While Mexico has made gains, many of them stem from trade diversion rather than large-scale foreign capital relocation.


Mexico City

Mexico nearshoring yet to yield big investment despite global trade tensions

Amazon Sidebar Checks

As U.S.–China trade relations frayed in the late 2010s, multinational companies moved to realign their production and supply chains—a trend that accelerated during the pandemic. Mexico emerged as a destination of interest for the relocation of manufacturing through “nearshoring.”

Source: Federal Reserve Bank of Dallas
By: Enrique Martínez García, Manuel Sánchez and Luis Torres
December 05, 2024

The resulting reality surrounding nearshoring’s impact on Mexico’s economy is nuanced. While Mexico has made gains, many of them stem from trade diversion rather than large-scale foreign capital relocation. Mexico’s export growth reflects China’s retreat more than the effects of a nearshoring-driven investment boom.

Indicative of the global trade environment, U.S. import values remain below their peak (in mid-2022), suggesting a sluggish trade environment with consequently modest trade improvement for Mexico.

Mexico’s strengths predate talk about nearshoring  

Nearshoring, which involves moving production closer to consumer markets, holds promise for Mexico due to its geographic and cultural proximity to the U.S., competitive labor costs and favorable trade conditions under the United States–Mexico–Canada Agreement (USMCA, the successor to NAFTA).  

Mexico also boasts a level of economic sophistication, marked by a diverse, complex export base, strong alignment with U.S. value chains and a prominent role in high-value industries such as automotive manufacturing. This background enhances Mexico’s potential in the global supply chain and logistics restructuring.  

Much of the buzz surrounding nearshoring in Mexico didn’t gain traction until 2022, despite U.S.–China trade tensions and prior discussions in the U.S. about shortening supply chains (Chart 1). This timing aligns with the Ukraine war and broader global supply-chain disruptions.  

Chart 1

Nearshoring’s influence on Mexico’s economy should be visible in its international economic accounts. These include the balance of payments and international investment position data, which track financial flows, trade and investments.  

If nearshoring were significantly driving production relocation to Mexico, the foreign direct investment (FDI) portion of the balance of payments should increase. Foreign-held liabilities in the international investment position should rise, and gross fixed capital formation in the national accounts should grow as production capacity expands.  

However, FDI inflows have not surged, as might be expected, and domestic sources have driven much of Mexico’s investment growth. Since 2019, Mexico’s current account deficit has narrowed, suggesting that recent investment has been largely self-financed.  

Mexico’s investment rebounds moderately  

Gross fixed capital formation rose as Mexico recovered from the pandemic economic slowdown. Nonresidential construction and imported machinery and equipment drove the increase (Chart 2).  

Chart 2

This suggests that companies, particularly in the foreign-owned maquiladora sector, are positioning themselves to take advantage of nearshoring opportunities. Maquiladoras are generally involved in the labor-intensive assembly of intermediate and final goods for export. Part of the recent investment growth may simply be a temporary catch-up, involving projects delayed during the pandemic.  

Public sector initiatives such as the Yucatán Peninsula rail project—the Tren Maya—the Felipe Ángeles International Airport, north of Mexico City, and the $16.4 billion Dos Bocas refinery in Tabasco, have contributed to the construction surge, further complicating the attribution of recent investment trends to nearshoring.  

Mexico’s puzzling FDI numbers  

Despite the increased attention to nearshoring, foreign-held assets (including FDI) relative to Mexico’s GDP have declined since 2022, international investment position data show (Chart 3).  

Chart 3

While new FDI surged immediately following the pandemic-era recession, new FDI since 2022 has declined to a 10-year low (Chart 4). Foreign capital inflows from company parent accounts and non-FDI portfolio investments have also been limited.  

Chart 4

Reinvested earnings now account for most FDI inflows, reflecting a shift toward building additional capacity from own resources. The manufacturing sector absorbed nearly half of total FDI between early 2022 and mid-2024, with key contributions from the transportation equipment, food processing and metals industries. The U.S. remains Mexico’s largest source of FDI and, along with other traditional partners—Canada, Japan, Germany, Argentina and Spain—collectively accounts for 80.7 percent.  

FDI inflows are primarily concentrated along the corridor stretching from the Pacific port city of Manzanillo eastward through El Bajío to Mexico City and in the northern border states.  

Shifts in nearshoring models may conceal full impact  

Despite recently lackluster FDI inflows, nearshoring to Mexico could be more significant than it appears, taking alternative forms through “shelter companies” and third-party logistics providers. Shelter companies registered under Mexico’s IMMEX (Programa de la Industria Manufacturera, Maquiladora y de Servicios de Exportación) program, which supports maquiladora plants, allow foreign firms to quickly establish operations without directly owning facilities or navigating complex regulations.  

While these arrangements reduce ownership risks and streamline logistics, they don’t contribute to FDI in the same way as foreign acquisitions. Instead, shelter companies’ activities appear in Mexico’s service exports under “other business services,” which include leasing, rental of assets and management services. These have modestly grown from 0.25 percent of GDP in 2017 to 0.5 percent in mid-2024.  

Another nearshoring strategy involves contract manufacturing. U.S. firms outsource production to third-party suppliers and third-party logistics firms in Mexico. This approach shortens supply chains without significant foreign capital investment. As a result, the rise in Mexican exports to the U.S.—rather than large-scale foreign capital relocation—likely explains a substantial portion of the domestic investment associated with nearshoring efforts.  

Logistics opportunities from e-commerce  

The rise of e-commerce and related de minimis trade—small shipments exempt from duties—has spurred logistical shifts that Mexico could leverage by becoming a fulfillment hub for U.S. e-commerce through the IMMEX program. Thus, Mexico could expand from business-to-business to business-to-consumer logistics.

Since the U.S. raised its de minimis threshold from $200 to $800 in 2015, Chinese e-commerce platforms such as Shein and Temu have driven an explosion in shipments to the U.S. In some cases, these goods are routed through Canada and Mexico. Total de minimis shipments equaled 7.3 percent of U.S. consumer goods imports and 19.2 percent of e-commerce sales, valued at $54.5 billion (largely originating in China), which are not fully captured in U.S. trade data.  

Gains through trade diversion are not a panacea  

There are limits to trade diversion. Mexico’s share of U.S. imports increased from 13.4 percent in 2017 to 15.8 percent by 2024, primarily benefiting from China’s declining share, which fell from 21.6 percent to 13.2 percent (Chart 5, Panel A). The shift reflects China’s pivot toward high-tech industries, such as electric vehicles, and its gradual exit from low-value manufacturing, which has benefited countries in emerging Asia more than Mexico.  

Mexico, however, has gained in more capital-intensive sectors such as automotive manufacturing, where it already held a comparative advantage. Still, Mexico’s pandemic-era export growth has moderated since 2022, and export-destination diversification has deteriorated, with 83.1 percent of exports now directed to the U.S. Although IMMEX has supported maquiladora industries and Mexico’s most export-oriented states, its broader impact remains limited.  

China has pivoted away from advanced economies, not just from the U.S., supported by initiatives such as the Belt and Road, which helps build and fund infrastructure improvements abroad, and by efforts to internationalize the renminbi. This reflects a strategic shift toward emerging markets and the “Global South” (Chart 5Panel B).  

Chart 5

Meanwhile, Mexico has experienced limited growth in “trade triangulation” between it, China and the U.S. through re-exports. Nonetheless, the share of Chinese value-added inputs in Mexican gross exports has increased significantly since 2015, highlighting deeper integration of Chinese goods into Mexico’s export supply chains, particularly in electronics and computers. The companies involved—many of them non-Chinese—use Chinese inputs in their final goods. By 2020, Chinese value-added reached 8 percent overall, while the U.S. value-added share declined to 12.7 percent.  

Nearshoring to Mexico remains an ambition  

Domestic investment and reinvested earnings from foreign-owned firms have increased, but large-scale foreign capital relocation has yet to materialize. Shelter companies and contract manufacturing facilitate logistics and minimize ownership risks for foreign firms, though their impact on nearshoring remains modest.  

Surveys from Banco de México suggest that firms still anticipate greater nearshoring benefits in the coming years, particularly after 2026, although significant challenges remain.  

Mexico faces structural obstacles that limit its ability to fully capitalize on opportunities to attract foreign capital and boost productivity. Infrastructure bottlenecks involving electricity generation (including the mix of renewable and nonrenewable sources) and water supply could hinder further integration into global value chains. 

Additionally, a weakening rule of law due to the recent judicial reforms and rising insecurity complicates efforts to attract new FDI. Economists warn that tariff-driven trade distortions could lead to inefficient production allocation and higher consumer costs.  

The USMCA trade agreement, linking Mexico with the U.S. and Canada, is scheduled for review in 2026. A potential reopening of the pact adds uncertainty, though a favorable outcome could boost business confidence and new FDI inflows.

Mexico’s advantages have limited appeal for companies operating outside the Americas, which often prefer low-cost alternatives in emerging Asia and tend to follow a “China Plus One” strategy of maintaining operations in China while adding facilities in other low-cost countries to mitigate risks and rising costs.  

Ultimately, nearshoring’s modest impact is reflected in Mexico’s recent underwhelming economic growth performance. Even if Mexico successfully attracts more foreign capital through nearshoring, long-term economic expansion and rising living standards will depend on innovation and technological advancements, not just the relocation of foreign capital. This challenges the overly optimistic view of nearshoring as a guaranteed path to economic progress.  

About the authors

Enrique Martínez García is an assistant vice president in the Research Department at the Federal Reserve Bank of Dallas.

Manuel Sánchez is a Mexican economist and former deputy governor of Banco de México. 

Luis Torres is a senior business economist in the San Antonio Branch of the Federal Reserve Bank of Dallas.

The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

  • Be Ready! Grumpy Old Winter’s Here and Itching for a (Snowball) Fight