Mexico Will Be Bigger Than China?

Companies are pouring billions into Mexico!

Mexico, home of amazing food, legendary boxers, cocaine and General Motors? Mexico has been the talk of the town in the geopolitical space lately because as the US is diversifying from China they’re going to places like Mexico for cheap labor, let’s get in to it.

Bullish?

On October 1, 2018 the United States, Mexico and Canada renegotiated their previous trade agreement NAFTA and replaced it with the United States-Mexico-Canada-Agreement (USMCA). It came in effect mid 2020, here’s what it does:

• Increase U.S. farmers’ access to the Canadian dairy

• Increase access to poultry products

• Cars and trucks with at least 75% of their components manufactured in one of the three participating countries could be sold free of tariffs.

• 40-45% of the work done on some vehicles must be done by workers earning at least $16 per hour.

• Increase copyright protections

This agreement definitely puts Mexico in the car manufacturing scene in a big a way. Auto makers like Ford are investing big in Mexico, they opened a campus worth $260 million. Auto makers are taking advantage of the cheap labor from Mexico. But this article not only about trade agreements and auto makers, that’s only one piece of the puzzle. Due to the Chinese heavy handedness, fumbling on COVID and geopolitical tensions with the US, a lot of companies are moving away from the red dragon.

US imports from Mexico reached it’s highest number in history in 2022 by hitting $454 billion, up from $382 billion the year before. They also seem to be on pace this year to top it. Meanwhile, Chinese exports to the United States tumbled by 18.2 percent. This all sounds good when laid out this way, but can Mexico actually take advantage of the worsening US-China relations and replace them?

Mexico’s Issues

Mexico has a lot of issues it needs to solve before it can be viewed in the same light as China. Unlike Mexico, China had the advantage of authoritarianism, one of the few ways that system is advantageous is the fact that you can change the country at the snap of a finger. For Mexico, change is not impossible if they want to pursue it, but like all good things, it will take time.

Security

As we all know the security situation in Mexico is not great, they have deeply entrenched cartels that have been making billions of dollars exporting drugs for decades. These cartels corrupt Mexico’s institutions from the inside out. They are heavily armed, have ongoing wars against each other and terrorize the civilian population.

Obviously it’ll be hard for Mexico to become a powerhouse in it’s current state. Everyone knows the problem, but like all major problems the solution is not trivial. To win over the people, these cartels actually feed people in their hometowns, pave roads and give gifts. They bribe police officers, government officials and more. Oh, and did I say they make Billions of dollars?

If the government does not have the civilians fully on their side, it’s just going to be really difficult to solve this problem. Someone has to break these guy’s backs but on the bright side cartels don’t seem to *in general* mess with Americans and their businesses. You can also make deals with them, If they can find a way for this to continue, it might be a decent ‘band aid’ solution.

Transportation

Mexico does not have a robust rail transportation system, but they can work on making it better. They need more ports an make the ones they already have WAY more efficient. This leaves transportation by road the best way to do it, but still requires work for more efficiency and they also need to find a way to fix their cargo theft problem. Mexico recorded 237 cargo thefts the first 2 months of 2023, this issue goes hand in hand with their cartel problem.

So.. Can They Do It?

I mean, anything is possible but I don’t think so. A lot of companies from around the world are investing in Mexico which makes their short to mid term grown almost inevitable, I would buy that stock. What going to hold them up is mostly the security issue, because the transportation part can be solved by just throwing money at it. We don’t live in the 1600s, violence and business do not mix, big business requires stability and I’m afraid the security issue always makes that a huge grey area. How are companies going to feel when truck loads of semi conductors keep getting stolen and sold to China on the black market?

I’m afraid this might force companies to not continue investing too heavily. Why get your cargo stolen when you can go to another country and have that not happen? So what I see happening is more of a diversification away from China than outright replacement. Places like Vietnam are getting some of the shine too.

As always, thank you for reading.