The Mexican nearshoring success story faces threats from Trump administration tariffs and domestic judicial reforms. Global Insight assesses how Mexico is weathering the storm.

In recent years, thousands of US companies have relocated operations from Asia and Europe to Mexico, part of what’s been called a nearshoring phenomenon. Multinationals have sought supply chain resilience against major disruptions in global trade. Now, though, the extent of the impact of Donald Trump’s tariffs is becoming clear.

The Trump administration has imposed tariffs on goods exported to the US from Mexico, as part of an executive order which also targeted Canada and China. These tariffs now stand at 25 per cent for goods not covered under the USMCA trade agreement, as well as the same rate on cars and auto parts, while everything else is covered under a ten per cent ‘universal’ tariff. Explaining the reason behind the tariffs, the Trump administration referred to ‘a national emergency’ relating to immigration and the supply of drugs over the US border.

Mexico’s nearshoring boom also faces other threats, including the possibility of a fall in business confidence due to the major judicial reforms passed in 2024.

Mexico’s renaissance

Big names such as Foxconn and Lego have relocated operations from Asia and Europe to Mexico in recent years, taking advantage of the country’s free trade agreements, geographical proximity to consumers in the US and the opportunity to reach the American market without attracting the tariffs applied to products from China. Mexico has thus become a key location within the reorganisation of global value chains.

Enrique Martínez García, International Group Head of Research at the Federal Reserve Bank of Dallas (Dallas Fed), says Mexico’s nearshoring boom to date should be understood as ‘the shift in trade from China to Mexico.’ He says this preceded the 2018–19 trade tensions between China and the US, but companies have been further ‘incentivised to explore alternative manufacturing hubs to avoid tariffs since then.’

Research by Dallas Fed, led by Martínez, shows that Mexico’s share of US imports increased from 13.4 per cent in 2017 to 15.8 per cent by 2024. China’s share declined, meanwhile, falling from 21.6 per cent to 13.2 per cent. The rising cost of labour in China has also made Mexico a more cost-effective alternative for manufacturing, Martínez explains. According to a 2024 study by Trading Economics, Mexico’s average labour cost per hour is around $4.50, compared to China’s $6.50.

‘Companies are also diversifying their supply chains to mitigate risks associated with over-reliance on a single country, especially after the disruptions caused by the Covid-19 pandemic and geopolitical tensions such as the Ukraine war,’ says Martínez. He adds that this diversification includes the ‘China Plus’ strategy adopted by many multinationals, under which businesses seek to ‘diversify their production networks while still incorporating Chinese inputs.’ The border closures in Asia and shipping slowdowns of the Covid-19 pandemic ‘showed that you have to be closer to your trading partners,’ adds Emilio Arteaga, an officer of the IBA International Trade and Customs Law Committee.

The Dallas Fed report highlights that the benefits of nearshoring to the Mexican economy began to materialise in 2022 and are particularly evident in terms of increased domestic investment. Industries such as electronics and manufacturing have witnessed substantial domestic investment following increased demand for Mexican-produced goods, says Martínez. He adds that nearshoring to Mexico has also ‘stimulated economic growth by creating jobs and boosting export-oriented sectors’ and ‘spurred development in infrastructure and logistics.’ Bank of Mexico figures show that, by the end of 2022, nearly 40 per cent of business owners in Mexico reported increased demand or higher amounts of foreign direct investment.

Despite the imposition of US tariffs, nearshoring remains a key plank within Mexican President Claudia Sheinbaum’s ‘Plan Mexico’, which is intended to establish the country as one of the world’s top ten economies. This strategy includes additional tax incentives for companies that set up manufacturing arms in Mexico, designed to support businesses to boost local output and to substitute imports from Asia.

The country has also recently opened the Trans-Isthmus railway in the state of Oaxaca. The railway, which has been touted as an alternative to the Panama Canal, transported its first shipment of vehicles in March. Mexico is also expanding the Port of Manzanillo, with the aim of it becoming the busiest seaport in Latin America. Anna Yamaoka-Enkerlin, Chief Operating Officer with Break & Make Robotics, also highlights Mexico’s 25 per cent write-off on worker training costs and significant allowances for machinery purchases, which are available until October 2030.

In January, meanwhile, Sheinbaum announced that Amazon Web Services had invested in a ‘digital region’ hub – comprising a data centre and other cloud infrastructure – in the Mexican state of Querétaro, which has emerged as a focal point for nearshoring and hosts numerous car and aerospace companies. Sheinbaum said the $5bn investment by Amazon symbolises the ‘great future’ of doing business in Mexico.

Risks and reforms

Not everybody agrees with President Sheinbaum on this point. The development of nearshoring in Mexico is tempered by the reality of the drought experienced in the country, with global risk intelligence company Verisk Maplecroft’s Water Stress Index identifying it as among the 50 most water-stressed nations on earth. There are also shortfalls in infrastructure, power and fuel, including natural gas. ‘Mexico still faces bottlenecks, particularly in basic infrastructure, such as water supply and the energy mix, which are essential for expanding production capacity,’ says Martínez.

Mexico’s Ministry of Infrastructure, Communications and Transportation estimates that a $400bn infrastructure investment is required by 2032 for the country to be able to handle the volume of traffic brought by nearshoring operations and the related challenges faced by ports, border crossings and railways.

Miriam Grunstein, Chief Energy Counsel at Brilliant Energy Consulting in Mexico City, highlights that some companies are steering away from the country ‘because of energy scarcity.’ This refers not only to the intensive power requirements of operations such as data centres, she says, but also relates to the need for gas, which, despite the energy transition, is ‘unavoidable in operating heavy industry.’ Mexico has become increasingly reliant on piping gas from the US in recent years, particularly to fuel manufacturing associated with nearshoring.

Tesla, whose CEO Elon Musk is now also a key adviser to President Trump, had planned to establish a lithium battery gigafactory in the north of Mexico, but the project has been on hold since 2024. ‘In general, US companies already entrenched in Mexico are not rushing to close their factories,’ says Yamaoka-Enkerlin. ‘But those considering new nearshoring ventures – such as Tesla’s proposed mega factory – are taking a wait-and-see approach.’

Most recently, companies contemplating nearshoring to Mexico have been cautioned by risk analysts to consider rule of law concerns associated with the country’s controversial judicial reform. This reform, which the government says is aimed at reducing corruption, redirecting public spending and increasing democratic representation, includes the appointment of judges by popular election and a reduction in the capacities and oversight of the country’s national electoral commission.

In December, Mexico’s Constitution was also amended to absorb two previously independent regulators, the Energy Regulatory Commission and the National Hydrocarbons Commission – which oversaw the power and oil and gas sectors respectively – into the executive branch. The change has been introduced in an attempt to promote energy independence, reducing reliance on foreign imports. However, it’s led to additional concerns about the separation and balance of power within the Mexican state.

Investor bodies such as Moody’s have warned that the judicial reform will create uncertainty about the legal security of doing business in Mexico. In their January 2025 economic outlook report for Mexico, Deloitte meanwhile observed that ‘the announcement of this [judicial] reform, in February 2024, and its approval by Congress, in September 2024, have injected volatility into financial markets and uncertainty into the investment climate.’ It noted that Mexico has been ranked on numerous occasions by the World Justice Project as among those nations with the weakest rule of law.

Specifically, critics fear that the impact of the judicial branch being popularly elected on the rule of law will reduce business confidence. ‘You cannot invest in a country where the rule of law is not guaranteed by impartial judges,’ says Grunstein. She adds that ‘while an arbitration ruling has to be executed in Mexico, by a Mexican judge’ under the reform, for companies this may still not be an ideal substitute for the previous arrangements of judicial authority.

Yussef Nuñez, Deputy Director of Publications & Consulting at advisory company Emerging Markets Political Risk Analysis, says that a weakened rule of law can increase the exposure of businesses to complicity in organised crime, which is a major problem in Mexico. A 2024 report produced by the Institute of the Americas at the University of San Diego highlights that 13 per cent of American Chamber of Commerce in Mexico member companies are now spending more than eight per cent of their entire operational budgets on security. Notably, the report found that ‘states with high levels of business victimisation are also states with some of the main highways in the country critical for cross-border trade and commerce.’

Further, a reform of the energy sector is planned by the Sheinbaum administration to overturn the changes introduced in this area by the Mexican government in 2013, which opened the market up to private investment. The new reform will probably strengthen state control over fuel supply in Mexico in 2025. Secondary legislation connected to the energy reform was put forward in March, says Grunstein. ‘It remains very ambiguous and unclear [as to] how private parties may participate in the electricity generation market,’ she says. ‘Also, there are new entry barriers in the natural gas transport and distribution sectors and it is yet to be seen if these will be permanent.’

In the new landscape created by the judicial reform and President Trump’s trade war, those considering car manufacturing, aerospace and data centre operations that rely on renewable energies might now be feeling ‘shaky’ about setting up in Mexico, says Grunstein.

‘The reform of the judiciary […] has, undoubtedly, affected the decision-making process of many foreign companies considering nearshoring opportunities in Mexico,’ says Carlos Del Rio, Vice Chair of the IBA Latin American Regional Forum. Deloitte reports that the number of announcements of new investment into Mexico dropped by 75 per cent in the first eight months of 2024, compared with the same period in 2023.

‘Members of the judiciary branch, associations of lawyers in Mexico – such as the Barra Mexicana de Abogados – law firms and lawyers have all made public their key concerns with different elements of the Judicial Reform,’ explains Del Rio. ‘It is and will continue to be top-of-mind until the end of the election process for judges, when we will have clarity as to the integration and operation of the Federal Judiciary branch.’ The election of judges will begin in June.

‘All stakeholders will also be mindful during 2025 [of] the integration and operation of the Judicial Branch’s new administrative body and the disciplinary tribunal,’ adds del Rio. According to documents related to the reform, a Judicial Discipline Tribunal will be established with the power to sanction judges, including with criminal charges.

‘Key trading partners’

‘The US and Mexico are key trade partners,’ says del Rio. Indeed, Mexico surpassed China to become the number one import partner to the US in 2023. In that year, American consumers bought more goods from Mexico than China for the first time in 20 years.

‘The industrial capacity and economies of Mexico and the United States are intertwined,’ says Del Rio. ‘Companies deciding on gaining access to the benefits of having manufacturing operations in Mexico make their analysis with a long-term perspective. It is indisputable that gaining the cost-advantages of operations while being so close to the US market and with unparalleled access to other major markets have been and will most likely continue to be the key benefits to newcomers in Mexico.’

The tripartite free trade agreement USMCA, between the US, Mexico and Canada, is also up for renegotiation in 2026, during President Trump’s second year in office. Del Rio highlights that, as part of Mexico’s ‘global network of foreign trade agreements,’ which also includes the Trans-Pacific Partnership and the EU-Mexico Free Trade Agreement, the USMCA has promoted the ‘beneficial trade conditions’ that are still leading to companies setting up new operations south of the US border.

‘We all clearly anticipate much noise up to 2026, when the USMCA will be renegotiated,’ says Del Rio, referring to events during President Trump’s first tenure and what has been made public to date about Plan Mexico. Ultimately, del Rio believes ‘that both countries share the knowledge of the benefits that the other brings to the table.’

Domestic consultations on the USMCA have reportedly begun in each country. According to an alert published by global law firm White & Case, the Trump administration will ‘likely withhold US renewal approval to compel a partial renegotiation of certain commitments through the joint review.’ According to the alert, while the full scope of the US’ plan hasn’t yet been developed, aspects currently being discussed in Washington include ‘modifications to the automotive industry rules of origin, strengthened forced labour import prohibitions, new restrictions on Chinese companies in North America, and resolutions to ongoing USMCA implementation disputes.’

In announcing Plan Mexico, President Sheinbaum re-iterated the benefits of the USMCA to the three countries in terms of employment, economic growth and regional markets. ‘It has proven to be one of the best trade agreements in history [...] furthermore, it is the only way in which we can compete with Asian countries, particularly with China,’ she claimed.

Martínez suggests that Mexico’s USMCA negotiations in 2026 ‘could also deepen trade integration within the North American region, which would further enhance its attractiveness to global investors.’ At the Mexico end, private and public sector engagement will be key in overcoming challenges, he says, citing the importance of ‘the development of third-party logistics and supplier networks, as well as further leveraging models like the shelter [a form of legal entity] industry to mitigate ownership and legal risks for foreign investors.’

Yamaoka-Enkerlin says that ‘Trump’s longstanding hostility’ to China ‘could lead him to view Mexican nearshoring as a strategic way to weaken Beijing, and US dependency on China – potentially easing some concerns about interruptions to nearshoring.’

At the same time, ‘in 2025 and beyond, re-shoring back to the US may gain traction as breakthroughs in robotics and AI drive down domestic manufacturing costs,’ says Yamaoka-Enkerlin. ‘As these innovations continue, and human manufacturing labour is replaced by robots, more businesses may find it increasingly cost-effective and efficient to bring production lines back onto US soil – an on-shoring trend that could decrease nearshoring in the medium to long term.’

Ann Deslandes is an independent journalist and consultant in Mexico covering security, resources and infrastructure matters. She can be contacted at anndeslandesconsult@gmail.com

Image credit: Negro Elkha/AdobeStock