading partner in goods. In 2022, the two countries’ bilateral trade of goods was US$779.3 billion, an increase of 15.21% from 2021, making Mexico United States’ second largest export market. Foreign direct investment (FDI) in Mexico increased 12% in 2022 to US$35.29 billion, and the United States continues to be Mexico’s top source of FDI, contributing 42.5% of all inflows to Mexico.
Main Advantages of Nearshoring in Mexico
Mexico’s strategic location allows for easy access to the U.S. market and industry, offering an unrivaled competitive advantage in the global market through its ability to leverage advanced U.S. technology with a skilled and cost-effective Mexican workforce and technical staff. The country shares a 1,954-mile land border with the United States, which is a key market for many international businesses. This means that companies can take advantage of the close proximity to their clients in the United States, which can help reduce shipping times and costs.
With its proximity to the United States, nearshoring in Mexico allows for shorter lead times for product delivery, which can result in cost savings and increased customer satisfaction. Moreover, Mexico’s proximity to the United States provides certain advantages over inbound freight from China, with fewer touchpoints, less complexity, and reduced risks. Also, by establishing operations in Mexico, U.S. companies can shorten their supply chain and foster closer communication with plant management.
Mexico’s labor costs are generally lower than those in the United States, making it an attractive option for businesses looking to reduce their operating costs. The minimum wage in Mexico is currently around US$1.50 per hour, which is lower than in many other countries, and in 2020 the average manufacturing labor cost in Mexico was US$4.80 per hour, compared to US$6.50 per hour in China.
With a highly educated and motivated workforce that possesses a wide range of industry-specific knowledge, from manufacturing and engineering to accounting and finance, companies can achieve cost savings without compromising productivity or quality. Further, establishing manufacturing operations in Mexico provides the added benefit of retaining U.S. personnel in key areas, including administration, research and development, warehousing and product finishing.
Another advantage of establishing business operations in Mexico is the ability to effectively own, manage and control a Mexican entity and its operations. This includes the right to acquire ownership of land and buildings for industrial operations in both the border zone and throughout the rest of the country. This allows companies to have a greater degree of control over their operations and assets, and to obtain financing in Mexico.
Mexico boasts a well-established transportation and logistics infrastructure, which facilitates business activities by simplifying the transportation of goods and materials to and from the country. In addition, streamlined customs clearance procedures between the United States and Mexico further enhance the convenience and speed of cross-border trade. These advantages can be particularly valuable to companies that need to move large volumes of goods with efficiency and reliability. As an example, transporting goods from Mexico to New York can take about 6 – 12 days while going from Shanghai to New York can take about 35 days. Mexico to Los Angeles is 4 days where Shanghai to Los Angeles is 22 – 26 days.
While Mexican roads have undergone significant improvement over the past few decades, certain areas still face limited improved roads and bridges, and security concerns persist in certain regions. Railways offer a slower but somewhat more reliable transportation option to the border, with ongoing infrastructure plans set to make significant improvements in rail infrastructure to benefit North American manufacturers and distributors.
Mexico has one of the broadest networks of free trade agreements in the world, affording businesses hailing from Europe, Latin America and Asia the opportunity to export goods to the U.S. and Canadian markets, thereby enjoying the many benefits of the United States-Mexico-Canada Agreement (USMCA), NAFTA’s successor.
Mexico currently enjoys a unique opportunity, making it a compelling option for companies seeking to nearshore their operations to stay competitive in the global market. For international companies, especially U.S. companies, looking to nearshore their businesses, Mexico may be an attractive option based on its strategic location, low costs, skilled labor force, robust logistics infrastructure, wide range of free trade agreements and positive economic outlook. By understanding the applicable legal considerations and taking advantage of the benefits that Mexico has to offer, international businesses can stay competitive in the global market.