Trade consultant Nelson Balido, principal of Balido & Associates, outlines what Mexico's government must do in order for that country to become an attractive alternative for manufacturing products destined for U.S. consumers.

China of late has been losing its luster as a source of cheap manufacturing for goods sold in the western hemisphere. Factory wages are rising, reducing the cost advantage that sellers had realized from siting production overseas. Lack of intellectual property protection is another critical emerging issue that’s causing manufacturers to sour on China.

In theory, Mexico stands to gain from China’s loss. Its combination of relatively low-cost labor and proximity to U.S. markets makes it an ideal candidate for alternative sourcing. The recent ratification of the U.S.-Mexico-Canada Agreement, replacing the 25-year-old North American Free Trade Agreement, further enhances Mexico’s position as a key supplier of manufactured goods.

Yet several obstacles stand in the way of Mexico’s success. Chief among them, says Balido, are tensions between Mexican state governors and federal authorities. The former “understand [the importance of] cross-border trade and business,” he says, while the latter have put into place policies that threaten that activity. They include turning over Mexico’s customs operations to the military, and a pause in the move toward privatization of the country’s energy interests. The result, according to Balido, has been the misdirection of investments and frustration of opportunities for the development of clean energy, which otherwise promises to lower the cost of manufacturing in Mexico.

One model that encourages the growth of Mexican business might involve sourcing the parts that go into finished goods from multiple countries, possibly with final assembly in the U.S. But if Mexico’s government fails to seize the opportunity, Balido says, the country could be left out of future lucrative business deals.