Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Mexico Is Becoming the New China for US Supply Chains
Transcript
- Lucas: So here's a number that stopped me this week: Mexico is now the top source of US imports in several key manufacturing categories — auto parts, electrical equipment, even medical devices. The US actually imported more from Mexico than from China in those sectors last quarter for the first time since we started tracking this data. Luna: That's a big shift. I remember when 'Made in China' was basically the default label on everything in a US store. What changed? Lucas: A lot of it is the nearshoring wave that's been building since the trade war started back in 2018. But the real acceleration happened in the last 18 months. Companies realized that having supply chains halfway around the world is a risk — not just for tariffs, but for shipping disruptions, geopolitical tension, you name it. And Mexico is right next door. Luna: The geography argument is obvious, but it's not like Mexico suddenly appeared on the map. What made it click now? Lucas: Three things. First, the USMCA — the trade deal that replaced NAFTA — gave companies certainty about cross-border rules. Second, Mexico's labor costs are still competitive, but more importantly, its manufacturing workforce has been growing and improving in skills. And third, the strong dollar has made investing in Mexico cheaper for US companies — their capital goes further. Luna: That dollar strength is a double-edged sword though, right? It makes Mexican exports more expensive in global markets. Lucas: Exactly, but for exports to the US, the exchange rate is actually favorable because the peso has weakened against the dollar — though it's actually strengthened relative to other emerging market currencies recently. The trade-weighted dollar index is around 120.5, down just slightly from recent highs, but still very strong. And you can see it in the EWW ETF — Mexico's main ETF — it's up almost one percent in the last five days, while the broad emerging market ETF, EEM, is down one percent. Luna: So Mexico is outperforming the EM pack. That's a clear signal. But let's get concrete — which companies are actually moving production? Lucas: Tesla is the marquee example. They're building a Gigafactory in Nuevo León, just south of Texas. It's supposed to start production later this year. But there are dozens of others — Foxconn, the iPhone assembler, has expanded in Guadalajara. Schaeffler, the German auto parts maker, opened a new plant in Guanajuato. And smaller suppliers are following too. Industrial real estate in Monterrey and Ciudad Juárez is booming — rents up something like 30 percent year-over-year. Luna: Wow. And I'm guessing this isn't just about US companies. Chinese firms are also setting up in Mexico to bypass tariffs, right? Lucas: That's the twist. Some Chinese manufacturers are building factories in Mexico to export to the US under the USMCA rules. So you have this 'China plus one' strategy where global companies keep some production in China but add a second hub in Mexico. It's creating a complex web — but for Mexico, it's a clear win in terms of investment and jobs. Luna: You know, this topic actually reminds me — if you're finding value in these deep dives into emerging market economics, maybe consider supporting the show. We keep it ad-free, and listener support is what makes that possible. If today's conversation was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, it genuinely helps us keep the lights on and the research deep. Every little bit goes directly into making episodes like this one. Luna: Absolutely. No pressure, just a simple way to say thanks. Alright, back to Mexico — Lucas, what are the risks here? Lucas: The biggest risk is that Mexico becomes a victim of its own success. Infrastructure is strained — power grids, water, roads. In Monterrey, there are already water shortages. The government under President Sheinbaum has been investing in infrastructure, but it's a race against time. Also, crime and corruption remain concerns for companies setting up operations. Luna: And there's the political risk. US election cycles always bring uncertainty about trade policy. If a new administration reopens the USMCA or imposes new tariffs, Mexico could be hit hard. Lucas: Right. But so far, both US parties have supported nearshoring rhetorically. The real wildcard is whether Mexico can maintain its competitiveness as wages rise and other countries like Vietnam or India offer alternatives. Luna: For investors, how do you play this? EWW is the obvious one, but are there other ways? Lucas: There are Mexican industrial real estate companies like Prologis Mexico, or you can look at specific sectors — auto parts, electronics, even healthcare. But you have to be selective. Not every company will benefit equally. And remember, the peso has been volatile, so currency risk is real. Luna: So what's the bottom line for our listeners who are thinking about emerging market allocation? Lucas: Mexico is probably the most compelling emerging market story right now for us focused investors. It offers geographic proximity, trade integration, and a manufacturing base that's scaling fast. But it's not a sure thing — you need to watch infrastructure, politics, and the dollar. If those factors align, Mexico could be the manufacturing powerhouse of the Americas for the next decade. Luna: And that's a shift worth paying attention to. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners for joining us on The Emerging Markets Podcast.