Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Mexico Became America's Top Trade Partner
Transcript
- Lucas: So there's this chart that's been sitting in my feeds for months, and it just keeps getting steeper. Mexico is now the United States' single largest trading partner. As of the latest data, it's overtaken China — not just in some narrow category, but in total two-way trade in goods. Luna: Right, I've seen that. And it's not just a blip. Last year, China held the top spot. This year, Mexico's share has jumped by — what, something like 8 percent? Lucas: Closer to 10 percent year-over-year, depending on the month. And the broader context matters. The US trade deficit widened to 77.6 billion dollars in May — that's a sharp drop from 54.6 billion the prior month. But the composition is shifting. Imports from China are shrinking, while imports from Mexico are growing. Luna: Okay, so that's the tariff war effect, right? But also nearshoring — companies moving production closer to the US. How much of this is real structural change versus just rerouting through Mexico? Lucas: That's the million-dollar question. There's definitely some rerouting — Chinese components assembled in Mexico still count as Mexican origin under trade rules. But the data suggests genuine capacity build-out. Mexico's manufacturing PMI has been in expansion territory for 14 straight months. Industrial electricity demand is up 6 percent. That's not just assembly. Luna: I want to come back to electricity demand because that's a constraint. But first — the ETF. EWW, the Mexico ETF, is trading around 75.45 today. That's actually down a bit from its highs. Is the market already pricing in a slowdown? Lucas: I think there's caution. The peso has strengthened significantly — it's up about 12 percent against the dollar over the past year. That's great for imports, tough for exporters. And the strong dollar index is at 120.5, which makes Mexican goods more expensive in dollar terms. So there's a squeeze coming. Luna: Yeah, the peso strength is a real headwind. But look at the alternatives. China's yuan is flat against the dollar at 6.78. Japan's yen is weak at 162.4. Mexico's currency strength reflects genuine capital inflows — foreign direct investment is up, portfolio flows are up. That's a vote of confidence. Lucas: Absolutely. And let's not forget the political angle. The US and Mexico have a new trade framework under USMCA — that's locked in until 2026, actually. But there's a review coming up next year. And Mexico's own industrial policy is getting more aggressive. They're offering tax incentives for semiconductor packaging, EV battery plants, medical devices. Luna: But infrastructure is a bottleneck. I was reading about the Nuevo Laredo border crossing — wait times for trucks can exceed six hours. And the energy grid is a real constraint. Mexico has had blackouts in the industrial north. Can they really scale without massive investment in power generation? Lucas: That's the critical question. The government has pledged 13 billion dollars for grid upgrades and new natural gas plants. But private sector participation is limited by constitutional restrictions on energy investment. So it's a mixed picture. The potential is there, but execution is everything. Luna: And what about labor? Wages in Mexico have been rising — the minimum wage went up 20 percent this year. That's good for workers, but it chips away at the cost advantage over China, which still has a huge labor pool and a weakening currency. Lucas: Right. Mexico's manufacturing wage is now about 4.50 dollars per hour, compared to China's 6.50 — but that gap is closing. And for some high-skill roles, Mexico is already more expensive. So the value proposition has to be more than cheap labor. It's proximity, speed to market, and avoiding tariffs. Luna: Speed to market is real. A product made in Monterrey can reach a US warehouse in 48 hours. From Shanghai, it's four weeks. For industries like auto parts or electronics, that's a huge advantage. And we're seeing it in the data — Mexico's exports of computer equipment to the US are up 35 percent year-over-year. Lucas: That's the kind of shift that doesn't reverse easily. Once supply chains are rebuilt, even if tariffs come down, companies won't necessarily go back. The Biden administration is also pushing 'friend-shoring' — favoring allies. Mexico is definitely an ally. Luna: But the US is also trying to onshore more. There's the CHIPS Act, the Inflation Reduction Act — hundreds of billions in subsidies for domestic production. So Mexico isn't the only game in town. How long can this boom last before it hits limits? Lucas: I think we're in the middle of a multi-year trend. Nearshoring to Mexico isn't a fad — it's a structural response to three things: trade war uncertainty, the pandemic's supply chain lessons, and the need for speed. Even if the US brings some production home, Mexico will still be the backyard factory. Luna: Let's talk about what this means for other emerging markets. If Mexico is winning, who's losing? Obviously China. But what about Southeast Asia — Vietnam, Thailand? They've been big beneficiaries of the trade war too. Lucas: It's not zero-sum. Vietnam's exports are still growing — they're up 12 percent this year. But Mexico is uniquely positioned because of geography and USMCA. For Southeast Asia, the advantage is in electronics and textiles. Mexico is more auto-heavy and industrial. So there's some complementarity. Luna: But the strong dollar complicates things for all EM. The trade-weighted dollar index is at 120.5 — that's high. It makes dollar-denominated debt more expensive, and it puts pressure on EM currencies. Mexico's peso is an outlier — most EM currencies are weaker. Lucas: And that's why Mexico's story is so interesting. It's attracting capital despite the strong dollar. That says something about the perceived stability of the country — or at least the perceived inevitability of the nearshoring trend. The risk is that if the dollar keeps strengthening, even Mexico could feel it. Luna: And if there's a recession in the US? That would hit Mexico hard. The US is Mexico's biggest market by far. So this is a leveraged bet on the US economy. That's something investors need to factor in when looking at EWW or any Mexico-exposed asset. Lucas: Fair point. But even in a recession, the structural shift might cushion the blow. Companies won't suddenly move supply chains back to China. The cost of moving is already sunk. So Mexico's position is sticky. Luna: Sticky but not invulnerable. The next few quarters will tell us a lot. I'm watching the Mexican peso and the trade balance numbers. If exports start to slip, that's a warning sign. Lucas: Absolutely. And before we wrap, I want to mention something else. The kind of analysis we're doing here — looking at real numbers, real trade flows, real company decisions — that takes time to research and produce. If you've gotten something out of this episode, or any of our 135 episodes so far, there's a simple way to support the work. Luna: Yeah, it's buy me a coffee dot com slash fexingo. A couple of dollars a month genuinely makes a difference in keeping this show ad-free and independent. We don't have corporate backers — it's just us and our listeners. Lucas: Exactly. Even the price of a coffee helps cover hosting costs, data subscriptions, and the time we put into each episode. No pressure — just if it's something you value and can swing. Now, back to Mexico. Luna: So to sum up: Mexico is the new top US trade partner, driven by nearshoring and tariffs. But the peso strength, infrastructure constraints, and a potential US slowdown are real risks. It's a high-conviction bet, but not a sure thing. Lucas: And that's the kind of nuanced picture you don't get from a headline. The numbers tell a story, but they also raise questions. We'll be tracking it closely. Thanks for listening — and if you want to dig deeper, check out our earlier episodes on Vietnam's semiconductor push and the shift in payment rails. All at fexingo dot com slash emerging markets.