Tic-Toc: Nearshoring to Mexico Has an Expiration Date. Essential Insights for Investors

Nearshoring involves reorganizing supply chains to reduce costs and ensure shipping reliability, especially following the disruptions caused by the pandemic and the trade tensions between China and the United States. In an interview with Alejandro Delgado, Country Manager Mexico at SiiLA, Jim Costello, Chief Economist at MSCI, discussed the impact of company relocation and expansion on the Mexican economy, highlighting how it is transforming global trade relations.

While Mexico is strategically positioned to take advantage of this realignment due to its proximity to North American markets under the USMCA, Jim warns that growth resulting from this phenomenon will be temporary, as "there is a limit to the amount of manufacturing activity that can be shifted to Mexico from other regions around the world."

The economist also mentioned that the "additional boost" Mexico is receiving "won't continue indefinitely," as sustained growth will depend on various internal and external factors, such as risk diversification, labor costs in different regions, and political tensions that could affect supply chains.

However, Jim noted that nearshoring is not new but rather a natural extension of the close trade relations Mexico and the United States have developed over decades. The key to driving development lies in making the most of the "bonus period" that will stabilize.

As an example of the changing investment landscape, the MSCI executive recalled that in 2003, many companies bet on Mexico. Still, China's entry into the World Trade Organization created unexpected competition, offering significantly lower wages than Mexico's. This made it difficult for industrial activity to flow into Mexico at the time.

Yet, the situation shifted in Mexico's favor. On the one hand, China's economic development over the past 20 years and wage increases in its coastal regions reduced its competitive cost advantage. On the other hand, supply chain risks during the pandemic crisis led many companies to diversify their portfolios and move their operations closer to consumer markets like the United States.

According to Jim, investors' challenges will be not to overestimate growth potential and to recognize that investments fluctuate, eventually falling as they rise. For now, however, the outlook for the Mexican economy is positive.