Mexico is wasting its nearshoring opportunity

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On paper, it is one of the world’s great opportunities. Wary of China, the US is hunting for reliable alternatives nearer home to locate low-cost factories. Across the border lies Mexico, a land of low-cost labour and abundant possibility, with preferential trade access and tax breaks under the Biden administration’s green energy programme. Is this a match made in heaven?

Recent headlines might encourage that impression. In July, Mexico passed China as the biggest source of imports into the US. Foreign direct investment into Mexico hit a record $32.9bn in the first nine months of this year. Industrial parks near the American border are filling up. Tesla has announced plans for a $5bn “gigafactory” in Mexico.

Moving US manufacturing to Mexico is nothing new. The process began with the North American Free Trade Agreement in 1994, which spurred a wave of investment into assembling cars, trucks and televisions. Mexico’s exports to the US were above those of China in the 1990s, but lost the crown as Chinese imports rocketed. This year’s change owes more to sharply declining Chinese imports than to booming Mexican exports.

Foreign investment into Mexico has grown, particularly this year. But last year Brazil performed far more strongly, attracting 41 per cent of all FDI into Latin America and the Caribbean against Mexico’s 17 per cent. (Brazil’s economy is about a third bigger than Mexico’s).

Industrial parks near the US border are filling up, though this partly reflects a lack of suitable land rather than a widespread boom. Tesla has delayed construction of its Mexican factory, which in any case would not strictly meet the definition of nearshoring as it would complement, rather than substitute, its giant plant in China.

In July, the peso hit its highest level against the dollar since 2015 but analysts credit this to tempting opportunities in Mexico’s money markets, rather than to racy fundamentals: Mexican interest rates are more than double those of the US. The IMF forecasts Mexican economic growth this year of 3.2 per cent — healthy but hardly the tempo of a booming economy.

Businesses operating in Mexico say some nearshoring is happening, but only a fraction of what could occur with the right government policies. Here the figure of Andrés Manuel López Obrador, the quixotic leftwing president, looms large. López Obrador is a nationalist with an instinctive suspicion of business and a nostalgia for the state-directed economy of his youth.

One of his first acts was to scrap Mexico’s investment promotion agency, arguing that it was unnecessary. As he poured billions of dollars into a new oil refinery, the president attacked foreign companies investing in renewable energy and promoted state-generated electricity instead, which comes mainly from fossil fuels. The result is a shortage of the green electricity vital to attract new factories.

Water shortages are another constraint. López Obrador cancelled a mostly built $1.4bn US brewery project in the arid north on these grounds; his penchant for decision-making on the hoof also led him to send in troops to seize a privatised railway line, which he needed for a pet infrastructure project.

Security, or the lack of it, also worries business. US officials have said swaths of Mexican territory are controlled by drug cartels, rather than the government.

Mexico should make the most of a historic chance to win nearshoring business. For that, it needs a government that understands what policies are needed. López Obrador has largely been squandering the opportunity.