Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How Mexico Is Winning the Nearshoring Race
Transcript
- Lucas: So Mexico just posted another record month in exports to the United States, and it's not just cars anymore. We're seeing everything from medical devices to aerospace components crossing the border. And I think this is a genuinely underappreciated story in global trade. Luna: I was just looking at the latest trade numbers. The US deficit widened again in May, to about 77 and a half billion dollars, but the story inside those numbers is that imports from Mexico are surging. It feels like the nearshoring wave is finally showing up in the data. Lucas: Exactly. And you know, as we talk about these shifts, I want to take a quick moment. Look, if these conversations have moved your work forward in some small way, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's what keeps this show ad-free and independent. No pressure, just a small way to keep us going. Luna: Yeah, I think a lot of listeners really do find these breakdowns useful. And it's a small gesture that goes a long way. Lucas: Alright, back to it. So why is Mexico winning? The obvious answer is proximity, but it's more than that. You've got the USMCA framework, which gives tariff-free access for most goods, and you've got wage differentials that still matter, especially for labor-intensive manufacturing. Luna: But it's not just low wages anymore. I've seen reports of foreign direct investment into Mexico hitting record levels, with companies building entire clusters, not just single plants. What's driving that? Lucas: Right. So you have companies that used to source from China, and they've learned a hard lesson about supply chain resilience. So they're looking for alternatives. And Mexico offers a lot: time zones that overlap with US business hours, lower shipping costs, and the ability to respond quickly to changes in demand. Luna: And the trade-weighted dollar has been softening a bit, down to 120.7 recently, which makes US imports a little more expensive, but it also makes Mexico's exports more competitive in global markets. That's a double-edged sword. Lucas: Actually, that's a good point. The dollar has been easing, and that's part of the reason the trade deficit hasn't shrunk — imports are still strong, but exports are also up. Look at the numbers: exports of goods and services rose to 3.75 trillion annualized by April, while imports are at 4.62 trillion. So the gap is still there, but the composition is changing. Luna: So Mexico is not just a cheap labor story anymore. What are the specific industries that are really driving this? Lucas: Let's start with autos. Mexico is now the largest auto exporter to the US, overtaking Japan and Germany. And it's not just assembly — you've got engine plants, battery plants, and now EV supply chains. Tesla announced a new plant in Nuevo León, though construction has been slow. But the ecosystem is building. Luna: And electronics? I remember when that was almost exclusively Asia. Lucas: Right. So you're seeing a lot of electronics assembly, especially in states like Baja California and Chihuahua. The us mexico border region is becoming a hub for things like medical devices, too. You know, Johnson & Johnson and Medtronic have had plants there for years, but now they're expanding. Luna: So what's the catch? There must be challenges that keep this from being a slam dunk. Lucas: Oh, there are plenty. First, infrastructure. The border crossings are still bottlenecks, with long truck queues. And inside Mexico, the power grid is strained, especially in the industrial north. There have been blackouts that forced factories to shut down, which is a real problem for just-in-time manufacturing. Luna: I've heard about water issues too, especially in Monterrey. That's a major concern for semiconductors and other high-tech industries. Lucas: Exactly. Water scarcity is a big deal. And then you have the political side. The current government is winding down, and there's uncertainty about energy policy. Investors want to know if the next administration will be as business-friendly. Luna: But despite those challenges, the investment is flowing. The Mexican peso has been strong, and we saw the iShares MSCI Mexico ETF up 4.3 percent over the last week, which is one of the best performing emerging market funds. Lucas: And that's a good signal. The market is betting that Mexico's fundamentals are improving. But let's zoom out for a second. What does this mean for the US trade deficit? If imports from Mexico are rising, that's still a deficit, but it's a different kind of deficit. It's more like intra-regional trade than outsourcing to the other side of the world. Luna: So does that make the deficit less of a political problem? I mean, the US still runs a huge trade deficit, and that's been a political football for years. Lucas: It does change the calculus. Because jobs that come back to North America are more visible, and they support the argument that nearshoring can create US jobs, even if it doesn't eliminate the deficit. The deficit with Mexico is a fraction of what it is with China. In 2025, the US goods deficit with China was over 290 billion dollars, while with Mexico it was around 150 billion, and that's growing, but it's a different dynamic. Luna: And the ETF data shows that investors are broadly bullish on emerging markets right now. EEM is up 3.1 percent in five days, and VWO is up 2.3 percent. But Mexico is outpacing with that 4.3 percent. So the market is clearly rewarding Mexico's positioning. Lucas: Right. And it's not just Mexico. You see similar trends in India, which we covered a while back, but Mexico is really the poster child for nearshoring to the US market. The question is whether the infrastructure can keep up with the demand. Luna: What about the election cycle? The current president, López Obrador, was skeptical of foreign investment in some ways, though he did push for nearshoring. His successor, Sheinbaum, seems more pro-business. Is that helping? Lucas: It is. The transition has been relatively smooth, and her administration has signaled continuity, but also openness to private investment, especially in energy. That's crucial because you can't have a manufacturing boom without reliable power. Luna: So what's the biggest risk to this whole story? Is it policy, infrastructure, or something else? Lucas: I'd say infrastructure is the top risk, but policy uncertainty is a close second. If the next US administration decides to renegotiate USMCA or impose tariffs on Mexico, that would be a huge setback. But so far, the trend seems durable because it's based on economic fundamentals, not just political favor. Luna: And those fundamentals are also showing up in the stock market. The S&P 500 is up 2.3 percent in five days, hitting 7,600, and the NASDAQ is up 4.2 percent. So there's a risk-on mood, which tends to favor emerging markets. Lucas: Exactly. And when you have a risk-on environment, plus a weaker dollar, that's a tailwind for emerging market assets. But it's important to remember that Mexico is not just a commodity play anymore. It's becoming a manufacturing hub with real tech and industrial depth. Luna: So for someone listening, what's the one takeaway? Is Mexico going to keep winning the nearshoring race? Lucas: I think the takeaway is that Mexico has a real shot at becoming a top-tier manufacturing economy, but it's not guaranteed. The pieces are in place: proximity, trade agreements, and a growing industrial base. But the infrastructure and energy challenges are real. If Mexico can solve those, it could be the biggest beneficiary of this shift. If not, countries like India and Vietnam could take some of that business. Luna: And the data we're seeing this week, with Mexico's ETF outperforming and the peso staying firm, suggests the market is betting on the optimistic scenario. Lucas: So it's a fascinating story to watch. And I think it'll be one of the defining themes of global trade over the next decade. Luna: Absolutely. Thanks for breaking it down, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. If you found this useful, you know where to find us.