Monday, March 4, 2024

Mexico, the winner of the geopolitical battle between China and the United States

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The headlines last week were read with some astonishment: Mexico surpassed China as the main exporter to the United States. According to official data, published Wednesday, the Latin American country became the most important trading partner of the United States, which bought the largest amount of its goods and services from its neighbor in 2023. The reasons, however, have less to do with Mexico and more to do with current geopolitical tensions. The U.S. wants to stop buying from China, and Mexico is fighting for that slice of the pie.

In 2023, U.S. purchases of Chinese products reached $427.2 billion, a 20% decline compared to 2022. In contrast, Mexico exported $475.6 billion worth of products to the U.S., an increase of 4.6% compared to the previous year. This was enough for Mexico to become the top exporter to the U.S., displacing China for the first time in 21 years.

The change is the result of a trend that has been going on for years, buoyed by the growing and increasingly bitter rivalry between China and the United States. As a result of this rivalry, both countries have been imposing heavy tariffs since 2018 and Washington has sought to gradually diversify its suppliers, reduce its purchases from the Asian giant, and increase trading with countries considered more ideologically aligned. Additionally, the United States has had to deal with the logistical aftermath of the Covid-19 pandemic and the bottlenecks it triggered in global supply chains.

The share of Chinese products in total U.S. imports also fell: they stood at 13.9% in 2023, the lowest level since 2004. In 2022, they reached 16.3%.

The trend could continue even more markedly in the future: President Joe Biden’s administration is considering new increases in tariffs on Chinese products such as electric vehicles, equipment for obtaining solar energy and less advanced semiconductors. The final decision is expected to be made sometime during the first half of this year.

Since China’s entry into the World Trade Organization in 2002, the United States has gradually increased its imports from the Asian country, which soon became the “factory of the world.” It was a convenient relationship for both countries: American consumers saw the cost of products, from doors to T-shirts, visibly drop, while exports fueled prodigious economic growth in China, which exceeded double digits for years. In 2017, at the peak of imports, Chinese products represented 21.6% of total U.S. imports.

But the tables were turned in 2017 when Donald Trump came to power. After an initial honeymoon, in which Trump was warmly welcomed by President Xi Jinping in Beijing and even received a dinner in the Forbidden City — a gesture reserved for very few — a trade war broke out in 2018.

Each country raised tariffs on the other’s products. The geopolitical and economic rivalry spread to the tech sector. The so-called “decoupling” era began, with each side trying to separate their supply chains and, above all, their respective technological sectors.

The Covid-19 pandemic forced the trend to come to a pause. In 2020, as the world locked down against the virus, and in 2021, as the first vaccines began to be administered, Americans rushed to buy all kinds of products made in China as they shifted to a new lifestyle, including remote work. Computers, office supplies, large television screens, toys and gym equipment were some of the products that were snapped up.

In 2022, U.S. imports from China were still on the rise due to problems in supply chains. Once resolved, companies issued orders to replenish their stocks.

The 2023 data now points to a return to the trend seen in the Trump era. Neither country has withdrawn their tariffs. Distrust between the two governments is still present, despite small steps to stabilize the relationship, such as the face-to-face meeting between Biden and Xi in San Francisco last year. What’s more, since 2018, various companies have moved their production from China to other countries, such as Vietnam and Mexico.

But the U.S. Federal Reserve has warned that reduced trade between China and the United States could impact inflation in the United States. Some analysts argue that shifting the production of goods — that were until now bought cheaply from China — to the United States or other third countries could increase inflation by reducing the availability of the labor market.

In turn, Chinese companies are counterattacking by changing the way they do business with the United States. Some have chosen to move part of their production to Mexico, such as Hisense, which in 2022 began manufacturing refrigerators and other appliances for the North American market in a $260-million plant in Mexico. Chinese automobile companies JAC Motors and SAIC Motor have also either launched or announced plans to build assembly plants in the country.

A similar trend has been detected in Vietnam, according to the report Geopolitics and the Geometry of Global Trade by the McKinsey Global Institute. Various Chinese companies have invested in factories in their neighboring country. “For some observers, the U.S. shift toward imports from Vietnam represents a rerouting of trade from China, with limited value added in Vietnam. In this telling, China and the United States remain interconnected, but supply chains have become longer and more opaque,” the report states.

Mexico is in direct competition with Vietnam, says Alberto Villarreal, director of Nepanoa, a Chicago-based company that helps foreign companies expand to Latin America. “Mexico is not going to supplant all those imports from China,” he argues, “and it is competing at a global level for those exports with other economies in Asia such as Vietnam, the Philippines, Singapore, which is a much more developed country, and with India.”

Mexican entrepreneurs in the manufacturing, logistics and agriculture industries have been moving in coordination with some state governments, says Villarreal. “They are doing business tours, visiting different countries with different investors,” he explains, “and those are the industries that are spearheading this for the U.S.-Mexico relationship.”

But Mexico is also in competition with the United States. Since the Barack Obama administration, the White House has been trying to return the manufacturing jobs that went offshore during the globalization boom. These efforts are aimed at strengthening employment and reducing the country’s dependence on imports.

Mexico has natural advantages and also offers greater stability compared to emerging markets in Eastern Europe, for example, or in the Middle East. That said, relations between Mexico and its northern neighbor can be bumpy. The arrival of hundreds of thousands of undocumented migrants at the U.S.-Mexico border has proved to be a source of tension, as has fentanyl trafficking, which has triggered a national health crisis.

“Business people are paying close attention to the elections in each country this year,” says Villarreal. “We are going to hear a lot about migration, we are going to hear the word fentanyl a lot, and we must not forget that the free trade agreement is going to be updated in 2026. Businesspeople and investors are taking note, while remembering that the geopolitical conflicts happening in the world are having a positive impact on the relationship between Mexico and the United States.”

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