In the depths of the pandemic, as global supply chains collapsed and the cost of shipping a container to China increased almost twenty-fold, Marco Villarreal saw an opportunity.
In 2021, Mr. Villarreal resigned as general manager of Caterpillar in Mexico and began cultivating ties with companies seeking to move production from China to Mexico. He found a customer in Hisun, a Chinese producer of off-road vehicles, which hired Mr. Villarreal to establish a $152 million manufacturing site in Saltillo, an industrial hub in northern Mexico.
Mr. Villarreal said foreign companies, particularly those looking to sell in North America, viewed Mexico as a viable alternative to China for several reasons, including simmering trade tensions between the United States and China.
“The stars are aligning for Mexico,” he said.
New data released Wednesday showed Mexico overtook China to become the top source of official U.S. imports for the first time in 20 years – a significant shift that highlights how heightened tensions between Washington and Beijing are changing trade flows.
The U.S. trade deficit with China narrowed significantly last year, with merchandise imports from the country falling 20 percent to $427.2 billion, data showed. U.S. consumers and businesses have turned to Mexico, Europe, South Korea, India, Canada and Vietnam for auto parts, shoes, toys and raw materials.
Mexican exports to the United States were about the same as last year, at $475.6 billion.
The total U.S. trade deficit in goods and services, consisting of exports minus imports, narrowed by 18.7 percent. Overall, U.S. exports to the world increased slightly in 2023 from the previous year, despite a strong dollar and a soft global economy.
US imports have fallen every year as Americans bought less crude oil and chemicals and fewer consumer goods, including cell phones, clothing, camping equipment, toys and furniture.
Recent weakness in imports and falling trade with China are partly a reflection of the pandemic. American consumers stuck at home during the pandemic have been stocking up on laptops, toys, Covid tests, sporting goods, furniture and home exercise equipment made in China.
Even as concerns about the coronavirus subsided in 2022, the United States continued to import a lot of Chinese goods, as bottlenecks at congested U.S. ports were finally resolved and companies restored their warehouses .
“The world couldn’t access enough Chinese goods in ’21, and it gorged itself on Chinese goods in ’22,” said Brad Setser, an economist and senior fellow at the Council on Foreign Relations. “Since then, everything has returned to normal. »
But beyond the unusual swings in annual trends over the past few years, trade data is beginning to provide compelling evidence that years of heightened tensions have significantly eroded the U.S.-China trade relationship.
In 2023, quarterly U.S. imports from China were about the same level as a decade ago, despite a slowdown in growth in the U.S. economy and an increase in U.S. imports from other countries in the world.
“We’re decoupling, and that’s taking a toll on trade flows,” Mark Zandi, chief economist at Moody’s Analytics, said of the U.S. and China.
Economists say the relative decline in trade with China is clearly linked to tariffs imposed by the Trump administration and then maintained by the Biden administration.
A study by Caroline Freund, dean of the School of Global Policy and Strategy at the University of California, San Diego, showed that trade with China fell for products subject to high tariffs, such as screwdrivers. and smoke detectors, while trade in products not subject to customs duties declined. , like hair dryers and microwave ovens, continued to grow.
Ralph Ossa, chief economist of the World Trade Organization, said U.S.-China trade had not collapsed, but had grown about 30 percent slower than the trade between these countries and the rest of the world.
There have been two episodes in recent history in which U.S. trade with China slowed significantly, he said. The first occurred when trade tensions between the two countries escalated in 2018. The second occurred when Russia invaded Ukraine, prompting the United States and its allies to impose tough sanctions and further overhaul global trade relations.
“There was a time when geopolitics didn’t really matter for trade, but as uncertainty increases around the world, we see trade becoming more sensitive to these positions,” said Stela Rubinova, research economist at the World Trade Organization.
Some economists warn that the reduction in trade between the United States and China may not be as sharp as bilateral data shows. Indeed, like Hisun, the Chinese automobile manufacturer, some multinationals have transferred part of their production out of China to other countries, while continuing to source raw materials and spare parts from China.
In other cases, companies may simply ship goods actually made in China to other countries to avoid U.S. tariffs.
U.S. trade statistics do not record these products as coming from China, even though a significant portion of their value would have been created there.
Mrs. Freund, who wrote a recent article On this, he said that trade relations between the two countries “are certainly softening, but not as much as official statistics suggest.”
Yet geopolitical risks are clearly pushing companies to look to other markets, particularly those with low costs and stable trade relations with the United States, such as Mexico.
Jesús Carmona, president for Mexico and Central America of Schneider Electric, the French electrical equipment giant, said the Biden administration’s 2022 climate law and geopolitical tensions resulting from the war in Ukraine were two factors pushing companies to turn to Mexico.
When China appeared to align with Russia in the conflict, “that set off all kinds of alarms,” Mr. Carmona said. “People realized that we cannot have such a dependence on China, which we have built over the last 40 years as we made China the factory of the world. »
Schneider, already very present in Mexico with nine factories and nearly 12,000 employees, decided in 2021 to expand further in the country. Today, after opening new manufacturing sites and expanding existing plants, the company has about 16,000 employees in Mexico, and expects that number to soon reach about 20,000.
Schneider sends about 75 to 80 percent of its Mexican production to the United States, including a range of products such as circuit breakers and panels used to distribute and regulate electrical energy.
While foreign direct investment in developing countries fell by 9% in 2023, the flow of these investments to Mexico appeared 21 percent last yearaccording to the United Nations Conference on Trade and Development.
South Korea is another economy caught in the shifting tides between the United States and China. Like Mexico, South Korea faces lower tariffs because it has a free trade agreement with the United States. In December, U.S. imports from South Korea reached a record high.
South Korean businesses have also particularly benefited from President Biden’s new climate legislation. The U.S. government offers tax credits to consumers who buy electric vehicles, but it has set some limits on the sourcing of parts for these cars from China.
As large manufacturers of batteries and components for electric vehicles, South Korean companies have seized the opportunity to participate in the expanding U.S. vehicle supply chains. A Korean battery maker, SK On, has invested $2.6 billion in a factory in Georgia and is building new facilities in Georgia, Tennessee and Kentucky in partnership with Hyundai and Ford.
Min Sung, commercial director of SK On, said China was becoming increasingly restrictive for Korean businesses. At the same time, constraints imposed by the United States to benefit China through tax credits for electric vehicles have given Korean companies “more room to play.”
“For businesses to survive, you always have to find the market with the most potential,” Mr. Sung said.
As major Korean companies like SK, LG, Samsung and Hyundai build new facilities to manufacture products in the United States, this also appears to increase U.S. trade with South Korea, as the companies import certain materials, machinery and parts from their country of origin to supply their countries. new facilities.
Mr. Sung acknowledged that growing American skepticism toward China was bringing the United States and South Korea closer together.
“It has never been stronger than in the last two years between two allies,” he said.