Nearshoring: How We ́re Doing Month by Month | Monthly Newsletter #9

How´s the Trade Balance Doing? – July

In July, Mexico’s trade balance recorded a slight deficit of just $72 million dollars, compared to a $645 million deficit in the same month last year. Thus, in the first seven months of 2024, the trade balance logged a deficit worth $5.57 billion, which set below the $7.15 billion deficit recorded in the same period last year.

In July, exports increased 14.7% annually and were driven by a 16.2% rise in non-oil exports and partly offset by a -10.2% decrease in oil exports. Among non-oil exports, those destined to the US increased 18.0% annually, while exports to the rest of the world rose 7.1%. By type of good, manufactured exports rose by 15.9%, driven by increases in machinery and special equipment for various industries (53.2%), mining and metallurgical products (28.5%), electrical and electronic equipment (15.3%), food, beverages, and tobacco (10.6%), and automotive products (7.2%). The annual growth logged in automotive exports resulted from an 8.3% increase in sales to the US and a 2.0% increase in exports to the rest of the world. In the first seven months of 2024, total exports amounted to $354.18 billion, logging 4.3% annual growth. During this period, the structure of merchandise exports was as follows: Manufactured goods 89.2%, oil products 4.9%, agricultural goods 4.2%, and non-oil extractive products 1.7%.

Similarly, imports recorded a 13.3% year-over-year increase in July. This figure was driven by a 15.9% rise in non-oil imports and was partly offset by a -15.6% decline in oil imports. By type of good, consumer goods imports increased 16.5% year-over-year, as imported non-oil consumer goods rose by 30.4%, while oil consumer goods fell by -38.3% (gasoline, butane, and propane gas). Meanwhile, intermediate goods imports rose by 13.3% compared to the same month last year and were driven by a 14.6% increase in non-oil imports, although they were partly offset by a -3.7% decline in oil imports. Capital goods imports reached $5.21 billion, marking an annual increase of 8.7% compared to July 2023. In the January – July 2024 period, the total value of imports totaled $359.75 billion (+3.8% vs. the same period of 2023): Intermediate goods accounted for 75.5% of the total, consumer goods 14.5%, and capital goods 10.0%.

New FDI Investments in the US Decreased in 2023, Especially in Manufacturing

A research report made by fDi Intelligence, a company specialized in global foreign direct investment (FDI) analysis, found that new investments in manufacturing in the world’s largest economy slowed to their lowest levels on record since 2014, despite expectations of significant inflows.

According to fDi´s report, which used data from the Bureau of Economic Analysis (BEA), new foreign investment in manufacturing stood at $42.9 billion in 2023, down from $63.9 billion in 2022 and $123 billion in 2021, logging a clear downward trend. The decline is unusual given the fact that the US government launched two programs to attract foreign direct investment: 1) The Inflation Reduction Act (IRA) and 2) the Chips and Science Act (CSA). Both programs offered a combined total of $400 billion in tax credits, loans, and aid to companies. With these incentives, Goldman Sachs estimated that FDI inflows could total around $1.2 trillion in 2023.

After the implementation of the IRA and CSA, significant FDI announcements were made involving the world’s largest economy; however, official data revealed that these did not materialize.

Additionally, fDi Intelligence explained that obtaining resources from the IRA and CSA entailed far-reaching requirements, which discouraged several companies that were seeking said subsidies. For example, the CSA was presented in July 2021 and was only passed into law in August 2022. It took 16 more months to be approved for a UK-based company with operations in New Hampshire. This shows that, despite the announcements, the most that companies could do was merely express interest since there were no laws to follow. Similarly, other bottlenecks that may have contributed to the decline in FDI include a shortage of construction workers, rising costs and scarcity of capital, concerns about a US recession, and the upcoming presidential elections.

In conclusion, the decline in new investments is not limited to the manufacturing sector, as total new FDI investments for 2023 amounted to $175.9 billion, 40% less than the $294 billion inflow logged in 2022, also according to BEA data.

Global Trade Balance CPB

By monitoring the World Trade Monitor (WTM), an international trade indicator designed by the Netherlands Bureau for Economic Policy Analysis (Central Planning Bureau, or CPB), we found that Mexico´s trade has set in line with global economic trends. In this context, the slowdown in Mexican trade seen since 2023 could partially echo international activity. Recently, we have seen a rebound in international trade, which could provide a boost for Mexico in the coming months.

In its latest report, the WTM indicates that international trade increased 0.7% m/m in June, according to seasonally adjusted figures, reversing the 0.3% m/m decline logged in May. This shows that there was an improvement in global trade trends by the end of the second quarter of 2024. This trend has also been seen in Mexico, where trade remains weak but has improved compared to the beginning of 2024.

By analyzing figures by region, we noticed that, in terms of exports and imports, the world’s major economies quickly regained the momentum they´d lost during the pandemic. However, since the second half of 2022, the momentum seen in international trade has been waning. In this regard, there´s been a clear downward trend in China, with growth rates falling below the rest of the countries in our sample. Since December 2019, the Asian giant’s exports have increased by 5.9% (vs. 16.6% globally) and imports have risen 11.6% (vs. 19.6% globally). On the other hand, the world’s largest economy, the United States, is very much in line with global trade trends, although it has recorded an even better performance in exports (20.8%).

It´s worth noting that from December 2019 to June 2024, trade in Latin America has increased the most compared to other regions, including the Eurozone, China, and the US. This is due to the reconfiguration of global trade patterns after the pandemic, surges in commodity prices, and the trade war between the US and China. In this regard, Latin America’s export volumes have risen by 24.7%, while import volumes have increased by 24.8%.

Thoughts on Nearshoring

It´s a fact that FDI in Mexico has reached all-time highs; however, it has recently been argued that, since new investments aren´t recording an upward trend, the Nearshoring phenomenon is not evident. This is despite the fact that new investments included in FDI have decreased pretty much at a worldwide level, including in the US. It´s important to keep in mind that part of Nearshoring stems from the need to reduce exposure to China, the world’s largest market.

Experts have pointed out that the best way to demonstrate the relocation trend of supply chains is not through FDI data, as it tends to be biased and has interpretative limitations. Perhaps the best way to highlight Mexico’s advantage regarding the relocation of supply chains would be by evaluating US imports and how they have shifted for each of its trading partners, given the fact that it´s a highly competitive market.

It´s undeniable that Mexico has become the United States’ main trading partner, as its share of total US imports has increased significantly. From January to July of 2024, imports from Mexico accounted for 15.7%, compared to an average of 13.2% from 2014 to 2018, displacing China and Canada. During this period, Mexico has gained 2.5 percentage points of market share. In conclusion, although FDI figures suggest there has not been a substantial increase in installed capacity (97% of FDI in the first half of 2024 corresponds to profit reinvestment), Mexico has achieved a significant increase in its share of trade with the US. In this sense, the progress that´s been made regarding Nearshoring is undeniable, although, of course, there are challenges that need to be addressed, which we will discuss in the following section.

Nearshoring Challenges – IMCO

In a recent study on industrial policy conducted by the Mexican Institute for Competitiveness (IMCO for its initials in Spanish), it was outlined that Mexico implemented strong industrial policies during the import substitution model (1942-1980) in order to boost a promising industrial sector that could eventually become competitive at a global level. However, this model was insufficient and led to issues that eventually steered to its abandonment, as the world increasingly engaged in expanding international trade. Mexico was no exception as the country joined the General Agreement on Tariffs and Trade (GATT) in 1986 and later signed a Free Trade Agreement with the United States and Canada in 1994. Since then, Mexico has increased its participation in global trade and now has 14 trade agreements with 50 countries, along with 30 Investment Promotion and Protection Agreements (IPPA´s). In this sense, the IMCO’s key point is the need to acknowledge that the country replaced industrial policies with trade policies for much of the recent period.

In this context, it´s no surprise that the states with stronger exports also received greater foreign direct investment (FDI) inflows. The IMCO estimates that the six states bordering the US accounted for 52.5% of the country’s FDI flows last year. Additionally, the institute analyzed why increased exports didn’t translate into greater national economic growth; it found that the share of imported goods within exports has grown over time. This provided two key takeaways: 1) Despite increased exports, the participation of local companies compared to foreign ones has decreased over time in many manufacturing industries, and 2) Mexico is an economy that imports intermediate goods, which are used to produce final goods, and exports them, meaning we are a manufacturing hub. In summary, the IMCO’s second key point is that a trade policy without an industrial policy does not translate into growth.

Lastly, the IMCO’s recommendations should not be ignored, and the incoming administration has an important task regarding Nearshoring and the country´s industrial policy, which should include: i) Encouraging foreign companies to participate in the manufacturing of intermediate goods in our country, without falling into an import substitution model and disregarding concepts such as comparative advantage; ii) fostering or creating conditions for national companies to actively participate in global value chains for export; iii) attracting new networks, such as the data centers recently announced in Querétaro.