Mexico's Economic Rise: Nearshoring, Infrastructure, and Remittances Fuel Growth

Mexico's Economic Resurgence

Mexico, long overlooked as an engine of growth, has recently been hailed as a potential top performer and a hot spot for accelerated economic development. Spanish news outlet El País highlighted experts' bewilderment last year as Mexico continued to post a GDP growth rate between 3% and 4% following the pandemic. This impressive growth is the result of tectonic shifts in geopolitics and global markets, with Mexico's success largely attributed to its increasingly profitable trade relationship with the United States through a strategy known as nearshoring.

The United States has long depended on China for trade and manufacturing. However, with growing tensions between the two countries, American companies are slowly shifting their focus to their next best option and potentially most strategic partner for the future – a partner that's literally right at their doorstep. This article will explore how Mexico is benefiting from the political dynamics between the US and China, and examine the additional opportunities Mexico is securing to cement its tremendous future growth prospects.

Post-Pandemic Growth

For a middle-income country that was hit hard by the pandemic, Mexico is now performing remarkably well. The country has consistently posted a sustainable 3% to 4% GDP growth rate, which is nothing short of impressive. This achievement is even more noteworthy when considering that throughout the past century and into the modern day, Mexico has been weighed down by civil unrest, corruption, excessive centralized control, and the effects of large-scale international drug trade.

According to El País, the recent record-breaking growth figures resulted from policies introduced during President Andrés Manuel López Obrador's administration. These included a host of policy changes under his center-left government, involving labor reforms and social security measures. On the grand strategy side, a carefully managed fiscal policy allowed the country to maintain a low debt-to-GDP ratio held in Mexican pesos, which has helped keep the currency stable in comparison to the US dollar.

This stability has done much to attract foreign investments over the years, with investors confident that their Mexican pesos won't lose value. By September 2023, both public and private investments hit record highs, with public investment surging by 21% and private investment by 19.7% compared to the same period the previous year. This growth is largely due to Mexico's status as the United States' chief trading partner.

On the social side, labor reforms and reorganization of Mexico's social protection systems have allowed the already industrious and hardworking Mexican population to live healthier lives and achieve better financial stability. This is largely thanks to President López Obrador's strong campaign on wealth distribution and efficient taxation.

While the president isn't without his critics, particularly regarding his handling of Mexico's democratic process and apparent unwillingness to address some pressing social issues, the improvement of Mexico's GDP per capita and disposable income for average Mexicans under his presidency cannot be denied. Nominal GDP per capita as of 2024 now stands at $15,000, compared to $9,000 in the 2016-2017 period. Projections made in 2024 forecast the figure rising to $18,500 if trends continue, which would amount to a 100% increase in GDP per capita from the 2016 period.

Improvements in healthcare and living standards have enabled the Mexican workforce to be more productive in all aspects. The North American Free Trade Agreement (NAFTA) opened the floodgates, and now Mexican industrial workers are A-grade contractors for all kinds of products. The country has continued its export of cars under American brands, car parts, machine tools, and aerospace components. Its other main export, petroleum, has also been brought under prudent management by the government-owned Pemex.

There was a time when Mexico was heavily dependent on oil, similar to a Middle Eastern oil exporter. Today, that dependency has been reduced to about 1.3% of GDP. However, new reserves are being explored with the assistance of private firms. In all aspects, foreign direct investment continues to rise, reaching the $100 billion mark as of November 2023.

The Industrial Drive

Incentives to help grow local skill development and entrepreneurship in industrial activities have been key for driving resilient economic growth around the world. For Mexico, nearshoring has been that incentive. Nearshoring occurs when companies shift their supply chains to a nearby country. It's the opposite of offshoring, which American companies have been doing by moving their operations to China for decades.

Nearshoring is now the big word with American businesses and industry. They've calculated that massive gains and savings could be made from shifting their production processes to Mexico, and they've calculated just right. Mexico intermittently failed to capitalize on the industrial wave of the 19th and 20th centuries. Nevertheless, a sufficient foundation was established to help kickstart the progress we see today.

Mexico experienced significant growth during the 20-year period between 1950 and 1970 as the country sought to rapidly transition from its post-feudal economic system. NAFTA in the 1990s changed everything by removing trade restrictions that normally apply when businesses trade with foreign countries. After NAFTA, the United States-Mexico-Canada Agreement (USMCA) was signed to further facilitate nearshoring.

Both agreements ensure free and reduced-tariff trade, which means that Mexico, the United States, and Canada can trade with each other and benefit from reduced or eliminated tariffs and duties for important goods. If a Mexican tech company makes products for US buyers, in some cases they can be bought and sold without having to pay more. The inclusion of Canada means that Mexican products can also be bought there as well, doubling the reach. These agreements also cover raw materials, making production as a whole cheaper and easier.

Starting in 1994 when NAFTA was signed, US engineering giants found out that they could save a lot of money by moving or outsourcing production to Mexico compared to China. This has been Mexico's economic engine. At the very least, American companies save 20% of costs by nearshoring their production to Mexico. This has been a powerful economic engine for Mexico's diversified economy and it's how Mexico benefited from free trade with the USA, even though its agricultural sector suffered losses.

Things have really changed in China. It isn't the dreamland of cheap industrial labor and low overall production costs for outsourcing operations anymore. It's been a long time, and the Chinese population is on average much older, more educated, and they demand better wages. China had no hourly wage laws until 1994. Since then, it grew to an average of just under $4 US per hour, but it also came with increased tariffs, taxes, and stronger regulatory interference from the Chinese Communist Party. Now, nearshoring has made paying skilled Mexican workers $4.50 an hour worthwhile, as American companies get overall better results.

There was also the trade war drama between the USA and China over a few years that caused tariffs and duties to rise. Importing anything made in China over to the States suddenly began to cost a whole lot more. So China wasn't cutting it anymore. Now, let's explore how exactly Mexico has benefited, starting with its automotive industry.

Mexico's Automotive Industry

Mexico has been an early witness to the rise of the automobile, but the Mexican Revolution delayed things. It was only in the 1920s that Buick and Ford established production facilities for their vehicles in Mexico. In 1961, Mexican authorities took a fateful decision when they required foreign car manufacturers to comply with new regulations and obligations to help localize manufacturing within Mexico. As a result of this new requirement, American car manufacturers complied, along with Volkswagen, which became one of the trusted automobile names in the country.

This was the start of Mexico's industrial production ventures, and by the 2000s, the country's supply chains became extremely important to the production process of the American automotive industry, amounting to 23% of cars produced in North America as a whole. It's safe to say that without Mexican production, we probably wouldn't be driving a lot of the vehicles that are on the road right now.

Starting from the 2010s, European and Korean car manufacturers began establishing agreements to build assembly plants in Mexico. Despite the pandemic shock, the industry has continued to expand steadily thanks to the resilience of entrepreneurs and the skilled workforce. This made 2023 one of the record export years for the automotive industry of Mexico.

Electronics and Medical Devices

Conversely, the expansion of the robotics and electronics sectors has been the most significant. By 2023, Mexico's electronics exports to the US had surpassed $85 billion. Many major companies like Samsung, Intel, and HP have long since taken advantage of NAFTA and now USMCA to outsource their production processes to a growing and young skilled Mexican workforce. Over decades, this workforce has now grown to be a quality juggernaut.

This experience in electronics has allowed the country to create a niche for itself in the medical device manufacturing industry, which has grown to $6.6 billion in 2023. Mexico's medical electronics equipment hub is located in the city of Tijuana in the state of Baja California. Medtronic and Johnson & Johnson are some of the major companies in this global niche that rely heavily on Mexican expertise.

These are just some examples, but trends for all of these industries have continued to be on the up and up, allowing Mexico to maintain a favorable trade balance. Mexican industrial manufacturing often operates in a contractor and outsourcing capacity, with their goods typically serving as critical components for products sold by companies in other countries.

Even though the country has so far been lacking in the kind of entrepreneurship that would see the rise of valuable domestic brands, Mexico still has strong skill, education, and supply chain bases. The nearshoring trend is expected to continue as the value of Chinese goods continues to rise with the simultaneous rise of high-value Chinese corporations.

It's been nothing but good news for the industries in northern Mexico. In fact, the northern region is the richest per capita area in the country now. These are Mexican states such as Nuevo León, Chihuahua, and Sonora, right along with Baja California where Tijuana is located. All of these states border the United States.

Nuevo León stands out as a prime manufacturing hub of skilled workers, with a per capita GDP of $17,979 in 2019. In comparison, the entire country's per capita GDP at the time was just $9,990. That's about 1.8 times more than the average. Also, by 2019, the state had 199 foreign investment projects from the United States alone. Sweetening the deal is the streamlined highway connection to the border towns of Laredo and McAllen in Texas.

This is where neighboring states in Mexico are headed, for spreading the gains out to the rest of the country. Other big steps are being taken too, particularly in infrastructure development.

Infrastructure Projects

Mexico is a vast country spanning around 761,600 square miles. Connecting this extensive territory, which includes diverse biomes like deserts and tropical forests, is a major challenge. However, to proactively boost economic productivity and create pathways for increased opportunities, the country needs to invest in and maintain robust transport infrastructure. By ensuring efficient and reliable transportation networks, Mexico can better connect its diverse regions, facilitate smoother trade, and attract more investment.

That's why when President López Obrador came into office in 2018, he announced a collection of several infrastructure projects intended to increase connectivity throughout the country. The crown jewel among these is the Mayan Train, connecting the southern states of Yucatán, Quintana Roo, Campeche, Tabasco, and Chiapas. It's a 966-mile-long line providing much-needed connectivity to a part of the country that in the past didn't have much of it.

As of 2024, the line has opened partially, but when it's fully operational, the Mayan Train is expected to carry 3 million passengers a year with 42 trains. Tourism is also a focus of this project. Tourism currently accounts for around 8.5% of the Mexican GDP and has been vital to the prosperity of many of the country's seaside settlements. The southern Mexican states of Yucatán, Quintana Roo, and Campeche are growing tourist hotspots. The project is set to bring some of that tourism to lesser-known Mayan heritage sites in Campeche, Tabasco, and Chiapas.

As a side note, we should also mention that Quintana Roo has received a new international airport located in the town of Tulum. It goes hand in hand with the rail project to boost tourism and will also boost commercial and industrial sectors along with it.

Despite worries regarding the rail project's environmental impacts and whether or not it may put at risk the same heritage sites it's trying to promote, proponents are optimistic. They repeatedly emphasize that the project would turn the Mexican South's once-neglected ethnic Mayan villages into thriving population centers and create 500,000 jobs. The true impact of the project remains to be seen after all of its lines become operational and some time passes.

President López Obrador's most important infrastructural undertaking is probably the Interoceanic Corridor. It's an ambitious project that looks to cut through the difficult terrain of the Isthmus of Tehuantepec. To clarify, an isthmus is a narrow strip of land between two large bodies of water. For better perspective, consider the Panama Canal, which crosses the Panama isthmus. It's a strategically significant landform acting as a narrow land bridge that connects North and South America, with the Panama Canal cutting through it to facilitate maritime trade between the Atlantic and Pacific Oceans.

This corridor won't be as difficult as the one in Panama, however, as it will basically only be a road and rail network connecting two ports: Coatzacoalcos in the state of Veracruz and Salina Cruz in the state of Oaxaca. The idea of this sort of corridor was long held as a dream for vitalizing the Mexican economy as well as bringing prosperity to the south of the country. However, the previous administrations of Ernesto Zedillo and Enrique Peña Nieto failed to come up with anything that could have worked.

This current corridor project was launched in 2018 along with the Mayan Train, and it looks toward bringing back to life a century-old rail project started under the administration of President Porfirio Díaz, which was later abandoned due to the violence of the Mexican Revolution. In many ways, you can think of this project as a way to right the wrongs of past Mexican history and, of course, finally bring prosperity to a long-neglected part of the country.

The line is a distance of about 188 miles for both the road and rail components. The rail component is expected to consist of multiple lines, with one line already being open as of 2024. Of course, the corridor would work by allowing for the shipment of unloaded goods from one port to the other in an efficient way. It's not the same as having a direct water-based canal like the Panama Canal, but it's still set to be a major booster of trade in the Central American region. Mexico simply plans to be the next one to benefit big time by being a facilitator.

The project isn't just limited to the road and rail network, as areas are being set aside for industrial parks. Once fully operational, Mexico expects the project to not only be an economic corridor but also work as a growth-spurring engine for building sea-related industries to prop up within the country.

President López Obrador has presented it as a competitor to the Panama Canal, especially given the crisis it faced in 2023 due to drought. On the other hand, Panamanian experts believe that it won't be a direct competitor. Panamanian economist Felipe Argote stated that an alternative to the Panama Canal wouldn't be a threat as there is ample demand for ships. Instead, it would likely help alleviate the excess demand rather than significantly reduce its traffic.

We see it as Mexico creating its own niche. The Panama Canal will always remain relevant as its benefit of direct ship transit will forever remain lucrative for global trade. With the Interoceanic Corridor, though, Mexico stands a good chance at driving international trade traffic within Mexico and will hopefully benefit average Mexicans in the process. Upgrading the ports as part of the project may also create possibilities in the future so that Mexico can develop a strong civil marine sector.

The project has had $2.8 billion US invested into it already, with much more planned. All this development is well and good, but making all of this work is going to depend on more factors, including remittances and return migration.

Remittances and Return Migration

So far, we've thoroughly discussed how the Mexican economy is built strong on multiple fronts: good macroeconomic management, industrial expansion, nearshoring benefits, and infrastructure development. What we can't ignore, however, are remittances, which are another important lifeline of the Mexican economy.

Remittance is the money that's sent by a worker or a diaspora member back to their country of origin. This remittance cash doesn't have anything to do with investments or business by themselves, but having these remittances sent from a strong currency to a developing country by workers back to their families can really change lives.

You see, a developing country spending a lot to industrialize and take off needs to have a proper balance of payments. Balance of payments is an economic term for the difference between money going in and out of a country. For example, if Guatemala wants to buy necessary oil from Mexico, then they must have US dollar reserves to do it. Going back to Mexico, the importance of a good balance of payments can be seen in the way they pay for their labor-friendly policies.

Most of the remittance flow into Mexico is from the United States. In 2023, $63.3 billion in remittances were received by families thanks to the hard work being done by a family member just north of the border. It's a rising trend as Mexicans in the United States continue achieving more success.

There's no shortage of research on why remittances are good for economic life. They help reduce poverty, improve quality of life, increase welfare, and so on. The best thing about remittances is that they're often sent to help support loved ones back home when times get tough. This is what kept Mexicans going through some of the hardest periods in its political history and through tough times when it comes to law and order.

But there needs to be a balance. There's always a fear for Mexico because when remittances overflow, the Mexican peso gains value. That makes foreign direct investment costlier. It's a problem that's a matter of careful management, and so far, things look great.

Side by side with remittances, return migration is another factor to be considered. This is about Mexicans who go back to their home country from, for example, the United States or Spain by their own will. Usually, they do this because they feel their experience or education gained abroad will serve them more benefit in their home country.

So in a way, return migration of this kind can frequently mean people with better education and resources are coming back home. If you're one of those people, there are a load of things that you can do with this skill and education advantage, like starting a business or adding yourself to a professional workforce. As a group, this demographic can become an economic and intellectual elite.

It's the basis of a dual approach to becoming a rich country. With what we've been discussing, tying this all together, imagine skilled Mexicans returning home to help grow a skilled overall workforce. Then this higher-skill workforce would then be employed for high-value nearshoring projects, helping the country industrialize further. Then hopefully, the government does their part by maintaining a decent labor policy, countrywide connectivity projects, and remains fiscally responsible. This then connects all of Mexico closer together through infrastructure projects to try and fight regional inequality and have the entire country become richer in the process.

In Mexico's case, this basically means the wealth would be more equally spread out instead of just in the northern states. And that, my friends, is the formula which is set to finally make Mexico a rich country as a whole, and it's been a long time coming.

The arrival of a new country that's becoming more widely recognized for its economic prominence changes the face of global trade. For example, there was a time during which it was unthinkable that South Korea could have had any sort of real impact upon the world. Lo and behold, Hyundai, Kia, Samsung, K-pop, and K-dramas are everywhere. In the same way, a Mexico that's economically strong and capable of playing a key role in global supply chains is a Mexico that can offer its neighbors near-limitless opportunities for cooperative economic prospects.

As Mexico continues on this path of economic growth and development, it's poised to become a major player on the global stage. The combination of nearshoring benefits, infrastructure development, remittances, and return migration is creating a perfect storm for Mexico's economic rise. With careful management and continued investment in its people and infrastructure, Mexico is well on its way to becoming a rich country and a force to be reckoned with in the global economy.

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