In 2023, Mexico overtook China as the No. 1 source of goods imported to the United States for the first time in over two decades, according to data from the U.S. Commerce Department.
The value of imports from Mexico rose almost 5%, to more than $475 billion, from 2022 to 2023. At the same time, the value of Chinese imports plummeted 20%, to $427 billion.
This significant shift in trade flows is a good trend for the U.S., but are we seeing the whole picture?
Let’s Look Under the Hood
Are Mexican exports to the U.S. actually greater than Chinese exports? Probably not, when measured in units or tons. Mexican exports are 11% higher measured in dollars. That percentage needs to be adjusted for relative pricing to compare exports in real terms.
In 2022, Mexico had a trade deficit of $108 billion with China, inevitably driven by Chinese prices mostly being lower than Mexican prices. Mexico’s trade deficit with China was 6% of Mexico’s GDP.
In contrast, the U.S. trade deficit with China is 1% of our GDP. U.S. goods’ prices average about 40% higher than China’s leaving the factory. Based on their massive trade deficit with China, I estimate Mexico’s prices to average 20% higher than China’s, more than offsetting the 11% trade difference measured in dollars. I also found some Department of Transportation (DOT) data that suggests that the tonnage of imports from China was greater than that from Mexico in 2023, excluding petroleum, minerals and agricultural products.
I expect Mexico’s prices will rise, driving the dollar value of imports higher. China’s weak economy has resulted in deflation, and the yuan is down 15% vs. the dollar since 2021. In contrast, on Jan. 1, 2024, Mexico raised its minimum wage by 20%, and the peso is up 15% from January 2020.
Also, the Chinese drop may have been partly cyclical. The U.S. had overstocked on Chinese goods during the pandemic and worked that inventory down in 2023. Shorter lead times on Mexican goods meant smaller inventory builds. Chinese shipments may recover in 2024.
Let’s Dig Deeper
Does the change in trade volume mean the U.S. is much less dependent on China? No. Mexico largely ships product categories that we make in volume here; e.g., agricultural products, motor vehicles, oil and gas and beer. China still ships us huge volumes of products that can almost only be obtained from China; e.g., rare earth minerals, solar cells, computers, cell phones and carbide.
Increasingly, Chinese products are being shipped to Mexico to be finalized and exported to the U.S. to skirt U.S. duties and tariffs.
In conclusion, the import data is an inexact measure of the actual physical amounts and the impact on the U.S., Mexico and China.
U.S.-Mexico Cross-Border Trade Flows
Some industries, such as automakers, rely heavily on cross-border trade with Mexico and have set up plants on both sides of the border that depend heavily on each other for a steady flow of parts. The Alliance of Automobile Manufacturers stated, "In many instances, auto parts can cross the border seven to eight times before being integrated into the final assembly of a vehicle.”
In principle, on each shipment, only the new value added is reported as the value of the import. When there is no duty, I wonder if that principle is always followed, or if the total value of the shipment is calculated with each pass. If it’s the latter, Mexican shipments are overstated. An in-depth analysis raises concerns.
Chinese Foreign Direct Investment (FDI) Flocks to Mexico
The Chinese investment that is pouring into Mexico represents a rerouting of trade from China through Mexico. Chinese products are being shipped to Mexico to be finalized and exported to the U.S. with zero USMCA duty or China Section 301 tariffs. Chinese FDI into Mexico is largely in manufacturing facilities in regions that export to the U.S.
Setting off Warning Bells
Tesla, the #1 worldwide EV-maker, and its biggest rival, China-based behemoth BYD, are stoking worries among other U.S. automakers. Tesla CEO Elon Musk is wooing his Chinese suppliers to replicate the Tesla Shanghai gigafactory supply chain and locate it in Mexico. At the same time, BYD has announced plans to build an EV factory in Mexico for exporting to the U.S. market. In addition, the value of auto parts made by Chinese factories in Mexico and exported to the U.S. jumped 15% from 2022, to reach $1.1 billion in 2023.
Here’s the rub — American tax attorneys have discovered a way in which a Chinese-owned enterprise with a facility located in Mexico could build EVs that would qualify for the U.S. $7,500 tax credit, providing no China-sourced battery minerals or components were used in the manufacture of the EVs. China-based battery maker Contemporary Amperex Technology Company is already considering a facility in Mexico, while other companies have expressed interest in lithium mining in Mexico.
The U.S. is considering raising tariffs on all Chinese EVs, no matter where they are finally assembled, to circumvent the export of Chinese EVs through Mexico and also to address concerns about Chinese smart cars/parts and data security.
Is Nearshoring to Mexico a Good Trend for the United States?
The short answer is yes. Nearshoring to Mexico is better for the U.S. than work staying further offshore; for example, in Asia. More nearshoring to Mexico supports increased bilateral manufacturing with the United States. Mexican exports to the U.S. have, on average, 40% U.S. content vs. 5% for Chinese exports.
Mexico is an attractive manufacturing alternative due to the benefits of localization. Free trade agreements between the U.S., Mexico, and Canada (USMCA) eliminate tariffs on most goods manufactured in Mexico. In addition, Mexico is a much lower geopolitical risk than China. Also, as millions of Mexicans get good jobs nearshored from Asia, crime, corruption and drug smuggling will decline. Incomes will rise faster, and the U.S. will offshore less to Mexico. North America will be stronger.
What’s Driving the Trend?
Geopolitical risk and industrial policy are driving reshoring and FDI into the U.S., and nearshoring and FDI to Mexico. COVID shutdowns, the Ukraine and Israel-Hamas wars, the Red Sea crisis and increasing tension over Taiwan show that it is time to evaluate reshoring and nearshoring as insurance against disastrous disruptions.
Factoring in Geopolitical Risk
The importance of factoring in geopolitical risk when making sourcing decisions for your business has surged in the last few years. Companies can use the Reshoring Initiative’s free online TCO Estimator and our new Geopolitical Risk measure (GPR) to compare alternative sources. GPR is the probability in a year of a U.S. buyer being decoupled for six months or more from its source.
United States GPR
Sourcing from within the United States carries a minimal degree of geopolitical risk (GPR: 0.05%/year). The U.S. is uniquely positioned with peaceful neighbors, vast ocean borders defended by the world’s most powerful Navy and history’s most advanced military, with an immense degree of cultural influence around the globe. These factors give the U.S. an exceedingly low level of geopolitical risk for American firms doing business with other American-based firms.
Mexico GPR
Mexico’s advantageous geography and low GPR score (GPR: 0.4%/year) make Mexico an attractive nearshoring location for U.S. manufacturers. The chief risks of doing business in Mexico stem from its high levels of corruption, organized crime and lagging infrastructure. Overall, U.S. firms face a moderately low level of supply chain risk when operating in Mexico.
China GPR
In contrast, sourcing products from China carries a considerable amount of geopolitical risk (GPR: 3.5%/year), thus an estimated overall risk around 35% over 10 years. The main risks stem from four areas: authoritarian governance, favoritism to Chinese competitors, the desire to reclaim Taiwan and susceptibility to international sanctions. In addition to the risk of war, there is the potential for voluntary economic decoupling between the U.S. and China.
Conclusion
The U.S. likely still buys more physical goods from China than from Mexico, even if it is a lower dollar amount. The Mexico/China trend is an important piece of the self-sufficiency puzzle.
However, U.S. dependence on China for key products has not been reduced. U.S. and Mexican companies and government need to accelerate both reshoring and nearshoring. For help, contact me at 847-867-1144 or [email protected]
Harry Moser is founder and president of the Reshoring Initiative.
