Mexi-GO! Mexico is an Even Bigger Supply Chain Player Following China Tariffs

According to Freightos data displayed in Windward Port Insights, shipping prices from China to the U.S. increased by 166% to $6,723 since the beginning of the year.

The increase in shipping prices is not occurring in a vacuum. The Houthi attacks in the Red Sea (and elsewhere), the Panama Canal drought, and sanctions against Russian entities have created tangible price increases.

The average transit time from Asia to New York during May was 28 days, 12% more than before the Red Sea crisis began. In contrast, the average transit time from Asia to LA and Long Beach was 14 days.

Price hikes and transit time spikes create uncertainty and large manufacturers cannot afford to be left in the dark. Not knowing when shipments will arrive is a crucial issue that hampers their ability to coordinate haulage properly, plan their inventories, and most importantly, run their production lines without incurring significant costs and revenue loss.

The increased war-zone risks and longer transit times led to huge price hikes for the shipments and the supporting services, such as insurance. Given the existing geopolitical challenges, cross-ocean trade route uncertainty is expected to continue until the end of the year (at least).

Logistics companies’ behavior reflects this, as they are planning their operations at least half a year in advance to avoid supply shortages.

It’s hard to speak about the Mexico-U.S. relationship without a brief look back at just how much COVID-19 seemed to change the dynamic.

The COVID-19 pandemic significantly disrupted global supply chains, exposing the vulnerabilities of the just-in-time (JIT) inventory management system. This approach, which focuses on minimizing inventory costs by receiving goods only as they are needed in the production process, proved fragile in the face of widespread lockdowns, factory shutdowns, and transportation bottlenecks.

Many countries shifted towards a just-in-case (JIC) strategy, which emphasizes building buffer stocks and diversifying supply sources to enhance resilience against future disruptions. This shift not only altered the logistics landscape, but also reshaped international trade relationships, particularly for the United States.

One of the most notable changes was the increased reliance of the U.S. on Mexico as a crucial trade partner and shipping hub. The proximity of Mexico to the U.S. offers several advantages, including shorter supply chains, reduced transportation costs, and quicker turnaround times compared to distant Asian markets. During the pandemic, these benefits became even more pronounced, as companies sought to mitigate risks associated with long, complex supply routes.

Mexico’s robust manufacturing sector and its participation in the United States-Mexico-Canada Agreement (USMCA) further solidified its role as a vital link in the supply chain, enabling more seamless trade flows and greater supply chain reliability.

The U.S.-Mexico trade relationship has deepened due to the need for nearshoring strategies. Companies have increasingly looked to relocate production closer to home to reduce dependence on far-flung suppliers. Mexico’s competitive labor costs, skilled workforce, and improving infrastructure (more on this below) make it an attractive alternative to Asian manufacturing giants.

This nearshoring trend is likely to persist – especially if we see more U.S. tariffs – driven by both economic and geopolitical factors, as businesses aim to enhance supply chain agility and reduce exposure to international disruptions.

Mexico is becoming more of a hotspot for third-party logistics (3PL) providers and manufacturers as the country gains steam as the U.S.’s top trading partner, according to Sourcing Journal.

An article in March notes: “Last week transportation and supply chain management services provider Echo Global Logistics unveiled it has established operations in Mexico City, Monterrey and Laredo, Texas – the last of the three being a major trade hub directly on the U.S.-Mexico border.

Echo’s expansion south of the border mirrors another U.S.-based logistics provider, Ryder System Inc., which completed a substantial buildout recently with the addition of its own 228,000-square-foot warehouse and cross dock in Laredo.”

Mexico is a highly effective partner for nearshoring with the U.S. Three key factors highlight Mexico’s usefulness as a nearshore partner:

• Geographical proximity
• Cost-effectiveness
• Cultural alignment with the U.S.

These factors collectively mitigate risks associated with far-flung supply chains and provide robust alternatives to traditional manufacturing hubs in Asia.

Geographical proximity is a big advantage of nearshoring to Mexico. Being closer to the U.S. not only reduces transportation time and costs, but also offers greater flexibility in logistics. Unlike the limited modes of transport available from Asia, primarily air and ocean, Mexico provides a diverse array of shipping options, including extensive trucking routes, rail networks, and ports. For instance, approximately 14,000 trucks cross the Laredo border daily, ensuring a constant flow of goods. This logistical versatility means that if one transportation mode faces disruption, there are readily available alternatives, thereby enhancing supply chain resilience.

Cost-effectiveness is another compelling factor. The average age of Mexican supply chain workers is around 26, making the labor force relatively young and dynamic. Additionally, wages in Mexico are competitive, offering significant savings for companies.

This cost advantage is particularly beneficial for industries such as automotive manufacturing, where the bulk and weight of products makes shipping from distant locations impractical and expensive. Similarly, toy manufacturers sometimes dealing with bulky products that occupy significant container space, are finding it economical to set up operations in Mexico. By relocating production to Mexico, these industries can save on transportation costs and reduce lead times, making their operations more efficient and cost-effective.

Home appliance companies represent another sector increasingly turning to Mexico. A substantial portion of home appliances sold in the U.S. are already manufactured in Mexico and there are plans to expand factory operations further. Companies aim to gradually increase production capacity by 20 percent, reflecting a strategic move to bring more production closer to the U.S. market. This trend highlights a broader shift as businesses across various industries evaluate the benefits of nearshoring and consider Mexico as a viable solution for enhancing supply chain efficiency and resilience.

Cultural alignment between Mexico and the U.S. further strengthens the nearshoring proposition. Shared cultural values and business practices facilitate smoother collaboration and integration. This cultural synergy enhances communication, reduces misunderstandings, and fosters stronger business relationships. Mexico’s alignment with U.S. regulatory standards and its participation in the United States-Mexico-Canada Agreement (USMCA) streamline trade processes ensures that goods move freely and compliantly across borders.

Like any relationship, the one between Mexico and the U.S. has its issues.

While nearshoring to Mexico offers significant advantages for the United States (as detailed above), several challenges loom. As noted in the intro of this report, geopolitical tensions catalyzed Chinese manufacturers to set up shop in Mexico, making it somewhat of a transshipment hub.

Security issues in Mexico present a substantial barrier for U.S. companies considering nearshoring. Increasing incidents of truck theft and hijacking create significant risks for logistics operations. The highways, particularly the critical route between Laredo and Monterrey, are often two-lane roads plagued by traffic congestion, which exacerbates these security risks.

These factors collectively contribute to a challenging environment for transporting goods safely and efficiently, posing a deterrent for U.S. companies looking to move their operations closer to home.

Infrastructure limitations further complicate the nearshoring landscape. While the largest port in Mexico handles around 3-4 million TEUs (twenty-foot equivalent units) per year, it pales in comparison to major ports like Shanghai and LA-Long Beach, which manage over 30 million containers annually. This discrepancy highlights Mexico’s lag in port capacity and efficiency, which can hinder the smooth flow of goods. Additionally, the two-lane highway infrastructure is insufficient to support the growing volume of trade, leading to significant delays and logistical bottlenecks.

Capacity issues also pose a formidable challenge. The U.S. faces over-capacity with declining freight rates, whereas Mexico struggles with a severe shortage of drivers, with estimates suggesting the country lacks 50,000 drivers. The threat of kidnapping and violence further deters individuals from pursuing careers in trucking, exacerbating the capacity crisis. This shortage impacts the reliability and efficiency of nearshoring operations, making it difficult to meet the increased demand.

A Windward blog post, “High Stakes on the High Seas: Curbing the Cocaine & Fentanyl Flood,” noted that the Fentanyl epidemic in the U.S. is partially fueled via Mexico.

One of the major difficulties in stopping maritime Fentanyl smuggling is that most of the chemicals and tools needed to make the dangerous drug are actually legal. They can come into Mexico, where the finished product is made, and then they are smuggled across the Mexican-U.S. border.

To address the challenges of nearshoring between Mexico and the U.S., it is essential to develop a diversified transportation strategy. This means not relying solely on trucking or intermodal rail, but also incorporating maritime solutions. For instance, a new maritime route from the Gulf of Mexico can offer cost-effective connections to U.S. states, such as Florida and Louisiana. This diversification not only mitigates the risk of disruptions in any single mode of transport, but also optimizes logistics efficiency and cost management.

Intermodal transportation, which combines multiple modes of transport such as rail and truck, is also emerging as a potential solution to road challenges. It offers a cheaper and more secure alternative to over-the-road (OTR) transport, with a significantly lower incident rate.

Despite its advantages, intermodal transport currently accounts for less than five percent of the logistics market in Mexico, indicating substantial room for growth. Investment in intermodal infrastructure could alleviate some of the pressure on the road network and enhance the overall security and efficiency of goods movement.

Technological advancements will also play a crucial role in enhancing the security and efficiency of nearshoring. AI-driven solutions that monitor and assist drivers, can improve safety and response times. These systems can detect when a driver stops unexpectedly, triggering an emergency response if needed. While there are privacy concerns, focusing on high-risk scenarios, rather than the entire fleet, can help mitigate these issues.

The advent of autonomous (driverless) trucks presents another promising solution. Automated vehicles can address the driver shortage and reduce the risk of hijacking, as they are less vulnerable to human-related security threats.

Mexican policies have been instrumental in facilitating nearshoring growth. Competitive salaries, coupled with a focus on innovation and education, have improved the talent pool available for more sophisticated manufacturing and logistics roles. This shift from a primarily manual labor force to a more skilled workforce supports the country’s ability to meet the demands of nearshoring effectively.

To sustain and enhance these solutions, continuous investment in infrastructure is essential. Expanding and upgrading road networks, ports, and intermodal facilities will reduce congestion and improve the flow of goods. Additionally, fostering public-private partnerships can accelerate these developments, ensuring that infrastructure keeps pace with the growing demand for nearshoring.

Mexico and the U.S. must also cooperate closely to address the pressing issue of fentanyl trafficking. The illicit flow of fentanyl across the U.S.-Mexico border poses significant security risks and undermines the stability required for effective nearshoring operations. Both countries need to implement comprehensive measures to curb the production, distribution, and trafficking of this dangerous synthetic opioid.

For government and law enforcement agencies looking to stave off fentanyl and other illegal drugs, Windward’s Maritime AI™ platform has a track record of assisting in major drug busts and smuggling attempts.

Based on Windward’s AI insights and alerts, The Nigerian navy recently stopped the Sweet Miri vessel as it was attempting to smuggle 2 million liters of oil.

President Joe Biden is actually the “good cop” compared to former President Trump in regards to importing goods from China. A potential black swan event is on the horizon in the U.S. political arena.

Trump signaled that he intends to hike tariffs on Chinese imports to a flat 60%(!) tariff on all goods if he wins the election. This unprecedented rise could cause a critical disruption to the Trans-Pacific trade corridor, necessitating a comprehensive strategic adaptation by all players in the maritime logistics sector, which would obviously have a major effect on Mexico’s supply chain role.

Windward wrote about the effects of this potential tariff increase back in April 2024, with a reported 15% surge in shipments entering the U.S. from China via Mexico. This trend is possible due to Chinese entities setting up shop in Mexico, using Mexican ports to sidestep U.S. tariffs. President Biden’s latest tariff announcement shows why the reliance on Mexico as a strategic intermediary in global trade is expected to intensify even further.

Windward will continue to monitor this situation and keep you updated when necessary…