Mexico has been making front page news recently for all the wrong reasons. As a major drug producing and transit country, it is the main foreign supplier of marijuana and a major supplier of methamphetamine to the United States. Although Mexico accounts for only a small share of worldwide heroin production, it supplies a large share of heroin consumed in the United States. An estimated 90% of cocaine entering the United States transits Mexico. In the United States, wholesale illicit drug sale earnings estimates range from $13.6 billion to $48.4 billion annually. From January 2000 through September 2006, the Mexican government arrested over 79,000 people on charges related to drug trafficking. Some 8,000 people have died in Mexico the past two years, as drug gangs fight for territory amid government crackdowns.

Although Mexican drug cartels, or drug trafficking organizations, have existed for quite some time, they have become more powerful since the demise of Colombia's cartels in the 1990s. Mexican drug cartels now dominate the wholesale illicit drug market in the United States. Arrests of key cartel leaders, have led to increasing drug violence as cartels fight for control of the trafficking routes into the United States.

Closure of the cocaine trafficking route through Florida also pushed cocaine traffic to Mexico, increasing the role of Mexican cartels in cocaine trafficking. The National Drug Intelligence Center now considers Mexican drug cartels as dominating the U.S. illicit drug market. According to the Center, Mexican cartels "use their well-established overland transportation networks to transport cocaine, marijuana, methamphetamine, and heroin – Mexican and increasingly South American – to drug markets throughout the country."

As a result of their dominance of the U.S. illicit drug market, Mexican cartels are the leading wholesale launderers of drug money from the United States. Mexican and Colombian trafficking organizations annually smuggle an estimated $8.3 to $24.9 billion in drug proceeds into Mexico for laundering. In addition to money, stockpiles captured by Mexican soldiers show that warring traffickers are now obtaining military-grade weaponry such as grenades, launchers, machine guns, mortars and anti-tank rockets.

Against a backdrop of kidnappings, murders and police battles with drug cartels, Mexican industry has been going in a different direction. The 41% drop in the peso against the U.S. dollar has made Mexico an even cheaper place to manufacture. Factory workers in Juarez can be hired for $1.50 an hour. A quiet transformation has been taking place south of the U.S. border.

Sound fiscal and monetary policies after the 1994 financial crash have made Mexico a more stable macroeconomic environment. Local governments have been collaborating with universities and private industry to upgrade their workforces, parts supply networks, research and development programs and infrastructure. Mexico has become a magnet for factories that go beyond assembly work.

Mexico stands to benefit from a number of developments that are working in its favour. Canadian and American companies are revisiting their reliance on Asian manufacturing and are reconsidering their “near-shoring” options. Mexican goods can reach U.S. and Canadian cities in a matter of days rather than a month from China, a big issue as importers seek to reduce inventory costs and lead times. As the economic turnaround begins to unfold, rising Chinese costs and concerns over increasing fuel and transportation costs are becoming important considerations. Mexico looks better than China when it comes to technology theft, quality control and delays due to miscommunication. NAFTA and similar free-trade deals with Japan, Europe, and most of Latin America give Mexico duty-free access to more markets than any other country.

However, as the conduit for the movement of goods between Canada, the United States and Mexico, trucking companies need to be particularly vigilant. A government-funded intelligence group is warning U.S. trucking companies working in Mexico or near the border to establish special security procedures in light of the surge in drug-related violence along the key commercial corridor.

The Highway Information Sharing Analysis Center, which is financed by the Department of Homeland Security and run out of the Transportation Security Administration, issued an advisory warning drivers and trucking companies that they could be exposed to violence from Mexico's drug wars. "Truck drivers carry a risk as they are involved in operations that might interest these criminals," the warning said, adding that drivers should "maintain situational awareness at all times and be extremely conscious of your environment." The center urged trucking companies to set up internal reporting procedures so their drivers can maintain regular contact while in risky areas. It also advised firms to establish special distress signals. Center director Don Rondeau said transportation-industry representatives had sought advice on how to protect drivers and trucks.

Mexico has a way to go to solve its drug traffic issues. Fortunately, attacks on foreign staff and factories have been rare in the border towns along the drug-trafficking routes. A recent survey of 136 U.S. manufacturers by Boston supply-chain consulting firm AMR Research indicates that the companies intending to expand in Mexico outnumber those planning to cut back by 5 to 1. In China, the ratio is 2 to 1. Mexico is becoming a key manufacturing centre in aerospace, automotive, computer equipment, consumer electronics, home appliances, information technology, light manufacturing, machinery, medical devices, microelectronics, pharmaceuticals and telecom equipment. If Mexico can address its drug related issues as the economy recovers, it may become a preferred supply chain location compared to India, China and other countries.