Dallas Fed: Nearshoring to Mexico has yet to fully materialize

DALLAS, Texas – Nearshoring to Mexico has yet to fully materialize, according to a new study published by the Federal Reserve Bank of Dallas.

The study was authored by Enrique Martínez García, assistant vice president at the Dallas Fed and deputy director of the Global Institute; Luis Torres, senior business economist at the Dallas Fed; and Manuel Sánchez, a Mexican economist and former deputy governor of Banco de México.

"Nearshoring to Mexico remains an ambition," the authors wrote. "Domestic investment and reinvested earnings from foreign-owned firms have increased, but large-scale foreign capital relocation has yet to materialize."

The researchers looked at Mexico's international economic accounts, specifically the foreign direct investment (FDI) portion, to gauge whether production capacity has expanded as a result of nearshoring.

New FDI inflows have not surged, as might be expected with more nearshoring activity, but have actually declined since 2022, and much of Mexico's investment growth has come from domestic sources and reinvested earnings of foreign-owned firms, according to the study.

Other key findings include:

* While new FDI surged immediately following the pandemic-era recession, it is now at a 10-year low.

* Shelter companies and service providers are playing a larger role in nearshoring by offering asset leasing and management solutions without direct investment. Mexico's service exports that fall under "other business services," which capture some of those alternative models of nearshoring, have grown slightly from 0.25 percent of GDP in 2017 to 0.5 percent in mid-2024, reflecting moderate evidence of nearshoring activity.

* Mexico's pandemic-era export growth has moderated since 2022, and export-destination diversification has deteriorated slightly, with 83.1 percent of exports now directed to the U.S. That's up from about 81.4 percent two years ago.

* Mexico's export growth to the U.S. is largely driven by trade diversion from China, but there is some evidence of increasing integration of Chinese inputs into Mexico's exports and logistics.

Global Institute

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The research was conducted as part of the Dallas Fed's newly launched Global Institute. The institute aims to become a resource for the Federal Reserve System and the public to understand the changing and complex global economy and its implications for U.S. monetary policy.

The Dallas Fed believes its strong legacy of international research and the Eleventh District's special location will greatly assist the Global Institute as it launches policy-related research on global trade, international capital flows and migration, with a particular focus on the U.S.–Mexico relationship.

"The Global Institute aims to become a resource for the Federal Reserve System and the public to understand the changing and complex global economy and its implications for U.S. monetary policy," a Dallas Fed press release states.

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