Nearshoring in Mexico: A Lifetime Opportunity

Pat Ottensmeyer Nearshoring, in which manufacturing is relocating from Asia—mostly China—to North America—mostly Mexico—is one of the key drivers behind creation of CPKC (Canadian Pacific Kansas City), the first and only transnational, single-line railroad linking Canada, the United States and Mexico. CPKC, the merger of the Canadian Pacific and Kansas City Southern, was originally announced on March 21, 2021, roughly one year after USMCA (United States-Mexico-Canada Agreement) was ratified, replacing NAFTA (North American Free Trade Agreement), which had been in place since the mid-1990s and helped drive privatization of Mexico’s national railroad system. Some background: On June 19, 2019, the U.S. Senate passed the Protocol to replace NAFTA with USMCA, described by former U.S. Trade Representative Robert Lighthizer as “the gold standard by which all future agreements will be judged, and citizens of all three countries will benefit for years to come.” U.S. The House of Representatives passed the agreement on Dec. 19, 2019; the Senate passed it on Jan. 16, 2020. The Canadian House of Commons and Senate passed the USMCA Implementation Act on March 13, 2020. Three years later—March 14, 2023, one day before the Surface Transportation Board approved the CPKC merger—KCS President and CEO Pat Ottensmeyer gave a presentation, “Nearshoring in Mexico: A Lifetime Opportunity,” at Railway Age’s Next-Generation Freight Rail Conference in Chicago. As Railway Age’s 2020 Railroader of the Year and 2022 Co-Railroader of the Year with CP President and CEO Keith Creel, he has talked extensively about nearshoring, and his role as chair of the U.S. Chamber of Commerce U.S.-Mexico Economic Council, in which he worked to ensure that the rail industry has a voice by working with public- and private-sector leaders to strengthen bilateral commercial ties. Ottensmeyer retired as KCS chief executive on April 14, 2023, when CPKC’s Final Spike ceremony took place, and is now a special advisor on Mexican affairs to CPKC chief executive Creel. “The thesis for investing in Mexico remains strong,” Ottensmeyer said as he began his NGTC talk. “Mexico has maintained Investment Grade ratings throughout the pandemic. With exception of early in the pandemic, the Peso exchange rate has remained stable for the past five years. Through August 2022, Mexico’s manufacturing sector has grown at three times the rate of GDP growth. The country’s manufacturing base is large and is well integrated into existing North American supply chains. Most trade disputes have been resolved in Mexico’s judicial system, and the Mexican Supreme Court has ruled in favor of investors in proposed changes in Electricity Law.” Ottensmeyer referred to the ongoing U.S.-China trade war, in which the U.S. imposed trade tariffs on China in the first half of 2018. Since, then China has lost more than four percentage points of its share of U.S. imports. Reshoring/Nearshoring Push Factors The pandemic and the Russia-Ukraine conflict are the two main “push factors” behind nearshoring and “reshoring,” the practice of bringing manufacturing and services back to the U.S. from overseas. “The pandemic caused significant and widespread disruptions to global supply chains,” Ottensmeyer noted. “Companies exposed to global trade are trying to mitigate the risks from supply chain disruptions by moving supply chains closer to home. Time zones are also more relevant than before as video-conferencing for meetings, management, etc., are more widely utilized.” On the Russia-Ukraine conflict, security is a major concern. “Sanctions on Russia by the West make companies want to relocate resources to countries that have lower risk of sanctions—’friend-shoring,’” Ottensmeyer said. “An energy crisis is impacting many countries, but Europe especially. Firms are looking for locations with more energy availability and reliability, and North America has plenty of energy, including Mexico’s resource potential for renewable energy.” Reshoring/Nearshoring Pull Factors There are also “pull factors” for nearshoring/reshoring. “The goal of the USMCA is to reduce tariff costs and boost the integration of regional supply chains among its members,” said Ottensmeyer. “Since the original NAFTA, merchandise trade in North America has increased steadily. The three countries in the region not only trade, but also co-produce. Mexico is not only one of the top three exporters to the U.S., but also one of the top three importers. Many intermediate goods go back and forth several times across the border. Mexico already has a large manufacturing base that is highly integrated with the U.S. Its macrostability means the real exchange rate has remained stable in recent years. The country has political stability when compared to other emerging markets. Institutional checks and balances have been working. One recent example is that Congress rejected […]

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