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As the U.S. supply chain becomes disconnected from China, Mexican manufacturing is emerging as a winner.
Manufacturing in Mexico is attractive to companies that experienced pandemic-era supply chain disruptions and those looking to reduce dependence on U.S.-China trade amid geopolitical uncertainty.
This is called nearshoring. Bring production facilities closer to domestic markets.
Alberto Ramos, head of Latin American economic research at Goldman Sachs, said in an interview with CNN that Mexican manufacturing has a chance for long-term success as nearshoring continues and global supply chains are reorganized. he said.
Ramos said Mexico and China have long competed for the U.S. manufacturing market, but as the U.S.-China relationship changes, Mexico appears poised to gain an advantage.
Mexico will overtake China as the largest exporter to the United States in 2023. These exports were driven by manufacturing, which accounts for 40% of Mexico’s economy, according to Morgan Stanley.
According to trade statistics released by the Department of Commerce on April 4, U.S. imports from Mexico continued to increase in February.Meanwhile, China’s exports to the US fell by 20% 2023 compared to 2022.
Ms. Kathryn Tai, U.S. Trade Representative He told CNN’s Julia Chatterley that the U.S. economy has been overly dependent on China’s economy in the past because of supply chains.
“The challenge for us is how do we make our economies and trade more resilient? Because the way we trade today, supply chains are so intertwined and there is so much concentration in the Chinese economy. “We all feel very vulnerable because of the current situation and the supply chain is fragile,” Tai said.
As geopolitics and competition change, both U.S. and Chinese companies see potential in Mexican manufacturing: low labor costs, geographic proximity to the U.S. market, and Canada (USMCA) Agreement, a free trade agreement established in 2020 that allows trade in the North. America being more cost-effective and efficient are all factors contributing to a potential boom.
U.S. policy is intended to reduce dependence on China and “create greater resiliency” in U.S. trade, but moving supply chains could be fraught with challenges.
Indeed, the U.S. move to disengage from China’s economy could potentially allow China to access new markets and avoid U.S. tariffs.
Cars are a major export for Mexico, and they tell a lot about what’s going on.
Mexico is a global hub for automobile factories, with factories of major companies operating in the United States, such as General Motors, Ford, and Stellantis.
Almost all American automakers sources parts from Mexico to manufacture cars and trucks. Because these parts are significantly cheaper than US-made parts.
Free trade agreements like USMCA mean that businesses in the United States, Mexico, and Canada face fewer barriers when selling, buying, and moving parts across North America.
The shift away from free trade is tariff policy: In 2018, the United States increased tariffs on imports from China. This makes it more expensive for Chinese products to enter the U.S. market and discourages companies from relying on Chinese supply chains.
Jose Luis Gonzalez/Reuters
Employees working at the Ciudad Juarez factory that exports automotive products to the United States
A car requires tens of thousands of parts, which are manufactured in many different locations. Additionally, Mexican manufacturing is increasing exports to the United States, while Chinese companies are using Mexico as a route to avoid U.S. tariffs on Chinese goods, according to Xeneta, a sea freight benchmarking and market intelligence platform. There is a possibility that
Shipping container exports from China to Mexico rose nearly 60% in January compared to a year ago, according to container trade statistics analyzed by Xeneta.
A surge in exports from China to Mexico suggests that “the increase in trade we are seeing may be due to importers trying to avoid U.S. tariffs,” Zeneta’s chief analyst said. , Peter Sand said in a research note dated March 15.
An April report from Moody’s Analytics said Mexico is increasing manufacturing output, but production could be boosted by products made abroad.
According to José Enrique Sevilla Masip and John Raines, country risk analysts at S&P Global Market Intelligence, the increase in Mexican exports to the United States is due to “a simultaneous and closely correlated increase in Mexican exports from China. This is almost in line with the increase in imports.”
Goldman’s Ramos said there is an economic incentive to move production to Mexico to avoid tariffs. “This is a way to circumvent the policy objectives behind the tariffs,” he told CNN.
On Capitol Hill, lawmakers are focusing on the possibility that Chinese steel is avoiding U.S. tariffs. The Biden administration announced it is working with the Mexican government to prevent China and other countries from evading U.S. tariffs on steel and aluminum through imports from Mexico.
Already in February, Tai asked Mexican Economy Secretary Raquel Buenrostro about the “lack of transparency” surrounding Mexico’s imports of steel and aluminum from “third countries.”
Concerns about tariff evasion have drawn a reaction from the US president and will continue after the November election. The USMCA is scheduled to be reviewed in 2026.
US President Joe Biden and his challenger former President Donald Trump are both spouses There is a goal to grow domestic manufacturing, but opinions differ on how to go about it.
Biden recently told steel workers in Pittsburgh that the U.S. government should consider tripling tariffs on Chinese steel. And President Trump has proposed that if he returns to office, he could impose 60% tariffs on Chinese goods.
“Both U.S. presidential candidates are vying to capture key battleground states in the Midwest, where the auto industry is strong, and as the 2024 presidential campaign unfolds, the U.S.・The trade issue between Mexico and China will become even bigger.”
While supply chains are changing, relocating factories isn’t always easy. It can require a significant investment of time, money, and even human resources. But companies moving forward are creating long-term opportunities for Mexican manufacturing.
“It certainly feels like the economy is improving in Monterrey,” the northern Mexican city, said Christopher Enemarque, a portfolio manager at RBC. During a recent visit to Mexico, he told CNN: “After meeting with companies and experts in the real estate industry, the feedback we received was that nearshoring is likely to be a growth driver for Mexico, especially in the north, for several years.”
Tesla (TSLA), for example, announced last year that it would build a new factory in Monterrey. “We’re very excited about this,” Chief Executive Officer Elon Musk said at the company’s investor day, adding that the factory will expand production capacity rather than replacing capacity elsewhere. It added that it would add.
Julio Cesar Aguilar/AFP/Getty Images
A sign announcing the arrival of Tesla seen in Monterrey, Nuevo Leon, Mexico on March 12, 2023
Ramos told CNN that while sentiment on the ground is exciting, most investment flows are still unknown.
Analysts at Morgan Stanley expect Mexican exports to the United States to rise from $455 billion to about $609 billion over the next five years.
This makes Mexico an attractive base for many Chinese companies. In February, EV maker BYD, a global competitor to Musk’s Tesla, announced major expansion plans in Mexico.
BYD does not currently sell cars in the U.S. market, but moving to Mexico would give it better access to the Mexican market while also preparing it for a potential U.S. expansion.
“Chinese investment and exports to Mexico are very likely to be key issues ahead of the USMCA review scheduled for 2026,” Sevilla Massip and Raines said.
But until then, places like Monterrey will continue to benefit.
Monterrey, RBC reported. Enemerke says, “It feels more lively, new, and vibrant than other industrial cities I’ve been to, mainly in Asia.”
CNN’s Michael Nam contributed to this report.
