Mexico is trying to be best new trade buddies with both the US and China — but it might not be able to handle the pressure

• Mexico is now America's top trade partner thanks to US-China tensions and "nearshoring."
• To benefit, Mexico needs to make critical changes to its infrastructure to meet increased demand.
• Mexico has benefited as a link between the US and China but has also angered both already.

Mexico is America's new, old best friend in the world economy, but now its neighbor to the south needs to figure out how to take advantage of its status.

According to a recent post from Luis Torres, a senior business economist at the Federal Reserve Bank of Dallas, Mexico has once again cemented its place as America's top trading partner.

But now Mexico needs to show it can sustain the momentum that appears to be building from increased "nearshoring," a practice in which countries bring supply chains for crucial goods to countries that are close physically and politically.

As the world moves forward from the height of the pandemic, Mexico's ability to take the top spot away from China is a clear sign of how the economic chaos of 2020 will continue to define the world economy for years to come.

Mexico's infrastructure is not ready

Being a more attractive trade partner to the US is one thing. Keeping that force going and riding the wave to improve Mexico's own economy is another beast.

Mexico has seen some positives in its economy.

Mexico has the strongest currency in the world this year, its stock market has performed well, and Foreign Direct Investment — the amount of ownership in domestic companies being made by foreign companies or governments — is up 40%. In addition, the US avoiding a recession would be a welcome sign of relief for Mexico.

Rental prices in industrial areas are "soaring" and US investment in industrial real estate is on the rise, Bloomberg reported.

However, Mexico's energy availability and infrastructure are at the top of the list of the country's economic problems.

Most of the natural gas used to fuel Mexico's industry is imported from the US, and its availability is limited to the industrial corridors that are already developed. S&P Global notes that those areas are already saturated and would need more infrastructure.

Mexico also has a strained and erratic electricity supply that will be further tested as more companies move into the country. Mexico's energy consumption has tripled over the past three decades and will continue to grow, Bloomberg reported.

And then there are things Americans often take for granted, like access to water. In Nuevo León, where Tesla is building its factory, a drought in 2022 left thousands of residents without water, causing social unrest.

Mexico has benefited by being the middleman

As tensions continue between the US and China, the latter has strengthened its trade relationship with Mexico. China is now Mexico's largest trading partner globally, and Mexico is already China's second-largest trade partner in Latin America.

China's Foreign Direct Investment in Mexico is still small (about 1% of Mexico's Foreign Direct Investment) but it is its fastest-growing source of outside investment.

While direct trade between the US and China has declined, Mexico appears to be taking advantage by acting as the middleman between the two powers. The difference is now the supplies are moving through Mexico first, thanks to the country's proximity to the US and its ability to skip the higher tariffs placed on Chinese imports.

It also doesn't hurt that Mexico can offer plenty of low-cost labor for Chinese companies to set up shop south of the US border.

"We're increasingly seeing Chinese companies manufacturing finished goods in Mexico to serve their US customers, immunizing themselves against further worsening of the US and China relations," the consulting firm Kearney wrote in its 2022 Reshoring Index report.

Of course, the downside to the US consumer is that adding a go-between could mean higher prices. The Fed reports that prices of imports from Mexico are already on the rise.

Mexico is already angering its friends

As trade ramps up between China and Mexico, tensions are also rising between the two countries due to Mexico's decision to raise tariff rates between 5% to 25% for some goods coming from countries that don't have a free-trade agreement with the country.

The move raised eyebrows in China.

"Despite the fact that the measures taken by the Mexican authorities were not targeted against specific countries, they will, to a certain extent, affect trade and economic exchange between China and Mexico," He Yadong, a commerce ministry spokesperson, said at a press conference after the move.

And then there is the US. Some American companies have accused Mexico of limiting their ability to expand in the country in favor of local companies. This has caught Washington's attention and there's growing concern that this could lead to retaliatory tariffs.

This all could mean little to the Mexican economy if the government doesn't invest more to shore up the country's infrastructure.

If Mexico's economy is going to surge, it needs to be more than just a middleman. The country will continue to be attractive to foreign governments and corporations, but without domestic investment, the Mexican economy won't benefit directly from importing goods, manufacturing products with them, and then turning around and exporting those products to another country.

"The reason they turn and look at Mexico, and that Mexico is attractive, is that it's already integrated into the United States," Gerardo Esquivel, a former deputy chief of the country's central bank told Bloomberg. "That's going to bring more investment flows even if Mexico doesn't do anything."