Will Mexico Finally Join the “A” List? 

One winner from the geopolitical war between China and the United States is Mexico. Indeed, such are the tensions that America is rewriting their global trade agreements where they are seeking to lessen their dependence on supply chains between themselves and their geopolitical rivals and look to find a source of imports closer to home.  

The main beneficiary of such agreements is Mexico, as they have now overtaken China as the largest supplier of goods to the United States, and as of July 2023 China’s share of American imports was 14.6% whilst Mexico led the way with 15%. 

Whilst Mexico is enjoying a resurgence in their export trade, it is interesting to note that 2023 data shows not only can the country boast one of the best performing stock markets, it also enjoys being the owner of the strongest currency. Globally, Mexico is attracting a raft of investors, such interest not being seen since 1994 when NAFTA (North American Free Trade Agreement*) was signed. 

*NAFTA – was enacted in 1994 and created a free trade zone between Canada, the United States and Mexico, and on January 1st, 2008, all quotas and tariffs were eliminated on American exports to Canada and Mexico. As of 2018, Mexico represented America’s third largest trading partner (after China and Canada) and the second largest export market. 

However, history dictates that in the past Mexico has not grasped the opportunities when presented, to turn round their economy. Such opportunities as NAFTA, a great trade deal with the United States, still could not help the Mexican economy. One of the phrases that can be deemed the opposite of a growth miracle is a withering calamity and that could only be said of Mexico’s economy between 1994 and 2017. Trade agreements are supposed to help poor countries grow faster than their richer counterparts, yet by any standards, one can only say the Mexican economy has been sorrowful. 

Even today, Mexico’s growth rate has averaged circa 2% per annum, which is nowhere close enough to reduce poverty, and does not compare favourably with their peers in other developing countries. In fact, in 2000/2001 Poland, Turkey and Malaysia are just three examples of countries who were poorer than Mexico and data confirms that they are now considerably richer. 

So why is it that Mexico cannot use these trade agreements to improve their economy? The answer is that there are many roadblocks both new and old that could be an impediment to the continuation of the current boom. For starters, the current government is seeking to increase its role within the economy and, as a result, has often clashed with business interests across various sectors. 

Therefore, many Mexican companies have been somewhat recalcitrant when it comes to borrowing, which in turn would have increased investments across the board and turned the current boom into a more lasting period of growth. Another impediment to borrowing is the high interest rates, with smaller businesses therefore being unable to utilise credit as a means for expansion. 

Competition is another factor that could derail the potential for Mexican growth, with Japan, Vietnam and other countries, despite not being “near” the United States, are all vying to replace China as an importer to America. Furthermore, Mexican infrastructure is currently under increasing strain from current investments, as there are continuing bottlenecks being created by scarcity of water, limited industrial space and power transmissions that are becoming increasingly more erratic.

Examples of these bottlenecks as voiced by experts can be seen in Monterey, a northern industrial hub in Mexico. In this instance, one expert recounted that in 2021 Tesla was on the edge of opening a factory in Texas and was looking for a supplier of computers that allows autonomous driving for their electric cars. They were currently shipping these computers from China and were looking for a supplier closer to home, otherwise known as friend shoring and nearshoring*. In this instance, Quanta Computer Inc, who had a factory in Monetary, agreed to meet demand by outfitting a building in their complex. Once production started, output was hampered by power blackouts, as the city’s power grid could not keep up with growing industrial demand.

*Friend Shoring – This where companies move their supply chains from geopolitical adversarial countries to those countries considered as geopolitical allies. In the above example, shifting manufacturing from a Chinese supplier to a Taiwanese supplier. The ultimate goal is to stop countries like Russia and China from gaining advantages from leveraging key raw materials e.g., rare minerals, products such as energy, fertilisers and fuel, and computer parts which would disrupt western economies. In other words, it is a barrier to key supply chain blackmail.

*Nearshoring – This where a supply chain or production is shifted from overseas to a neighbouring country or nearby country, usually within the same continent or region. The above scenario, where Tesla moved their supply chain to Monterey to supply computers to their Texas factory, is a prime example.

Monterey is the capital of the district of Nuevo Leon and more than 30 companies have moved to this area after Tesla announced they were to build a factory in Monterey. However, other carmakers have announced EV investments in Mexico such as BMW, Kia Motors and General Motors, and other industries are growing such as plastics and aerospace, found just across the border from California, while home appliance and electronic companies are also expanding.

Data released by the Mexican Association of Private Industrial Parks shows that currently circa 75% of lessees are foreign companies and in 2022 vacancies fell to just 2.1%, whilst in Monterey in order to secure a lease, companies now have to commit to a minimum of 10 years.  Investment in industrial real estate is reaching an all-time high with Corporacion Inmobiliaria Vesta SAB, a real estate developer raising circa USD 450 Million via an IPO in the United States. Furthermore, Prologis, a real estate investment trust based in San Francisco, together with their Mexican arm, are planning a USD 1.2 Billion investment in land and warehouses.

Originally, back in the 1960’s Mexico made its name in the manufacturing sector where factories (maquilas) could be found alongside the US border. These factories employed low wage labour and were quite profitable exporting to the United States. They were also given a boost when NAFTA was signed, which had a knock-on effect to such cities as Monterey. However, small scale farming was a casualty of NAFTA, as Mexico imported American foodstuffs such as corn, thus putting the farmers in jeopardy to the extent that the countryside almost became derelict.

The current President Lopez Obrador, known for his thriftiness when it comes to the public purse, is intent on “levelling up” the north south divide. To this end, projects funded by the public purse include a railway line linking the pacific ocean to the gulf of Mexico. The idea being that the railway will be lined on either side with industrial parks. However, for investors, these proposed industrial parks are so much further from the American border, and this is pointed out by the boss of Nuevo Leon’s largest industrial park who says you can drive to the border crossing in circa 2 ¾ hours, with no red lights.

However, the current President is also known for his anti-business stance, and even sent troops to try and renationalise a private railway, whilst at the same time discouraging foreign companies away from Mexico’s energy markets. However, the president did engage with Tesla as they are seen as job creating initiatives.

Experts suggest that Mexico’s growth rate could increase by 0.7% due to nearshoring, which, whilst not much, would increase growth to almost 3%. In fact, few economies in Latin America have prospered like Mexico’s during Q1 and Q2 of 2023. Despite all positivity on nearshoring, many economists have been downbeat on Mexico’s economy and have been left scratching their heads as they have been proved wrong time after time with Mexico producing strong data and a resilient economy. 

Furthermore, with post-covid supply chain issues still being problematic between China and the United States, (covid related supply chain issues led to a 600% increase in the cost of shipping goods from Shanghai to Los Angeles), Mexico’s economy should continue to benefit form nearshoring, especially given the current strength of existing production and manufacturing with America. 

However, much of the improvement in Mexico’s economy could well depend on whether or not the United States enjoys their much trumpeted “soft landing*”. Such is the lack of agreement on a soft landing, Mexico’s Financial System Stability Committee has expressed caution over the Mexican economy in the coming months. Recently released data in Mexico is mixed, and whilst figures show retail sales and employment growing, exports on the other hand fell reflecting figures showing industrial production as flat. 

*Soft Landing – is a cyclical slowdown in economic growth that avoids recession.  There are mixed thoughts from economists in the United States as to whether or not America will enjoy a soft landing or will indeed go into recession. Some experts believe that a recession is still on the way, with a 5% interest rate (up from near zero in March 2022) yet to fully impact consumers and businesses. On the other hand, US equity investors are showing signs of a fading risk aversion, indicating that immediate fears of a recession have passed. 

There is much to be optimistic about Mexico’s economy, with some analysts predicting GDP to reach between 2.05% and 2.75%, going up to 3%. However, infrastructure is still a problem, and in 2022 a drought in Nuevo Leon left reservoirs empty. This impacted production for some companies who are still waiting for the promised aqueduct to be built by the government.

The on-going question is whether or not Mexico will see an increase in domestic investment, which will help put the economy on an upward curve of growth. However, some economists are downbeat, saying there will be no real value added locally as Mexico will just continue to import components for assembly then export the final product.

Much of the investment is centred around provinces such as Nuevo Leon, leaving a hefty divide between north and south. The President is determined to bridge this divide and spread the wealth evenly across Mexico. This is Mexico’s big chance to become an on-going success story, let’s hope they grab it with both hands.