Top U.S. trading partner China is replaced by Mexico.

By COMFORT OGBONNA

Mexico has surpassed China as the top trading partner of the United States, with a trade volume of $263 billion during the first four months of 2023. This shift can be attributed to strained U.S.-China relations, U.S. tariffs on Chinese goods, and supply chain disruptions caused by the pandemic. Manufactured goods make up a significant portion of Mexico’s trade with the U.S., accounting for $234.2 billion of the total volume. Currently, trade with Mexico represents 15.4 percent of all U.S. imports and exports.

Canada has now taken second place in terms of U.S. imports and exports, accounting for 15.2 percent, according to Torres. China, on the other hand, follows closely behind with 12 percent. Torres attributes China’s rapid trade growth with the United States to its entry into the World Trade Organization in 2001.

This move allowed China to tap into major consumer markets and leverage its economic strength to become a prominent manufacturing hub. However, critics argue that China flooded the global market with inexpensive exports while restricting foreign access to its own market, resulting in significant declines in U.S. manufacturing employment.

Sectors and regions heavily dependent on China’s trade have faced adverse effects such as increased unemployment, decreased labor force participation, and limited wage growth.

Following the initiation of the U.S.-China trade war in 2018, Mexico has stepped in to fill the void. Additionally, Mexico has benefited from the trend of “nearshoring,” which involves relocating manufacturing operations from China to nearby countries that are less politically hostile.

Nearshoring not only helps to avoid the strict control and frequent lockdowns imposed by the Chinese Communist Party but also reduces shipping costs and facilitates coordination with factories in the same time zone. While bringing manufacturing back to the United States is not feasible due to high labor costs, real estate prices, and regulatory burdens, Mexico has emerged as a favored nearshoring destination in the Americas.
Torres emphasized the significance of maquiladoras, foreign-owned factories that capitalize on inexpensive Mexican labor for labor-intensive manufacturing processes. These factories have been instrumental in the U.S. automotive industry’s practice of shipping parts to Mexico for assembly and subsequent sale in the United States.

In addition to vehicle manufacturing, the maquiladoras are now witnessing a rise in the production of computer and electronic equipment, driven by the trend of nearshoring. While other industries are also shifting their operations to Mexico, Torres cautioned that the country’s manufacturing sector still incurs higher costs compared to China. Consequently, this leads to either higher retail prices or reduced profit margins for U.S. companies.

China maintains low labor costs by exploiting forced labor from captive populations, such as the Uyghur Muslims. Even those fortunate enough to receive payment typically earn wages well below global standards.

“While the principal focus of trade policy was once free trade, greater efficiency and lower prices, that may no longer be the case. Today’s global economic relationships encompass a myriad of concerns, among them national security, climate policy and supply-chain resiliency,” Torres concluded.

The pandemic has taught American consumers to expect rapid delivery times, leading to increased interest in nearshoring and shipping networks that don’t require crossing the Pacific Ocean. This trend, known as the “Amazon Prime Effect,” has made regional supply chains more attractive. Additionally, regional supply chains have the positive impact of creating more jobs in the United States, even if manufacturing is done in other hemispheric nations. For instance, approximately 40 percent of parts sent to Mexican factories are made in the United States, compared to only four percent for Chinese factories. Some major retailers, like Walmart, are becoming concerned about deteriorating relations with China potentially disrupting supply chains. As a result, “regionalization” is seen as a safer option than “globalization,” despite potentially higher costs.

Shifting manufacturing from China to Mexico has significant costs that should not be underestimated, according to a recent BI piece.

While American consumers may be concerned about higher retail prices for goods made with cheap Mexican labor instead of incredibly cheap Chinese labor, it is important to consider the potential risks associated with fragile transoceanic supply lines and factory shutdowns ordered by Chinese Communist overlords. While these concerns may not be at the forefront for the average consumer, professional market strategists recognize their significance.