The unexpected winner in the US-China trade war. “Monterrey is booming, new and vibrant”

Against the background of geopolitical uncertainty, but also of rather tense trade relations between the US and China, global commodity supply chains are being reorganized and the most advantageous seems to be Mexico, according to CNN.

Thus, manufacturing in Mexico is attractive to US companies that have had supply chain problems during the pandemic or want to reduce dependence on trade between the US and China amid geopolitical uncertainty. This is called “nearshoring” and refers to the situation when companies bring their production facilities closer to their 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 economic research for Latin America at Goldman Sachs.

The analyst said that Mexico and China have been competing for the U.S. manufacturing market for years, but amid the changing relationship between the U.S. and China, Mexico looks poised to dominate, especially after overtaking its competition in 2023 to become main exporter to the USA. These exports were driven by the manufacturing industry, which comprises 40% of Mexico’s economy.

Mexico is also a global hub for auto manufacturing, home to plants of major companies operating in the US, including General Motors, Ford, Stellantis and nearly a dozen other companies.

Virtually every American automaker depends on parts from Mexico to build their cars or trucks because these parts can be substantially cheaper than US-made parts.

In the desire to reduce dependence on China, in 2018 the USA increased tariffs on imports from this country. That makes Chinese products more expensive to enter American markets and discourages companies from relying on traditional supply chains. At the same time, the US-Mexico-Canada Agreement (USMCA) was established in 2022, making trade in North America more cost-effective and efficient.

Under these conditions, taking into account the fact that labor is cheaper in Mexico and that it is closer, analysts anticipate a real boom in exports for this state.

Double-edged measures

The measures taken by the Americans, however, have two edges and it is possible that precisely the desire of the US to disengage from the Chinese economy will allow China to access new markets and avoid American tariffs.

China’s shipping container exports to Mexico rose nearly 60 percent in January compared with last year, according to container trade statistics analyzed by Xeneta.

The sharp increase in exports from China to Mexico suggests the possibility that, in fact, “the increase in trade we’re seeing is due to importers trying to get around US tariffs”.

An April report by Moody’s Analytics said that while Mexico has increased production, it could be boosted by goods manufactured outside the country.

Increase in Mexican exports to the US “was roughly matched by the simultaneous and closely correlated increase in Mexican imports from China,” according to country risk analysts at S&P Global Market Intelligence.

A gradual change

While supply chains are changing, moving factories isn’t always so simple. This can require significant investment, from time to money and people.

Tesla (TSLA), for example, said last year it would build a new factory in Monterrey. “We are very excited about her,” CEO Elon Musk said during an investor day for the company, adding that the plant will increase production here.

“Monterrey – the analysts also said – it is booming, new and vibrant, more so than other industrial cities”.

Mexico has also become attractive for Chinese companies

Analysts at Morgan Stanley estimate that the value of Mexico’s exports to the United States will increase from $455 billion to about $609 billion over the next five years.

This makes Mexico an attractive base for many Chinese companies as well. Electric vehicle maker BYD, a global competitor to Musk’s Tesla, announced plans for a major expansion in Mexico in February. Although BYD does not currently sell cars in the US market, a move to Mexico would provide better access to the Mexican market while preparing the company for a potential move to the US.