Managing the Risks of U.S.-Mexico Trade Relations
By Jaclyn Jaeger
Mexico is currently experiencing a manufacturing and infrastructure boom, providing especially attractive opportunities for U.S. companies looking to nearshore. However, with opportunities come many risks unique to the region that must be strategically mitigated.
Trade wars between the United States and China that began in 2018 have driven many U.S. companies to move their production and sourcing operations to Mexico, marking a shift in international trade that continues to accelerate. According to the U.S. Department of Commerce, U.S. imports from Mexico surpassed U.S. imports from China for the first time since 2002.
U.S. imports from Mexico reached $475.6 billion in 2023, a 4.6 percent increase from 2022, while U.S. imports from China fell 20 percent to $427.2 billion, according to Commerce Department data.
Mexico’s manufacturing growth trend is projected to continue. According to research conducted by the Boston Consulting Group (BCG), more than 90% of executives surveyed in the North American manufacturing sector in 2023 reported that they’ve moved some of their production and sourcing over the past five years and will continue to do so over the next five years.
BCG further estimated that trade between the United States and Mexico is expected to increase by $300 billion over the next decade. “Recent shifts in global trade patterns are creating new opportunities if issues such as the adequate supply of electricity, water, and skilled labor are addressed,” stated Eduardo León, a BCG
U.S.-MEXICO Trade Compliance & Supply Chain Risk
October 29 – 30, 2024 •
INFRASTRUCTURE BOOM
Mexico’s newly elected President Claudia Sheinbaum brings with it the promise of expansive new nearshoring opportunities for North American manufacturers. In President Sheinbaum’s “100 Steps to Transformation,” which outlines her administration’s initiatives for 2024-2030, a few of Mexico’s major infrastructure projects include:
• Modernizing the railroad of the Isthmus of Tehuantepec;
• Expanding major ports, including Coatzacoalcos and Salina Cruz;
• Building new highways and expanding current ones;
• Investing in renewable energy projects;
• Expanding and developing several major airports; and
• Developing 10 new industrial parks as part of the Interoceanic Corridor of the Isthmus of Tehuantepec infrastructure project.
Inaugural Summit on
Mexico City
President Sheinbaum stated that a priority of her administration is the continued development of the Interoceanic Corridor of the Isthmus of Tehuantepec – the narrowest part of Mexico that separates the Pacific Ocean from the Gulf of Mexico and the Atlantic Ocean. During a meeting with U.S. authorities in June, officials with the Mexican government shared that the corridor will provide “a modern and efficient alternative for global trade due to its easy access to the United States, Asia, and Central and South America.” Mexico aims to create a trading route that rivals the Panama Canal.
These infrastructure projects are critical to North American manufacturers because several industries and sectors stand to benefit, including agriculture, electronics, extractives, food and beverage, logistics, medical devices, pharmaceuticals, renewable energy, semiconductors, specialized manufacturing, textiles, and tourism.
RISKS AND MITIGATION MEASURES
In addition to the many opportunities Mexico affords North American supply chains, it poses myriad risks that companies must strategically navigate as well. Below is a summary of some key risks unique to Mexico, and considerations for addressing them.
BRIBERY AND CORRUPTION RISK. Compared to other countries, Mexico gets an overall “medium” bribery risk score of 56 out of 100 as it relates to bribery and corruption risk, according to the 2023 TRACE Bribery Risk Matrix. For business interactions with government officials, Mexico scored 62, based on “a medium degree of government interaction, a high expectation of bribes, and a high regulatory burden.” For anti-bribery deterrence and enforcement, Mexico scored 71, based on “a low quality of anti-bribery dissuasion and a low quality of anti-bribery enforcement.”
Guillermo Sánchez Chao, a shareholder in Greenberg Traurig’s Mexico City office, said it’s important that companies have in place a robust anti-corruption compliance program and ensure compliance with the U.S. Foreign Corrupt Practices Act (FCPA). “That’s the most important thing when doing business in Mexico,” he said.
Trade Compliance & Supply Chain Risk
October 29 – 30, 2024 • Mexico City
CARGO THEFT. Mexico poses a high risk for cargo theft, commonly linked to drug cartels. “Drug cartels are pretty aggressive,” Sánchez Chao said.
Data from the Confederation of Industrial Chambers of the Mexican States (CONCAMIN) estimated that over 85,000 hijackings occurred during former President Andres Manuel Lopez Obrador’s first five years in office. Cargo hijacking is so prominent that it prompted Mexico’s National Chamber of Freight Transport (CANACAR) to issue an open letter to the then-president.
“Beyond the official figures, the reality is that the number of crimes committed to the detriment of cargo transportation hurts us daily,” CANACAR stated in its letter. “The most alarming is the violence with which they are committed.” Violent hijacking affects not only cargo operators but also a supply chain that moves more than 600 million tons of goods and merchandise across Mexico annually, the letter continued.
During a meeting with CANACAR in February 2024, one solution reached was federal agencies agreed to convene regional meetings concerning the 10 states with the highest number of thefts “to address the issues of road safety, administrative attention, and liaise with state and municipal authorities,” CANACAR stated.
The 10 states with the highest number of hijackings are Estado de Mexico, Puebla, Michoacán, Hidalgo, Querétaro, Tlaxcala, Guanajuato, San Luis Potosí, Jalisco, and Veracruz.
Inaugural Summit on U.S.-MEXICO
Recent data shows that violent hijackings in Mexico continue to escalate. According to Reliance Partner’s Mexico Cargo Hijacking Data Portal, Mexico recorded 7,862 violent cargo-truck hijackings in 2023, up three percent from 2022.
Estado de Mexico, Puebla, and Michoacán accounted for 86% of hijackings, while Mexico’s northern border states accounted for less than 1% of the total. Along the U.S. border, the highest incidences of hijacking occurred in Nuevo Leon (49) and Baja California (12), according to the data portal.
To build a robust and resilient supply chain, companies should map out the transportation of their goods, focusing on enhancing security on the routes that move through the highest-crime regions of Mexico. Conducting due diligence on suppliers, logistic partners, and other potential business partners in Mexico is also critical for reducing supply chain risk.
INFRASTRUCTURE DEFICIENCIES. “As a country, Mexico needs to improve its infrastructure generally, and specifically in terms of electricity and water,” said Eduardo Grajales González, a member of the international trade practice in Greenberg Traurig’s Mexico City office. Although several plans are ongoing to reform Mexico’s infrastructure, the extent to which those projects will progress is unclear.
For example, President Sheinbaum’s “100 Steps to Transformation” plan includes an initiative to make the region of Campeche a central production area for rice, milk, and infrastructure development due to water access in the region. President Sheinbaum also announced a series of water-treatment projects that would benefit industry and agricultural irrigation throughout Mexico.
When considering a facility’s location, it’s important to consider the entire lifecycle of the supply chain throughout the region in its current state – the availability of water, electricity, telecommunication, roads, ports, railways, and the skill set of the available workforce.
CONCLUSION
Navigating Mexico’s legal, regulatory, and infrastructure landscape can be daunting. González advised seeking the help of legal counsel or business consultants who are familiar with Mexico’s business environment, and who have expertise in helping businesses develop or expand their operations in the country.
Also, network with peers and learn from the experiences of other companies that have long operated in the region, are well-versed in navigating some of the challenges at the sector level, and whose manufacturing operations continue to succeed in Mexico.
Lastly, prepare now for what’s ahead. Aside from Mexico’s many infrastructure projects, the United States–Mexico–Canada Agreement (USMCA) has long provided incentives for North American manufacturers. This is because, under the USMCA, manufacturers benefit from duty-free trade as long the products “originate” within the signatory countries, in compliance with the USMCA’s “Rules of Origin.”
However, the unknown outcome of the U.S. elections and the forthcoming joint review of the USMCA in 2026 leaves the USMCA’s future in question. As this landmark review approaches, it will be prudent for companies to stay abreast of the outcome, and what it could mean for North American manufacturing operations in Mexico