Oct 31, 2024

USA Elections 2024: Why They Won't Negatively Impact Mexico's Nearshoring Boom

In this blog, we’ll explore why the United States is no longer a prime manufacturing destination and why it relies on strong alliances, particularly with countries like Mexico.

Why the U.S. elections do not affect Mexico’s Nearshoring Boom

The United States is holding presidential elections, and Mexico is concerned about potential impacts on its economy, particularly the risk of slowing its nearshoring boom. Mexico fears a worst-case scenario if Donald Trump is re-elected, given his threats to raise import tariffs to discourage companies from producing in China or Mexico, aiming to shift production back to the U.S. However, looking back at the 2016 U.S. elections, who played a pivotal role in Mexico’s nearshoring boom? That’s right—it was Trump! Coupled with the COVID-19 pandemic, companies were compelled to start manufacturing closer to their end customers.

However, regardless of whether Trump or Harris is elected, the United States is no longer a manufacturing hub—and this is unlikely to change in the future. In addition to uncompetitive wages, other critical factors include an aging population, which is expected to slow labor force growth and reduce participation rates.

Trump will most likely not impose 50% higher tariffs

Surely, Trump want to protect its country of only importing products to its country and rather producing them itself, however the manufacturing industry is declining since several decades, and especially young people prefer to work in other, more attractive sectors such as technology, hospitality, or leisure sector.

In addition, it is almost impossible to impose e.g. 50% tariffs on imported products. Under the USMCA, goods that follow specific origin rules—especially in the car industry—can cross the border without tariffs. If the U.S. wants to add tariffs due to national security concerns, it first has to discuss this with Mexico and Canada to try and solve the issue. If no solution is reached, the U.S. can go ahead with the tariffs, but Mexico or Canada could then put similar tariffs on U.S. goods in return. This system ensures both sides talk it over and have fair options if tariffs are added for security reasons. Given today's political situation, it’s unlikely the U.S. would impose such tariffs, as it could harm U.S. security and disrupt economic partnerships in the region.

Having said, during election season, candidates often make bold promises aimed at winning over their voter base. These pledges are crafted to resonate with supporters’ concerns, though they may shift once real political and economic challenges come into play.

United States isn’t a manufacturing country anymore

As you can see from a study of Virtual Capitalist (see chart below), the manufacturing sector accounts for 14 of the top 20 declining industries. The most growing industries are service sectors, particularly leisure, hospitality, and professional services, which will experience the most growth in the next years, and represent seven of the 20 fastest-growing industries. For example, the healthcare and social assistance sector is projected to add 2.6 million jobs, driven by increased demand from an aging population and higher chronic disease rates. Another significant industry is Computer Systems Design, anticipated to expand by 20% in employment due to increasing demand for computing infrastructure and IT security. Given the industry’s workforce of 2.3 million in 2021, this growth translates to nearly half a million additional jobs over the next ten years.

On the other hand, goods-producing sectors, like manufacturing, are projected to decline due to automation and global competition. Indeed, the decline in U.S. manufacturing is driven by high labor costs, a shift toward service-based industries, and the efficiency of global supply chains. Strict U.S. regulations, combined with trade policies favoring imports, also make domestic production less attractive. Meanwhile, companies have invested in emerging markets with lower costs and growing consumer demand, leading the U.S. to focus primarily on high-tech and specialized manufacturing. These factors together have reduced the scale of traditional manufacturing in the U.S.

In addition, the COVID-19 pandemic has significantly impacted these projections, with some industries expected to see rapid recovery and others experiencing long-term shifts, such as increased demand for IT and telework infrastructure.

Source: https://www.visualcapitalist.com/charted-americas-fastest-growing-industries-by-employment-change/

High FDI investments in 2024 from U.S.

As you can see in the graph below, in 2Q24, the US maintained its lead as Mexico's top investor, contributing 44.1% of foreign direct investment (FDI) with $13.7 billion, up 5.7% from the previous year. Germany followed, investing $4.2 billion (13.4% of FDI), marking a substantial 63.8% increase.

Together, the US and Germany account for over half of Mexico's total FDI, which demonstrates that American companies keep investing into Mexico and are not waiting for the results of the elections 2024.

Additionally, significant investments have already been made by American companies in 2022 ($15 billion USD, 42%) and in 2023 ($14.4 billion USD, 40%). Therefore, if the United States were to raise tariffs, it would also impact its own companies.

Source: BBVA Research with data from Ministry of Economy (SE)

4 reasons why United States is no Manufacturing country

We explain you the four main reason why Mexico is not a manufacturing country anymore.

Forty years of falling manufacturing employment

Manufacturing, once a major source of U.S. job growth, has seen a steady decline in employment over the past 40 years as the economy shifted to service industries. Employment in manufacturing peaked in June 1979 at 19.6 million but dropped to 12.8 million by June 2019—a 35% decrease. Each recession since 1979 further reduced manufacturing jobs, which never fully rebounded afterward. This trend detailed using data from the Bureau of Labor Statistics, highlights declines across key manufacturing industries, including fabricated metals, machinery, computers, and textiles, reflecting the sector’s shrinking role in overall employment.

It’s important to note in the chart below that the impact of the COVID pandemic is not reflected which disrupted the supply chain, and companies had not yet considered shifting production closer to their customers.

Manufacturing in the U.S. is plumming in future

Between 2021 and 2031, the manufacturing sector accounts for most of the fastest declining employment industries, with 14 out of the twenty projected to experience significant job losses. Even though that it remains the largest segment of the goods-producing sector in the United States and representing over half of its total employment, the manufacturing sector is projected to face significant employment decline, primarily due to the increasing adoption of automation technologies.

Many occupations within manufacturing, particularly those in production roles, are expected to lose jobs as industries integrate more advanced tools, such as collaborative robots (cobots). These robots perform repetitive tasks, improving productivity but reducing the demand for human labor in routine manufacturing jobs. Consequently, nearly half of the 30 occupations projected to see the fastest job losses are within the production occupational group.

The manufacturing jobs have already faced significant challenges in the past, particularly between 2001 and 2011, when rapid productivity increases and the offshoring of jobs to countries with lower labor costs led to substantial job losses. While the sector saw a net increase of 619,600 jobs in the following decade, it is expected to decline by 139,400 jobs during the projection period from 2021 to 2031.

Industries such as tobacco manufacturing, apparel production, and certain chemical product manufacturing are projected to experience the fastest declines. Tobacco manufacturing is expected to decline by 4.0% annually, driven by a long-term decrease in smoking rates and a shift toward electronic vapor products. Coal mining is another sector facing decline, with a projected annual decrease of 3.4%, attributed to diminishing demand for coal in favor of natural gas and renewable energy sources.

U.S. Labor force age is increasing

The U.S. median age increased to 38.9 years in 2022, driven by the aging baby boomers and their children, the echo boomers. Despite more births than deaths, declining birth rates over the past two decades suggest the median age will keep rising slowly. On the other hand, Mexico’s average age is under 30, make it attractive for companies to invest and attract young engineers and talents.

As the population gets older, fewer people are expected to be part of the workforce, and by 2031, only about 60.1% of people will be working or looking for work. However, more older workers, especially those 65 and older, will stay in or return to the workforce, which will help balance this decline.

The number of workers aged 65 and older is expected to grow from 18.9% in 2021 to 21.5% by 2031. Similarly, more people aged 55 to 64 will stay in the workforce, increasing from 64.6% to 68.2%. As a result, a significant part of the workforce growth will come from people aged 65 and older.

United States Population growth slowed down

Between 2021 and 2031, labor force growth is projected to slow considerably due to an aging population and declining population growth rates. Older adults participate less in the workforce, reducing the overall pool of available workers, which affects the manufacturing sector in particular. As total employment is expected to increase modestly by 5.3% over this period, much of this growth is attributed to recovery from pandemic-related job losses.

Population growth, which supported labor expansion in past decades, has dwindled from over 2% in the late 1970s to just 0.9% by the mid-2000s and is forecast to decline further to 0.7% annually. This trend is driven by lower birth rates, higher mortality rates in an aging population, and reduced immigration, underscoring challenges for sustaining labor force levels in the coming years.

Why is Mexico the perfect partner for United States

As you can see, there are several reasons why the United States is dependent on other manufacturing countries, and Mexico has emerged as a prime nearshoring destination, attracting global companies looking to bring their manufacturing operations closer to key markets.

Trade Agreements: Mexico has a network of free trade agreements, including the United States-Mexico-Canada Agreement (USMCA, formerly NAFTA). In addition, Mexico is the second largest economy in Latin America and fifth largest in the Trans-Pacific Partnership (TPP)
Cost-Efficient Supply chain: While transportation from China to the USA by sea often takes two weeks across the Pacific, goods from Mexico's manufacturing facilities are usually only 24 hours or less.
Market Size: Mexico's geographic proximity to the USA and Canada, one of the largest consumer markets in the world (500 million the three countries together), makes it an attractive location for companies looking to produce nearby.
Highly Skilled Workforce: Increasing proportion of well-educated professionals, including those with experience abroad Low average age (28-29 years) of the Mexican population compared to USA (39 years) Germany, Austria, and Switzerland (48 years)
Cost advantage due to low personnel costs (up to 30-50% savings compared to production in the USA)
Cultural and Time ZoneSimilarities Mexico's cultural affinity and similar time zones to North America can facilitate communication and collaboration between companies and their nearshore partners. In addition, many Mexican worker are bilingual and speak beside Spanish also English.
Industry Specialization: Some industries such as electronics, automotive, aerospace, and medical devices, have seen significant nearshoring activity in Mexico due to the country's established expertise in these sectors.