By Alexis Milo,

November 7th, 2023

The development of the manufacturing industry requires three key elements: skilled labor at competitive wages, a good geographic location, and the availability of world- class energy. Since the beginning of trade liberalization in the mid-1980s and the implementation of the North American Free Trade Agreement (NAFTA) in 1994, Mexico has successfully developed the first two elements.

Mexican labor competes in both price and quality with that of other countries in sectors that require high standards, such as automotive and aerospace indus- tries. Moreover, Mexico’s geographic location is ideal, as it is next to the world’s largest market and has access to two oceans for trade with Europe and Asia. To facilitate this, infrastructure has been developed to connect production centers with the United States.

However, one element that has lagged behind Mexico’s rapid development as a leading manufacturer is the availability of high-quality energy at competitive prices. For example, between 1994 and 2022, the installed capacity for electricity generation increased from 34.3 to 94.4 megawatts, representing a cumulative in- crease of 175%. However, this growth is significantly less compared to the nearly ninefold increase in Mexico’s total exports during the same period. Furthermore, the growth in energy production capacity has primarily occurred in the central and northern regions of the country due to their proximity to demand centers and the development of communication and transportation infrastructure over the past few decades. Consequently, the southeastern region of the country has significantly fallen behind in both national manufacturing production and attrac- ting investments. It is estimated that states with natural gas infrastructure and adequate electricity generation capacity have a per capita GDP 50% higher than those without these resources.

The growing global demand for manufactured goods necessitates that the indus- trial sector meets requirements for the production of goods. As a result, its share in total energy consumption has surged, accounting for over 40% of the total final international consumption. Recent geopolitical conflicts have had a significant im- pact on energy prices, which is likely to increase their significance in investment decisions and production costs. The combination of increasing global demand and higher energy requirements is accompanied by a huge opportunity: nearshoring.

Trade tensions, the pandemic, and geopolitical conflicts have led to a reconfigu- ration of global value chains. Due to the accelerated process of globalization, the production of many goods has been segmented, with production stages located in different regions to minimize overall costs. For example, the production of an iPhone involves over 200 component suppliers worldwide.


In this globalized context, trade tensions between the United States and China, which began with the Trump administration, led to an increase in tariffs for both countries. The possibility that the situation could worsen and become bigger, prompted many companies to relocate at least some of their production processes from China to other countries. Additionally, the pandemic significantly disrupted the transportation of goods, increasing costs and volatility. Bringing production centers closer to each other and to consumer centers reduces transportation costs and uncertainty. Moreover, the conflict between Russia and Ukraine highlighted the risk of being too dependent on potentially antagonistic nations for key inputs.

In light of this opportunity, international public and private financial institutions have estimated that Mexico’s exports could increase by $40 billion to $80 billion wi- thin a 5-year period, representing a 10% to 20% growth. Considering the value-ad- ded nature of these exports and their ripple effects, this could contribute to an increase in GDP of 3% to 6% over the mentioned period. Macroeconomic growth models show that over a 5 to 7-year period, the economic growth rate could increa- se by half to one percentage point per year and then return to a neutral level. This would have a significant impact, increasing per capita income by approximately 4% compared to models that show growth rates without nearshoring.

In a conservative scenario, the installed capacity of the Mexican economy increa- ses and exports increase significantly. This would imply the creation of 400,000 additional jobs and higher wages. However, this would be a one-time increase in national income resulting from increased investment and resource reallocation in favor of the export sector. It wouldn’t necessarily lead to sustained growth rates or an extension of nearshoring benefits beyond the export sector and its immediate connections. But, this scenario is not a given, as it requires ensuring the continued supply of inputs, especially energy, logistical infrastructure, and legal and policy cer- tainty. These factors were present in the post-NAFTA period and led to the outcome described, albeit partially and unevenly distributed across the country’s regions.

The results of nearshoring can be highly positive, but it is important to ensure that these effects have a lasting impact. The question is: how can its medium and long- term impact be maximized?

One way to leverage the momentum of nearshoring in the coming years and extend its effects is to include regions that have been marginalized in the de- velopment process triggered by trade liberalization in the production and va- lue-added generation stemming from nearshoring. As mentioned earlier, in- frastructure development and energy generation were concentrated in thecentral and northern regions of the country, leaving the southeast with signifi- cant gaps. Of the three key elements required to trigger a manufacturing boom in the southeast, two are already present.

First, the availability of skilled labor at competitive wages could be important, given that while the national average employment rate in the manufacturing industry is 16.7%, in the southern states (Campeche, Chiapas, Oaxaca, Quintana Roo, Ta- basco, Veracruz, and Yucatán), it is only 10.1%. In these southeastern states, the average daily wage is 402 pesos, 16% lower than the national average of 477 pesos, making labor costs in the southeast highly competitive.

Second, it has a strategic geographic location; the southeast region has important seaports for maritime trade and significant projects like the Trans-Isthmus Corri- dor, connecting the Gulf of Mexico with the Pacific Ocean, which should be con- sidered. It is worth noting that this trade route could gain even more significance because of the reduced capacity of the Panama Canal due to declining water levels.

In the context of nearshoring, projects to increase energy availability in the re- gion are of vital importance. Recent studies by the Mexican Institute for Compe- titiveness (IMCO) indicate that the availability of natural gas and the subsequent electricity generation are essential factors for the development of the south and to capitalize on the nearshoring boost from a geographical perspective.

As the IMCO pointed out, the industrial sector, which includes the generation of electricity for individual consumption, required an average of 2.7 billion cubic feet per day (mmscfd) of natural gas in 2021, according to the most updated data from the Energy Information System (SIE) of the Ministry of Energy (SENER). 48.1% of this demand was concentrated in the six northern border states of the country (Baja California, Chihuahua, Coahuila, Nuevo León, Sonora, and Tamaulipas), while the nine states in the southern-southeastern region represented only 16% of the sec- tor’s demand. Except for the states of Puebla, Tabasco, Veracruz, and Yucatán, the demand from the other states in the south and southeastern region was marginal, as in the case of Oaxaca, or non-existent, as in the case of Campeche, Chiapas, Guerrero, and Quintana Roo.