The United States and Mexico are benefiting from the relocation of businesses, as part of the nearshoring revolution, but Christiana Riley, Regional Head of North America, believes the economic benefits can boost many countries across Latin America. 

There was an inflection point in the middle of 2023 when Mexico overtook China as the United States’ main trading partner. There are small moments in history that signify major change, a suggestion that something has shifted fundamentally – and this was one of them.

Since that moment, trade between Mexico and the US has taken off. Cars, trucks and televisions have poured in from Mexican factories across the border, while billions of dollars of corporate investment have flowed the other way. American manufacturers rush to build production capacity closer to home to isolate themselves from geopolitical tensions in Asia.

The US now makes up close to 40% of all foreign direct investment in Mexico, growing at a rate of more than 20% per year, while Mexican exports to its northern neighbour were worth $475.2 billion last year.

Most of the US investment has been in the northern and western states, where most manufacturing and assembly plants are located, but the impact has rippled out across the country. It is contributing significantly to the economic uplift and general rise in prosperity for the Mexican population.

Political relations between the neighbouring countries have points of tension, principally over immigration and narcotics trafficking, but the rhetoric should not disguise that this new era of cross-border economic co-operation is in the national interest of both sides.

USMCA review

The United States-Mexico-Canada Agreement (USMCA) has been instrumental in reducing trade barriers and is up for review in 2026. This is a complex agreement and we can expect a fair bit of political noise around the terms. However, given the commonality of interests, the general mood is that difficult issues can be resolved regardless of who is leading the trade review at that point.

There are, of course, internal risks that could derail the wider US and Mexican economies, not just nearshoring.

The new government in Mexico City, who will take office in October, arrives at a time when the economy is at risk of overheating because of increased public spending. It needs to ensure the independence of the central bank on monetary policy and the prudence of the finance ministry on fiscal policy.

Speaking to CEOs and fund managers on both sides of the border, it’s clear that confidence was shaken by the widening of the fiscal deficit in 2024. However, the president-elect has made commitments to reduce the deficit starting in 2025 as the country has no appetite to erode Mexico’s hard-won standing in global capital markets.

Market confidence is the big challenge in Washington as well. The November elections and shape of the new Congress will determine whether traders will be sitting at their desks at midnight every few months watching nervously to see if the US is going to breach the government debt ceiling and default.

The US also looks further South

Beyond Mexico there is a broader nearshoring opportunity which could spread the benefits to the rest of Latin America. The de-risking dynamics that entice US companies to set up operations closer to home should, in theory, bring Brazil, Chile and Argentina into play as attractive nearshoring options.

Between them, these core South American countries have abundant energy resources, vibrant agricultural sectors and access to large untapped deposits of rare earth minerals, like lithium and cobalt, that are vital raw materials for both heavy industry and the technology sector. Businesses, both in the US and Mexico, will need intermediate goods and inputs for their production processes from these countries.

In addition, they have sophisticated and economically competitive workforces and there are many free trade agreements in place. Their proximity to the US means there are no major logistical problems in moving production there, while they are far enough away to classify as relatively low risk for man-made or natural disasters disrupting supplies.

While they each boast pockets of economic vibrancy, Brazil, Chile and Argentina are behind Mexico in developing the infrastructure that will persuade multinationals to commit significant investment, such as roads, factories, ports and a secure energy supply.

Mexico still has a hill to climb in terms of quality and breadth of access to education but the need for upskilling in digital coding, artificial intelligence and other modern manufacturing techniques, is recognised at the senior political level and is being prioritised.

The Mexican government has laid out a challenge by asking what it would take to build a world class tech sector capable of enticing a chip manufacturer to build a major plant in Mexico.

Santander, across the region

We are one of the largest technology players in Mexico, employing around 5,000 people at our technology and software development centre in Querétaro, and we are trying to create a longer-term virtuous cycle across Latin America in places that have struggled to find the resources to invest in education and upskilling.

We are also highly active in helping businesses in both north and south identify and fund opportunities. We have the number one corporate and investment bank in Mexico, the second largest retail and commercial platform and, within that, we have a strong support network for small and medium enterprises (SMEs). We spend a lot of time helping US companies looking for partners to create robust supply chains.

For US SMEs, this is unfamiliar territory and they value our ability to accurately assess and price risks when financing expansion of manufacturing across the border or shifting operations from other regions.

The questions facing Latin American governments and business leaders about how to modernise and reposition their economies are the same as those that confronted South Korea, China and Vietnam 30 years ago.

The ways they responded transformed East Asia into a global hub of manufacturing that has dominated industries from smartphones to automobiles. That is the potential prize that nearshoring now offers Latin America.