In spite of being on top for decades, China is no longer the top US trade partner. That honor now belongs to Mexico. And the Latin American country isn’t slowing down.
Recent numbers reveal a strengthening of economic partnership and inter-reliance between the neighboring nations. And this period coincides with a weaking of trade with China that may deepen the disparity much further in coming years as Mexico continues prioritizing manufacturing and infrastructure development.
Total bilateral trade between Mexico and the United States as of the beginning of 2023 reached a staggering $263 billion USD for Jan-April, making Mexico the top US trading partner for the second time since last year. For the past few years, China and Canada have vied with Mexico for this spot, and the countries have been in a near three-way tie since 2020.
However, trade between the US and Mexico during the first four months of this year constituted 15.4% of all the goods exported and imported by the US. Canada holds the number two spot at 15.2%, while China has now slumped to just 12%. The gap is widening.
During this period, the US imported $157 billion from Mexico and exported $107 billion to Mexico, overall. This comes as no surprise, as Mexican manufacturing has been growing steadily. And of course, manufactured goods are a primary factor in import and export between the two countries. During this period, total trade of manufactured goods between Mexico and the US exceeded $234 billion USD.
China’s bilateral trade with the US had been growing since the signing of NAFTA and a few years later China’s admittance into the WHO. Decades of friendly tariffs, low labor costs, and a strong supply chain had made the Asian country the indisputable king of export manufacturing. But several factors contributed to the decline of China on the world scene overall, erasing its status as the top US trading partner specifically.
The situation is complex. But to put it simply, China no longer has the same benefits it once offered US manufacturers and consumers. The Pacific Ocean stands between the countries as a barrier to swift and flexible transportation of goods. In the Amazon Prime era, consumer demand can change rapidly, and manufacturers must have the ability to deliver goods quickly and in lockstep with shifting trends. Additionally, the costs of energy and fuel to transport these goods across the world has become prohibitive.
But China has also experienced a population decline that exacerbated rising labor costs. The working age population, ages 15-59, has decreased by 8% in recent years, and census data reveals this demographic now has only 875 million people, down from 970 million just a decade ago.
Additionally, the Trump-era trade war that set up a spike of new tariffs significantly damaged China’s popularity among US companies and consumers. Prices simply rose too high to sustain China’s top US trading partner status. Now, around $335 billion in trade, or 66% of China’s US-bound exports, fall under these restrictive tariffs, averaging 19.3%. In retaliation, China now has a 21.2% average tariff on US goods bound for China. And according to the WHO, this exceeds the average tariff rate between member nations by around 9%.
But there are additional factors cementing Mexico’s status as the top US trading partner. For one, the recent global crisis revealed a growing shift away from globalism to regionalism. New value has been placed on resilience. While supply chains that stretched across the globe may have made sense at one point due to high cost efficiency, these tiny margins expose companies to greater risk during times of uncertainty and crisis.
As such, US manufacturers and manufacturers across the globe place more value on regionalization, keeping supplies closer to them. In light of this shift in priorities, nearshoring has strengthened as a trend. This affords more flexibility, shortens transit times, and affords greater control of the supply chain. Therefore, it makes sense for US companies to begin prioritizing business with Mexico over China.
Mexico has also maintained a relatively stable low cost of labor and is becoming the more cost-effective option. While China’s labor costs are skyrocketing, Mexico remain among the lowest in the developed world.
Free-trade agreements with over 50 countries has also made Mexico extremely popular with US manufacturers. The country now has preferential tariff arrangements with most of the global market. And under the USMCA, Mexico enjoys a virtually duty-free export/import relationship with the US.
As long as Mexico continues to invest in infrastructure, free-trade agreements, skilled labor development, and pro-business policies, it is likely their status as top US trading partner will hold. Canada is still quite competitive, and the position may change hands from time to time. But China’s day in the sun seems to have passed. And by all signs, tomorrow belongs to Mexico.
