One of my favorite trade rags these days is World Trade Magazine. While many of their articles clearly dig into minutia intended only for logistics and customs/trade professionals, at least 10% of what they write is of far more value when it comes to global sourcing than what is coming out of all of the other trade pubs combined. A recent article highlighting why Mexican sourcing is growing more attractive is a case in point. The piece is a great primer for anyone interested in understanding why and how Mexico is once again becoming a global sourcing powerhouse -- and is poised for even greater things throughout 2008. The largest reason for this -- besides the lower risk of sourcing from a country that is geographically connected to the United States -- is currency related. According to the story, "The interdependence of the American and Mexican economies has led to a tight alignment in terms of currency fluctuations." According to Jorge Pinto, the former executive director of the World Bank, who is quoted in the article, "the peso will remain closely linked to the U.S. dollar."
But Mexico's rising competitiveness from a currency perspective in relation to other countries that have seen significantly more currency inflation relative to the dollar is only one factor making the region more attractive than China and others of late as companies re-evaluate their global sourcing strategies. The North American Free Trade Agreement or NAFTA, as it is better known, has torn down trade barriers between the US, Canada and Mexico. According to Wikipedia, "The North American Free Trade Agreement (NAFTA) eliminated the majority of tariffs on products traded among the Canada, United States and Mexico, and gradually phases out other tariffs over a 10-year period. Restrictions were to be removed from many categories, including motor vehicles, computers, textiles, and agriculture. The treaty also protects intellectual property rights (patents, copyrights, and trademarks), and outlines the removal of investment restrictions among the three countries." Clearly, while not all of these objectives have been achieved -- such as complete IP protection -- it's clear that sourcing from Mexico is a lot safer than sourcing from China when it comes not only to protecting intellectual property, but also lower -- and more predictable -- tax, tariff and related costs.
What will the future of Mexico sourcing hold for US companies? My guess, especially as the dollar shows no signs of escalating in value, is quite a lot. Still, Mexico is not a low-cost panacea by any stretch. Factory and skilled labor wages are not anywhere near the level of China, India or other developing regions in Asia. Nor are wages uniform across the country. Corruption is also still rampant throughout the nation, as is poverty (I often tell anyone going to India for the first time to brace themselves for the same level of poverty as one can see around Mexico city). Still, when it comes to the dollars and sense of importing manufactured parts and goods into the US on a total cost basis, the benefits that Mexico presents more than outweigh the risks. Clearly, that South of the border margarita has never looked better (just make sure to get it without ice) ...
- Jason Busch