When China and the US Have a Trade War, Mexico Wins

The "Three Amigos" summit held in Mexico City brought together the US,  Mexico, and Canada in an agenda filled with concerns about illegal  immigration, drug trafficking, and energy security. But the summit also  offered opportunities to capitalize on a fantastic year of trade between  Mexico and the US.

In October alone, U.S. imports from Mexico increased by 17.5% compared  to last year, while U.S. imports from China decreased by 7.2%. This  shift is even more substantial in vehicles and electronics, which  increased respectively by 25.8% and 24.3%

Trade wars affect supply chains. In 2022, this involved a clear shift in  US imports from China to Mexico and other “substitute” countries, such  as Malaysia, Taiwan, and Thailand, which increased their exports to the  U.S. and the rest of the world.

China has long been the world's leading manufacturer, but the pandemic,  the trade war, and rising wages have caused some manufacturers to look  for alternatives. Mexico is an increasingly attractive option for the US  due to its physical proximity, favorable trade agreement, and decades  with a strong manufacturing tradition. As a result, some U.S. companies,  such as Walmart, Samsung, Amazon, and Dell, have decided to move their  supply chains to Mexico as an alternative to China.

The trade war has also impacted the U.S. auto parts industry and home  furnishings market, benefiting exporters in Thailand and Vietnam.

But the shifts in trade are not only limited to products facing high  tariffs. U.S. computer imports from China, a product with a U.S. tariff  of zero, have decreased by $3.4 billion, while imports from Mexico have  increased by $9.2 billion.

Manufacturing between the U.S. and Mexico is highly integrated. For some  companies, the uncertainty created by the trade war was enough to  shift. For example, Dell, the computer manufacturer, announced in 2019  that it was opening a new manufacturing facility in Mexico to reduce the  impact of tariffs on its supply chains in the U.S.

Dell's shift to Mexico came with challenges, including a rapidly  changing market about to burst. In 2020, U.S. imports of laptops,  computers, phones, and headphones from China were higher than ever.  Stuck at home, consumers switched their spending away from services and  toward electronics. But as the market has shifted and the trade war  tariffs continue, the U.S. has decreased its reliance on China.

Currently, China accounts for 18% of U.S. imports, down from 22% at the  beginning of the trade war. Conversely, U.S. imports from Mexico have  increased by 38% from pre-trade war levels and have recovered well  following the pandemic.

Regional value chains are gaining popularity as a sustainable and  resilient alternative to global value networks. They provide economic  benefits for local producers and consumers and can help increase  Mexico's share of the North American market. Developing more robust  regional value chains can also lead to the growth of new industries in  Mexico, such as electric mobility and clean energy, resulting in good  manufacturing jobs.

In addition, robust regional value chains are advantageous for the  United States and Canada. As Mexico's manufacturing sector expands and  develops economies of scale, specialization, and internal competition,  it strengthens the resilience and competitiveness of the entire North  American region.

By working together, the Three Amigos can identify areas where their  countries have complementary capabilities and could develop supply chain  networks that rely more on local and regional sources. By investing in  infrastructure, supporting domestic suppliers, and promoting digital  technologies like DataMexico, the supply chains in North America can become more resilient and competitive.