America's Renewed and Time-Tested Ally in the Global Economy
Once again, Mexico has solidified its position as the foremost trading partner of the United States, with a remarkable flow of $263 billion worth of goods exchanged between the two nations within the initial four months of the current year.
The expansion of Mexico's manufacturing base has emerged as an attractive alternative to China for sourcing and production.
In terms of traded commodities, Mexico holds a significant share of 15.4 percent in the overall imports and exports of the United States. This percentage slightly surpasses the trade proportions with Canada and China, standing at 15.2 percent and 12 percent, respectively, as reported by Luis Torres, a senior business economist at the Federal Reserve Bank of Dallas.
As for the results for June alone, Mexico exported products to its northern neighbor for a customs value of US$41.1 billion, representing a 4.4 percent year-over-year increase.
Mexico's achievement in dethroning China, a country that had progressively integrated itself into the American economy over the past two decades, signifies a clear indication of how the economic turmoil witnessed in 2020 continues to exert its influence on the global economy for years to follow.
According to Torres, the groundwork for this transition was laid prior to the pandemic, attributed to the tariffs on select Chinese goods imposed by former President Donald Trump and the ratification of the US-Canada-Mexico trade agreement—an update to the almost three-decade-old NAFTA deal.
However, Torres also suggested that these shifts highlight an accelerated movement towards "nearshoring," a strategy wherein nations relocate the supply chains of essential goods to geographically and politically proximate countries.
Mexico's Nearshoring Opportunities
While comprehensive recent data on nearshoring remains scarce and evidence is largely anecdotal, the rising protectionism and interconnected industrial policies align with the trend towards reduced global trade, a surge in regional trade, and nearshoring and reshoring endeavors.
An escalated manufacturing presence in Mexico not only supports enhanced bilateral manufacturing ties with the United States but also solidifies Mexico's status as the principal U.S. manufacturing trading partner—a position it claimed in 2022.
The automotive sector serves as a prominent illustration of the cross-border manufacturing synergy. Typically, an intermediate product produced in a U.S. plant is exported to Mexico, where it integrates into the assembly process before returning as a final product to the United States.
This intricate supply chain is facilitated by foreign-owned assembly plants in Mexico, commonly known as "maquiladoras." Over the past two decades, transportation has constituted roughly 24.5 percent of total bilateral manufacturing trade, followed by computer and electronic equipment at 22.4 percent, electrical equipment and components at 8.5 percent, and machinery (excluding electrical) at 7.7 percent.
The rise in protectionist measures and the corresponding industrial policies align with a broader trend of reduced global trade, augmented regional trade, and the concepts of nearshoring and reshoring (bringing production back to the domestic soil), as underscored in Torres' analysis.
The surge in nearshoring activity during the pandemic emanated from heightened expenses associated with transporting goods across the Pacific and the growing consumer preference for expedited delivery, often referred to as "The Amazon Prime Effect."
In response to escalating political tensions between the United States and China, corporations such as Walmart progressively sought solutions closer to home to meet their operational requirements.
Michael Burns, a managing partner at Murray Hill Group—an investment firm specializing in supply chain dynamics— said nearshoring signifies not a retreat from globalization but rather the subsequent phase of globalization, one that concentrates on regional networks.
China's Advancements Traced Back to World Trade Organization Membership
China's admittance into the World Trade Organization in 2001 has steadily propelled its share of U.S. trade. Membership in the WTO offers countries preferential tariffs for trading among themselves, safeguarding them against non-tariff obstacles like quotas and currency constraints.
Following its WTO entry, China's accessibility to prime consumer markets worldwide, coupled with its inherent economic strength and adeptness at mobilizing resources for growth, quickly reshaped it into a pivotal manufacturing center.
Within a decade of joining, concerns mounted, alleging China's inundation of the global market with inexpensive exports while simultaneously restricting foreign entry to its domestic market. This surge in China's trade coincided with a steep decline in U.S. manufacturing employment.
A Turning Point: U.S. Tariffs on Chinese Exports
Starting in 2018, the U.S.-China trade relationship began to wane as the Trump administration imposed tariffs on imports from China. In response, China reciprocated with similar measures on imports from the U.S. Consequently, China lost its position as the primary trading partner later that year.
Approximately $335 billion of trade (66.4 percent of China's exports to the U.S.) remains subjected to these tariffs. The average U.S. tariff on Chinese imports stands at 19.3 percent, while China's average tariff on U.S. imports is 21.2 percent, per the WTO. This surpasses the 9 percent average tariff among WTO members enjoying most-favored-nation status.
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The quest for the leading trade partner position saw Mexico and Canada, highly intertwined with the U.S. economy, vying for dominance. The economies of the three countries were formally connected through the North American Free Trade Agreement (NAFTA) in 1994 and later with the United States-Mexico-Canada Agreement in 2020, which succeeded NAFTA.
While Mexico is competitive in foreign sales of durable goods, such as autos and appliances, U.S. exporters are especially competitive in capital- and technology-intensive manufacturing sectors, such as industrial supplies and capital equipment.
Of all U.S. exports of goods in the first half of 2023, 17.7 percent went to Canada, 16.0 percent to Mexico and 7.2 percent to China.
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This is one of nine stories in this week's edition of The Rising Tide, our weekly newsletter devoted to explaining bigger issues in business and economic development. To subscribe for full access, go to?https://lnkd.in/gNE3U-dh?
Other stories in this edition:
Trump's Bold Trade Plan: Former President Donald Trump wants to establish a "protective barrier around the U.S. economy" by implementing a flat 10 percent tariff on imports from all countries, a move that experts caution could elevate consumer costs across the economic spectrum and potentially trigger a worldwide trade conflict.
The Sun Belt Continues to Draw People Despite Rising Heat: The Economist found that the 15 fastest-growing cities in the United States are nestled within the Sun Belt and that an astounding 86 percent of the top 50 zip codes experiencing the most substantial influx of new residents since the onset of the pandemic are concentrated in Texas, Florida, and Arizona.
Why People Believe in Conspiracy Theories: People believe in conspiracy theories due to factors like distrust in authorities, cognitive biases, the need for explanations, social belonging, dissatisfaction with mainstream views, exposure to conspiracy-related content, personal experiences, and the allure of hidden knowledge. These elements can intertwine and contribute to the appeal of such theories.
An Alarming Pattern of Safety Lapses and Near Misses: While there have been no major U.S. plane crashes in more than a decade, there have been at least 46 close calls involving commercial airlines last month alone, part of an alarming pattern of safety lapses and near misses in the skies and on the runways of the United States, a New York Times investigation found.
A Cautionary Tale of Making Big Promises and Failing to Deliver: ?Wielding a golden shovel for the groundbreaking, former President Donald Trump referred to the Foxconn project in Wisconsin five years ago as the “Eighth Wonder of the World.” Instead, it is the butt of local jokes due to unfulfilled promises.
The Justice Department Cracks Down on COVID-19 Fraud: Federal law enforcement agencies have taken sweeping action across the nation, aiming at combatting COVID-19 fraud amounting to more than $830 million. The Department of Justice brought criminal charges against 371 individuals and managed to reclaim $231 million in embezzled funds.
Travel Industry Set to Soar: The World Travel & Tourism Council anticipates that travel is poised to burgeon into a colossal $15.5 trillion industry by 2033. This remarkable figure would constitute over 11.6 percent of the global economy, marking a remarkable 50 percent surge from 2019.
Tips on Hiring House Cleaners: As a single (divorced) man, I live in a rather large house in Queretaro, Mexico, and have hired a maid to come in once a week. If you are going to hire someone come clean your house, here are some tips to make that go smoother.
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