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Mexico Overtakes China To Become the No. 1 US Trade Partner
Last month, the Federal Reserve Bank of Dallas reported that Mexico has officially replaced China as America’s top trade partner. From January to April 2023, trade between the U.S. and Mexico reached $263 billion, surpassing that of both China and Canada.
It should be no surprise that China was the top trade partner for the U.S. during the majority of the 2010s. China’s previous reign as the top U.S. trade partner began in 2014, but the country’s increase in trade started shortly after it joined the World Trade Organization (WTO) in 2001. Then, within 10 years of its admission, “critics increasingly accused China of flooding the world with cheap exports while limiting foreign access to its market.”
There seemed to be no way to surmount China from its top spot until its dramatic decline in 2018, immediately after “the Trump administration imposed new tariffs on imports from China, whose government responded with a similar action on imports from the U.S. China subsequently lost its position as top trading partner later that year.”
China began to rise again in the early 2020s leading into the pandemic until supply chain issues took hold. However, the global economy is also rapidly changing and being drastically influenced by recent sociopolitical issues unfolding all over the world. America’s relations with China have been fractured as of late, and that continues to hinder business and imports between the two countries.
Meanwhile, Mexico has upped the ante. Its “expanding manufacturing base has offered an alternative to producing in China,” giving them an edge in the exchange with the U.S. Approximately $157 billion worth of Mexican goods were imported into the United States between January and April, while America’s exports to Mexico totaled roughly $107 billion.
According to the Federal Reserve Bank of Dallas, “sourcing or producing goods in a nearby country is sometimes referred to as ‘nearshoring,’” and it offers many benefits. Sourcing manufactured goods from Mexico helps prevent supply chain issues and utilizes far fewer resources than having goods shipped from overseas.
Although still anecdotal, “more activity in Mexico would support increased bilateral manufacturing with the U.S.,” and “increased protectionism and related industrial policy are consistent with less global trade, more regional trade, and nearshoring and reshoring (returning production to the home country).”
One key example of this is how the automotive industry promotes cross-border manufacturing between Mexico and the U.S. This occurs when “a U.S. plant typically produces an intermediate good that is then exported to Mexico where it becomes part of the assembly process before a final good is then imported back into the U.S.”
Business Insider adds “that the average import from Mexico is ‘40% U.S made,’ meaning that 40% of the parts that go into the end product are still produced in the U.S. The average Canadian import, meanwhile, is 25% made in the U.S. ‘As for a product coming in from China? Just 4% of it was made in the USA,’” according to author Shannon O’Neil’s book, “The Globalization Myth: Why Regions Matter.”
As a result, the Federal Reserve Bank of Dallas noted that “while Mexico benefits from increased trade with the U.S., the impact on U.S. producers and consumers has been mixed. To the extent that frictions with China account for Mexico’s ascension in the trade rankings, the higher profile comes at a cost to U.S. firms and consumers through higher input and purchase prices.”
Recently, President Joe Biden has also made efforts to enhance the relationship between the U.S. and China “after seeing the fracturing grow in recent years.”
Regardless, it appears that trade with Mexico will continue to grow exponentially and be stronger than ever before.
Discussion Questions
DISCUSSION QUESTIONS: What do you think about the U.S. importing from Mexico, Canada, and China? Would the U.S. be better off focusing on producing more domestic products and exporting to other countries?
Poll
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Jasmine Glasheen
Content Marketing Manager, Surefront
Gary Sankary
Retail Industry Strategy, Esri
When it comes to manufacturing products, reshoring and nearshoring have been in play for a while now. Trump’s China tariffs, the pandemic highlighting the need for diversified supply chains, logistics snafus, and rising tensions with China have all played in Mexico’s favor. Other Latam countries have also benefitted, helped by the fact they are geographically proximate to the US which allows for shorter lead times. This is particularly advantageous for apparel where retailers need to quickly interpret trends and take them to market. Over the next few years, I think the importance of Latam as a trade partner will grow.
Mexico has so many advantages to leverage for US companies that I am only surprised this didn’t happen sooner. Proximity, a large population of potential workers, and integration with the US transportation infrastructure, to name a few.
It’s important to note that Chinese firms are pouring investments into Mexico to build manufacturing capabilities and preserve a market for Chinese goods, only now sporting a new Hecho en Mexico label.
There would be no better option than investing in US manufacturing as long as consumers are willing to pay for the American cost of living. Domestic manufacturing not only provides jobs, but protects our interests and dependency on rival nations. Given the choice, however, I’d vote for Made in Mexico over Made in China. The more local transport is better for the environment and allows for faster speed to market when needed (like personal protection items-face masks, etc).
In order for the apparel business to become more data driven at the product development level, the whole time/action calendar needs to be dramatically compressed. That’s a huge advantage for Mexico and all of Latin America. China knows this, so Gary Sankary’s comment is spot on. Even without the politics, the dynamics of the competitive market are hard at work here. Cheap labor made Asia the obvious choice for many years. As the labor advantage narrows, and political considerations increase, the move to Mexico makes abundant sense.
Near-shoring reduces risk in the supply chain. Given recent disruptions, it has been important for the U.S. to diversify it’s supply chain and distribute the risk. We were too reliant on China for our manufacturing needs in the past. This is not only increased supply chain risk, but also means we don’t have enough U.S. labor experienced in high tech manufacturing. To reduce future supply chain risk, this should be the next focus area – increasing local capabilities in high tech manufacturing so we don’t get left behind.
The emergence of Mexico as the top US trading partner is welcome due to several factors. Aside from the geopolitical factors with the China and US relationship, we are emerging from a disrupted post-COVID global supply chain, which had widespread impacts across the entire retail sector. As retailers and their wholesale partners were challenged with supply chain disruptions, long lead times, and empty shelves, nearshoring and Mexican-based manufacturing has become a viable and cost-effective operating model.
Mexico and the broader LATAM market will benefit significantly from the increased interest in nearshoring and the need for fashion brands to stay ahead of emerging trends while mitigating costs and driving profitability. TikTok and other social media platforms have influenced the accelerated fashion trend cycles. Apparel manufacturers have been working overtime to keep up with the rapid changes.
Increasing the proportions of fashion apparel produced in Mexico and the LATAM markets will help to ignite the promise and value proposition that the original NAFTA and subsequent U.S.-Mexico-Canada Agreement (USMCA) established. The increased nearshoring may eventually result in a renaissance of fashion apparel produced in the US.
The news is not that Mexico replaced China as America’s largest trading partner. It is that Mexico replaced Canada, which has historically been America’s largest trading partner (per DOC, June 2023). Notably, some 40 percent of the value of Mexico’s exports to the United States consists of parts and components made at American plants.
Would the U.S. be better off focussing on producing more domestic products? Sadly, geopolitics gets in the way of the best economic decisions for companies and countries. Goods should be sourced domestically or internationally from the country with the best advantage (price and quality) of producing those goods. Anything else will only increase the cost and lessen the quality of those goods.
Using trade for geopolitics, like the Trump (and continuing Biden) tariffs, they created the biggest tax increase for America’s middle class. Few trading tools are more efficient than tariffs. How much of tariffs on imported goods became a factor in recent inflation?
It’s fantastic products that are Made in Mexico can use a hybrid of American/Mexican production materials! Living in San Diego, where the border the Mexico is 30 minutes away, it’s easy to see the incredible local offerings that come from us working together.
The craftsmanship I’m seeing here is phenomenal. I hope it continues on mass produced goods as Mexico continues to expand its manufacturing for US retailers.
Expanding two-way trade across the Mexican border is a good thing. Companies take advantage of the labor cost savings when they ship parts and components to Mexico for final assembly and export to U.S. markets. This can be true for American auto manufacturers as well as Chinese consumer electronics makers.
It’s worth noting that this goes beyond the “maquiladora” practices of a few decades ago, where U.S. companies set up plants just across the border in Mexico to perform low-value labor. (For many years, millions of grocery coupons were sorted and counted in such facilities operated by manufacturer agents.)
It’s ironic that we needed to invent a term, “nearshoring,” to describe the common-sense business practice of sourcing goods closer to the point of consumption. A thriving trade in manufactured goods across North America and Latam is healthy for the entire region.
We will import goods into the States as long as the prices continue to be low enough to differentiate whichever products are being considered. Should we want to run a net trade surplus with all of our trading partners-of course. Is that remotely possible? No, primarily because in spite of the occasional wringing of hands when an exposè on working conditions in the Iphone factories comes out, we are hooked on the price points delivered by cheap labor. Speaking for me, I would not be excited about paying, say, $1,300 for an Iphone instead of $700 (which is still a lot of money). Sadly, it is easier to “vote with your wallet” than your conscience.
Apple works with suppliers in 43 countries and six continents to make its products, and the chain gets even more complicated when you break it down into raw materials. Most assembly is done in China because they offer the most and most competent human resources. If the iPhone were moved out of China toady, the product would not only be more expensive but of lesser quality.
Moving more production into the NAFTA area makes sense since buyers will be better protected from IP theft from designed products and be more predictable from a low or no tariff perspective. Moving trade to nearshore potentially reduces waste due to mismatched calendars, longer-term bets large batch runs vs. shorter run precise manufacturing
One of the goals of NAFTA is to facilitate the movement of goods and services across borders. As the volume of trade is growing across NAFTA, will the infrastructure be able to handle it and how can it be more efficient? It would be great if we as an industry, and country and as part of NAFTA think ahead and be more intentional about our infrastructure to become both more efficient and environmentally friendly.
This was a big driver of the just-completed Canadian Pacific – Kansas City Southern rail merger – Vancouver to New York, through Minneapolis and Chicago all the way down to Houston and on through the Mexican manufacturing heartland to Pacific ocean ports. A well-run operation that will deliver efficient logistics all the way around. (disclosure: my father-in-law was a VP at the CP back in the 1980s.)
Every country should be a net exporter…right ??(That is, of course a joke – as I hope everyone realizes.) Manufacturing has tended to drift to countries where labor is cheaper or natural resources are located or for a number of other reasons, and tho that may have disadvantaged certain people – namely those who used to work in those industries – it’s hard to make the argument the country as a whole has suffered. That, at least is the economics. From strategic or (other) political perspectives, we’ve learned it may indeed matter where things come from, but whether it’s best to have some things made here, or just in a variety of different places is hard to say.
Per your comment, studies have shown that the loss of jobs applied to international imports was more than made up for by new jobs created.
And, of course, yes, all countries can not be a net exporter. The math doesn’t work. It doesn’t even make economic sense for governments to have that as a target.
We need a strategic, balanced approach. Indeed, a shift to Mexico brings many more advantages and potentially solves several other problems, such as migration issues. Critical goods and differentiating products, their IP needs to stay in the US.
We have two good neighbors in Canada and Mexico. Both countries have product we want, and continue to be ripe for trade expansion. But we’ve not done enough strategic work, nor the investments in plant, technology with either to fully realize the good benefits. Some of the benefits are shorter distances to ship, friendly economies, retail growth for one another, a reasonable political climate for the USA, and a long-term buffer in the face of worldwide instability.
I’d love nothing more than to see the US, Mexico and Canada find a deeper grove in product, manufacturing, tech innovation and defense.