Manufacturing in Mexico is having its time. The US is buying in — and so is China

Manufacturing in Mexico is having its time. The US is buying in — and so is China

As the US supply chain decouples from China, Mexico’s manufacturing sector emerges as a winner.

Manufacturing in Mexico is attractive to companies struggling with pandemic-era supply chains or looking to reduce reliance on trade between the US and China amid geopolitical uncertainty.

That’s called nearshoring, which is when companies bring production facilities closer to the home market.

As nearshores continue and global supply chains reorganize, Mexico’s manufacturing sector has a chance for long-term success, according to Alberto Ramos, head of Latin American economic research at Goldman Sachs, who spoke to CNN.

Ramos said Mexico and China have been competing for the US manufacturing market for years, but amid strained US-China relations, Mexico appears poised to advance.

Mexico overtakes China as the top exporter to the US in 2023. Those exports are driven by manufacturing, which comprises 40% of Mexico’s economy, according to Morgan Stanley.

US imports from Mexico continued to rise in February, according to April 4 trade data released by the Commerce Department. Meanwhile, China’s exports to the US are down 20% in 2023, compared to 2022.

US Trade Representative Katherine Tai told CNN’s Julia Chatterley that the supply chain has made the US economy too dependent on China’s economy in the past.

“The challenge for us is how do you create more resilience in your economy and trade? Because currently, the way trade operates, our supply chain is entangled and they have created so much concentration in the Chinese economy, that we all feel very vulnerable because the supply chain is fragile,” Tai said.

Amid geopolitical changes and competition, US and Chinese companies see potential in Mexican manufacturing: Low labor costs, geographic proximity to American markets and the US-Mexico-Canada agreement (USMCA) — a free trade agreement established in 2020 that makes trade in North America is more cost-effective and efficient — all contributing factors to the potential boom.

Made where?
While US policy aims to reduce reliance on China and “create more resilience” in US trade, supply chain movements can be complicated.

In fact, the US push to disengage from the Chinese economy may allow China to access new markets and avoid US tariffs.

Cars are a major export for Mexico, and they reflect a lot of things going on.

Mexico is a global hub for auto factories, hosting factories from major companies operating in the US, including General Motors, Ford, Stellantis and nearly a dozen others.

Almost every American car manufacturer relies on parts from Mexico to build its cars or trucks, because those parts can be much cheaper than parts made in the US.

Free trade agreements like the USMCA mean that companies in the US, Mexico and Canada face fewer barriers to moving, selling and buying parts across North America.

A diversion from free trade is tariff policy: In 2018, the US raised tariffs on imports from China, which made it more expensive for Chinese goods to enter the US market and prevented companies from relying on Chinese supply chains.

Cars require tens of thousands of parts, which can be made anywhere. And while Mexico’s manufacturing sector boosts exports to the US, Chinese companies may use Mexico as a route to avoid US tariffs on Chinese goods, according to Xeneta, a sea freight rate benchmark and market intelligence platform.

Exports of shipping containers from China to Mexico rose nearly 60% in January compared to a year ago, according to Container Trade Statistics analyzed by Xeneta.

The surge in exports from China to Mexico suggests the possibility “that the increase in trade we are witnessing is due to importers trying to circumvent US tariffs,” Peter Sand, chief analyst at Xeneta, wrote in a March 15 research note.

An April report by Moody’s Analytics said that although Mexico has increased its manufacturing output, output may be boosted by goods produced abroad.

The increase in Mexican exports to the US has been “roughly matched by a simultaneous and closely correlated growth in Mexican imports from China,” according to S&P Global Market Intelligence country risk analysts Jose Enrique Sevilla-Macip and John Raines.

Goldman’s Ramos said there is an economic incentive to move production to Mexico to avoid tariffs. “It’s a way to circumvent the policy objectives behind the tariff,” he told CNN.

On Capitol Hill, the possibility of Chinese steel bypassing US tariffs has drawn attention from lawmakers. The Biden administration announced that it is working with the Mexican government to prevent China and other countries from circumventing US tariffs on steel and aluminum through US imports from Mexico.

As early as February, Tai asked about the “lack of transparency” regarding Mexico’s steel and aluminum imports from “third countries” during a meeting with Raquel Buenrostro, Mexico’s economy secretary.

Concerns about tariff evasion drew a response from the US president – and will continue after the November election. The USMCA is set to be revised in 2026.

Both US President Joe Biden and his challenger, former President Donald Trump, support the goal of expanding domestic manufacturing, but they differ on how to do it.

Biden told steelworkers in Pittsburgh recently that the US government should consider tripling tariffs on Chinese steel. And Trump has suggested a potential 60% tariff on Chinese goods if he returns to the presidency.

“With both US presidential candidates competing to win key Midwestern states with important automotive industries, the US-Mexico-China trade issue will only increase as the 2024 presidential campaign unfolds,” said Sevilla-Macip and Raines of S&P Global.

A gradual transition
While supply chains are shifting, relocating factories isn’t always that easy. It can take a huge investment, from time to money to people. Companies moving forward, however, create long-term opportunities for Mexico’s manufacturing industry.

“It certainly feels like things are booming in Monterrey,” a city in northern Mexico, said Christoffer Enemaerke, portfolio manager at RBC. On a recent trip there, he told CNN, “we met with companies and experts in the real estate industry and the feedback was that nearshoring is likely to be a multi-year growth driver for Mexico, especially in the northern part of the country. .”

Tesla (TSLA), for example, said last year that it would build a new factory in Monterrey. “We’re very excited about it,” CEO Elon Musk said during an investor day for the company, adding that the plant will add capacity, rather than replace capacity elsewhere.

Sentiment on the ground is attractive, but most investment flows are yet to be seen, Ramos told CNN.

Analysts at Morgan Stanley see the value of Mexico’s exports to the United States rising from $455 billion to about $609 billion over the next five years.

That also makes Mexico an attractive base for many Chinese companies. EV maker BYD, a global rival to Musk’s Tesla, announced in February plans for a major expansion in Mexico.

Although BYD does not currently sell cars in the US market, the move to Mexico will provide better access to the Mexican market while preparing the company for a possible move to the US.

“Chinese investment and exports to Mexico will most likely be a major issue ahead of the USMCA’s scheduled 2026 review,” Sevilla-Macip and Raines said.

Until then, however, places like Monterrey continue to reap the rewards.

Monterrey, says RBC’s Enemaerke, “feels booming, new and vibrant, more than any other industrial city I’ve been to, which is mostly in Asia.”