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Mexico becoming the global leader for offshoring advantages

A male employee looking deeply into the mechanisms within factory machinery.
29 Apr 2014

Although China used to be a major site for investing in manufacturing facilities due to its low wages and the weak value of the yuan​, things have changed. The yuan has appreciated in value, and wages have grown higher, according to Business Insider. Additionally, it has become much more expensive to ship goods from China to the U.S.

In response to this, many companies are moving back from Asia to North American countries like Mexico, which has many benefits that make it more attractive for expansion than China. For example, wages in Mexico and the value of the peso are low. Additionally, shipping to other countries is easy because of the North American Free Trade Agreement (NAFTA), which allows for essentially tariff-free shipping between the three North American countries: Mexico, the U.S. and Canada. Mexico also has 44 free trade agreements with countries around the world, making it one of the most attractive places for shipping goods, across either the Atlantic or Pacific oceans. Electricity and gas are also cheaper, thanks to the benefits of North American shale gas expansions.

Although wages in Mexico are not quite as cheap as China this year, they will likely be cheaper by 19 percent in 2015, according to the Boston Consulting Group.

The shift from China to Mexico is a good one for U.S. companies in general, since many U.S. goods are shipped south to Mexico and assembled there, and then sent back up north. The total price of tariffs for this method of moving products back and forth is generally zero.

Growth in Mexico, rest of world still sluggish
Although Mexico is becoming the best choice worldwide for offshoring (or "nearshoring" in the case of U.S. companies), it is still suffering from the same problems that the rest of the world economy is facing. Although it is not plagued with the same inflationary problems as Brazil, the pace of Mexico's factory growth slowed in March, according to Reuters. Exports of Mexican goods rose 0.07 percent in March from the previous month. In February, Mexico experienced the greatest expansion of exports in over four years, so the results are disappointing.

Reuters suggests slow growth in the first quarter could be due to Mexico's dependence on exporting to the U.S., where it sends almost 80 percent of its goods. The U.S. experienced a bad winter that hurt sales in that country.

Interest rates in Mexico are likely to remain low as the economy begins to heat up again.

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