Nearshoring: How We’re Doing Month by Month | Monthly Newsletter | February 2024

Global Foreign Direct Investment

In the first nine months of 2023, global Foreign Direct Investment (FDI) amounted to $1.094 trillion dollars, a 15% decrease compared to the same period of 2022, according to data from the Organization for Economic Cooperation and Development (OECD).

The economies that reported the highest inflows of FDI in the third quarter of 2023 were the United States (110 billion), Ireland (26 billion), Canada (15 billion), and Brazil (15 billion). It´s noteworthy that China recorded outflows in the 3Q23, which had not occurred since 2005. In the first nine months of the previous year, the countries that attracted the most FDI inflows were the U.S. (265 billion), Brazil (50.9 billion), Canada (41.9 billion), and Mexico (32.9 billion).

The OECD´s report points out that Mexico continues to attract FDI inflows – despite global flows being negative for the year – and positioning itself as the economy with the fourth largest amount of inflows in the world. In addition, China´s outflows point out the structural changes that the world is undergoing for the first time in almost 20 years.

United States Imports

Most people have forgotten that before the Covid-19 pandemic, former President Donald Trump started a trade war with China to reduce the U.S. trade deficit with said country. This situation is evident as China has lost significant market share regarding U.S. imports. When reviewing annual figures for goods imported into the United States, and for the sectors with the largest impact, we find that Mexico’s share in imports has increased, but not uniformly. Some economies in Southeast Asia have increased their exposure.

The selected industries that have benefited from increased U.S. imports from abroad are automobiles, auto parts, computers, computer accessories, telecommunications equipment, and semiconductors. These industries account for almost 20% of all U.S. imports. The following points stand out:

1. China decreased its share in almost all industries, with two standouts: i) in computer accessories, it dropped from an average of 52% from 2013-2018 to 25% in 2022, and ii) in telecommunications equipment, a decline from 41% to 20% for the same period.

2. Mexico increased its share in automobiles from an average of 15% from 2013 to 2018 to 21% in 2022, in computers from 25% to 34% for the same period, and reduced it in telecommunications equipment from 20% to 18%.

3. Economies like South Korea, Taiwan, and Vietnam increased their exposureto U.S. imports in sectors such as automobiles, computer accessories, telecommunications equipment, and semiconductors, while China´s share decreased.

In summary, there is evidence of China’s reduced participation in U.S. imports, particularly in the selected sectors. However, Mexico was not a unanimous winner; other Asian economies took advantage of the situation to create new industries or expand existing ones. The country has a historic opportunity, and the next government in office should facilitate industrial and fiscal policies to position Mexico as an export hub.

How is the Trade Balance Doing?

In December, Mexico’s trade balance recorded a surplus worth $4.242 billion, compared to a $983 million surplus in the same month of 2022.

In the last month of 2023, there was a slight decline in exports, which logged an annual -0.2% setback, consisting of an -8.7% drop in oil exports and 0.4% growth in non-oil exports. Within non-oil exports, those directed to the U.S. grew at an annual rate of 2.0%, while those directed to the rest of the world decreased by -7.5%. On the import side, a -6.9% year-on-year figure was recorded in December. Said decline is explained by a decrease in imported intermediate goods (-11.8%), while imported consumer and capital goods increased by 12.0% and 7.9%, respectively, reflecting strength in domestic demand. The increase in consumer goods imports is associated with a 36.6% increase in non-oil goods and a 67.1% drop in oil goods such as gasoline, butane, and propane.

Considering the entirety of 2023, Mexico´s trade balance logged a deficit worth $5.464 billion, compared to the $26.879 billion deficit reported in 2022, reflecting an expansion in the non-oil balance from +$8.263 billion in 2022 to +$13.073 billion in 2023, and an oil deficit of -$18.536 billion in 2023, nearly half of what was recorded in 2022. Last year, exports grew by 2.6%, manufacturing by 4.0%, and automotive by 14.3%. Imports decreased 1.0% throughout the past year due to a decline in intermediate goods imports (-4.9%). On the other hand, capital goods imports rebounded 20.0% in 2023.

Taking into account a scenario involving moderation in global economic growth, various geopolitical fronts pointing toward disruptions in global trade, and possibly high interest rates for a longer than expected amount of time, this all suggests that external demand will remain weak this year. Therefore, for 2024, we estimate a relatively small trade deficit, around half a percentage point of GDP, or almost $10 billion.

Regarding the current account (trade balance + remittances + services balance + income balance), we estimate a $15 billion deficit in 2024, that is, -0.8% of GDP. A situation that we cannot rule out is a slight decrease in remittances, especially if there is an economic slowdown in the United States. Assuming remittances amount to $60 billion in 2024, the current account deficit would set at $19.8 billion or -1.0% of GDP. In both scenarios, the deficit can be fully financed through foreign direct investment, estimated to be close to $40 billion during 2024.