Nearshoring: How We re Doing Month by Month | Monthly Newsletter #12

How´s the Trade Balance Doing? – 2024

In 2024, Mexico’s trade balance closed with a deficit worth $8.212 billion USD, significantly higher than the $5.470 billion deficit recorded in 2023. This widening deficit signals a combination of factors:

• A contraction in the surplus within the non-oil trade balance (from $13.091 billion in 2023 to $1.832 billion in 2024).
• A reduction in the oil trade deficit (from -$18.561 billion in 2023 to -$10.044 billion in 2024).

Throughout 2024, total exports reached $617.1 billion, marking an annual growth rate of 4.1%. This performance was driven by a 5.2% increase in non-oil exports, which totaled $588.673 billion and accounted for 95.4% of total exports, while oil exports declined by 14.4%, reaching a total $28.426 billion. Notably, the US absorbed 84% of Mexico’s non-oil exports, logging a 6.3% increase compared to 2023.

A more detailed analysis of non-oil exports reveals that manufactured goods accounted for 89.8% of the total, amounting to $554.444 billion and increasing by 4.8% in 2024. It´s important to keep in mind that manufacturing exports are categorized into: 1) Food, beverages, and tobacco; 2) Textiles, apparel, and leather industry; 3) Wood industry; 4) Paper, printing, and publishing industry; 5) Optical, photographic, chemical, and watchmaking products; 6) Plastic and rubber manufacturing; 7) Production of other non-metallic mineral products; 8) Steel industry; 9) Metallurgy; 10) Metal products, machinery, and equipment; and 11) Other manufacturing industries. Nearly 80% of manufacturing exports belong to the “metal products, machinery, and equipment” category, with automotive products standing out (35%), along with electrical and electronic equipment (17%), and specialized machinery for various industries (16%). Automotive exports contributed $193.907 billion, with a moderate 2.7% year-over-year increase, driven by a 4.1% rise in sales to the US but offset by a -10.6% decline in sales to other markets. This drop signals rising international competition and slower demand in key markets.

Regarding agricultural exports, these reached $23.355 billion in 2024, recording an annual 7.1% increase, with notable products including tomatoes, avocados, bell peppers, fresh strawberries, and fresh vegetables. However, Mexico’s cattle exports to the US have been affected due to a suspension by the US government, which took effect in late November 2024. Lastly, extractive exports logged a solid 18.6% increase in 2024, reaching $10.875 billion, driven by stronger global demand for minerals and metals.

On the other side of the trade balance, imports totaled $625.312 billion in 2024, marking a 4.5% increase compared to 2023. This rise was attributed to a 7.3% year-over-year increase in non-oil imports, which totaled $586.842 billion this year, while oil imports (gasoline, butane, and propane) decreased -25.7% to $38.470 billion. By category, consumer goods accounted for 14.5% of total imports in 2024, valued at $90.908 billion. These goods logged an annual increase of 3.6%, driven by a 14.5% rise in non-oil imports, while oil-related imports fell by -41.5%. Intermediate goods made up 75.6% of total imports, reaching $472.828 billion (+4.4% vs. 2023). Non-oil intermediate goods increased 6.3% year-over-year, highlighting the manufacturing sector’s strength. Lastly, capital goods accounted for 9.9% of total imports, amounting to $61.575 billion, increasing by 6.4% in 2024, which underscores the continued investment in machinery and equipment within the local industry.

Overall, Mexico’s trade balance performance in 2024 pointed to sustained growth in non-oil exports, particularly in manufacturing and agricultural products, further consolidating the US as its primary market. However, the rising trade deficit underscores challenges such as the need to diversify export markets beyond its main trading partner, strengthen key activities like the automotive industry in global markets, and reduce dependence on imported inputs by reinforcing domestic supply chains. It´s worth noting that while the trade balance closed 2024 with a slightly larger deficit than in 2023, it remains manageable and does not create significant imbalances in external accounts.

Mexico´s 2025 Manufacturing Outlook

Mexico’s manufacturing sector faced a challenging period of stagnation in 2024, expanding just 0.2% from January to November, after growing 1.3% in 2023 and 5.7% in 2022. This performance was largely influenced by the US manufacturing sector, which contracted by 0.4% in both 2024 and 2023, following a 2.7% expansion in 2022. In this regard, Mexico’s manufacturing industry appears to be strongly correlated with US manufacturing through foreign trade.

This can be validated quickly by analyzing trade balance figures by type of good (consumer, intermediate, and capital) and destination. When analyzing the trade balance of intermediate goods between Mexico and the United States, we can conclude that it´s practically in equilibrium, meaning that export volumes closely match import volumes. For instance, between January and November 2024, Mexico’s exports of intermediate goods to the US totaled $188 billion, while imports reached $185 billion, resulting in a trade surplus of just $3 billion. In contrast, when carrying out the same analysis between China and Mexico, we find that Mexico is a net importer of Chinese intermediate goods, as the trade balance shows a $90 billion deficit. This stems from $8 billion in exports and $82 billion in imports during the first 11 months of 2024.

When analyzing the foreign trade (exports + imports) of intermediate goods between Mexico and the United States, we find a direct connection, serving as the channel that links US manufacturing performance with Mexico’s manufacturing sector. This highlights two key points: 1) The outlook for US manufacturing is a crucial determinant for Mexico’s manufacturing sector; 2) this linkage occurs solely through the trade of intermediate goods between the two countries.

Regarding this last point, we emphasize the importance of international trade for Mexico’s economic outlook. In light of the potential threat of tariffs on behalf of Donald Trump, the key concern is understanding which types of goods could be affected. As long as production chains and intermediate goods remain unaffected, the economic impact may be limited. Regarding Mexico’s trade deficit regarding intermediate goods with China, the review of the USMCA could lead to pressure on Mexico to reduce its reliance on Chinese imports – an issue the Mexican government is already addressing. This is a crucial development, as it would further strengthen the integration of Mexico’s and the United States’ production chains.

Top Manufactured Products – November 2024

With the available data, Mexico’s manufacturing exports totaled $508.29 billion in the first eleven months of 2024, logging a 4.8% annual increase compared to the same period of 2023. Within this category, the highest growth rates were seen in mining and metallurgy (7.0%), paper, printing, and publishing (6.6%), metal products, machinery, and equipment (5.8%), and plastic and rubber products (4.5%). On the other hand, declines were logged in the wood industry (-7.2%), steel (-5.7%), the manufacturing of other non-metallic mineral products (-3.1%), and other manufacturing industries (-1.1%).

Metal products, machinery, and equipment account for 80% of total manufacturing exports. In this regard, this category recorded $389.48 billion in exports from January to November 2024. However, breaking this down further reveals the strong momentum within much of the manufacturing sector. This category consists of the following products: 1) agriculture and livestock; 2) other transportation and communications (automotive); 3) special machinery and equipment for various industries; 4) household metal products; 5) professional and scientific equipment; 6) electrical and electronic equipment and devices; and 7) optical, photographic, and watchmaking instruments.

A detailed analysis shows that while automotive exports remain the cornerstone of the industrial sector, other segments are also logging solid growth and hold significant weight regarding Mexico’s exports. First, exports of special machinery and equipment for various industries totaled $81.49 billion in the first eleven months of 2024, logging a 14.0% increase compared to the same period in 2023 – making it the second-fastest-growing segment after optical, photographic, and watchmaking instruments (22.2%). Second, electrical and electronic equipment and devices recorded a 4.7% annual increase, reaching $86.47 billion, making it the second-largest segment within this category. Additionally, professional and scientific equipment accounts for 6.7% of the category and recorded an 8.7% annual increase, totaling $26.19 billion from January to November 2024. Lastly, it´s worth noting that all other segments posted moderate growth, except for household metal products, which declined by 7.0% year over year.

On Tuesday, January 21^st, 2025, a decree was published with the central purpose of promoting the national strategy known as Plan Mexico by encouraging new investments and regional development through tax incentives that will remain in effect until September 30^th, 2030. The decree aims not only to strengthen the country´s industrial sector and local value chains but also to foster innovation, boost technical talent development, and position Mexico as an attractive investment destination compared to key regional competitors.

Among its most relevant initiatives are various tax incentives designed to attract both foreign and domestic investment, strengthen the manufacturing sector, and establish Mexico as a key logistics hub in North America. Some of the most notable incentives include:

• Immediate deduction for investments in new fixed assets: Companies may opt for an immediate deduction of their investments in new fixed assets. However, the assets must be new, used for the first time in Mexico, and remain in use for at least two years.
• Additional deduction for training and innovation expenses: Companies may deduct an additional 25% of expenses related to technical or scientific training for their active employees registered with the Mexican Social Security Institute (IMSS for its acronym in Spanish), as well as expenditures on technological innovation or the development of inventions, including obtaining patents and initial certifications. To qualify, companies must have a collaboration agreement with the Mexican Ministry of Public Education (SEP) for the implementation of dual education programs.
• Inclusion of micro, small, and medium-sized enterprises (MSME´s): A minimum of 1 billion pesos in tax incentives will be allocated to companies with annual revenues of up to 100 million pesos. This provision seeks to democratize access to tax benefits, ensuring their availability to small and medium-sized businesses.
• Transparency and oversight through the Evaluation Committee: This committee will assess submitted projects to ensure compliance with the decree’s guidelines, with the following maximum authorized amounts:
  • 28.5 billion pesos for immediate investment deductions.
  • 1.5 billion pesos for additional deductions on training and innovation.
• Limitations on the application of incentives. The incentives do not apply to:
  • Office furniture and equipment.Internal combustion engine vehicles (except electric vehicles).Non-identifiable individual assets.Taxpayers with outstanding and unsecured tax liabilities.Taxpayers with restrictions on the use of digital seals.
  • Taxpayers conducting transactions with companies involved in allegedly irregular tax practices.
• Validity and long-term planning: The incentives will be in effect from their implementation (January 22^nd, 2025) until September 30^th, 2030, providing companies with certainty for long-term investment planning.

The Plan Mexico Tax Incentives Decree has the potential to transform the country’s economic landscape by fostering public-private collaboration and strengthening strategic sectors such as automotive, aerospace, and renewable energy. By aligning with the USMCA, Mexico can solidify its role as a key player in North American supply chains, reducing its reliance on Asian imports. However, its success will depend on efficient implementation, overcoming barriers for MSME´s, and the creation of complementary structural conditions, such as infrastructure improvements, legal certainty, and administrative simplification. With effective implementation and enhanced global outreach, this initiative could position Mexico as a key player in the global economy and a preferred destination for Nearshoring.

Tariff Threats Could Disrupt Nearshoring Expectations

On February 1st, US President Donald Trump signed an executive order under the International Emergency Economic Powers Act (IEEPA), mandating a 25% tariff on Mexican products to address the emergency situation posed by migration and drug trafficking, including fentanyl. The order grants the US president the authority to establish the necessary measures to address national security or economic threats originating from abroad. However, after a phone call, leaders of the United States and Mexico reached an agreement that included certain commitments from both nations, resulting in a one-month pause in the imposition of tariffs.

At this point, it’s difficult to say for sure how things will unfold, as many unknown factors remain in place, such as the magnitude of said tariffs, retaliatory measures, and their duration. Initially, the exchange rate will be the first element to adjust. A weaker Mexican peso could help keep the dollar prices of Mexican products in the US from rising as much as the tariff, helping exports remain competitive in North America.

However, at the same time, it´s foreseeable that a part of the tariff increase will be passed on to final consumers, who will inevitably adjust their purchasing decisions based on price, making the production process of certain industries less efficient, particularly those that are highly integrated with Mexico.

For Mexico, the export sector will be affected the most, as demand for Mexican products is expected to decrease. Exports account for approximately 30% of GDP, and of those exports, 83% are destined for the United States.

However, we believe that the first tangible impact of these punitive threats will be on productive investment. Even with the pause, there’s a possibility that tariffs on Mexican products will be implemented, which could deter interest in productive projects. At first glance, ongoing projects will likely continue as planned; however, new productive projects – especially those aimed at relocating production – could be put on hold until there is a clearer understanding of the rules of the game.