The quiet movement to Mexico for sourcing and manufacturing was growing at a steady pace until the Trade Wars and then the COVID-19 pandemic caused a rethinking of global supply chains. Over a period of two years, Mexico experienced explosive growth in its manufacturing sectors.
Mexico became the place American manufacturers wanted to go for sourcing and contract manufacturing as it rapidly became a viable alternative to China. This growth was so significant that, in 2023, Mexico surpassed China for the value of shipments imported into the United States.
The 301 U.S. import penalty tariffs initiated by the Trump Administration imposed a 25% tax on imports from China, with very few exceptions and exclusions. These tariffs ignited a trade war between the United States and China that continues today.
The Biden Administration kept these import tariffs in place and enhanced the restrictions on technology exports to China. Coupled with the threat of further increases in tariffs, including a 100% import tariff on Chinese electric vehicles, ongoing geopolitical issues and long, risky supply chains, manufacturers have turned their manufacturing interests to Mexico.
Growth statistics
The growth statistics in cross-border commerce between the U.S. and Mexico confirm this. Imports into the U.S. from Mexico are up 18%. Foreign direct investment (FDI) is up 8%. U.S. exports to Mexico are up 35%, while some ports of entry, such as Laredo, Texas, have grown 235% in the past year. Laredo is now the busiest land port in the United States.
With this fast-paced growth comes the need for improved efficiency and technology. In Laredo, southbound truck drivers slow to about 20 mph and pass through a technology corridor that scans the truck, matches the pre-submitted pedimento import documentation, and the truck is cleared to cross the border.
On the northbound side, U.S. Customs is implementing scanning and other technologies to improve the speed and efficiency of border crossings. However, these improvements have not kept pace with the growth; and as a result, crossing points in other ports such as San Diego cause back-ups of trucks for hours.
For example, a drive along the commercial border crossing at Otay Mesa, just south of San Diego, shows trucks in line to cross the border for miles. Driver wait times, fuel for idling trucks, and the resultant pollution are all problems that need to be addressed.
Other ports, such as the deepwater ocean port of Brownsville, Texas, have also seen spikes in activity, both in container imports bound for U.S. customers as well as exports from Mexico bound for world markets and shipped via U.S. ports.
Average salaries of production workers/machine operators (world)
Source: The Reshoring Institute, Global Labor Rate Comparisons Study, 2023
The labor rates
Another factor in the growth of cross-border commerce is the labor rate. The 2023 Global Labor Rate Comparison, research conducted by the Reshoring Institute, shows Mexico on the low end of labor rates when compared with major manufacturing countries.
China can no longer be considered a low-cost country due to the steady increase in labor costs over the past 10 years, while Mexico remains very competitive. As an example, the Reshoring Institute compared the average salaries of production workers/machine operators in 12 manufacturing countries. Mexico offers some of the lowest wages in the world.
Comparing labor rates in border city pairs, the labor rate differential is a stark reminder of why so many American companies have moved across the border. It’s important to keep in mind that wages are even lower in Central Mexico.
The industries
The number one product category by value and volume moving across the U.S./Mexico border is automotive parts and assembled vehicles. Global automakers recognized many years ago, that cross-border commerce provided a cost-effective approach to vehicle production.
Today, Mexico produces 16 out of every 100 vehicles sold in the United States. In addition, the processing of auto parts is also a major growth area for the painting and finishing of auto parts.
Electronics and appliances are the second largest category by value of Mexican imports into the United States.
The growth of contract manufacturers such as Flex, Sanmina, CEVA, Celestica, Jabil, and Foxxcon in Mexico has paralleled the growth in market demand, particularly as production continues to move out of China and into Mexico. Major electronics manufacturing in Guadalajara, Monterrey, and along the border in Tijuana has grown significantly since the pandemic as companies look for assembly areas in closer proximity to the U.S. markets.
Agricultural products and beer are also major industries experiencing growth in exporting to the U.S. Mexico is the largest exporter of agricultural products to the U.S., supplying billions of dollars in tomatoes, fruit, vegetables, and avocados. Other industries experiencing significant growth in cross-border commerce include medical devices, petroleum, apparel and footwear, plastics, and metals.
Crime rates at the border
In considering whether to “reshore” or “nearshore,” companies often compare manufacturing locations in the U.S. and Mexico. One of the key decision factors is the crime rate in border towns, often cited as a major problem along the border.
A common misconception about border cities is that they have higher crime rates than the average city in the United States. This misconception stems from the idea and political rhetoric that immigrants bring crime with them as they traverse the U.S./Mexico border.
However, in a study completed by the Reshoring Institute in the cities of Brownsville, Laredo, Eagle Pass, El Paso, Nogales, Yuma, and San Diego, all major U.S. border cities, crime rates are consistently lower than the national average in other American cities.
There are several contributing factors regarding the lower crime numbers in these cities. The first is that typically there are lower crime rates overall in immigrant communities than the average U.S. community. Second, there’s a higher presence of law enforcement in these cities due to their proximity to Mexico.
Whatever the reason may be, border cities on average have less crime than most cities in the U.S. On the Mexico side of the border, the story is different. Trucks headed north to the United States may be subject to cargo theft. The Mexican drug cartels have a stranglehold in some areas, making the safe execution of cross-border commerce difficult.
China +1 or China +2
A common strategy now is for companies to keep some manufacturing in China, but also establish manufacturing in one alternative country (China +1). Vietnam became very popular a few years ago as an alternative to China due to its very low labor costs and the Vietnamese government’s business quest for attracting manufacturing.
Vietnam deliberately focused on infrastructure building that would facilitate the development of an industrial base. But because of Vietnam’s relatively low population—about 98 million people—Vietnam’s workforce quickly became fully employed, and its factories are now working at capacity. India was also a popular choice, but the bureaucracy, infrastructure, and location make this country less desirable.
The pandemic revealed major risks in long global supply chains that could not be easily controlled or overseen. Mexico presented far less risk and a low-cost manufacturing environment. Benefitting from Mexico’s proximity to U.S. markets created another significant advantage. The result was companies establishing additional or alternative manufacturing sites in Mexico.
Other companies are considering a China + 2 strategy, bringing some manufacturing back to America, leaving some in China, and establishing operations in a third country. This strategy has the effect of mitigating the supply chain risk of geopolitics, trade wars, environmental impact, weather events, and black swan events such as another pandemic.
Sustainability
On many U.S. companies’ strategic agendas is the focus on sustainability. Shortening global supply chains by manufacturing closer to their markets, companies can also reduce their carbon footprint and address sustainability goals.
Mexico’s infrastructure still has its challenges. Roads and bridges need repair and new factories being built require roads, rail sidings, electricity, water, and sewage infrastructure.
The Mexican government is investing in these projects, and in improved border crossings, in conjunction with the United States.
One such project is Puerto Verde, a proposed new commercial border crossing in Eagle Pass, Texas—about 60 miles west of Laredo. This new rail and truck bridge crossing will relieve some of the congestion in Laredo, reduce idle time at the crossings, and save fuel.
City pairs–minimum wages 2024
Source: Reshoring Institute 2024
Mexico is a viable alternative
Mexico is a viable alternative to manufacturing in China. While there’s still work to be done on infrastructure on both sides of the border, the long-term prospects for growth are clear. Advantages in proximity and costs present an attractive solution for
companies looking for new or expanding manufacturing sites.
Mexico’s newly elected President, Claudia Sheinbaum, the first woman to be elected in Mexico’s 200-year history, will be interesting to watch. A climate scientist by education and experience, Sheinbaum is expected to take an analytical approach to problem-solving and growth in commerce. She’ll have a lot on her plate including crime and cartel violence, infrastructure, jobs growth, and cross-border commerce with the U.S.
Manufacturers are turning to Mexico for nearshoring and expanding supply chains. The economics seem to work well. The infrastructure is improving. The political climate is stable. Proximity to major markets is good. The risk is relatively low. The time is right for manufacturing in Mexico.
