In the midst of the pandemic, as global supply chains weakened and the cost of shipping a container to China increased nearly twenty-fold, Marco Villarreal saw an opportunity.
In 2021, Villarreal stepped down as general manager of Caterpillar in Mexico and began cultivating ties with companies looking to move production from China to Mexico. He found a client in Hisun, a Chinese maker of all-terrain vehicles, which hired Mr. Villarreal to set up a $152 million manufacturing site in Saltillo, an industrial center in northern Mexico.
Villarreal said foreign companies, particularly those looking to sell into North America, see Mexico as a viable alternative to China for several reasons, including trade tensions between the United States and China.
“The stars are aligning for Mexico,” he said.
New data released Wednesday showed that Mexico overtook China to become America’s top source of official imports for the first time in 20 years — a significant shift that highlights how rising tensions between Washington and Beijing are altering trade flows.
Data shows the US trade deficit with China narrowed significantly last year, with imports of goods from the country falling 20% to $427.2 billion. American consumers and businesses 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.
America’s total trade deficit in goods and services, which includes exports minus imports, narrowed by 18.7%. Overall, U.S. exports to the world increased slightly in 2023 compared to the previous year, despite a strong dollar and a weak global economy.
US imports have declined every year as Americans bought less crude oil and chemicals and fewer consumer goods, including cellphones, clothing, camping gear, toys and furniture.
The recent weakness in imports and declines in trade with China were partly a reflection of the pandemic. American consumers stuck at home during the pandemic have been snapping up Chinese-made laptops, toys, Covid tests, sports activities, furniture and home exercise equipment.
Even as coronavirus concerns eased in 2022, the United States continued to import many Chinese products as bottlenecks at congested U.S. ports finally eased and companies restocked their warehouses.
“The world couldn’t get access to enough Chinese goods in ’21, and 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 normalized.”
But beyond the unusual swings in annual patterns in recent years, trade data is starting to provide compelling evidence that years of escalating tensions have significantly dented America’s trade relationship with China.
In 2023, quarterly U.S. imports from China were about the same level as 10 years ago, despite a decade of growth in the U.S. economy and rising U.S. imports from other parts of the world.
“We’re decoupling, and that’s weighing heavily on trade flows,” said Mark Zandi, chief economist at Moody’s Analytics, of the United States and China.
Economists say the relative decline in trade with China is clearly tied to tariffs imposed by the Trump administration and then maintained by the Biden administration.
Research conducted by Caroline Freund, dean of the University of California at San Diego’s School of Global Policy and Strategy, showed that trade with China has declined for products that attract high tariffs, such as screwdrivers and smoke detectors, while trade in tariff-free products, such as hairdryers and microwave ovens, continued to grow.
Ralph Ossa, chief economist at the World Trade Organization, said trade between the United States and China has not collapsed, but has grown about 30% slower than trade between those 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 was when trade tensions between the countries escalated in 2018. The second was when Russia invaded Ukraine, prompting the United States and its allies to impose tough sanctions and further rearrange global trade relations.
“There was a time when geopolitics didn’t matter much for trade, but as uncertainty increases in the world, we see trade becoming more sensitive to these positions,” said Stela Rubinova, a 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 steep as bilateral data shows. This is because, like Hisun, the Chinese vehicle manufacturer, some multinationals have moved some of their production out of China and into other countries, while continuing to purchase some raw materials and components from China.
In other cases, companies might simply route goods actually produced in China through other countries to avoid U.S. tariffs.
US trade statistics do not record such products as coming from China, even though a significant portion of their value would have been created there.
Mrs. Freund, who wrote a recent document on the topic, he said that trade relations between the two countries are “definitely easing, but not as much as official statistics suggest.”
However, geopolitical risks are clearly pushing companies to look to other markets, particularly those with low costs and stable trade relationships with the United States, such as Mexico.
Jesús Carmona, president for Mexico and Central America at Schneider Electric, the French electrical equipment giant, said the Biden administration’s 2022 climate law and geopolitical tensions stemming from the war in Ukraine were both factors that they pushed companies towards Mexico.
When China appeared to align itself with Russia in the conflict, “all sorts of alarms went off,” Carmona said. “People have realized that we cannot have such dependencies on China, which we have built over the last 40 years as we were turning China into the factory of the world.”
Schneider, which already had a significant presence in Mexico with nine factories and nearly 12,000 employees, decided to grow further in the country in 2021. Now, after opening new production sites and expanding existing facilities, the company has approximately 16,000 employees in Mexico, with plans to reach approximately 20,000 soon.
Schneider sends about 75 to 80 percent of its Mexican production to the United States, including a variety of products such as circuit breakers and panels used to distribute and regulate electricity.
While foreign direct investment in developing countries fell by 9% in 2023, the flow of such investment to Mexico last year it increased by 21%.according to the United Nations Conference on Trade and Development.
Another economy caught up in the volatile tide between the United States and China has been South Korea. Like Mexico, South Korea is subject to lower tariffs because it has a free trade agreement with the United States. In December, US imports from South Korea were the highest on record.
South Korean companies have also particularly benefited from President Biden’s new climate legislation. The U.S. government offers tax credits for consumers who buy electric vehicles, but has set some limits on sourcing parts for such cars from China.
As major producers of electric vehicle batteries and components, South Korean companies have seized the opportunity to participate in newly 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 is becoming increasingly restrictive for Korean businesses. Meanwhile, US constraints on China benefiting from electric vehicle tax credits have given Korean firms “more room to play”.
“For business to survive, you always have to find the market that has the most potential,” Mr. Sung said.
As major Korean companies like SK, LG, Samsung, and Hyundai build new facilities to make products in the United States, US trade with South Korea also appears to be increasing as companies import some materials, machinery, and parts from their home countries to provide the new facilities.
In December, Korean exports to the United States surpassed Korean exports to China For the first time in 20 yearsdriven by shipments of vehicles, electric batteries and other parts.
Sung agrees that growing American skepticism about China is pushing the United States and South Korea closer together.
“The situation between two allies has never been as strong as in the last two years,” he said.
