One of the many buzzwords that has emerged from the pandemic period is “nearshoring,” the practice of bringing production closer to home.
As global corporations recalibrate the risks of relying on Chinese factories for their supplies, Mexico is emerging as one of the preferred destinations. Foreign direct investment (FDI) flows into Mexico have increased since the pandemic to the highest level in a decade, distributed across various states and sectors of the economy. FDI in Mexico rose to $31.4 billion in 2021 and reached $32.1 billion in just the first nine months of 2022. Growth is likely to persist this year, despite weaker global trade. More than 400 American companies intend to relocate from Asia to Mexico, according to the country’s economy minister.
Amid the pressure to adapt to altering supply chains, Chinese businesses are also making large investments and setting up factories in the Latin American nation, essentially allowing them duty-free access to the U.S. In 2021, Chinese firms accounted for 30% of foreign investment in Mexico’s border state of Nuevo León, after the U.S. at 47%. Last year, of the 101 confirmed projects in the state, 47 originated from the United States and 22 from China.
The manufacturing sector remains the main destination of FDI flows, a key factor behind the strong recovery in Mexican industrial activity. While automobile components lead manufacturing activity in Mexico, other sectors like electrical equipment and computer products are also witnessing strong growth.
Mexico is one of the world’s most open and globalized economies, having free-trade agreements with over one-fourth of the countries around the world. Trade represents nearly 80% of its gross domestic product, up from below 30% before the implementation of the North American Free Trade Agreement in 1994. Mexico has a dynamic industrial base, vast mineral resources, favorable demographics and a wide-ranging service sector. It is also conveniently located next to the U.S.