Mexico Replaces China for Imports. What’s Happening?


Last year, the U.S. imported more goods from Mexico than it did from China. It was a first. Although the trade deficit with China is still the biggest out of every country, and more than the trade deficit with Mexico and Canada combined, Mexican imports totaled $475.6 billion in 2023 versus China’s $427.2 billion.  U.S. imports from China fell by over $110 billion, but U.S. imports from Mexico rose by around $20 billion.

What’s happening? Surely the 2018 Section 301 tariffs against China has led to a remapping of supply chains out of mainland China.  A portion has moved to Vietnam. And a lot of it has gone to Mexico.

“Our imports last year were still high, above $3 trillion. For sure, more China parts are coming in via Mexico, Vietnam and other southeast Asian countries. With their domestic problems, China is focusing more on exports, allowing the yuan to decline to 7.3 to the dollar, and taking more advantage of the trading system,” said Jeff Ferry, chief economist at CPA. “But last year, China’s exports fell 4.6 percent and direct to the U.S. exports fell 11.6 percent. The long-term issue is different: forcing China goods to go through 3rd countries creates an opportunity for those 3rd countries to build their own industries.”

Mexico might not enjoy the heat from Washington, should Washington call them out for China transshipments, or the fact that China has quadrupled its industrial space there to 1.9 million square feet. Of that, 1.1 million sits in northern Mexico, geared towards duty free trade with the U.S.

American companies are also making investments, helping spur the import growth trend.  Automotive is arguably the place where this is happening most. 

The U.S. imported $173.10 billion worth of cars and car parts from Mexico in 2023 and exported $43 billion, making for a roughly $130 billion trade deficit in automotive. To put that number into perspective, the U.S. has a roughly $5 billion surplus in auto trade with Canada, and our deficit with Japan is around $54 billion. Our automotive trade deficit with South Korea is around $39 billion. (See Exhibit 18)

That trade gap will grow. Not only is China setting up shop there with its own auto industry, but so is Tesla.  They have a new factory going up in Nuevo Leon. 

Tesla CEO Elon Musk invited Chinese auto parts suppliers to Mexico to replicate the local supply chain at Tesla’s Shanghai plant in Mexico, according to a Bloomberg article published on Feb. 14. The company plans to build a cheaper next-generation electric vehicle at the Nuevo Leon facility, helped by $153 million in Mexican state incentives and of course the EV tax credit American EVs get even if made in Mexico.

Chinese automotive companies are seeking high-quality locations near the border. Jorge Luis Baca, regional director for Querétaro at American Industries Group, noted that since the last quarter of 2022, half of the Chinese companies surveyed have shown interest in relocating operations to Mexico, based on a report by Lumex Trade, a trade finance solutions provider based out of Mexico City.

This recent rise in Mexico’s exports isn’t primarily a function of Mexico gaining at the expense of China. Rather, it is evidence of the ongoing evolution of the North American auto industry and of Mexico’s evolution from being an oil and energy exporter to becoming a major auto exporter as well.

Monterrey, Saltillo, and Tijuana have the most Class A and B industrial properties. These cities also house the country’s four busiest border crossings, providing stable trade routes for China companies partnering with Mexico. Chinese investment in Mexico is a new trend, spurred by the ambitions of China’s own multinationals, and pressure to decouple coming from Washington.

A Morgan Stanley report in 2023 examined  the effects of nearshoring on Mexican exports under three cases over a 5-year period: A “bear case” or minimum case for potential export growth saw an added $78 billion worth of goods coming to the U.S. The “bull case” saw it rising by another $247 billion by 2028. The “base case” was also pretty impressive – if you are a Mexico exporter – $155 billion in five years should be added to the $475 billion recorded in 2023.  That’s not Chinese companies. That’s Mexican companies, American companies, and whoever else wants to set up shop and take advantage of the U.S. Mexico and Canada free trade deal.

Morgan Stanley estimated annual exports from Mexico should rise at a minimum of 3% to as much as 10% above current levels over the next five years.

The research also identifies two Mexican waves of nearshoring: The first one, an accelerated growth of the existing ecosystem where “macro and regional evidence show that we are well into the first wave”, the report stated. 

The second wave will be “dependent on several signposts ahead, including progress on USMCA disputes, campaign issues raised in Mexico’s presidential elections, the outlook for security and energy and the transition to electric vehicles,” according to the report.

“I still think it’s fair to call Mexico’s growth a decoupling trend,” said Ferry. “China tariffs and certainly the threat of 60% tariffs coming from the Trump campaign are creating this opportunity for Mexico.”


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