In 2018, China was the United States’ biggest trade partner. And Donald Trump was the US president. When he substantially raised tariffs on imports from China, he sparked a massive trade war with the Asian manufacturing giant. And as a result, it became immediately more expensive for Chinese goods to enter US markets. And from a long-term perspective, it dissuaded companies from using Chinese supply chains.
Then 2020 came and everything changed.
In the aftermath of a global lockdown, 2021 saw massive spending. Increased US consumption snarled shipping ports, with literally hundreds of cargo ships from China drifting in deep water for a turn to unload. Shortages gripped the US and other major consumer markets. Containers that had cost $2,000 to ship from China to the US were now costing $20,000.
Then the Ukraine war began.
Commodities prices again spiked. Supply chains that stretched across the globe became increasingly vulnerable and fragile. Shortages and swift changes in demand exacerbated the situation even further. The prospect of sourcing materials and parts from the other side of the planet made less sense than ever. And for many, the very concept of globalism began to look outdated.
Meanwhile, the Trump-era trade war with China was still in full swing. Under President Biden, the tariffs remained at record highs. China’s manufacturing might was faltering. And just south of the US border, without much fanfare, a cycle that began in the 1990s came full circle:
Mexico became the new biggest US trading partner, unseating China’s decades-long reign.
China’s manufacturing sector, compared with that of Mexico, is clearly on opposite tracks. New export orders are contracting sharply (down 40%). Manufacturing activity is sliding. Overall composite PMI stands at approximately 50.9, suggesting vulnerability. Property prices in the Asian country are declining. And global demand for products made in China is waning.
Global market share for Chinese manufacturing isn’t what it was in the 1990s – or even the 2010s. And the long-term declining trend is undeniable. China’s manufacturing is faltering. And there are many factors that can be blamed for this decline of China’s manufacturing sector.
But remarkably, China has not given up on the US market. Nor has it abandoned its hopes for manufacturing domination. In fact, the country has been working an angle since even before the Trump trade war.
In 2014, China’s investment in Mexico spiked. Virtually non-existent until that point, it went from nearly nothing to $1.1 billion USD. A full decade ago, the savvy manufacturing giant saw a shift coming and began constructing a bridge. But what may have been a hunch or whim at first quickly became apparent to China. They doubled down. In 2016, they invested approximately $5.5 billion in the Mexican market.
Now, the past several years have been hard on China’s overall economy. But they’ve continued dumping massive amounts of cash into Mexico’s manufacturing scene. In spite of the dire need for domestic investment, China still poured nearly $3 billion into Mexico in 2022. And Chinese manufacturing companies are flocking to Mexico in droves.
Just a few recent examples:
And why is China investing literally billions of dollars in Mexico? Put simply, Mexico provides a backdoor to the US consumer economy. As a member of the US-Mexico-Canada (USMCA) agreement, Mexico enjoys little to no tariffs on imports and exports with other member nations. This loophole theoretically allows China to operate factories in Mexico for export to the United States without the prohibitive tariffs or other associated costs like trans-pacific shipping.
So long as these products meet minimum requirements for sourcing materials in within the North American bloc, they may enjoy the same tariff protections any other goods do in Mexico. This, however, is easier said than done.
Chinese companies who come to Mexico want to rely on deeply entrenched supply chains from Asia. But even if their goods fail to meet the minimum requirements and are subject to tariffs, the duties on goods from Mexico are much lower than on those from China. It’s a win all around.
But it’s not just that Mexico serves as a loophole to the trade war. China observed Mexico’s rising star more than a decade and began forming inroads and nourishing a partnership with Mexico years before Trump was even elected.
Why?
Clearly, China noticed that Mexico contained all the necessary ingredients for a manufacturing success story:
And over the past decade, these factors have merged with a moment in world history when what Mexico has is uniquely valuable. Call it a geopolitical planetary alignment. Call it a shift to localism over globalism. Call it an economic strategy that paid off. Whatever you call it, it’s working. Mexico is producing more now than ever.
However you look at it, Mexico has a lot of advantages for business. And the rising Chinese investment in that country points to a new paradigm in manufacturing – one in which the United States and Mexico are partners. Indeed, the future looks very positive for Mexico in the long-term. And that’s a forecast even China is willing to gamble on.
