How Mexico may help the US remain a global GDP powerhouse

Following its strict lockdown due to the COVID-19 pandemic, China’s economy was expected to boom after its zero-COVID policies were lifted. Shockingly, this has not been the case. In April, China’s economic data arrived and unveiled a weak recovery thus far, shattering everyone’s expectations. According to the National Bureau of Statistics (NBS), China’s industrial production grew by 5.6%, well below the 10.9% mark analysts predicted in a poll by Reuters.

With second-place China’s halted momentum, the United States has the opportunity to prolong its reign as the largest economy in the world for years to come, currently leading with a gross domestic product (GDP) of $25.5 trillion in 2022. However, the United States cannot take all the credit. In recent years, a significant shift has occurred in the global manufacturing landscape, shown by China’s declining parity in GDP with the United States being forecasted and the rise of stiff competition from countries like Vietnam, India, and Mexico.

At first glance, Mexico's rise as a manufacturing powerhouse seems surprising. After all, it’s not in Asia where much of the focus has been for the last three decades. But it doesn’t take much to understand the reason behind Mexico’s rise as a manufacturing base. Thanks to its location next to the world’s biggest market, it offers a unique advantage of nearshoring. This shift in manufacturing dynamics, combined with other challenges faced by China, positions the United States to maintain its global GDP leadership for the foreseeable future.

China’s manufacturing downfall
China's long-standing dominance in manufacturing has gradually waned in recent years, as countries like Vietnam, India, and Mexico have emerged as attractive alternatives. Several factors contribute to China's manufacturing decline both internally and externally:

Internal factors: Over the past decade, China has experienced a crippling increase in labor costs, making it less competitive compared to lower-cost countries. Since 2010, China’s labor costs have doubled as the middle class expanded and migrated to urban areas, leading to worker shortages and higher wages in manufacturing regions. As a result, manufacturers seeking cost-effective options have turned from the diminishing Chinese labor force to other nations.

China is also grappling with an aging population, with roughly one-third of the population over 60 years of age, resulting from decades of the one-child policy set in 1979. This demographic shift puts pressure on the labor market, driving up wages and reducing the working-age population, which impacts the country's productivity and economic growth.

Along with a rapidly aging population, China's domestic market has reached a high level of saturation, necessitating a shift from export-led growth to fostering domestic consumption. This transition poses challenges for sustaining high economic growth rates and reduces China's dependence on manufacturing exports.

External factors: While China faces internal struggles in the manufacturing industry, its competitors are finding advantages. Vietnam, for example, has emerged as a strong contender due to its competitive labor costs, favorable business environment, and robust infrastructure. The Vietnamese government also provides various incentives for foreign investors, such as tax breaks and streamlined regulatory processes, to attract foreign direct investment (FDI) into its manufacturing industry.

India, on the other hand, capitalizes on its vast domestic market, serving as a manufacturing base for both domestic consumption and exports. With over one billion citizens, India boasts one of the world’s largest workforces, with a significant number of young, educated individuals who are capable of being trained for manufacturing jobs.

One other country that has shown astounding growth is Mexico, which brings us to the next section.

Mexico’s manufacturing boom
Mexico has witnessed substantial growth in manufacturing, with over 40% of its FDI being invested into its manufacturing sector; Mexico leverages its proximity to the United States and unique advantages over other countries. Moreover, FDI inflows for Mexico increased by 13% to $31.6 billion in 2021. Key factors contributing to Mexico's rise as a nearshoring manufacturing hub include:

Mexico shares a long and interconnected border with the United States, allowing for efficient transportation and reduced logistical complexities. This proximity, in addition to the stable and predictable trade environment provided by the United States-Mexico-Canada Agreement (USMCA), enables just-in-time production, faster response to market demands, and fostering collaboration between manufacturers and their American counterparts.

Mexico also boasts a sizable and well-trained labor force with expertise in manufacturing, particularly in industries such as automotive, electronics, and aerospace. This skilled workforce, combined with competitive labor costs, has attracted a significant influx of foreign investment, further boosting Mexico's manufacturing sector.

Finally, Mexico is also likely to attract more high-tech manufacturing where intellectual property (IP) is involved. The USMCA provides for adequate protection of IP which is going to be crucial for high-tech companies wanting to outsource but not risk losing their IP.

Implications for U.S. economic dominance
The combination of China's internal economic challenges and competition from abroad sets the stage for the United States to maintain its global GDP leadership for the foreseeable future. The global economic landscape is dynamic however, and future developments may impact these trends, necessitating continuous monitoring and adaptation.

The United States gains from Mexico's growing role as a manufacturing hub, capitalizing on close economic ties, geographical proximity, and sectoral expertise to achieve cost savings, improve supply chain efficiency, and accelerate market responsiveness, thus reinforcing its leading global GDP position. 

Meanwhile, potential economic obstacles in China, including demographic changes and market saturation, might slow its growth, enabling the United States, with its robust domestic market, innovative economy, and strategic alliances, to retain its economic dominance globally.

The Nearshore Company

About the author: Jorge Gonzalez Henrichsen, the Co-CEO of The Nearshore Company