Mexico has become the 11th largest global exporter – global procurement and supply managers must take note
Date: 1 April 2021
From 2001-2019, Mexico’s exports grew at a CAGR of 6.1%. In the past two decades Mexico has claimed a prominent position in US supply chains as a fully integrated manufacturing center, however Mexico is posed to increasingly link to the broader global economy. The machinery & electronics and transportation sectors respectively constituted 35% and 27% of Mexico’s exports in 2019. The transportation sector had particularly shown strong growth, increasing its share by 12% in 10 years from a 15% share in 2009. Agriculture & forestry, chemicals & plastics and textiles made up 9%, 5% and 2% of total exports in 2019. Mexico’s exports were heavily impacted by Covid-19 in 2020, with total exports declining by 9.3% to USD 418bn. With a sharp fall in exports in the first half of the year, some recovery was seen from September 2020 onwards.
Trends: From March 2020, Mexico’s exports were hit hard by the Covid-19 pandemic, leading to negative growth in exports over the next 6 months until August. However, driven by a strong rebound in shipments of manufactures, exports started growing YoY from September onwards.
- While Mexico’s share in global exports declined slightly from 2.6% in 2001 to 2.4% in 2019, a CAGR of 6.1% in its exports in that period shows strong and sustained growth of its export capacity
- Machinery & electronics and transportation exports contribute 62% of Mexico’s USD 461bn in exports for 2019, however other sectors like agriculture and chemicals & plastics have also grown at a CAGR of 8.4% and 6.7% respectively between 2001 and 2019
- The erstwhile North America Free Trade Agreement (NAFTA), now the US-Mexico-Canada Agreement (USMCA), signed in 1994 led to rapid growth in trade between the US and Mexico, which multiplied by a factor of six between 1993 and 2018. While most Mexico’s exports still go to the US, the share of Mexico’s exports to the US out of its total exports decreased from 86% in 2001 to 78% in 2019. It peaked at 89% in 2004
- Mexico’s free trade agreement with the European Union, which came into effect in 2000, gave the country even better access to global trade channels and helped give Mexican-made goods, like machinery and electronic equipment, a higher profile across Europe. However, Germany is the only EU country to feature in Mexico’s top 10 export destinations and received 1.5% of its exported goods in 2019
- Mexico is also part of the Pacific Alliance – a grouping with Chile, Colombia and Peru
- In the first half of 2020, manufacturing, which has been a key driver of the Mexican economy in the past decades, saw a major decline in output because of the pandemic. The IHS Markit’s Manufacturing Purchasing Managers’ Index (PMI) for Mexico hit an all-time low of 35 in April 2020, while it also recorded a low of 36.1 for US in the same month.
- Mexico will continue to remain a strong exporter, especially in the Americas in the medium to long term
Upshot: Over several years, Mexico’s has expanded its manufacturing capability and has increased its integration into the world’s higher-value supply chains, giving it a competitive edge compared with other developing countries. The Mexican economy had contracted for five straight quarters before the pandemic due to a variety of factors such as deceleration in investment and private consumption, and uncertainty around the free trade agreement with the United States and Canada. The pandemic further deepened this trend. However, gradual reopening of the economy has led to a recovery in manufacturing activity.
- Manufacturing will remain Mexico’s engine of growth. By stage of processing, capital goods and consumer goods contributed 48% and 31% of the country’s exports in 2018
- The normalization of trade flows between the United States and Mexico have helped a faster recovery in manufacturing compared to the rest of the economy. As economic activity picked up pace in the United States, so did the manufacturing output of Mexico with many industries reaching their pre-pandemic production levels
- To further boost the recovery process, it will be essential that the external demand for goods continues at its current rate and the demand for services, particularly tourism, makes a comeback, as this sector alone accounts for 77% of exports of services
- There also needs to be a strong rebound in domestic consumer spending for a wider and faster recovery of the overall economy
Imperatives: In the short term, Mexico will continue to be a major exporter to the US. In the long term, two new growth areas can be seen. Firstly, Mexico’s membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which was ratified in December 2018 has created an opportunity for it to emerge as an important sourcing destination for key APAC markets like Japan, Australia, Malaysia and Singapore. Secondly, the rise in household incomes across Latin America should create a new source of demand for high-value manufactured goods which Mexico can cater to by leveraging its comparative advantage in manufacturing compared to its peers in the region. These two opportunity areas will significantly expand Mexico’s exports in the long term.
- Assess categories of strength in Mexican manufactures and consider it among priority supply markets
- Leverage Mexico’s relatively cheaper labour costs compared to developed countries for higher value-added manufacturing goods
- Take note that Mexico supplies the US, which is a discerning developed market, therefore Mexico has demonstrated ability to export high value added products
- Take advantage of Mexico’s ability to meet global quality standards, with the Mexico having already signed trade agreements with multiple regions – North America, EU and some LATAM & APAC countries
- As an FDI friendly country, Mexico is the 15th largest FDI recipient. Closely watch the sectors attracting most FDI – a signal of continued capacity expansion in those sectors