In the midst of a pandemic, with global supply chains disrupted and the cost of shipping containers to China soaring nearly 20 times, Marco Villarreal saw an opportunity.
Villarreal resigned as Caterpillar’s general manager in Mexico in 2021 to begin strengthening relationships with companies looking to move manufacturing from China to Mexico. He found a customer in Hesun, a Chinese manufacturer of all-terrain vehicles, which hired Villarreal to establish a $152 million manufacturing site in Saltillo, an industrial hub in northern Mexico. .
Villarreal said foreign companies, especially those looking to sell within North America, see Mexico as a strong alternative to China for several reasons, including the escalating trade tensions between the United States and China.
“The stars are coming together for Mexico,” he said.
New data released Wednesday showed Mexico has surpassed China to become the U.S.’s largest regular source of imports for the first time in 20 years. This is a major shift that highlights how rising tensions between the United States and China are reshaping trade flows.
The US trade deficit with China narrowed significantly last year, with goods imports from the country dropping 20% to $427.2 billion, data showed. American consumers and businesses turned to Mexico, Europe, South Korea, India, Canada, and Vietnam for auto parts, shoes, toys, and raw materials.
Mexico’s exports to the United States were $475.6 billion, about the same as the previous year.
The total US goods and services trade deficit, which is calculated by subtracting imports from exports, shrank by 18.7%. Despite a strong dollar and a weak global economy, overall U.S. exports to the world in 2023 increased slightly from the previous year.
US import volume decreases year by year Americans bought less crude oil and chemicals, and fewer consumer goods such as cell phones, clothing, camping equipment, toys and furniture.
The recent slump in imports and trade with China partly reflects the pandemic. U.S. consumers stuck at home during the pandemic snapped up Chinese-made laptops, toys, coronavirus tests, athleisure, furniture, home exercise equipment and more.
Even as concerns about the coronavirus waned in 2022, the U.S. continued to import large quantities of Chinese goods as bottlenecks at busy U.S. ports finally cleared and companies restocked warehouses.
“The world couldn’t get enough Chinese products in 2021, and it devoured them in 2022,” said economist Brad Setzer, a senior fellow at the Council on Foreign Relations. “Everything has been normal since then.”
But beyond the unusual fluctuations in annual patterns in recent years, trade statistics are beginning to show convincing evidence that the U.S.-China trade relationship has been severely damaged by years of escalating tensions. .
In 2023, U.S. quarterly imports from China were at about the same level as a decade ago, despite a decade of growth in the U.S. economy and an increase in U.S. imports from other parts of the world.
“We’re decoupling, and that’s weighing on trade flows,” Mark Zandi, chief economist at Moody’s Analytics, said of the U.S. and China.
Economists say the relative decline in trade with China is clearly related to tariffs imposed by the Trump administration and then maintained by the Biden administration.
Research by Caroline Freund, dean of the School of Global Policy and Strategy at the University of California, San Diego, shows that trade with China will decline for products subject to high tariffs, such as screwdrivers and smoke detectors, while trade for products without tariffs will decline. Growth continued, as did hair dryers and microwave ovens, which were shown to be on the decline.
Ralph Ossa, chief economist at the World Trade Organization, said trade between the U.S. and China has not collapsed, but is growing about 30 percent slower than trade between the U.S. and countries other than China. .
There have been two occasions in recent history when U.S. trade with China slowed significantly, he said. The first time was in 2018 when trade friction between the two countries intensified. The second time was when Russia invaded Ukraine, imposed harsh sanctions on the United States and its allies, and further reorganized global trade relations.
“There was a time when geopolitics was less important for trade, but as global uncertainty increases, trade is becoming more sensitive to these positions,” said Stella Rubinova, research economist at the World Trade Organization. That’s for sure.”
Some economists have warned that U.S. trade cuts with China may not be as steep as bilateral data suggests. Some multinational companies, like Chinese automaker Haishun, have moved some of their manufacturing outside China or to other countries, but continue to source some raw materials and parts from China. .
In other cases, companies simply route goods that are actually manufactured in China through other countries to avoid U.S. tariffs.
U.S. trade statistics do not record such products as coming from China, even though a significant portion of their value would have been generated there.
Ms Freund, who authored a recent paper on the subject, said trade relations between the two countries were “definitely shrinking, but not as much as official statistics suggest”.
Still, it’s clear that geopolitical risks are causing companies to look to other markets, especially those with lower costs and stable trade relationships with the United States, such as Mexico.
Jesus Carmona, president of Mexico and Central America for French electronics giant Schneider Electric, said both the Biden administration’s 2022 climate law and geopolitical tensions stemming from the Ukraine war are factors driving companies to Mexico. Ta.
When China appeared to be aligning with Russia in the conflict, “all kinds of alarms were raised,” Carmona said. “People realized that they couldn’t be so dependent on China, which they had spent the last 40 years building up to become the factory of the world.”
Schneider already had a large presence in Mexico with nine factories and approximately 12,000 employees, but in 2021 it decided it needed to grow further in the country. Currently, after opening new manufacturing sites and expanding existing plants, the company has approximately 16,000 employees in Mexico, a number that will soon reach approximately 20,000.
Schneider sends about 75 to 80 percent of its production in Mexico to the United States, including an array of products such as circuit breakers and panels used to distribute and regulate electricity.
Foreign direct investment in developing countries fell by 9% in 2023, according to the United Nations Conference on Trade and Development, but such investment flows to Mexico surged 21% last year.
Another economy caught up in the changing tides between the United States and China is South Korea. Like Mexico, South Korea has a free trade agreement with the United States, which reduces tariffs. U.S. imports from South Korea hit a record high in December.
South Korean companies are also particularly benefiting from President Biden’s new climate legislation. The U.S. government offers tax credits to consumers who purchase electric vehicles, but it has placed certain restrictions on sourcing auto parts from China.
As a leading manufacturer of electric vehicle batteries and components, Korean companies are seizing the opportunity to participate in the newly expanding U.S. auto supply chain. SK On, a South Korean battery manufacturer, has invested $2.6 billion in a Georgia factory and is partnering with Hyundai and Ford to build new facilities in Georgia, Tennessee and Kentucky.
Min Sung, chief commercial officer of SK On, said China is tightening regulations on South Korean companies. Meanwhile, US restrictions on China’s ability to benefit from electric vehicle tax credits have given South Korean companies “more leeway.”
“For a business to survive, it must always find more potential markets,” Sung said.
As major Korean companies such as SK, LG, Samsung, and Hyundai build new facilities to manufacture products in the United States, companies import and supply some materials, machinery, and parts from their home country. , new facilities that seem to have increased trade between the US and South Korea as well.
In December, South Korea’s exports to the United States exceeded its exports to China for the first time in 20 years, with shipments of cars, batteries and other parts.
Song agreed that America’s growing distrust of China is driving the United States and South Korea closer together.
“The relationship between our allies has never been stronger than in recent years,” he said.