Mexico as a Manufacturing Alternative: Nearshoring Exports and U.S. Tariff Pressure
Globalization has had a tremendous effect on how countries conduct international trade. With globalization, two countries with different competitive advantages can focus only on what they do best. By focusing on production competitiveness, the country can reduce production costs and set prices more competitively than those of other countries. Furthermore, this lower price can facilitate exports to countries that favor our products but have less competitive advantage. With higher exports, countries can earn income and use it to import goods they are not well-suited to produce. This scheme applies to all open countries nowadays, including Mexico.
“Mexico is the United States’ top trading partner in 2023, with total goods exceeding $798.8 billion”
— U.S. Census Bureau
As an open-market economy, Mexico actively contributes to international trade. Some of the country’s commodities, such as automotive manufacturing and electric vehicles, have dominated international markets and become the primary imports of many countries. In the last decade, Mexico has shown an impressive export performance. The export surged from US$414 billion in 20151 to US$665 billion in 2025. Among exported commodities, vehicles other than railway accounted for 26%, followed by electrical equipment (17%) and machinery, nuclear reactors, and boilers (17%)2. However, while Mexico’s exported commodities are diversified, international trade is less diversified in terms of its trading partners. By trading partner, most of these exports are directed to the United States, to which 85% are exported.
Given their proximity, trade between the United States and Mexico is inevitable. According to the gravity theory, the very close geographic proximity between these two countries, only 2000 miles apart, can increase the potential benefits of trade for both parties. However, geography is not the only reason behind the tight international trade relationship between these two countries. Following an extreme debt crisis in 1982, Mexico liberalized its trade policy by reducing tariffs and privatizing state enterprises. Furthermore, Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, thereby accelerating the country’s trade openness. Moreover, Mexico joined the North American Free Trade Agreement (NAFTA) in 1992, which became the basis for closer international trade among the United States, Mexico, and Canada.
NAFTA provides Mexico with broad access to the U.S. market and has transformed Mexico from an oil-exporting country into an automotive and electronics exporter. Since the implementation of this agreement, trade between Mexico and the U.S. has increased significantly. In November 2025, Mexico exported $44.5 billion to the U.S. and imported $26.6 billion from the U.S.3 Mexico’s top exports to the U.S. are computers, motor vehicles, and cars. On the other hand, Mexico’s main imports from the U.S. are petroleum, motor vehicles, and petroleum gas. Due to a more intense trade relationship with the U.S., Mexico has become one of the most prominent nearshoring destinations for companies serving the U.S. market. Many countries seeking access to the U.S. market regard Mexico as the top destination for foreign direct investment or company relocation.
Nearshoring is the relocation of business operations to locations near target markets. The objective of nearshoring is to serve the primary market more efficiently through supply chain strategy and transportation costs. Nearshoring is the opposite of offshoring, where the latter is defined as the movement of production to a distant country to reduce labor costs. Nearshoring differs from reshoring, which involves bringing production back to the home country. Finally, nearshoring differs from friend-shoring, which involves relocating supply chains to politically aligned or strategically trusted countries.
This article examines the nearshoring phenomenon in Mexico, in which firms from other countries and global firms are relocating operations to Mexico to enter the U.S. market. Economic reasons are the primary motive for companies to nearshore their operations in Mexico. However, beyond that motive, the impact of this activity on Mexican economy is not necessarily positive. This article analyses Mexico’s role in serving nearshoring demand from multiple dimensions. The analysis will be divided into several key questions.
How U.S. tariffs and trade policy shifts have accelerated nearshoring to Mexico
The concept of nearshoring is gaining popularity, particularly amid the recent, unprecedented U.S. tariff policy. In April 2025, U.S. President Donald Trump imposed high import tariffs on many U.S. trading partners to protect domestic producers and the long-run competitiveness of the U.S. trade sector. The country imposes double-digit import tariffs on many developing countries and is open to negotiation rather than a reciprocal response. However, what is more important is not which countries negotiated or disputed reciprocally, but that this situation has transformed the way the global economy shifts its trade policy. One policy response to the U.S. higher tariffs is firms’ nearshoring to Mexico. This situation is evidenced by the companies’ decision to relocate its operations to Mexico.
The nearshoring of global firms to Mexico occurred long before Donald Trump’s recent import tariff policy. In 2017, the U.S. imposed higher import tariffs on China by gradually increasing the rate from 2.7% in 2017 to 19% by 2023, and then reached 164% in April 20254. The U.S.-China trade war intensified until it culminated in a 49% import tariff on U.S. products from China. However, although the policy was specifically imposed on China, as a global powerhouse, many countries that outsource component production to China faced significant challenges when entering the U.S. market due to higher costs. Mexico emerged as a primary alternative amid this situation. Given its proximity to the U.S. market, producing in Mexico can minimize transportation costs. Truck and rail transport from Mexico to the U.S. can take only days, rather than weeks, when it originates in China. This can help companies reduce transportation costs and thus maintain competitive prices.
“The average U.S. tariff on Chinese exports has risen sharply since 2018, significantly altering global supply chains” — Chad P. Bown
Peterson Institute for International Economics, (PIIE), 2024
Given the situation, firms strategically integrated their supply chains to increase production capacity in Mexico, alongside their existing manufacturing activities in China. In response to increased demand for nearshoring, Mexico also implemented strategies to capitalize on this momentum. One of the most important strategic decisions was to secure the country’s continued participation in the North American Free Trade Agreement (NAFTA). By participating in the agreement, Mexico secured free access to the U.S. market and long-term cooperation among the U.S., Mexico, and Canada. This guaranteed market access and proximity to the U.S. were strong selling points for attracting global firms to nearshore their operations in Mexico. Many countries positioned Mexico as a preferred site for component production to meet compliance thresholds.
Furthermore, to support nearshoring demand, Mexico reformed its customs systems and border procedures. The reform involved digitalization efforts in cooperation with the U.S. authorities. In addition, Mexico implemented programs to attract additional investment, established workforce training partnerships, and offered tax incentives. The country also supported rising nearshoring demand by providing more stable macroeconomic conditions, such as a stable exchange rate, well-managed public debt, and an independent monetary policy, thereby ensuring long-run price stability.
“The USMCA Modernizes NAFTA and strengthens North American competitiveness in the global economy” — Office of the United States Trade Representative (USTR)
USMCA Fact Sheet, 2020
The role of USMCA in shaping investment, trade flows, and supply chain decisions
The United States-Mexico-Canada Agreement (USMCA) played a central role in shaping investment, trade flows, and supply chain decisions for countries nearshoring to Mexico. The agreement replaced NAFTA and entered into force in July 2020, serving as a basis for securing Mexico’s market access to the United States and Canada. The USMCA provides free trade among the U.S., Mexico, and Canada for most goods, which signals legal certainty for global firms to locate operations in Mexico. For investors, this legal agreement is an essential factor in investment decisions. Since its implementation in 2020, Mexico has experienced robust trade growth with the US, making it the second-largest U.S. export market. The USMCA also has a significant role in promoting foreign direct investment in the country. The agreement has created a more predictable regulatory environment for investors, making them feel safe to invest and relocate more companies. This decision creates additional employment opportunities for local residents and increases income.
However, recent global economic turmoil has contracted the Mexican economy. In the third quarter of 2023, the Mexican economy contracted by 0.3%. Although the economy rebounded by 0.80% in the following quarter due to export activity, this indicates the need to examine the USMCA from both the U.S. and Mexican perspectives. The agreement remains a lifeline for Mexico, sustaining its economic growth, particularly amid the U.S.-China trade war, which has made Mexico the preferred alternative for other countries seeking to enter the U.S. market. Nevertheless, the agreement remains vulnerable to threats, including rising tariffs, political tensions, and water management issues. The U.S. president warned that a 5% tariff on Mexican exports would be imposed unless water flows to the U.S. increased. This could be a trade-off between prioritizing the U.S. market and the Mexican domestic economy (including foreign investment in Mexico), which could affect foreign investors’ preferences for nearshoring to Mexico.
Mexico’s industrial structure: automotive, electronics, machinery, and industrial manufacturing
Automotive manufacturing is a key industry in Mexico. In 2024, Mexico was the fifth-largest vehicle producer worldwide, with total production of 3.99 million units, of which 3.48 million were exported5. This export activity has increased consistently over the past five years. Exports declined during the 2020 pandemic to 2.7 million units, increased to 2.9 million in 2021, and reached 3.48 million in 20246.
Overall, vehicle exports have shown a positive trend over the last five years, signaling the resilience of this commodity in the Mexican market. This consistent export dynamic not only reflects the resilience of the Mexican economy but also shows the growing demand for vehicles from other countries in Mexico. Most vehicle units are exported to the United States (80%), the top export destination, followed by Canada (8.5%), Germany (3.6%), Brazil (1.2%), and Colombia (0.9%).
The primary centers of automotive production are located in Northern and central Mexico, near the U.S. border, which facilitates logistics management. Key manufacturers include GM, Volkswagen, Nissan, BMW, and Ford, which are distributed across various regions. For example, General Motors, Mazda, and Honda operate in the Bajío region; Nissan operates in Aguascalientes; Volkswagen operates in Puebla; Kia and Tesla operate in Nuevo León; and Stellantis and Ford operate in Estado de México.
Electrical machinery and electronics are also another major manufacturing industry in Mexico. The country exported $113 billion in machinery and electronics, accounting for 3.28% of global exports. Most of the exports went to the United States as a top export destination, followed by India and Hong Kong. This performance put the country as the 9th largest exporters in electrical machinery and electronics in the world. Some of the major companies in this industry are Bosch, Deere, and Ford Motor. At the same time, the country also imports electrical machinery and electronics from other countries, notably from the United States, China, Vietnam, and Malaysia, making it the 8th largest importer in the world.
Nearshoring has played a significant role in Mexico’s impressive export performance, particularly in automotive, electronics, machinery, and industrial manufacturing. Although some key manufacturers were already operating in the national market, nearshoring has accelerated the country’s export performance by increasing load capacity. Nearshoring has also attracted more foreign direct investment to Mexico, strengthening the country’s automotive sector. The nearshoring, supported by the legal certainty from the USMCA, increased the automotive regional value from 62.5% under NAFTA to 75%, which incentivizes automakers to purchase more components within North America rather than importing from Asia.
Export dynamics and Mexico’s dependence on the U.S. market
Exports in Mexico have shown a positive trend in the last decade. In 2025, the country’s total exports reached $663 billion, double the 2016 level of $373 billion. Exports plummeted in 2020 to $416 billion due to the COVID-19 pandemic, but rebounded the following year quickly, reaching $494 billion in 2021. Overall, the export performance of Mexico can be seen in the graphs above. In monthly terms, Mexico’s exports peaked in October 2025 at $66.1 billion and were $60.7 billion in December 20257. In the same month, the country recorded a positive trade balance of $2.43 billion, indicating that export volume exceeded import value. This positive trade balance is also consistent with the country’s economic growth of 0.8% in the final quarter of 2025. This indicates that exports have contributed positively to the country’s economic growth.
In terms of commodities, export in the country is dominated by autos (26%), followed by electrical and electronic equipment (17%), machinery, nuclear reactors, and boilers (17%), optical, photo, and medical apparatus (4.8%), and mineral fuels, oils and distillation products (4.5%), and the rest are less than 3%. Mexico’s automotive industry is currently facing renewed pressure from U.S. tariff policy and uncertainty around trade rules. In terms of units, the number of autos exported plummeted in December 2025 to 227 thousand units, down from its peak of 331 thousand units in June. These declines in exports are evident among global brands, including Nissan (-47.7%), General Motors (-26.5%), and Honda (-45.5%), resulting in a 2.68% decline in overall automotive exports in 20258.
The decline in exports due to the recent U.S. tariff policy indicates Mexico’s significant reliance on the U.S. market. Hence, any shocks in the U.S. can affect the stability of bilateral trade between Mexico and the U.S. The U.S. is currently Mexico’s primary export destination, accounting for 85% of total export value, followed by Canada (3.2%), China (1.5%), and Brazil (1.5%). A high dependence on the U.S. market can be viewed as beneficial, as it reflects stable demand, investment flows, technology transfer, and employment opportunities. However, a heavy dependence on the U.S. market can also reduce innovation, widen the income gap, and, most importantly, undermine the Mexican peso’s exchange rate stability relative to the U.S. dollar.
Foreign direct investment trends and corporate relocation strategies
Mexico is among the top destinations for foreign direct investment. In 2023, the country ranked ninth among the world’s largest FDI recipients by receiving FDI at $36.1 billion9. Although foreign direct investment inflows to Mexico have increased over time, they peaked in 2013 at $47.5 billion10. Recently, FDI performance in Mexico has been lower than in 2013. Most of the FDI inflow comes from the United States (40.9%), followed by Spain, Canada, Germany, and Japan. This investment was allocated across various sectors, with manufacturing as the largest recipient, followed by financial services, mining, and trade.
The Foreign direct investment received is distributed to various sectors in Mexico. Most FDI is concentrated in multinational automotive manufacturers and electronic firms. These two sectors have dominated export activity, accounting for more than 85% of total exports, and have been the country’s major export sectors for the past 25 years. The U.S. tariff policy and trade tensions between the U.S. and China contributed to the slowdown in FDI to Mexico relative to 2013. With higher tariffs, particularly on goods reliant on Chinese manufacturing, firms need to identify alternative countries to reduce production costs and enter the U.S. market. Mexico is the most suitable alternative to support this mission due to its geographic proximity and free access to the U.S. market under the USMCA.
FDI to Mexico plays an important role in Mexican economic growth. Although as a fraction of GDP, the FDI fluctuates over time, it shows an increasing trend. As shown in the figure below, Mexico had a relatively stronger FDI inflow in 2013 at 3.8% of GDP, then gradually declined to 2.4% in 2024. Nevertheless, the FDI has risen from 1.8% in 2020, reflecting the resilient investor’s interest in Mexico’s manufacturing and nearshoring opportunities. This positive trend also highlights that nearshoring activities to Mexico remain attractive for foreign investors.
Infrastructure, logistics, energy, labor, and regulatory constraints
Despite the rising nearshoring demand for Mexico, some constraints remain. These constraints include infrastructure, logistics, energy, labor, and regulatory constraints. One of the attractive features of Mexico for global firms is its trade infrastructure, which is specifically designed to support long-term trade relations with the U.S. market. The trade volume between Mexico and the U.S. is approximately $800 billion in 2023, with 40% of the volume managed in the Port of Laredo. However, higher trade volumes are also accompanied by increased risk of congestion at the U.S. border. The U.S. Bureau of Transportation Statistics reports that cross-border truck crossings exceed 5 million annually at the U.S.-Mexico border. This congestion constitutes a threshold beyond which new investment relocation to Mexico is constrained. This congestion can result in waiting periods of up to 20 days for customs clearance.
In terms of logistics, delivery times also become a concern for nearshoring demand. Some of these logistical constraints can potentially hamper the growth of nearshoring to Mexico. For example, as demand for nearshoring increases, the availability of industrial space declines. For example, warehousing space is increasingly scarce in cities such as Ciudad Juárez, El Paso, and Monterrey. The limited industrial space can increase rental costs due to scarcity, thereby disincentivizing new investors from relocating their companies to the country. From the supply side, the rising demand for nearshoring can also be capped by labor availability. For example, the trucking sector in Mexico is currently experiencing a driver shortage. In 2023, the country experienced a 56,000-driver deficit, and this is expected to double by 2028.
The relocation of additional companies to Mexico also requires energy support for their operations, which depends on the country’s energy availability. Mexico currently relies on fossil fuels, which are nonrenewable and finite. This energy limitation constrains the country’s ability to serve incoming companies. Grid infrastructure deficits, insufficient power generation, and power outages appear to be the primary reliability issues affecting manufacturing operations nationwide. This situation can lead to project postponement, increased operating costs, and greater regional inequalities, as some companies tend to cluster in regions with better energy, infrastructure, and logistics.
Finally, not only are infrastructure, logistics, and energy facing challenges, but nearshoring demand to Mexico is also constrained by regulatory barriers. Recently, the Mexican government required companies to register their workers with the Ministry of Labor and Social Welfare and prohibited subcontracting. This regulation may increase production costs due to the labor component and disincentivize companies from nearshoring. The Mexican government also imposed regulations on environmental quality, requiring companies to obtain environmental permits to support their operations, particularly for water consumption and waste management. However, the main issue is that the permit is typically time-consuming to issue. Finally, custom regulation also becomes a concern for nearshoring companies. The country’s customs regulations impose stricter compliance requirements, highly digitized procedures, and severe penalties. The country’s 2026 customs reform, which requires full digitalization, may disincentivize nearshoring demand due to the risk of compliance failures leading to substantial fines and penalties.
Comparison with alternative manufacturing locations (Asia, Central America)
Mexico is a promising hub for global firms to enter the U.S. market, given its lower prices and tariffs. However, as a single country, Mexico also has a finite capacity to accommodate the incoming relocations. This finite capacity arises from constraints on the country’s infrastructure, energy resources, and regulatory framework. This condition provides other countries with an opportunity to participate in the market and compare the costs and benefits of relocating their firms to Asia or Central America. The cost and benefit are evaluated based on the structures, logistics, trade access, and industrial depth.
In Asia, several countries are alternatives. One alternative country is China. Despite the increased U.S. tariffs, China is undoubtedly a strong contender to the U.S. in terms of global manufacturing power. China can reduce production costs due to low labor costs and advanced production technologies. The country has a very deep industrial base with an integrated ecosystem and produces more than 25 million annually. Even for certain electronic commodities, such as semiconductors, China remains ahead of Mexico. Thus, nearshoring to Mexico is not merely a solution to expand the market, but it also depends on the type of product the country is focusing. However, shipping from China to the U.S. takes 20-30 days by sea, much longer than from Mexico. Other countries also have specific product types; for example, South Korea and Taiwan have a competitive advantage in semiconductor production relative to Mexico. This indicates that proximity to the target market is not the sole factor driving nearshoring; it also depends on the destination country’s competitive advantage.
Other alternative countries are also located in Southeast Asia. In this case, Vietnam, Thailand, and Malaysia are particularly attractive to foreign investors. For example, Vietnam is replicating China’s role as a semiconductor assembly hub and is attracting greater attention as an alternative to nearshoring locations. With the country’s low labor costs, investors can reduce production costs and set competitive prices. Vietnam offers lower labor costs than Mexico, and its manufacturing share of exports is 85%. In terms of industrial depth, the country has a growing supplier network and is strong in electronics and textiles production, although it is not a major producer of vehicles. Furthermore, Vietnam’s infrastructure capacity is expanding, and its labor market is comparable in size to Mexico’s. However, Vietnam has a long way to go to the U.S. market. Shipping from the country to the U.S. market takes 20-30 days by sea, which can be costly.
In Central America, some countries also have potential as hubs for the U.S. market, including Costa Rica, Guatemala, Honduras, and El Salvador. These countries are geographically proximate to the U.S. and have benefited from the agreement, as with the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). For example, Costa Rica offers low labor costs, a stable energy grid, and competitive shipping times (in days) to the United States via sea or air. The share of Costa Rica’s exports to the U.S. is also substantial, accounting for 45% of total exports, with medical devices and electronics as major export categories. However, the country’s labor force is smaller, at approximately 2.5 million, well below Mexico’s.
Risks, limits, and sustainability of Mexico’s nearshoring-driven growth model
Despite Mexico’s success as a major hub for the U.S. market, its nearshoring-driven growth model entails risks, limitations, and sustainability challenges. First, Mexico’s economic growth model is heavily dependent on the U.S. market. Statistics indicate that more than 80% of Mexico’s exports go to the U.S. market. Although this magnitude indicates privileged access to the U.S. market, it also indicates that the Mexican economy is vulnerable to U.S. economic and political conditions. Any shocks entering the U.S. economy and politics can be contagious to the Mexican economy and affect the stability of bilateral exports between the two countries. In the long run, a more diversified economy can better absorb economic shocks and serve economic sustainability more than one that relies solely on a particular country. Thus, the nearshoring-driven growth model may be profitable in the short run, but it cannot guarantee long-run sustainability.
Second, in the long run, Mexico has a finite capacity to accommodate incoming relocations. The country has limited resources, land, and workforce. Therefore, the nearshoring-driven growth model must be accompanied by internal, fundamental growth to ensure long-term sustainability. This fundamental growth should be grounded in innovation. Innovation can transform the country’s production function into increasing returns to scale, thereby accommodating more incoming relocations. Innovating the infrastructure development, energy generation, logistics, and customs regulations is fundamental to ensuring the growth model can accommodate more relocating companies in the long run. However, land remains finite; thus, there is a risk of a crowding-out effect on the domestic economy from the nearshoring growth model. For example, additional relocating firms along the Mexico border will require more water and energy to support their operations, which can crowd out domestic energy and water demand, reducing domestic consumption and labor supply.
Third, Mexico’s heavy reliance on the U.S. economy through the export channel will also affect the independence of Mexican macroeconomic policy in the long run. For example, when exports increase, demand for the U.S. dollar may rise, strengthening the U.S. dollar and depreciating the local currency. Therefore, if the economy is heavily dependent on exports and there is no economic diversification, the local currency may depreciate, thereby making imported goods more expensive. In this case, Mexico needs to draw on its foreign exchange reserves to intervene in the foreign exchange market and prevent the peso from falling too deeply. As more companies are established along the border, regional development there accelerates relative to other regions. Consequently, jobs will also be concentrated in the border area, which drives higher wages and a higher standard of living than in the rest of the regions. This situation can widen the welfare disparity between regions, resulting in a higher gap of income inequality and poverty level. This situation requires the Mexican government to implement diversified macroeconomic policies in different regions.
By Jagat Prirayani, Indonesia
Photo: dennis schrader / unsplash, KUKA Group, Rick González / CC BY 2.0
