Nearshoring: How We ́re Doing Month by Month | Monthly Newsletter #11

How´s the Trade Balance Doing? – September

In September, a trade deficit (exports minus imports) worth only $579 million dollars was recorded, well below the $1.498 billion reported a year earlier. This brought the January – September cumulative trade balance to a deficit worth $11.017 billion, compared to a $9.926 billion deficit in the same period of 2023.

In September, exports logged 0% annual growth, indicating stagnation; they recorded a sharp -44.9% drop in oil exports and a 3.3% increase in non-oil exports. Regarding the latter, agricultural exports rose by 12.5% year-on-year, mineral extractive exports increased by 26.4%, and manufacturing exports did the same by 2.6%. With respect to manufactured goods, exports increased 2.6% and were driven by rises in machinery and special equipment for various industries (34.1%), mining and metallurgical products (23.4%), paper, printing, and publishing products (15.7%), professional and scientific equipment (11.1%), and electrical and electronic equipment (3.5%). In contrast, automotive product exports recorded a -7.4% annual decline, due to a -2.9% decrease in sales directed to the US and a -31.2% drop in those directed to other markets. Thus, in the first nine months of 2024, total exports amounted to $455.717 billion dollars, recording a 3.2% annual increase. Over this period, exports were composed of 89.7% manufactured goods, 4.7% oil products, 3.9% agricultural goods, and 1.7% non-oil extractive products.

On the other hand, imports decreased by -1.8% year-on-year in September due to a sharp decline in oil imports (-33.8% year-on-year), although there was a slight increase in non-oil imports (+1.4% year-on-year). By type, consumer goods decreased by -5.3% year-on-year: There was a 5.4% increase in non-oil consumer goods imports, although oil-related consumer goods decreased -48.0% (gasoline and butane and propane gas). Intermediate goods imports were down -0.7% from the same month of 2023, with a 1.5% increase in non-oil imports and a -26.2% decline in oil imports. Imports of capital goods reached $4.767 billion and logged an annual -4.5% decline compared to September 2023. From January to August 2024, imports amounted to $466.734 billion dollars (+3.4% vs. the same period in 2023), with the following breakdown: intermediate goods accounted for 75.6% of the total, consumer goods 14.6%, and capital goods 9.8%.

Overall, the trade balance figures indicate that the external sector is showing somewhat of a sideways trend, which could signal an economic slowdown in Mexico and stagnation in the US manufacturing sector. Consequently, the trade balance recorded four consecutive months of negative results. Notably, the non-oil trade balance posted a surplus worth $640 million dollars, compared to a deficit worth $230 million in the same month of 2023.

What Are International Organizations Saying About Nearshoring in Mexico?

After the World Bank and the International Monetary Fund´s annual meeting was held in Washington, Nearshoring in Mexico was discussed in various forums, although it received somewhat limited attention. Here, we’ll review what both organizations have highlighted as evidence:

• World Bank: The effect of business relocation accounts for 0.2% of GDP at a country level; however, the figure is even higher in places like Nuevo León, Mexico´s northern states (the ones bordering the US), and some of the Bajío region, according to comments made by Mark Thomas, World Bank representative for Mexico, Colombia, and Venezuela, in an interview with El Economista. Thomas pointed out that Mexico’s main competition for attracting Foreign Direct Investment (FDI) flows lies not in Latin America but in Asian economies like Vietnam, Taiwan, and South Korea, as Nearshoring is driven by a geopolitical shift in investments resulting from US-China trade tensions. He also mentioned that Mexico should address issues such as water and energy constraints, land costs, and skilled labor occupancy rates to better capitalize on Nearshoring opportunities.
• International Monetary Fund: In its review of economic outlooks for the Western Hemisphere, the IMF included a specific section on Mexico titled “Relocation of Global Value Chains: The Role of Mexico.” In this analysis, IMF economists examine the effects of Nearshoring following the implementation of US tariffs on China. Their estimates for Mexico indicate that around 45% of the increase in Mexican exports to the US between 2017 and 2023 is attributable to these US tariffs on China. Additionally, the IMF found that the tariffs led to an increase in Mexico’s intermediate goods imports, primarily those from Asian markets, like China, although to a lesser extent than the primary effect. In other words, Mexico´s goods imported from China rose only by a fraction of the increase seen in Mexico’s exports to the US.

Moreover, the IMF found that the increase in Mexico’s exports to the US has been accompanied by a greater share of FDI flows to Mexico among emerging economies, particularly in the northern region and in the manufacturing sector (automotive and electronics). These are precisely the sectors that were affected by US tariffs on China. In conclusion, the increase in Mexico’s share of US imports appears to be driven by US companies themselves — due to cost advantages, proximity, and market integration — since nearly 40% of Mexico’s FDI originates from the US.

Source: International Monetary Fund. Regional Economic Outlook—Western Hemisphere. Online Annex 2.

How Does International Trade Affect Us?

As per the World Trade Monitor (WTM) indicator from the Netherlands Bureau for Economic Policy Analysis (CPB), the most recent publication highlighted that global merchandise trade increased by 1.4% in August compared to the previous month, after a 0.3% decline was logged in July. The monthly report highlights an increase in imports from Latin America (+2.7%) and China (+2.6%). In contrast, imports to the US decreased -1.2%. Regarding exports, significant increases were recorded in the United Kingdom (+3.4%), China (+6.9%), and the US (+3.8%). However, Latin American exports declined -2.0%. This points to a rebound in global trade trends in the middle of the third quarter. In its year-on-year comparison, global merchandise trade has logged five consecutive months of expansion, accelerating to 2.8% from the 1.8% recorded in the previous month.

It´s important to highlight China’s performance regarding international trade in August as it was very positive for the world’s second-largest economy amidst its efforts to reactivate economic growth. However, the economic and geopolitical environment is complicated, and China’s exports face numerous risks, including the implementation of higher tariffs. This is particularly relevant considering that China’s trade surplus is close to 0.8% of global GDP, one of the largest recorded in recent economic history.

Going forward, it will be essential to keep a close eye on international trade trends in order to understand the potential repercussions for Mexico, especially in light of the current situation, in which China and the US are the dominant forces in global trade. In this regard, the ongoing tensions and competition between the two countries could impact key sectors in Mexico, such as manufacturing, automotive, and agriculture. Even though the current trend is positive as we head towards the end of 2024, the outlook could shift depending on the outcome of the US presidential elections.

Next Steps: Increasing Exports of Higher Value-Added Goods

A few weeks ago, at a forum held in Monterrey, Economy Secretary Marcelo Ebrard unveiled an outlined framework to increase and prioritize the relocation of production chains. Ebrard stated that the goal is to boost exports with value-added goods, which currently account for 19.4% of total exports. This goal requires investment in R&D, reducing informality in the context of labor and economic policies, and speeding up the granting of patents. With this context, we have stressed that the true potential of Nearshoring lies in expanding current networks — from manufacturing and automotive to higher value-added products. This shift could accelerate the export growth rate from an annual 6% to more than double (12%). Currently, 70% of our exports are end-stage exports; they are produced using imported goods and their final sale is carried out in another country (manufacturing).

For this purpose, the Ministry of Economy has proposed replacing imports that Mexico currently sources from China. This is a key focus of the USMCA renegotiation, as Mexico should not become a bridge for Chinese products entering the US. This initiative will strengthen national value chains, especially in prioritized sectors such as automotive, medical devices, electronics, aerospace, data and chips, and textiles. In the coming weeks, a plan will be presented in partnership with major Chinese importers (Foxconn and GM) to substitute their imports. Developing and reinforcing a strong network of suppliers among Mexico’s main export sectors is essential.