Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Mexico Is Becoming the Top US Trade Partner in 2026
Transcript
- Lucas: So here’s a number that stopped me this week: In 2025, Mexico officially became the top trading partner of the United States, measured by total two-way trade in goods. It overtook China for the first time in over two decades. Luna: That is huge. I remember when China was number one by a mile. What’s the latest data showing? Lucas: Well, the latest numbers from the US Census Bureau for the first quarter of 2026 show the trend accelerating. us mexico trade is running at about $70 billion a month, while us china trade has slipped below $40 billion. And it’s not just a tariff story — it’s structural. Luna: Right, because the tariffs on China have been in place for years, but this shift really gained speed after 2022. What changed? Lucas: A couple of things. First, the USMCA — the us mexico canada Agreement — gave companies a stable framework. Second, and more important, nearshoring exploded. You had manufacturers in electronics, automotive, and medical devices moving production from Asia to northern Mexico. And it’s not just assembly anymore — there’s genuine value-add happening. Luna: I saw that Mexico’s manufacturing exports to the US were up about 12 percent year-over-year in the first quarter of 2026. That’s impressive, especially given that the peso has been relatively strong. Lucas: Yeah, the peso has been a story in itself. It’s been one of the best-performing EM currencies against the dollar. The trade-weighted dollar index is at 119.5, down from a peak, but the peso has held up. That’s usually a headwind for exporters, but Mexico’s factories seem to be absorbing it through productivity gains. Luna: And yet, when you look at the ETF for Mexico — ticker symbol e w w — it’s basically flat over the last five days. Meanwhile, South Korea’s e w y is up 11 percent. Why isn’t Mexico’s stock market reflecting this trade boom? Lucas: That’s the puzzle, right? The real economy is humming, but the equity market has been held back by a few things. One is that the Mexican stock market is heavily weighted toward old-economy sectors — cement, telecoms, some banks. The new manufacturing growth is mostly coming from private companies or subsidiaries of multinationals that aren’t listed in Mexico. Luna: So the public market isn’t capturing the nearshoring wave. That’s a classic emerging market problem. Lucas: Exactly. And there’s also political risk. The current administration under President Claudia Sheinbaum has been business-friendly, but there are concerns about energy policy and judicial reforms. Plus, the 2027 midterm elections could shift the landscape. Luna: Let’s zoom out. How does Mexico compare to other nearshoring destinations? We’ve covered Vietnam on this show — their semiconductor supply chain is growing fast. What’s Mexico’s edge? Lucas: Proximity is the obvious one. A truck from Monterrey to Dallas takes 24 hours. A ship from Shanghai to Long Beach takes three weeks. That matters for just-in-time manufacturing. But also, Mexico has a deep industrial base — it’s not starting from scratch. The automotive sector alone has decades of experience. And the labor force is younger than in China or even Vietnam. Luna: There are also free trade agreements. Mexico has deals with over 50 countries, which makes it a great export platform. So a car made in Mexico can go to Europe or South America tariff-free. Lucas: Right. And that’s part of why we’re seeing so much foreign direct investment. According to the Mexican Ministry of Economy, FDI hit $36 billion in 2025, a record. And the first half of 2026 is on track to beat that. A lot of that is going into the northern states like Nuevo León and Baja California. Luna: But there are risks. We mentioned the peso strength. And there’s also water scarcity in northern Mexico. Some of those industrial parks are in semi-arid regions, and water rights are becoming a big issue. Lucas: That’s a real concern. I’ve read reports that some companies are having to invest in their own water treatment plants. It adds cost. And then there’s security — cartel violence in certain regions can deter investment, though the industrial corridors have mostly been safe. Luna: So where does this leave investors? If you can’t buy the nearshoring boom directly through the Mexican stock market, what are the options? Lucas: A few ways in. One is through us listed companies that have big Mexico exposure — think of industrial REITs that own warehouses near the border, or auto parts suppliers. Another is through private credit funds that finance Mexican manufacturing. And then there’s the peso itself — some investors are using Mexican government bonds, which offer a decent yield, to play the currency story. Luna: That’s a higher-risk play, but it makes sense if you believe the nearshoring trend is durable. And I think it is. The geopolitical forces pushing it — us china tensions, the desire for supply chain resilience — aren’t going away. Lucas: No, they’re not. And here’s one more data point: the Chinese yuan has weakened to 6.76 per dollar, and the US trade-weighted dollar index has eased slightly. That makes US imports from Mexico relatively cheaper compared to China, which should reinforce the trend. Luna: So Mexico is winning on price and proximity. But we should also mention that not all of Mexico’s trade gains are coming at China’s expense. Some are just global demand growing. US imports overall are up because the economy is still strong. Lucas: True. US imports of goods and services were $4.4 trillion annualized in Q1 2026, up from $4.1 trillion a year earlier. So the pie is growing. But Mexico is capturing a disproportionate share of that growth. Luna: If this conversation about how trade flows are shifting has been useful to you, I’ll just say that the reason we can keep doing these deep dives without ads is listener support. You can help keep the show ad-free at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really makes a difference. And it means we can spend time on the data rather than selling something. Back to Mexico — I think the key question for the second half of 2026 is whether Mexico can maintain this momentum if the US economy slows. Luna: That’s the million-dollar question. Mexico is highly correlated with US industrial production. If the Fed under Kevin Warsh keeps rates high to fight inflation, that could cool US demand and hit Mexican exports. Lucas: Right. The new Fed chair has signaled a more hawkish stance, which could strengthen the dollar and hurt EM currencies. But Mexico might be better positioned than most because of its deep economic ties. Plus, remittances from Mexicans in the US are still strong — they hit a record $63 billion in 2025. Luna: That’s a huge stabilizer for consumption. So even if exports dip, domestic demand has a floor. Lucas: Exactly. And that’s why I think Mexico is one of the more resilient EM stories right now. It’s not just a trade story — it’s a demographic and structural one. The working-age population is growing, urbanization continues, and the middle class is expanding. Luna: Let’s keep an eye on the upcoming USMCA review in 2026. The agreement has a clause for a joint review every six years, and any disputes over rules of origin could create uncertainty. Lucas: Good point. That review is scheduled for July 2026, so literally next month. If there’s friction over automotive content requirements or digital trade, it could rattle markets. But the baseline case is that the agreement holds, and Mexico continues to integrate with the US economy. Luna: I think that’s a fair outlook. For now, Mexico is the quiet winner in the global trade realignment. Not flashy like South Korean tech stocks, but steady and structural. Lucas: And sometimes the steady story is the one that pays off in the long run.