Mexico's Manufacturing Sector Sees a Surge as US and China Show Interest

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As US supply chains move away from China, Mexico’s manufacturing industry is becoming more successful.

Manufacturing in Mexico is appealing to companies that faced supply chain challenges during the pandemic or are looking to reduce dependence on trade between the US and China due to geopolitical uncertainties. This strategy is known as nearshoring, where companies move production facilities closer to their home markets.

As nearshoring grows and global supply chains shift, Mexico's manufacturing sector has a chance to thrive in the long run. Alberto Ramos, the head of Latin American economics research at Goldman Sachs, shared with CNN that Mexico is in a favorable position to succeed. Mexico has been in competition with China for the US manufacturing market for quite some time, but with changes in the US-China relationship, Mexico seems to be gaining an edge.

Mexico became the top exporter to the US in 2023, surpassing China. Manufacturing, which makes up 40% of Mexico's economy, played a significant role in driving these exports, as reported by Morgan Stanley.

According to trade data released by the Commerce Department on April 4, US imports from Mexico saw a continuous rise in February. On the other hand, Chinese exports to the US experienced a 20% decline in 2023 compared to the previous year.

US Trade Representative Katherine Tai explained to CNN's Julia Chatterley that the US economy has become overly dependent on the Chinese economy due to supply chains in the past.

Tai emphasized the need to enhance resilience in the economy and trade to address this issue. She highlighted that the current supply chain setup has led to excessive concentration in the Chinese economy, making everyone feel vulnerable due to the fragility of these supply chains.

US and Chinese companies are both eyeing opportunities in Mexican manufacturing due to various factors such as low labor costs, close proximity to American markets, and the US-Mexico-Canada (USMCA) agreement. This free trade accord, implemented in 2020, aims to make trade in North America more cost-effective and efficient.

Wondering where products are made?

Moving supply chains away from China can be challenging, despite US efforts to reduce dependence on Chinese goods and promote trade resilience.

Interestingly, the US push to disentangle from the Chinese economy could inadvertently help China enter new markets and circumvent US tariffs.

Mexico is a significant exporter of cars, showcasing key aspects of its economy.

It serves as a major center for automobile manufacturing, with factories from top companies like General Motors, Ford, Stellantis, and many others based in the US.

Every American auto manufacturer relies on parts from Mexico to construct their vehicles, as they are often more affordable compared to parts made in the US.

Thanks to free trade agreements such as the USMCA, businesses in the US, Mexico, and Canada encounter fewer obstacles when it comes to transporting, selling, and purchasing parts within North America.

A diversion from free trade is tariff policy. In 2018, the US increased tariffs on imports from China. This action makes it more costly for Chinese goods to enter US markets and discourages companies from depending on Chinese supply chains.

An employee working at a Ciudad Juarez factory that exports its automotive products to the United States

An employee working at a Ciudad Juarez factory that exports its automotive products to the United States

Jose Luis Gonzalez/Reuters

Cars need many different parts, which can be produced in various locations. Mexico's manufacturing industry is sending more products to the US, but there are concerns that Chinese companies are using Mexico as a way to avoid tariffs on Chinese goods imposed by the US, as reported by Xeneta, a platform for ocean freight rate benchmarking and market intelligence.

According to Xeneta's analysis of Container Trade Statistics, exports of shipping containers from China to Mexico saw a significant increase of almost 60% in January compared to the previous year.

The increase in exports from China to Mexico may indicate that importers are trying to avoid US tariffs, according to Peter Sand, chief analyst at Xeneta. He mentioned this possibility in a research note dated March 15.

A report from Moody's Analytics in April suggested that although Mexico has seen a rise in manufacturing output, some of this production may be coming from goods made outside the country.

According to S&P Global Market Intelligence analysts Jose Enrique Sevilla-Macip and John Raines, the rise in Mexican exports to the US has corresponded with a similar increase in Mexican imports from China.

Goldman's Ramos pointed out that there is a financial benefit in relocating production to Mexico to evade tariffs. He mentioned to CNN that this strategy helps bypass the original reasons for implementing tariffs.

Lawmakers on Capitol Hill are concerned about the potential evasion of US tariffs by Chinese steel. The Biden administration has revealed plans to collaborate with the Mexican government in order to stop China and other nations from avoiding US tariffs on steel and aluminum through imports from Mexico.

In a meeting back in February, Tai raised concerns about the lack of transparency regarding Mexico's steel and aluminum imports from "third countries" while discussing the issue with Raquel Buenrostro, Mexico’s secretary of economy.

The US president is addressing concerns about tariff evasion, which will remain an issue even after the election in November. The USMCA will undergo a review in 2026.

Both President Joe Biden and former President Donald Trump aim to boost domestic manufacturing, but they have different approaches to achieving this goal.

Biden recently spoke to steelworkers in Pittsburgh, suggesting that the US government should think about tripling tariffs on Chinese steel. Trump, on the other hand, has floated the idea of imposing a 60% tariff on Chinese goods if he is re-elected as president.

According to S&P Global's Sevilla-Macip and Raines, the competition between the two US presidential candidates to secure key swing states in the Midwest, which have significant auto industries, will bring the issue of US-Mexico-China trade to the forefront during the 2024 presidential campaign.

The process of shifting supply chains can be complex because relocating factories requires a considerable investment of resources such as time, money, and skilled personnel. However, companies that are willing to make this move are paving the way for long-term growth and development in the Mexican manufacturing industry.

"It seems like Monterrey is experiencing a period of growth," mentioned Christoffer Enemaerke, a portfolio manager at RBC, after a recent visit to the city in northern Mexico. According to him, discussions with companies and real estate experts indicated that nearshoring could drive Mexico's growth, especially in the northern region.

For instance, Tesla (TSLA) announced plans last year to construct a new plant in Monterrey. CEO Elon Musk expressed his enthusiasm during an investor day, emphasizing that the plant would increase capacity rather than replace it elsewhere.

A billboard announcing the arrival of Tesla seen in Monterrey, state of Nuevo Leon, Mexico, on March 12, 2023

A billboard announcing the arrival of Tesla seen in Monterrey, state of Nuevo Leon, Mexico, on March 12, 2023

Julio Cesar Aguilar/AFP/Getty Images

Sentiment on the ground is exciting, but most investment flows are yet to be seen,Ramos told CNN.

Analysts at Morgan Stanley predict that Mexico's exports to the United States will increase from $455 billion to around $609 billion over the next five years. This growth makes Mexico an appealing destination for numerous Chinese companies. One example is EV manufacturer BYD, which is a strong competitor to Tesla, as they revealed plans in February to significantly expand their operations in Mexico.

BYD is not selling cars in the US at the moment, but expanding to Mexico could improve access to the Mexican market and set the company up for a possible entry into the US market.

According to Sevilla-Macip and Raines, it is highly probable that Chinese investment and exports to Mexico will be a major topic leading up to the 2026 review of the USMCA.

Monterrey is continuing to benefit from its growth and development, as noted by RBC's Enemaerke. He mentioned that Monterrey feels lively, modern, and dynamic compared to other industrial cities he has visited in Asia.

CNN’s Michael Nam contributed to this report.

Editor's P/S:

The article provides a comprehensive analysis of the impact of geopolitical uncertainties on global supply chains, particularly the shift from China to Mexico. Mexico's manufacturing industry has emerged as a major beneficiary, capitalizing on nearshoring strategies and the USMCA agreement. However, the article raises concerns regarding potential tariff evasion by Chinese companies using Mexico as an intermediary.

This highlights the complexities of global trade and the challenges faced by policymakers in balancing economic interests with geopolitical considerations. The upcoming 2026 USMCA review will be a critical juncture in addressing these concerns and shaping the future of trade relationships in North America. It is crucial for governments and businesses to work together to promote transparency and fair competition while fostering sustainable growth and resilience in global supply chains.