Mexico has a chance to reap nearshoring boons

NEW YORK, March 13 (Reuters Breakingviews) - Rarely has Mexico been so popular. The country pulled in, opens new tab a record $41 billion of foreign investment last year, while trade with the United States – despite the havoc of tariffs – reached, opens new tab a fresh high of $873 billion. Foxconn, the world’s largest electronics maker, has touted plans, opens new tab to expand beyond its already-sizable footprint, opens new tab in Chihuahua. The peso ​is up 18% since 2024, outmuscling every major global currency. Uncle Sam’s splintering of the world trade order has, in key ways, benefited its close neighbor.

Yet, despite it ‌all, economic growth for 2025 came in at 0.8%, the weakest pace since the Covid-19 pandemic. Attractiveness abroad contrasts with weakness at home. Mexico’s finance ministry projects that debt service costs will reach, opens new tab 4.1% of gross domestic product this year. This comes even as belt-tightening led to a 28% year-over-year cut, opens new tab in investment in physical infrastructure.

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The tumult of Washington’s protectionist turn might offer cover for a policy shift. Mexican trade officials will meet with U.S. and Canadian counterparts next week to review the ​USMCA, the free-trade agreement tenuously binding the economies of North America. Trump administration officials have made clear, opens new tab that they will seek new concessions, while the threat of scrapping the treaty altogether ​looms.

Disentangling the continent would be no mean feat. Roughly 30 cents of every dollar spent, opens new tab in the U.S. on Mexican goods starts its life on the American ⁠side of the border, according to the Atlantic Council. Components, materials, and intellectual property cross south before returning north in finished form. Benefits flow between partners, and shutting off this trade would reduce ​them. There is a reason that, as the White House has ramped up hostilities with China, Mexico has become the top U.S. trading partner.

Still, despite that momentum, policymakers could probably use an opportunity for serious ​changes. After all, a significant share of the income generated by Mexico’s export boom accrues to overseas shareholders, because so many of the factories lining its border are owned and financed from abroad. Improvements to the labor force, whether through up-skilling or otherwise, are blunted by the fact that over half, opens new tab of workers are in what statistics agency INEGI dubs informal occupations. The extent of this unregulated “shadow economy” means that gains accrue to a narrow slice of formal manufacturing workers ​in a handful of industrial cities.

Little wonder then that, over the decade to 2024, real output per person grew at about 0.6% annually, below the rate of Latin American peers like Chile or Brazil, ​according to World Bank data, opens new tab. Productivity growth has totally stalled, opens new tab.

The state, similarly, struggles to capture the fruits of increased activity. Mexico collected, opens new tab tax revenues equivalent to about 18% of GDP in 2024, lower than El Salvador, opens new tab and roughly half the rate ‌of wealthy economies.

The ⁠comparison with developing-economy peers is unflattering. Vietnam, which competes directly for manufacturing investment, grew, opens new tab 8% last year, having sustained a high pace for a decade by investing aggressively in its energy grid, ports, and technical education. India is growing at 6.5%. Even Poland, despite higher wages, grew, opens new tab by nearly 4%.

Negative consequences flow from the combination of state incapacity, weak productivity and low investment. Unreliable power is causing some, opens new tab companies to pull back on planned expansion, according to the Baker Institute for Public Policy. Government choices can compound these issues: a 2021 reform subordinated private and renewable generators to the state utility regardless of cost or efficiency.

Despite all of these ​setbacks, Mexican industry has navigated its northern neighbor’s ​trade tantrums with relative success. The share of exports, opens new tab ⁠entering the United States under the USMCA’s preferential terms doubled, opens new tab to nearly 88% by year-end, as firms sought to avoid punitive tariffs. The treaty’s impending review will determine whether terms tighten, and what Mexico must do to maintain them. Potential agenda items, including tighter rules of origin and restrictions on Chinese content, ​overlap neatly with the idea that the country should produce more value domestically.

It would be easier to do so if the government fixes its various ​chronic issues. Mexico’s value-added tax ⁠rate of 16% is riddled with exemptions, including reduced rates in border zones. Closing some of these could help bolster the $43 billion infrastructure budget. Formalizing even a fraction of the shadow economy would expand the tax base further. Confronting state-owned oil-and-gas giant Pemex, by letting it shrink or finding private partners willing to bear its multi-billion-dollar annual losses, would free up further fiscal space. It would also help to unshackle fossil-focused national energy ⁠policy, potentially ​alleviating a chronic industrial concern.

In a fragmenting global economy, geographic proximity is worth more than it once was. Deep integration with ​the United States, the world’s largest consumer market, is a particularly rare advantage. The USMCA review is an uncomfortable moment, but also a clarifying one. Whether Mexico treats Washington’s impatience as a threat to be managed or an opportunity too valuable to ​waste will define its next decade.

Follow Sebastian Pellejero on LinkedIn, opens new tab.

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Editing by Jonathan Guilford; Production by Pranav Kiran

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Sebastian Pellejero

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Sebastian Pellejero is a U.S. columnist for Reuters Breakingviews, based in New York. He writes about topics across business, investing, markets and technology. Prior to joining in March 2025, he worked as an equity research analyst at BlackRock and a markets reporter for The Wall Street Journal, along with stints at Bloomberg and Debtwire. He is a graduate of Wake Forest University and speaks Spanish.

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