In U.S. trade war with China, Mexico is emerging as the big winner

In U.S. trade war with China, Mexico is emerging as the big winner

New data shows a surge in trade between China and Mexico at a time of tough tariff talk during the presidential campaign. Customs data shows a significant increase in raw materials and components from China entering Mexico to be manufactured into fully assembled items that are then transported into the U.S. via rail or by truck.

“We are seeing more Chinese companies moving their production facilities from China to Mexico,” said Jordan Dewart, president of cross-border logistics specialist Redwood Mexico, adding that these facilities use Chinese third-party logistics companies, which provide services such as warehousing, inventory management, and shipping. “They can bring in their parts and raw materials from China and then produce the product in Mexico at their Chinese facilities and then ship those goods into the U.S. They are adding some value by operating in Mexico and taking advantage of the USMCA [United States-Mexico-Canada Agreement] to have their product made in Mexico.”

This nearshoring of manufacturing enables companies to change a product’s origin of goods, also referred to as the “economic nationality” of a product. When components or raw materials are imported into a country and used to complete a product, they undergo what trade officials call a “substantial transformation” and the manufacturing location determines the duties and other charges that can be levied on that product. Companies importing Chinese components and raw materials into Mexico and manufacturing their products in Mexico would have a “Made in Mexico” stamp on them, not “Made in China.”

“The key sectors have always been automobiles and textiles in terms of determining origin,” said Mary Lovely, Anthony Solomon senior fellow at the Peterson Institute for International Economics. “To have a product that’s labeled Mexican as opposed to Chinese in origin, you have to substantially transform the product, which means it has to become a different product. So if I get a whole set of wooden boards, and it is manufactured into a desk. The product has to change customs categories.”

The manufacturing shift has also changed the way European companies are operating across a wide range of products. “We have European-based companies who once solely manufactured in China and are now manufacturing their products here,” said Simon Cohen, founder and CEO of Henco Logistics. The strong pace of nearshoring demand, with items being manufactured, boxed up, and shipped to the U.S. from Mexico, is being driven by the “China Plus One” strategy and the USMCA, he said.

Data from freight analytics firm Xeneta shows China to Mexico container trade up by 26.2% from January to July 2024, after growing by 33% in 2023. The month of May, in particular, recorded the most containers from China into Mexico, with June only a couple of hundred containers shy of May volume.

VesselBot, which also tracks container flows shows, says the three-month period of April, May, and June recorded the highest volumes of Mexico exports to the U.S this year.

Growth in demand for containers shipping imports from China into Mexico in the first half of 2024 is further fueling suspicions it has become a “back door into the U.S.,” said Peter Sand, chief analyst for ocean freight rate benchmarking and intelligence platform Xeneta. “This route has grown increasingly popular over the past year-and-a-half,” he said.

Mexico’s free trade agreements and economic alliances make the country an attractive location for setting up manufacturing operations. Mexico has 13 free trade agreements spanning 50 countries, including the USMCA, and free trade agreements with the European Union, the European Free Trade Area, Japan, Israel, 10 countries in Latin America, and the 11-country Trans-Pacific Partnership. Mexico is also a member of the Pacific Alliance, a trade bloc formed by Mexico, Chile, Colombia, and Peru.

 

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