July 10, 2024 | Made in Mexico

US manufacturing is in trouble as companies move offshore to avoid taxation, high wages, and asinine green legislation. John Deere, an American branded company, announced it will move manufacturing from Illinois to Ramos, Mexico. This is part of a growing trend of companies simply finding it difficult to turn a profit in the US.

John Deere is moving numerous plants to Mexico, effectively eliminating over 4,000 manufacturing jobs. As I have noted in other posts, the Biden Administration sought to expand manufacturing roles by 1 million in 2024 but has seen a contraction. As for John Deere, the issue of a shrinking agricultural sector is partnering with heightened manufacturing costs. The Department of Agriculture noted a 7% decline in farms across the nation since 2017, with only 1.89 million remaining. The USDA predicts net income from agriculture will fall by 27% in 2024, or $43 billion. Animal products and crops are also believed to be in decline, with the USDA foreseeing a $21 billion loss in revenue for 2024.

The USMCA (United States-Mexico-Canada Agreement) has made it easier for corporations to leave the US and Canada in favor of Mexico. The automotive industry has already fled to Mexico with BMW, Honda, Ford, General Motors, Audi, Nissan, Tesla, Mazda, and Toyota all breaking ground on new manufacturing plants. States like Illinois and Michigan are especially feeling the effects of this shift. Texas and bordering states have felt the effects of “near-shoring” business alliances since the North American Free Trade Agreement (NAFTA), the predecessor of the USMCA.

The average hourly salary for unskilled labor is $4.55 per hour in Mexico compared to $17.42 in the US. The cost of living is simply drastically less in Mexico than in the US or Canada. Mexico has a robust, educated workforce, with more students graduating with engineering degrees than in America. There is also a strong apprenticeship aspect to trade labor in Mexico, with multiple generations of men honing their skills from a young age.

Mexico has adopted policies in recent years to attract business, holding 14 free trade agreements with over 46 nations. IMMEX (Industria Manufacturera, Maquiladora y de Servicios de Exportación) has boosted manufacturing as it permits companies to avoid taxes when importing materials used to manufacture goods. The Sectoral Promotion Programs (PROSEC) reduces Most Favored Nations (MFN) tariffs to 5% if not zero and expands across 20 sectors.

Aerospace, automotives, electronics, and more have left the US in favor of Mexico. Manufacturing contributes to 16% of Mexico’s GDP and the sector has expanded a 3.2% annual growth over the past 10 years.

Mexico dethroned China to become the top exporter of goods to the US in 2023, exporting $475.6 billion to the US in 2023, a 5% YoY uptick. This is the first time in two decades that Mexico’s exports to the US surpassed China’s, as Chinese exports fell 20% for the year. Biden calls nearshoring a method of “friend-shoring,” as it is safer to depend on a country geopolitically aligned.

Yes, businesses based in America will still pay Uncle Sam, but the allure of cheaper production and labor is causing numerous sectors to decline rapidly. Then we have state laws in the US in addition to federal that undercut revenue, but the politicians in charge at the state level are not concerned about the GDP or world trade. Those decision-makers only need to focus on their next election to remain in power, whether it is a detriment to America as a whole or not. Analysts will claim that sending jobs and manufacturing to Mexico is a partnership, but capitalism is indeed a game, and in this situation, Mexico has the upper hand over the rest of North America.

Martin Armstrong July 10th, 2024

Posted In: Armstrong Economics

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