REVISITING MEXICO: A critical link in the supply chain

Since the signing of the North American Free Trade Agreement (NAFTA) in 1993, Mexico has continually climbed in the ranks and emerged as both a critical enabler of global supply chains and a key hub on the continent. From auto manufacturing and electronics to distribution and logistics, the country has served as an all-important link in the supply chain, offering both lower-cost production and proximity to the US market.

Because of rising labor costs in China, recent trade wars, and growing concerns about resiliency, many supply chains have started to contract. And with US companies taking a closer look at nearshoring, Mexico has become a focal point in the discussion. The United States-Mexico-Canada Agreement (USMCA)—the new version of NAFTA—went into effect in July 2020 and offers new benefits. In addition, the COVID-19 global pandemic has escalated many nearshoring trends, making the country a prime alternative to China.

Mexico remains the world’s 15th largest recipient of foreign-direct-investment (FDI), with inflows of US $33 billion,¹ and it became America’s largest trading partner in 2019.

It is also one of the few Latin American countries that did not experience a significant drop in FDI during the pandemic: inflows declined less than 10%—significantly lower than the average of 37% throughout Latin America and the Caribbean.

Even though Mexico remains highly attractive in such areas as value, proximity, and resources, such issues as security and corruption remain challenges for many US businesses. Finding suitable suppliers, too, can be a challenge; labor productivity is declining; and new trade agreements may put upward pressure on manufacturing-labor rates.

Nearshoring to Mexico isn’t the right solution for everyone, however. We offer key questions to consider as you evaluate your geographic footprint and supply chain network.

1. World Investment Report 2020: International Production Beyond the Pandemic. United Nations Conference on Trade and Development; https://unctad.org/system/files/official-document/wir2020_en.pdf. 

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