Mexico is central to the productivity and prosperity of North America – particularly through its role as the United States’ largest trading partner. Whether it can turn this relationship into lasting domestic growth will depend on key policy choices that favour pragmatism over ideology.
Outsourcing some of its operations to neighbouring countries could help Mexico to reignite the economic dynamism that it has lost in recent years. But as it stands, this idea – known as ‘nearshoring’ – looks out of reach. So far, the nearshoring narrative has been more an ideal and an opportunity rather than the overwhelming reality it could be.
In 2025, Mexico traded $873 billion in goods with its main trading partner, the United States, and ranked among the top three trading partners of 36 of the 50 US states. It also drew a record $41 billion in foreign direct investment (FDI), although roughly two-thirds of this came from firms already in Mexico reinvesting their profits rather than from the materialisation of new projects.
Since 1994, Mexico made a formidable bet through the North America Free Trade Agreement (NAFTA), tying its economic future to that of the United States. Trade of goods and services is now equivalent to 89% of GDP, and 83% of it is with the Americans.
The size of Mexico’s economy has grown from $307 billion in 1990 to $1.83 trillion today, with GDP per capita surging from $3,640 to $13,741over the same period. Access to electricity has risen from about 93% in the early 1990s to almost the entire population, and health coverage from around 45% in 2000 to roughly 78% today.
Even so, structural problems, current ideology and the uncertainties around the US-Mexico-Canada Agreement (USMCA) renegotiation now stand in the way of further progress for Mexico.
Reshoring, nearshoring or no-shoring: what next for Mexican policy-makers?
It is important to dissect what the reconfiguration of supply chains entails, as three distinct responses are often intertwined.
- Reshoring brings investment and production back to Mexico or to the United States.
- Nearshoring relocates it to a neighbouring country, principally Mexico, to feed North American value chains.
- No-shoring is the recognition that some goods cannot be produced easily, or at all, in North America, and will keep coming from elsewhere, China included.
The task for policy is not to pick one of these and pursue it to the exclusion of the others. It is to map which products belong in each category and to design trade and industrial policy accordingly.
For example, a semiconductor-grade input or a specific class of rare-earth component may simply have to be imported for the foreseeable future; and a wiring harness or an auto component may be a natural candidate for nearshoring; while a high-value, capital-intensive process, such as advanced chip or battery-cell manufacturing, may be reshored to the United States.
Treating every import as a threat, or every relocation as a guaranteed win, blurs a key distinction on which sound policy depends.
How integrated are Mexico and the United States?
The depth of the US-Mexico relationship is hard to overstate. Their record bilateral trade in 2025 represented more than ten times that of 1993 ($80 billion), the year before NAFTA took effect (see Figure 1).
Mexico has now overtaken China as the top source of US imports, with its share reaching a record 17% in early 2026, more than doubling China's 7.2% (US Census Bureau, 2026). US investment in Mexico has surged from $37 billion in 1999 to $159 billion in 2024 (Congressional Research Service).
Figure 1. Mexico goods trade with the United States, 1990 to 2025
Source: US Census Bureau
Despite their enormous magnitude, these aggregate figures tend to understate how tightly the two economies are bound. This is because they count goods at each border crossing as if they were finished products. They are not.
Consider the car, one of North America's signature products. A single vehicle contains roughly 30,000 parts, and an engine or component can cross the US-Mexico and US-Canada borders seven or eight times before the car is finished (Cato Institute, 2025). An engine block might be machined in Michigan from US-processed steel, fitted with components stamped in northern Mexico, and returned north for installation, with value added at every step (De Gortari, 2019).
The Mexican car and the American car are, in practice, both just North American products.
The construction of this sophisticated trade architecture became particularly visible in 2025. Last year, the share of Mexican exports entering the United States under the USMCA rose from around 45% to nearly 88%, as firms restructured their supply chains to comply with its rules of origin and avoid President Donald Trump’s new ‘Liberation Day’ tariffs (US Census Bureau, 2026).
The same border crossings that make this system productive are precisely what make tariffs so disruptive, since a duty levied at each crossing stacks up, taxing the same goods over and over again.
Where does China fit in?
Mexico's relationship with China runs almost entirely one way. It sells little to China and attracts relatively small Chinese investment (see Figure 2). In 2025, exports to China were barely $10 billion and Chinese investment about $577 million (Data México, 2026).
Figure 2. Cumulative FDI by country of origin, 2018 to 2025
Source: Mexico Secretariat of Economy.
But as a supplier China looms large. It is the second-largest source of Mexico's imports after the United States, providing about a fifth of everything the country buys abroad, worth around $133 billion in 2025 (see Figure 3).
The mix increasingly favours the inputs that feed Mexico's export factories. These inputs include electronics, the single largest category, along with machinery, electronic components and car parts (UN Comtrade, 2026). Chinese-made cars have begun arriving as well, though mostly for the domestic market.
Figure 3: Mexico imports by country of origin, 2018 and 2025
Source: Banxico
There is a sharper edge to this. Mexico's fastest-growing exports to the United States are now advanced technology products such as computers, phones and electronics, and in 2025, it overtook China as their leading supplier to the US market (Brookings, 2026). But many of these exports lean heavily on imported content, much of it from East Asia (Federal Reserve Bank of Dallas, 2025).
How much of that content is ultimately Chinese, whether directly or through firms and suppliers linked to China, is currently one of the most important questions the United States has as it negotiates the future of its trilateral agreement with Mexico and Canada.
The Americans’ initial reaction to this challenge has been to force Mexico to reduce Chinese imports and investment. They have been particularly forceful when it comes to strategic or security-related sectors like microchips and even ports. Washington also set up a system to screen foreign investment.
This helps to explain Mexico's biggest trade move in years. The government published a decree on 29 December 2025 raising tariffs on 1,463 sub-categories of goods as of January 2026, with duties of 5% to 50% on countries without a trade agreement. This mainly affects China, but also hits Brazil, India, Russia and South Korea. About 40% of the affected goods are finished products and 60% are inputs for local factories.
What is at stake in the 2026 policy revision?
The clearest lesson from three decades of trade agreements is that Mexico and the United States are competitive together. The cross-border production that makes tariffs so costly is what allows North American firms to combine US capital and technology, competitive Mexican labour and manufacturing capabilities, and Canadian inputs into goods that sell worldwide.
On paper, the USMCA Joint Review is scheduled for July 2026. Under Article 34.7, the three governments would decide whether to renew it for a further 16 years or to begin a run of annual reviews that could see USMCA lapse by 2036 (Center for Strategic and International Studies, CSIS, 2026).
In practice, bilateral talks between Mexico and the United States opened well before that, prompted by the tariffs that Trump imposed on Mexican goods in early 2025 and conditioned on action against fentanyl and irregular migration (White House, 2025). When Secretary of State Marco Rubio visited Mexico City in September 2025, he delivered a list of 54 ‘trade irritants’, which both countries have been addressing even before the formal USMCA negotiations began.
The early alignment to US demands has paid off in market access for Mexico vis-à-vis the rest of the world. By the end of 2025, Mexico faced one of the lowest effective tariff rates of any major US trading partner, at under 5%, compared with 33% for China and an overall average of 10% (Penn Wharton Budget Model, 2026).
The expectation is that Mexico will come away with terms far more competitive than those facing the rest of the world and the great majority of its exports free of tariffs, with about 88% of its goods already entering duty-free under the current USMCA framework.
Can Mexico use nearshoring as a source for long-term growth?
There is no guarantee that nearshoring will lead to broad-based long-term growth, and the most sobering evidence comes from investment data. Despite Mexico’s record $41 billion in FDI in 2025, up nearly 11% on the year, roughly 68% was reinvested earnings and only 18% new investment, far below its 33% share in 2018 (see Figure 4). On top of this, Mexico's gross fixed investment had been falling year-on-year for 19 consecutive months as of March 2026 (INEGI, 2026).
Figure 4. FDI by type, 2018–2026*
Source: Banxico
Notes: Lines show levels (left axis). Markers show share of total FDI (right axis). *2026 figures are the trailing four-quarter sum (to Q1 2026).
The recent weakness in investment points directly at Mexico's structural constraints. These include labour policies such as the minimum wage increase of 260% (adjusted by inflation) over the last seven years. If historically cheap labour is the selling point, strong wage growth can spook would-be investors.
Indeed, survey evidence suggests that institutional quality, legal certainty and regulatory efficiency now weigh more heavily in location decisions than labour costs or fiscal incentives (Kearney FDI Confidence Index, 2026).
Recent reforms have deepened that concern. Since 2025, Mexico has become the first major economy to elect its judges by popular vote and has folded its independent regulators, including the antitrust authority, into the executive. Investors perceive these measures as an erosion of legal certainty, at a time when guarantees for investment are most needed (CSIS, 2025).
Other binding constraints include insecurity; issues with the reliability and efficiency of power supply; infrastructure challenges; an informal sector that absorbs more than half of all workers; and a fiscal position with narrowing room for the magnitude of public investment that nearshoring requires.
The Mexican government has unveiled a series of programmes to promote investment. These include: Plan Mexico, Wellbeing Poles and the recent Investment Simplification Decree, among others. Although they point in the right direction, the success of these policies is contingent on a larger picture that includes three elements: rebuilding confidence, improving productivity and securing the USMCA renewal.
Where can I find out more?
- Locked in low gear: Mexico's struggling economy: The Baker Institute on why Mexico's growth has stalled and the structural obstacles standing in the way.
- Mexico in US supply chains: lessons from the 2018-19 tariffs: US Federal Reserve economists on how deeply Mexico is woven into US production, drawing on the last tariff episode.
- USMCA has strengthened economic integration in North America: The Brookings Institution on the evidence that the agreement has deepened cross-border trade and production.
