The Biggest US Trading Partner Is No Longer China, Its Mexico

The new Cold War is a business opportunity, and Mexico looks better placed than almost any other country to seize it, according to a Bloomberg report.

US-China tensions are rewiring global trade, as the US seeks to reduce supply-chain reliance on geopolitical rivals and also source imports from closer to home. Mexico appeals on both counts-which is one reason it's just overtaken China as the biggest supplier of goods to the giant customer next door.

On top of resurgent exports, Mexico boasts the world's strongest currency this year and one of the best-performing stock markets. Foreign direct investment is already up more than 40% in 2023, even before Tesla Inc. starts building a proposed $5 billion factory. Not since the signing of the North American Free Trade Agreement in the 1990s has the country held the kind of allure for investors that it has right now, Bloomberg reports.

Yet Mexico has a history of missing what could have been its moments. Over the past three decades, even a trade deal with the world's biggest economy-which, just like today's wave of so-called "nearshoring," brought plenty of foreign investment-couldn't pull Mexico out of a rut.

Since 1994, the year Nafta took effect, growth has averaged about 2% a year, well below par for developing economies, and nowhere near enough to lift millions of Mexicans out of poverty. Turkey, Malaysia and Poland are just three examples of nations that were poorer than Mexico at the start of this century and are now substantially richer.

And there are plenty of obstacles, old and new, that could cut the current boom short.

The government of President Andrés Manuel López Obrador has repeatedly clashed with business interests as it seeks to bolster the state's role in the economy. Mexican companies have been reluctant to borrow and make the investments that could help turn a growth spurt into something more enduring. And the country is up against fierce competition, from Vietnam and other nations, in the race to replace China as a supplier to the US.

What's more, even the investments that Mexico is already getting are putting its infrastructure under growing strain, amid bottlenecks created by erratic power transmission, limited industrial space, and water scarcity.

Pedro Campa Eliopulos, a tech executive in the northern industrial hub of Monterrey, has a close-up view of Mexico's potential for liftoff-and the limitations.

Two years ago, when Tesla was poised to open a factory in Texas, it was seeking a supplier to make the "brains" of its electric vehicles-the computers that connect to satellites, allowing autonomous driving-somewhere nearby, instead of shipping them all the way from China. Taiwan-based Quanta Computer Inc., Campa's employer until recently, stepped up to meet the demand from a plant in Monterrey, the capital of Nuevo León state. "We started to outfit the building by August, and by December we were producing," he recalls. Soon Tesla itself will be a neighbor, with construction of the Monterrey Gigafactory due to start this year.

Campa describes how the plant kept getting hit by power blackouts that took a chunk out of its productivity, because the city's electrical grid struggles to keep up with its fast-growing industries. At such moments, he says, his thoughts on Mexico's prospects turned gloomy. He wondered if "much of nearshoring will go elsewhere-because we don't have the capacity to receive it."

For all the pitfalls, there's no doubt that parts of Mexico look like industrial boomtowns right now.

More than 30 companies have moved to Nuevo León since Tesla announced plans to build factories in Texas and Nuevo León, according to Iván Rivas Rodríguez, the state's economy minister. "It was a request from Tesla to its suppliers, telling them 'You have to come to North America,'" says Rivas, who sees his own job as making sure the deals close.

It's not all about Tesla, though. Other carmakers including General Motors, Kia Motors and BMW have announced EV investments in Mexico since the start of 2021. Electronics and home appliance makers are expanding in the center of the country. Across the border from California, the aerospace and plastics industries are also growing.

All in all, Mexico has surpassed China to be the largest trade partner of US.

Source: Bloomberg