Nearshoring in Mexico Is Mainly an Aspiration
There’s been much talk about “nearshoring,” the idea that manufacturers are reducing risk in their supply chains by bringing production closer to their end markets. Mexico is supposedly one of the big winners from this trend, as companies by the score are said to be building factories there to serve the U.S. market. Much of this investment ostensibly comes from Chinese firms that want to make things in Mexico to circumvent U.S. tariffs and trade sanctions on imports from China.
The data, though, show scant evidence of a Mexican manufacturing boom:
- Industrial production in Mexico has risen only 7% over the past six years. Moreover, industrial growth has been dominated by petroleum refining, favored by the government and protected against foreign competition. Output in sectors such as paper, chemicals, and basic metals has flatlined, and manufacturing of transport equipment–the target of much foreign investment–has been growing by less than 1% per year. Traditional industries such as furniture and textiles have been shrinking.
- Fixed investment is up sharply since a slump in 2020, but nonresidential construction and imported vehicles account for almost all the growth. Investment in machinery and equipment–the sorts of investment needed to open new factories–looks strong only because it looked so weak between 2018 and 2021.
- Foreign direct investment set a record in the first quarter of this year, but almost all of that came from foreign companies reinvesting the profits of their Mexican operations. Very little new direct investment came into the country, and almost none of that money came from China.
- The number of trucks crossing the border appears to be at a record level.
What’s going on? One plausible explanation is that much of Mexico’s boom in nonresidential construction involves warehouses. The inventories of U.S. manufacturers and wholesalers are high, by historical standards. It’s often cheaper for them to import goods through the ports of Los Angeles and Long Beach and truck them to warehouses in Mexico than to store their stuff in the United States, so developers are building vast amounts of warehouse space in northern Mexico. The increase in cross-border truck traffic may be due to this merchandise moving back and forth rather than to exports of goods churned out by Mexican factories.
Nearshoring, at least in Mexico, seems to be more of an aspiration than a reality, at least for now. Claudia Sheinbaum, who is to be sworn in as president on October 1, may need to make some major policy adjustments if she hopes to change that.
Tags: Foreign Investment, Manufacturing, productivity, supply chains, trade