Why is Mexico now the USA’s largest trade partner?

Mexico has now become the USA’s largest and most important trade partner. Even stripping away the emotions around the border and illegal immigration, Mexico should be front and centre of much of the USA’s political, economic and commercial thinking. If China was yesterday’s driver for growth and prosperity, Mexico is tomorrow’s – and this is why understanding the cultural aspects of working effectively along the US-Mexico trade corridor is of such critical importance.

But why has Mexico achieved this pivotal trade position for the USA? There are a number of reasons which are worth discussing:

1. Geographic proximity

This is, maybe, an obvious topic to start with but being obvious doesn’t make it of any lesser importance.  The shared US-Mexico border encourages the easy and relatively cost-effective movement of goods between the two countries.  Simply put, Mexico City is a lot closer to Texas than Beijing and that equates to a whole heap of cost savings on transportation.

The green agenda is also encouraging more environmentally conscious companies to reduce their carbon footprints. Near-shoring production and assembly can help in a big way in this area.  It’s a double whammy – reduced costs and reduced carbon emissions!

In addition, Mexico and the USA share similar time zones which make real-time communication much easier.  If your support function is in Guadalajara, you can get things moving faster than if they are in Manilla.

2. Permissive trade agreements

The USMCA (United States-Mexico-Canada Agreement), the successor to the much-decried NAFTA Agreement, has encouraged trade between the three countries by reducing tariff barriers and red-tape.  In addition to this over-arching tri-partite trade agreement, a number of very successful bilateral arrangements between the US and Mexico have been adopted which have eased barriers to trade even further.

International trade between countries flourishes when burdensome bureaucracy is kept to a minimum and the direction on this has been mostly on-way for a number of years – and this trend is likely to continue given the deepening political tensions between the USA and China.

3. Greater economic integration

COVID showed the fragility of extended global supply chains and forced many companies to completely rethink their approach to supply chain integration.  In complex manufacturing systems the same components and raw materials can move from site to site multiple times and proximity, once again, becomes a critical advantage.  The Maquiladora Program encourages US companies to set up manufacturing plants in Mexico, allowing them to benefit from cheaper labour costs without having to offshore long distances.

4. Global geo-politics

The world is a seemingly more complex place than it was in the 1990’s.  Back in those days relations between the US and China and the US and Russia were looking increasingly positive and it looked like we were moving towards an era of political stability and harmony – but those hopes have been erased as an increasingly confident China challenges US global hegemony and a suspicious and marshal Russian regime isolates itself from large parts of the world by supporting the likes of Assad in Syria and by invading neighbouring countries.

These political (non-commercially) driven developments have forced many of our clients to considerably disinvest from China and completely disengage with Russia.  However, the same companies are unwilling to also jettison the cost arbitrage that, for example, drove them to China in the first place.  This has led US companies to look at low-cost destinations which are geographically closer and politically safer.  Which country most easily comes to mind?  It is of course Mexico.

5. Capabilities and costs

Mexico has a readily available supply of well-educated, skilled potential employees who, on average, earn up to 80% less than the equivalent position in the USA.  In fact, the wages paid in Mexico are also lower than in China which surprises many people.  In addition, real estate prices are a fraction of those in the USA making it cheaper to develop greenfield sites as new technologies surface across different industries.

Mexico is investing heavily in its education sector and focusing on the skills areas most needed to help in the US-Mexico corridor.  For example, Mexico now produces over 100,000 degree-level engineering graduates every year which compares very favourably with an advanced economy such as the UK which produces less than 50,000 across the same disciplines.

6. Relative political stability

Although Mexico has numerous internal challenges ranging from extreme levels of poverty through to a worrying level of narcotics driven crime, it remains relatively politically stable which is what companies want when looking at any kind of long-term investment.  Various economic reforms which have been adopted over the last decade have led to a more attractive business landscape and high levels of automation on the border have drastically reduced the fear of corruption and non-compliance.

7. Regional self-sufficiency

Russia’s invasion of the Ukraine and the subsequent loss of wheat coming onto the global market highlights the fragility of food supplies; frequent political earthquakes in the Middle East and the resulting energy supply and price fluctuations are increasingly making governments look to a more regionally based energy and food policy.  Mexico exports very significant amounts of agricultural products to the USA (fruits, vegetables and livestock) and the US reciprocates by exporting food to Mexico – it is a very healthy bi-lateral trade system.

In addition, Mexico is a very significant exporter of oil and gas to the US as well as partnering with it on significant renewable energy projects.  The relationships built around food and energy underpin the current US-Mexico relationship and will continue to bind the two countries ever more closely together.

8. Foreign direct investment

All of this growth in trade has inevitably led to a large increase in cross-border investment opportunities at both a macro and micro level.  Of course, individual US companies have been setting up manufacturing facilities in Mexico, but this trend has led to the need for macro-level investment to ensure that Mexico’s infrastructure can keep pace with growing demands.  So, US institutions are investing in Mexico like never before and many of those investments are in really long-term, capital projects which will further tie the two countries together – both countries need these projects to succeed because they are mutually beneficial.

As we can see there are multiple drivers behind the growing interdependence of the USA and Mexico which point towards an ever growing and ever deepening relationship between the two countries – so what could possibly go wrong?

Unfortunately, there is one very significant barrier to the successful interface between the two countries and that is culture.  Do not fall into the trap of assuming that geographic proximity equates to cultural proximity because it does not.  There are some very big differences in the business norms and approaches common in the US and those found in Mexico.

Increasing numbers of US and Mexican companies are approaching Global Business Culture and asking for help in bridging the cultural differences which they find create barriers between their teams and impact in very practical ways on the efficient and effective execution of business.  These differences are real, and they impact on multiple arears of business at both a strategic and tactical level.

Global Business Culture runs live and webinar sessions in English and Spanish on US-Mexican business culture.  In addition, we develop customised e-learning programs which use real-life company-specific case studies as a learning tool.

Why not get in touch and see how we can help your business take full advantage of the manifold opportunities in the vibrant US-Mexico corridor through building ever greater levels of cultural fluency?