Manufacturing in Mexico experiences a surge in popularity. Both the US and China increase their purchases.
The growing popularity of manufacturing in Mexico is catching the attention of businesses that faced supply chain issues during the pandemic or want to reduce their reliance on trade between the US and China due to political uncertainties. This phenomenon is known as 'nearshoring,' which involves bringing production facilities closer to domestic markets. According to Alberto Ramos, head of Latin American economics research at Goldman Sachs, who spoke with CNN, Mexico's manufacturing sector has a great chance for long-term success due to nearshoring and the restructuring of global supply chains.
Over the years, Mexico and China have been locked in a battle for the US manufacturing market. However, with the evolving US-China relationship, Mexico seems set to take the lead. Mexico surpassed China as the primary exporter to the US in 2023, mainly driven by the manufacturing sector, which makes up 40% of their economy. Statistics indicate that US imports from Mexico continued to rise in February, while Chinese exports to the US dropped 20% in 2023 compared to 2022.
US Trade Representative Katherine Tai spoke with CNN's Julia Chatterley about how the US economy has become overly reliant on the Chinese economy. She mentioned that the goal is to create more resilience in the Indian economy and trade. "The challenge for us is how do you create more resilience in your economy and in trade? Because right now, the way trade has been operating, our supply chains have been so entangled, and they've created so much concentration in the Chinese economy that we all feel extremely vulnerable because the supply chains are fragile," Tai said.
US and Chinese companies are looking for opportunities in Mexican manufacturing. Several factors are contributing to this boom, including low labor costs, proximity to American markets, and the USMCA – a 2020 free trade agreement that simplifies and makes trade in North America more cost-effective.
Despite efforts to decrease US reliance on China and foster greater resilience in the American economy, shifting supply chains can be challenging. In fact, the need to disengage from the Chinese economy might even be helping them expand their reach and avoid US tariffs.
Cars are a prime example. Mexico is a global hub for car factories, with companies like General Motors, Ford, Stellantis, and more than a dozen others. Almost every American auto manufacturer relies on parts from Mexico to produce their vehicles since they are significantly cheaper than parts made in the US. The USMCA eliminates barriers for companies in the US, Mexico, and Canada, making it easier for them to move, sell, and buy parts across North America.
However, tariff policy is another concern. The US raised tariffs on Chinese imports in 2018, which makes it more expensive for Chinese goods to enter US markets, discouraging companies from relying on Chinese supply chains. Cars require an enormous number of parts, which can be produced in various locations. Although Mexican exports to the US are increasing, Chinese companies might be using Mexico as a way to evade US tariffs.
According to Xeneta, a platform tracking ocean freight rate data, exports from China to Mexico increased by nearly 60% in January 2023 compared to the previous year. This trend raises the possibility that the increase in trade is due to importers trying to bypass US tariffs. Peter Sand, chief analyst at Xeneta, noted in a March 15 research report that "the increase in trade we are witnessing is due to importers trying to circumvent US tariffs."
A Moody's Analytics report in April revealed that while Mexican manufacturing output is increasing, production may be augmented by goods manufactured elsewhere rather than in Mexico. The same source also pointed out that the growth in Mexican exports to the US has been mirrored by "simultaneous and closely correlated growth in Mexican imports from China."
In response to concerns about tariff evasion, the US and Mexican governments are working together to prevent Chinese steel from entering the US through Mexican imports. Biden recently announced that they are reviewing tariffs on Chinese steel and aluminum, an issue that is likely to remain a concern beyond the upcoming election. Both Biden and Trump, regardless of who wins, aspire to promote domestic manufacturing but have different plans for accomplishing it.
"The ongoing tug-of-war between the two US presidential hopefuls over the crucial Midwestern states with sizable auto industries will only heighten the significance of the US-Mexico-China trade dynamics throughout the 2024 election campaign." - Sevilla-Macip and Raines from S&P Global.
As the global supply chain undergoes a metamorphosis and corporations transfer their factories, it's not always a straightforward process. This shift requires considerable investment, time, money, and resources. However, the companies that are moving forward are opening up lasting prospects for the Mexican manufacturing sector.
"Things seem to be thriving in Monterrey, a city in northern Mexico," stated Christoffer Enemaerke, a portfolio manager at RBC. During a recent trip there, he spoke to CNN and mentioned, "we met with firms and experts in the real estate sector, and they all agree that nearshoring could drive growth in Mexico, particularly in its northern regions, for several years."
Tesla (TSLA) is one such company that has announced plans to establish a new facility in Monterrey. CEO Elon Musk touted this decision by stating, "We're absolutely stoked about it," adding it would augment their capacity instead of replacing existing capacity.
There's a buzz on the ground, but the significant investment flows have yet to make their appearance, according to Ramos.
Analysts at Morgan Stanley predict the value of Mexico's exports to the US will surge from $455 billion to approximately $609 billion in the coming five years.
This growth makes Mexico an enticing prospect for several Chinese companies as well. EV manufacturer BYD, a global rival to Tesla led by Elon Musk, announced plans for a substantial expansion in Mexico in February.
Although BYD doesn't sell cars in the US market currently, establishing themselves in Mexico would offer better access to the Mexican market while streamlining their transition into the US.
Sevilla-Macip and Raines believe the growth of Chinese investment and exports to Mexico will become a prominent issue before the 2026 scheduled review of the USMCA.
Until then, places like Monterrey continue to reap the benefits.
"Monterrey feels booming, fresh, and bustling, more so than other industrial cities I've been to, which have mostly been in Asia," claimed Enemaerke from RBC.
CNN's Michael Nam contributed to this report.
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Source: edition.cnn.com
