US and China are buying into Mexico’s manufacturing moment

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As US supply chains decouple from China, Mexico’s manufacturing sector is emerging as a winner.

Manufacturing in Mexico is attractive for companies that experienced pandemic-era supply chain snarls or want to decrease reliance on trade between the US and China amid geopolitical uncertainty.

That’s called nearshoring, which is when companies bring production facilities closer to home markets.

As nearshoring continues and global supply chains are reorganized, Mexico’s manufacturing sector has an opportunity for long-term success, according to Alberto Ramos, head of Latin American economics research at Goldman Sachs, who spoke with CNN.

Ramos said Mexico and China have been competing for the US manufacturing market for years, but amid a shifting US-China relationship, Mexico looks poised to pull ahead.

Mexico surpassed China as the top exporter to the US in 2023. Those exports were driven by manufacturing, which comprises 40% of Mexico’s economy, according to Morgan Stanley.

US imports from Mexico continued to increase in February, according to April 4 trade data released by the Commerce Department. Meanwhile, Chinese exports to the US were down 20% in 2023, compared to 2022.

US Trade Representative Katherine Tai told CNN’s Julia Chatterley that supply chains have made the US economy over-reliant on the Chinese economy in the past.

“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 have created so much concentration in the Chinese economy, that we all feel extremely vulnerable because the supply chains are fragile,” Tai said.

Amid shifting geopolitics and competition, US and Chinese companies both see potential in Mexican manufacturing: Low labor costs, geographic proximity to American markets and the US-Mexico-Canada (USMCA) agreement — a free trade accord established in 2020 that makes trade in North America more cost-effective and efficient — are all factors contributing to a potential boom.

While US policy intends to decrease reliance on China and “create more resilience” in US trade, moving supply chains can be tricky.

In fact, the US drive to disengage from the Chinese economy might be enabling China to access new markets and avoid US tariffs.

Cars are a major export for Mexico, and they illustrate much of what’s happening.

Mexico is a global hub for car factories, hosting plants from major companies operating in the US, including General Motors, Ford, Stellantis and nearly a dozen more.

Virtually every American auto manufacturer depends on parts from Mexico to build its cars or trucks, because those parts can be substantially cheaper than those made in the US.

Free trade agreements like the USMCA mean companies in the US, Mexico and Canada face fewer barriers moving, selling and buying parts across North America.

A diversion from free trade is tariff policy: In 2018, the US hiked tariffs on imports from China, which makes it more expensive for Chinese goods to enter US markets and dissuades companies from relying on Chinese supply chains.

Cars require tens of thousands of parts, which can be made in any number of places. And while Mexico’s manufacturing sector is increasing exports to the US, Chinese companies might be using Mexico as a route to avoid US tariffs on Chinese goods, according to Xeneta, an ocean freight rate benchmarking and market intelligence platform.

Shipping container exports from China to Mexico were up nearly 60% in January compared to a year ago, according to Container Trade Statistics analyzed by Xeneta.

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