Could Mexico benefit from nearshoring?

The ‘nearshoring’ trend is picking up speed: Mexico is well-placed to benefit, says the team on the BlackRock Latin American Trust.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The pandemic exposed the fragility of many supply chains for companies across the world. As geopolitical tension rises, the trend for ‘re-shoring’ or ‘near-shoring’ is gathering steam. With its proximity to the US and skills in key sectors, could Mexico be a beneficiary?

Globalisation has been an important factor in supply chain planning since the 1990s. It has allowed companies to locate manufacturing in the cheapest location, snaking supply chains across the world. This has been a driving force for GDP growth for many emerging markets.

This has started to reverse in recent years: rising geopolitical tension, particularly between the US and China, has disrupted fluid trade between nations.1 Former hotspots of low-cost manufacturing have seen labour costs rise, making it less economic for companies to outsource manufacturing. In particular, the pandemic showed how quickly supply chains could be disrupted and the potential repercussions.

Companies have started to reconfigure their supply chains, bringing supply closer to home (“nearshoring”), or onto friendly territory (“friendshoring” or “allyshoring”). In Asia, it has seen many companies develop a ‘China plus one’ strategy, adding alternative manufacturing options to their existing manufacturing capability in China.2

Mexico’s potential

Mexico is ideally placed to be a beneficiary of this trend. Its proximity to the US makes it a natural option for international companies looking to move. In a recent research report, Oxford Economics says: “Mexico is the emerging market with potentially the greatest to gain from the trade decoupling between US and China. Since 2017, Mexico has surpassed Canada to become the US's largest trade partner after China, thanks to its geographically privileged position, competitive production costs, and a comprehensive free trade deal (USMCA).”3

We believe this could be a driver for Mexican GDP growth over the next few years. Mexican growth has been stable but unexciting. The IMF expects GDP growth of 1.8% in 2023 and 1.6% in 2024.4 This does not look high compared with the growth emerging from Asia, but is relatively strong compared to its Latin American peers.

Our meetings with companies on the ground suggest that they are already benefiting from the nearshoring trend, with international companies building manufacturing capability in the region. There were encouraging signs on foreign direct investment.5 In the first quarter of the year, investment was 48% higher than the first quarter of 2022 (excluding two one-off deals - Televisa-Univisión merger and the restructuring of Aeroméxico). It will not happen quickly, but should be an incremental tailwind for economic growth over the next few years.

Selected sectors

However, the benefits will not be universal. To date, they have been concentrated in particular industries. Mexican suppliers in sectors such as automotive, minerals and machinery have successfully managed to displace suppliers in other countries. Smaller sectors such as food & beverages and metals have outperformed too - Mexico's beverage industry has grown the most.6

However, there are other areas where Mexico has not managed to take market share. Nor has it proved the main beneficiary for companies moving out of China. In sectors such as electronics, furniture, and clothing, Mexican exporters have not yet managed to capitalise on the move away from China.

Fears over political risk have deterred some international businesses from relocating to Mexico in recent years.7 However, a change of government in 2024 may usher in a more business friendly environment, which could allow Mexico to capitalise on the nearshoring trend still further.

The outlook for the Mexican economy remains positive. It remains a defensive choice in Latin America with strong government finances. When the stock market is experiencing a period of robust growth and positive returns, investors may perceive higher levels of risk associated with potential market corrections. Thus, more recently, we have reduced our weighting a little, because the stock market has performed well. We are also cognisant that the Mexican economy could be more sensitive to a potential slowdown in economic activity in the United States. Nevertheless, we believe the shifting of global supply chains will provide a boost for the whole economy.

Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.


1 Financial Times, 5 April 2023, Geopolitical tensions threaten outlook for global economy -
2 Wall Street Journal, 9 May 2023, China Finally Has a Rival as the World’s Factory Floor -
3 Oxford Economics, 26 June 2023, China’s loss is not Mexico’s gain -
4 Mexico Business News, 11 April 2023 -,and%20for%202024%20to%201.6%25.
5 Mexico News Daily, 22 May 2023, Q1 foreign investment tops $18bn -
6 Oxford Economics, 26 June 2023, China’s loss is not Mexico’s gain -
7 Financial Times, 3 June 2022, Why Mexico is missing its chance to profit from US-China decoupling -

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Fund-specific risks

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.

Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.

Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.