The transformation of supply chains will take time but the snarls caused by China’s zero-Covid policy will push companies to diversify operations on a “just-in-case basis,” said John Paul Lech, a portfolio manager at Matthews International Capital Management in San Francisco.
That gap was almost $200 billion four years ago. Mexico exported $422 billion to the US in the past 12 months, $121 billion less than China. The Inter-American Development Bank in June 2022 estimated nearshoring could add up to $35.3 billion a year more in annual exports from Mexico. Mexico’s exports to the US have been growing faster than its Asian rival’s for most of the time since 2016. During his trip to Washington this month, Lopez Obrador forecast US investment in the country would reach $40 billion between now and 2024. Vacancy rates at industrial parks in Juarez, Reynosa and Monterrey hit record lows in the first quarter on nearshoring demand, Credit Suisse analysts said in a June report. In the first quarter of this year, Mexico reported a record inflow of $19.4 billion in foreign direct investment, up 5.8% from the same period of last year after excluding one-off mergers. Last week, the US said Mexico’s energy policies violated North America’s free-trade deal, though there was little fallout in the peso market. More recently, Mexican President Andres Manuel Lopez Obrador’s nationalist energy policies and skirmishes with companies have been seen as a deterrent to investment. Most notably, the predictions surfaced in 20 as surging oil prices raised transportation costs, then again when US President Donald Trump rattled trade relations with China during his tenure in office. And there have been times in the past when analysts thought Mexico was poised for a breakout that didn’t come to fruition. The dollar value of Mexico’s exports to the US still trail China’s by a large margin, even as the gap grows ever narrower. Still, some skeptics doubt the shift to Mexican production will be significant enough to form the basis for long-term gains for the currency. In a year during which the dollar has climbed to a record in its best annual run since 2015, the peso has gained less than 1% to about 20.4 per dollar, marking the second-best performance among major currencies behind Brazil’s real. Meanwhile, China’s Contemporary Amperex Technology Co., the world’s biggest maker of batteries for electric vehicles, is considering locations in Mexico for a plant to supply automakers, Bloomberg reported this month. and Quanta Computer, French firm Faurecia SE, Germany’s ZF Friedrichshafen AG and APG Mexico - have set up in the state of Nuevo Leon since 2021. From Tijuana on the West Coast to Matamoros at the southern tip of Texas, bulldozers and excavators are everywhere. The boom can be seen across Mexico’s industrial north. Nearshoring will accelerate this trend in the coming decade, according to Hariharan. Since the height of the pandemic selloff in March 2020, the peso has rallied about 15% versus its Chinese counterpart, one of the best performances among major currencies. The shift can also be seen in the Mexican peso’s performance against China’s yuan. “This is going to be a decade of an ascent of Mexico at the expense of China.” “Mexico is beginning to reclaim the competitive advantages it lost decades ago,” said Hari Hariharan, the chief executive officer of New York-based hedge fund NWI Management.
Now, Mexico’s exports to the US are narrowing the gap with China, and the currency market is being roiled, shocking investors who at the end of last year were forecasting the peso would be one of the world’s biggest losers in 2022. It’s the beginning of a turnaround from two decades ago, when China joined the World Trade Organization and quickly displaced Mexico as the top manufacturing hub for US companies. A Covid-induced aversion to far-flung supply chains is also pushing companies to move operations from Asia to nearer the US - the world’s biggest market - a shift known as “nearshoring.” Adding to those logistics concerns are the strict shutdowns as part of China’s Covid Zero policy and concerns that China could make a move against Taiwan that would spur sanctions from Western countries. Mexico is luring factories from China as higher wages and a jump in transportation costs undermine what had been its competitive advantages. But another key factor is expectations for a sea change in global trade in coming years that could bring a surge in foreign direct investment.
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Some of the strength stems from fairly typical drivers - a tight fiscal policy and interest-rates increases that have lifted the carry trade.