Why US imports from Mexico exceeded imports from China

What is behind this change in trade? Is it motivated by “friendshoring”?

There are two factors contributing to this change.

First, North American auto production has finally recovered from the coronavirus pandemic and resulting chip shortage. Mexico has become a major automobile producing country in recent years, and as a result, U.S. imports of automobiles from Mexico have increased significantly. This is not actually due to a move away from China, as China has never been an important auto supplier to the US. Automobile production in Mexico has been steadily growing since joining the North American Free Trade Agreement (NAFTA) with the United States and Canada in 1994.

Second, President Donald Trump’s tariffs on trade with China have led to an official underestimation of imports from China. The average tariff is currently around 18%, which is a big incentive for companies to find ways to avoid this tax. They accomplish this primarily by moving final assembly to Southeast Asia (Vietnam, Malaysia, Thailand), but Chinese companies such as Shein and Temu also have so-called de minimis exceptions that allow shipments under $800 to enter. is used extensively. The US has no tariffs. The official import volume is clearly too low, as micro-shipments are not counted in U.S. trade data. China’s own data shows it sells more to the United States than it reports importing.

What does this mean for the future of US-China trade relations?

The frictions currently complicating direct bilateral trade between the United States and China are likely to continue. President Joe Biden’s administration is still reviewing the Trump tariffs, but any changes would likely result in higher tariffs on strategic goods rather than lowering them (reports have indicated that tariffs on electric vehicles would increase).

Trump, currently the front-runner for the Republican presidential nomination, is calling for a 60% tariff on imports from China. Naturally, therefore, companies are looking for ways to avoid tariffs, primarily by setting up alternative sites for final assembly. True “risk avoidance,” the goal of the Biden administration, requires more than just tariffs and reductions in bilateral trade. Solar panels manufactured in Vietnam using Chinese wafers can avoid tariffs, but their main components are still made in China. iPhones made in India with displays and circuit boards made in China still contain a lot of Chinese content. The same goes for important medicines manufactured using Chinese active pharmaceutical ingredients.

As the Biden administration recognized in its supply chain review, true risk mitigation means building alternative sources of production for key components of strategically important goods.

Is China also losing ground with other trading partners amid its domestic economic challenges, or does this change simply represent a realignment of trade patterns?

In fact, far from losing its global position, China is increasing its position. Although exports fell slightly in 2023 due to the contraction in global consumer spending, China’s exports of electric vehicles and “green” goods are steadily increasing. An analysis of trends in China’s trade after the introduction of the Trump tariffs shows that China’s exports have increased by approximately $1 trillion worldwide, and exports now account for a higher proportion of China’s gross domestic product (GDP) than before the tariffs. It became clear that there was.

Although trade patterns are being reorganized to avoid tariffs, the world’s dependence on China as a source of supplies has increased, and even though China’s domestic economy is weak, it is exporting more than it was five years ago. dependence is increasing.

What advantages and disadvantages will this change bring to the North American economy?

The recent increase in Mexican exports is not primarily due to Mexico gaining at China’s expense. Rather, it is evidence that the North American auto industry continues to evolve and that Mexico is evolving from an oil and energy exporter to a major auto exporter.

Most of the trade diversion caused by President Trump’s tariffs has flowed to Southeast Asia and, to a lesser extent, South Korea and Taiwan. Mainly I haven’t been to Mexico. There are several high-profile examples of Chinese companies setting up factories in Mexico to serve the North American market, including key Tesla suppliers and other auto parts manufacturers. Some high-profile investments are also being considered, including Chinese electric vehicle (EV) company BYD, but the scale of this change is still small.

That said, the fact that Mexico is part of the integrated North American market and a “free trade agreement” partner with the United States means that Mexican-based production will receive EV subsidies under the US Inflation Control Act. This creates opportunities to obtain qualifications. Mexican-made EV batteries and other green products may also be eligible. Additionally, continued difficulties in global transportation demonstrate the benefits of producing in Mexico and shortening supply chains, even if tariffs on many goods are already zero globally.

It is therefore clear that there are fairly positive regional dynamics that support the growth of bilateral trade between the United States and Mexico. While Mexico is increasing U.S. energy imports, it has become a true center of production for North American automobiles and aircraft parts.

Such regional integration would receive a further boost from President Trump’s proposed removal of China’s “most-favoured nation” status, along with new tariffs. However, it is very easy to avoid bilateral tariffs. Assembling Chinese parts in Vietnam is as easy as shipping the parts to Mexico for final assembly. Empirical data suggests that Southeast Asia and India are more likely to benefit from increased US tariffs on consumer goods and electronics than Mexico.

However, the continuation of this regional power relationship is not guaranteed. The Trump administration renegotiated NAFTA, which should help Mexico avoid some new trade tensions. However, the US currently has a widening trade deficit with Mexico, and it is unclear whether Mexico and Canada will be exempted from the flat 10% tariffs touted by the Trump campaign in the press. If a second Trump administration takes office, it is likely that tweet-driven trade policies will be reinstated, and Mexico is unlikely to be spared.