| Mexico | Sep 23, 2020
As companies across the world make significant changes to the way they source, produce, and distribute goods, Mexico is turning out be an obvious choice in the Americas.
The coronavirus crisis has hit global trade at an unprecedented scale and rate, revealing the fragility of the modern supply chain. The supply of goods has become a hot issue amid restrictions aimed at slowing the spread of COVID-19. From surgical masks to basic products and materials, the pandemic has highlighted weaknesses in how goods around the world are sourced, stored, and distributed.
For the last few years, geopolitical issues and shifting priorities have been setting the stage for gradual changes. Studies show that there has been a marked shift away from China to countries such as Mexico, Vietnam, and India. And COVID-19 has further accelerated this shift. In fact, the need to design smarter, stronger, and more diverse supply chains is one of the main lessons of the crisis. In a recent report, the Economist Intelligence Unit (EIU) said the pandemic will reverse globalization by accelerating a move toward regional supply chains.
In the US, the crisis has exposed serious concerns related to securing necessary pharmaceutical and medical equipment supplies. According to the US Department of Health and Human Services, 95% of surgical masks and 70% of tighter-fitting respirators are made overseas. In light of this, the pressure to reassess far-flung supply chains and shift supply chains closer to home continues to intensify.
First and foremost, for the US this means less reliance on China, which represents around 30% of global manufacturing. Even before the COVID-19 pandemic, this trend had started to materialize as companies took actions to avoid trade-war related tariffs and the Chinese government redirected its support toward higher-value production. No other country matches the manufacturing dominance of China, but with the development of new capabilities and evolving environmental attitudes, the competitive playing field is changing.
It is no secret that the US’ relationship with China is deteriorating and undergoing a rapid, and perhaps, permanent transformation. 90% of Americans now view China as a threat compared to 48% in 2018, according to the April 2020 edition of the Pew Research Center. And with China falling in attractiveness, Mexico is taking its place.
Imports from Mexico have increased by more than 15% since 2017, with the majority of gains coming from industries affected by the US-China trade war. A more supportive trade connection between the US and Mexico is a win-win situation. It will enable the former to reduce reliance on China as a primary supply partner and ultimately strengthen the benefits of the US-Mexico-Canada Trade Agreement (USMCA).
Not only is Mexican manufacturing capacity more efficient than most manufacturing in China, Mexican goods can be transported to the US via ground transport in a matter of days or hours. What’s more, both countries operate on the same time zone, and companies on both sides of the border can coordinate door-to-door transport, allowing manufacturers to focus on their core competency and reduce the need for big in-house logistics teams. All these factors show exactly why Mexico is picking up a big share of the manufacturing being shifted away from Asia.
Global manufacturing consulting firm Kearney’s Near-to-Far Trade Ratio (NTFR), which tracks the movement of US imports toward nearshore production in Mexico, further explains this shift.
The NTFR is calculated as a ratio of the annual total dollar value of Mexican manufactured goods to the US, divided by the dollar value of manufactured imports from 14 Asian low-cost countries, including China. Since 2013, NTFR has hovered steadily between 36% and 38%, but after the USMCA, it raced to 42%. On a dollar-value basis, Mexico’s manufacturing imports to the US increased 10% between 2017 and 2018, from USD278 billion to USD307 billion, and by another 4% between 2018 and 2019, to USD320 billion.
The US-China trade war pushed companies to start rethinking and reshaping their supply networks. Now, as hundreds of thousands of customers around the world fall victim to shortages, companies are racing to regionalize operations and bring manufacturing closer to home. And for companies based or interested in the US, the choice has never been clearer.