Sourcing Strategies: Mexico's Emergence as America's Top Import Partner

In recent years, the global supply chain has seen significant shifts. In 2023, Mexico exported goods worth $475.61 billion to the U.S., overtaking China as the U.S.'s largest import partner. With this shift, it's important to understand what’s driving Mexico’s rise and how it impacts different industries.

Why Mexico is Now an Important Trade Partner for the USA

Mexico has become a major trade partner for the U.S. for several important reasons:

Strategic Location and Proximity

Being so close to the U.S. gives Mexico a huge advantage. Shorter distances mean lower transportation costs and quicker delivery times, making it much easier and cheaper for American businesses to import goods from Mexico than from farther countries. The trend of nearshoring to Mexico is helping U.S. companies build a stronger and more flexible supply chain. This shift reduces reliance on distant suppliers and helps businesses better handle global disruptions, like those during the COVID-19 pandemic.

Response to Global Events

1. US-China Trade War: Since 2018, the US-China trade war has led to tariffs on Chinese products, pushing companies to seek cost-effective alternative markets. Mexico, being the closest to the USA, has become the go-to option for nearshoring in the American supply chain.
2. COVID-19 Pandemic: The pandemic caused major disruptions, like border closures and a 500% spike in global shipping costs. Mexico’s close proximity helped ease some of these logistical and cost challenges, making it an attractive option for American businesses considering nearshoring strategies.
3. Russia-Ukraine War: The war restricted raw material suppliers, pushing companies to find alternative sources. Mexico has stepped in to fill some of these gaps, providing a stable and reliable supply of necessary materials.

Mexico's Network of Trade Agreements

As of the end of 2023, Mexico has signed free trade agreements with over 50 countries worldwide, such as US, European Union, Japan: South Korea, Israel and etc. One of the most valuable agreements is the United States-Mexico-Canada Agreement (USMCA), which is an update to the North American Free Trade Agreement (NAFTA). This agreement has strengthened trade relations between the three countries, providing more solutions for labor, digital trade, and intellectual property (IP), and adjusting automotive demands.  Learn more about USMCA at ustr.gov

Tariff-Free Products Imported to the USA

One major advantage of importing from Mexico to the USA is the tariff-free status of many products under the United States-Mexico-Canada Agreement (USMCA). This agreement provides significant benefits by allowing certain products that meet the rules of origin to be imported without tariffs. Here are some of the key tariff-free products:

Electronics

In recent years, Mexico's electronics manufacturing industry has experienced explosive growth, meeting the high demand for consumer electronics and providing advanced electronic control components for other manufacturing sectors.

Industry Clusters

• Western Region: Focused on aerospace, high-tech products, information technology, and electronics manufacturing.
  • Key States: Baja California, Sonora, Chihuahua, Jalisco, Aguascalientes.
• Eastern Region: Focused on computer, home appliance, and consumer electronics components.
  • Key States: Coahuila, Mexico City, Nuevo León, Querétaro, Tamaulipas.

Major Electronics Companies

Guadalajara, known as "Mexico's Silicon Valley," is a hub for software and electronics manufacturing, hosting 12 OEMs and over 380 suppliers with an annual export value of $150 billion. Major companies include HP, Samsung, Panasonic, LG, Foxconn, Toshiba.

Future Prospects

Even during the 2020 COVID-19 lockdowns, Mexico's consumer electronics sales reached record highs and have continued to grow steadily. Consumer electronics are now one of Mexico's fastest-growing manufacturing sectors.

Read more: Mexico’s Electronics Manufacturing Clusters

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Home Appliance

As the world's fifth-largest exporter of home appliances, Mexico has a strong foundation in appliance manufacturing. Many companies in the sector have shifted towards electronics to leverage expertise and supplier networks.

Industry Clusters

• Key States: Nuevo León (41% of national capacity), Saltillo, Querétaro, Guanajuato, San Luis Potosí, Tamaulipas.

Major Appliance Companies

Leading appliance manufacturers in Mexico include Sony, Whirlpool, GE, Zuo, Amana, Danby, Ethan Allen, EMZ, Siemens, and Diehl Controls.

Future Prospects

The market for smart appliances is growing, with increasing demand for innovative features driving consumer interest. From 2021 to 2026, the CAGR for the smart appliance market is expected to reach 48%.

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Textile and Apparel

Since Mexico's first textile factory opened in Puebla in 1830, the textile manufacturing industry has remained a cornerstone of the nation's manufacturing sector. Today, Mexico's annual textile exports total $7 billion, making it one of the fastest-growing manufacturing industries.

Industry Clusters

• Key Regions: Central and northeastern Mexico.
  • Key States: Mexico State, Hidalgo, Tlaxcala, Jalisco, Queretaro, Coahuila, Sonora, Guanajuato, Nuevo Leon, San Luis Potosi

Major Textile Companies

Renowned clothing manufacturers like Delta Apparel, Grupo Denim, and Levi Strauss & Co. have large production bases in Mexico. Other companies produce industrial textiles, such as airbag supplier UTT and specialty fabric supplier Carolina Performance, along with Japan's Toray Industries. Many Chinese textile factories have also relocated to Mexico.

Future Prospects

The demand for industrial textiles, fabrics, and specialty clothing is increasing. Mexico's fashion industry is also driving innovation in garment technology, enhancing the competitiveness of the textile sector. For example, Yucatán has established Mexico's first fashion industry lab for design, innovation, and prototyping. Experts predict the market size for Mexico's textile manufacturing industry will grow by $3.98 billion between 2021 and 2026, with a CAGR of 4.13%.

Read more: Spotlight on Textile Manufacturing in Mexico

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Automotive and Auto Parts

Mexico's automotive manufacturing industry has a long history, with vehicle and auto parts manufacturers found throughout the country. Today, Mexico is the world's fourth-largest exporter of auto parts and the number one exporter of vehicles to the USA. In the automotive manufacturing sector under the USMCA, automakers must ensure that at least 75% of auto parts are manufactured in Mexico, the United States, or Canada to qualify for full tariff-free treatment.

Industry Clusters

• Key States: Coahuila, San Luis Potosí, Baja California, Nuevo León, Jalisco, Sonora, Guanajuato.
• Notable Cities:
  • Hermosillo, Sonora: Home to a major Ford assembly plant.
  • Saltillo, Coahuila: Known as "Mexico's Detroit" due to its concentration of automotive manufacturing.

Major Automotive Companies

At least ten well-known automotive OEMs have established plants in Mexico, including BMW, Chrysler, Ford, General Motors, Honda, Kia, Mazda, Nissan, Toyota, and Volkswagen. These companies collectively operate 20 factories across the country. In March 2023, Tesla announced plans to build a factory in Mexico, and many Chinese auto parts companies have also established operations there.

Future Prospects

The traditional automotive industry is paving the way for the development of electric vehicles in Mexico. Various supporting factories are also preparing to shift towards electric vehicle production.

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Aerospace Manufacturing in Mexico

The aerospace industry accounts for nearly half of Mexico's total foreign direct investment (FDI) and continues to grow. In 2021, the aerospace industry in Mexico was valued at approximately $6.22 billion, with a projected compound annual growth rate (CAGR) of over 18% by 2027. Mexico exports various aerospace products, including engine parts, aircraft fuselages, landing gear, and avionics.

Industry Clusters

• Key States: Querétaro, Sonora, Chihuahua, Nuevo León, Baja California.

Major Aerospace Companies

Mexico is home to about 300 aerospace manufacturing companies, including OEMs and suppliers. In Querétaro alone, the aerospace cluster includes companies like Bombardier, GE IQ, Safran, Airbus, Delta, Eurocopter, Aernnova, Meggitt, ITR, Cormer, Regent, and Liberty Spring.

Future Prospects

Around 79% of companies in Mexico's aerospace sector are involved in component production, with some manufacturers exploring new directions. The Mexican Aerospace Industry Federation (FEMIA) is actively encouraging local companies to seize new opportunities and provide global aerospace industry support.

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Medical Device

In 2019, Mexico became one of the world's largest exporters of medical devices, instruments, and parts, with exports valued at $11.7 billion. Industry experts predict a CAGR of 8.4% for Mexico's medical device industry by 2025.

Industry Clusters

• Key States: Baja California (largest cluster with 67 companies), Chihuahua, Sonora, Coahuila, Jalisco, Nuevo León, Tamaulipas.

Major Medical Device Companies

There are nearly 650 companies involved in medical device manufacturing in Mexico, exporting products worth approximately $8 billion. Major companies include GE, Medtronic, Siemens, Cardinal Healthcare, Tyco, Becton Dickinson, 3M, Stryker, Kimberly Clark, Boston Scientific, and Johnson & Johnson.

Future Prospects

The 2021 amendment to Mexico's health product regulations has made it easier for international medical device manufacturers to enter the market, simplifying administrative procedures and reducing regulatory burdens.

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Challenges of Manufacturing in Mexico

Energy Transition

Firstly, Mexico's energy transition is slow. In 2023, 78% of the country's electricity came from fossil fuels, the highest dependence in the Americas. Natural gas makes up 57% of the country’s power, but due to limited domestic production, most of the supply is imported from the USA. In 2023, Mexico's daily imports of U.S. natural gas rose by 7.8%, reaching a record 6.134 billion cubic feet.

Security Situation

Secondly, Mexico's security situation is challenging. In the first half of 2023, the homicide rate was 12 per 100,000 people, much higher than the global average. Drug cartels frequently engage in highway robbery and extortion, leading to strikes and protests by truck drivers over road safety.

Lack of High-End Talent

Thirdly, Mexico lacks high-end talent despite a young workforce. Only 25% of the labor force has a STEM background. "Nearshoring" is expected to create 1.1 million jobs in the next three years—18% of them being management roles—there’s a real need for skilled workers. The government is working on training programs, tax breaks, and certifications to build up STEM talent, but it'll take time for these efforts to show results.

Conclusion

Mexico’s rise as the U.S.'s largest import partner highlights its strategic advantages— being close by, having strong trade agreements, and a diverse industrial base. The country has positioned itself as a key player in the global supply chain, especially with the benefits of tariff-free imports under the USMCA. While there are challenges, such as slow energy transition, security concerns, and a shortage of high-end talent, Mexico continues to attract foreign investment and grow its manufacturing capabilities. As global supply chains keep evolving, Mexico’s role as a key trade partner for the U.S. is only expected to strengthen, offering flexibility and resilience in a complex global market.

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FAQ

1. When to source from Mexico or China?

Choosing between sourcing from Mexico or China depends on your business model and product industry. If you prioritize faster delivery times, lower shipping costs, and easier quality control, Mexico is ideal, especially for industries like automotive and aerospace. For lower production costs, high-volume orders, and a diverse product range, China is often the better choice, particularly for electronics and textiles. Assess your specific needs and market focus to determine the best sourcing strategy.

2. What are the key advantages of sourcing products from Mexico?

Sourcing products from Mexico offers several advantages, including:

• Proximity to the USA, which reduces shipping costs and delivery times.
• Trade agreements like the United States-Mexico-Canada Agreement (USMCA) that provide tariff-free access for many products.
• A diverse manufacturing base with strengths in electronics, automotive, aerospace, textiles, and medical devices.
• Favorable labor costs and a growing pool of skilled workers.

3. What risks should I be aware of when sourcing from Mexico?

Key risks include:

• Potential political and economic instability.
• Security concerns in certain regions.
• Dependence on the USA for natural gas imports, which could affect energy costs.

4. How does the quality of products from Mexico compare to those from China?

Both Mexico and China have manufacturers that produce high-quality products. The quality largely depends on the specific supplier and their adherence to quality standards. Mexico's proximity to the USA can offer better oversight and easier quality control visits. However, China's manufacturing sector is more mature and developed, providing a wide range of quality from low-cost, lower-quality items to high-end, high-quality goods.