In a recent video by the YouTube channel The Invisible Hand, it is revealed that China is increasingly “nearshoring” its operations to Mexico, leading to significant economic growth for the country. This shift marks a transformative period for Mexico, positioning it as a burgeoning financial superpower. Let’s take a look at some of the more interesting facts from the video.
Mexico’s Strategic Advantage
Mexico, the 13th-largest country in the world and the second-largest economy in Latin America, has historically been overshadowed by its northern neighbor, the United States. However, its close proximity to the U.S. is becoming a strategic advantage, fueling economic growth, which is something I find extremely fascinating. The two countries share a 1,954-mile border, 54 border crossings, and four time zones, creating a strong trade relationship that benefits both nations, particularly Mexico.
Economic Growth Concentrated in the North
A map showing GDP per capita indicates that economic activity and income are concentrated in Mexico’s northern regions, which share a border with the U.S. These states have established a strong export base and are less reliant on commodities than the southern regions. However, this phenomenon is spreading across the country, with significant growth noted in southern states such as Oaxaca and Tabasco.
The Rise of Nearshoring
The video highlights the impact of “nearshoring,” where business operations are transferred to nearby countries from ones further away. This trend is gaining traction as American, European, and Asian companies move their operations to Mexico. This shift is driven by global tensions, trade wars, and the increasing unattractiveness of manufacturing in China. As a result, foreign investment in Mexico saw an 18% year-on-year growth in 2023, marking the largest increase on record.
Mexico’s Economic Boom
In February 2024, Mexico overtook China as the leading source of imports for the U.S., fueling further economic growth. I thought this was interesting due to the size difference and the general impact of the two countries. This development has positioned Mexico as one of the G20’s fastest-growing economies, with wage growth increasing at a record pace. However, the nation still faces challenges, including deep income inequality and high poverty rates, with around one-third of the population living in poverty.
Historical Economic Development
Mexico’s economy has long been characterized by resource extraction, particularly oil. The discovery of large oil fields in the early 20th century propelled Mexico to become one of the world’s leading oil producers. The state-owned oil company PEMEX, created in 1938, has historically generated significant government revenue. Despite periods of economic boom, such as the Mexican Economic Miracle from 1950 to 1981, Mexico has also faced economic crises, including the 1982 debt crisis, which led to a decade of stagnation.
Shifting Focus to Trade and Manufacturing
In recent decades, Mexico has shifted its focus from oil to trade and manufacturing. The North American Free Trade Agreement (NAFTA), which took effect in 1994, allowed Mexico to trade freely with the U.S. and Canada, significantly boosting exports and foreign investment. This trade liberalization has transformed Mexico into a manufacturing powerhouse, particularly in electronics and automotive parts.
The Impact of Nearshoring
The practice of nearshoring is not limited to American companies; European and Chinese firms are also investing heavily in Mexico. Rising shipping costs and trade wars have made Mexico an attractive destination for manufacturing operations. The USMCA agreement, which replaced NAFTA, requires a certain percentage of goods to be made in North America to be tariff-free, further boosting Mexico’s manufacturing sector.
Challenges and Opportunities
Despite the optimism surrounding Mexico’s economy, several challenges remain. The country has low productivity gains, a large informal sector, and poor access to loans and credit. Education levels are also a concern, with low rates of educational attainment and enrollment. However, Mexico’s young and growing workforce presents an opportunity for continued economic growth.
The Stability of the Peso
People in the comments shared their thoughts: “another thing is, Mexican people aren’t crossing the border anymore, its mainly other nationalities below Mexico”
Another commenter added: “I’m glad for Mexico and any nation attaining greater well-being as this increases the well being of humanity as a whole.”
One person concluded: “Also as of recent the Mexican peso has remained stable and has held its worth more so than the u.s dollar.”
The Path Forward
Mexico’s proximity to the U.S., combined with the trend of nearshoring, positions it for significant economic advancement. However, the country must effectively use the inflow of investment to build long-term economic capacity and reduce inequality. With strategic investments in education and infrastructure and formalization of the informal sector, Mexico has the potential to realize its status as a developed and wealthy nation fully.
Impact on Mexico’s Stability and Growth
What do you think? How will the increasing trend of nearshoring impact Mexico’s long-term economic stability and growth? What steps can the Mexican government take to address the deep income inequality and high poverty rates in the country? How might the global shift away from China as a manufacturing hub affect other emerging markets in the region?
Watch the entire video on The Invisible Hand’s YouTube channel for more information here.
