Recent data reveals a significant increase in trade between China and Mexico amidst intense tariff discussions during the presidential campaign. Customs data indicates a notable rise in raw materials and components from China entering Mexico, where they are manufactured into fully assembled products and then transported to the U.S. by rail or truck.
“We are observing more Chinese companies relocating their production facilities from China to Mexico,” stated Jordan Dewart, president of cross-border logistics specialist Redwood Mexico. He added that these facilities utilize Chinese third-party logistics companies for services such as warehousing, inventory management, and shipping. “They import parts and raw materials from China, manufacture the products in Mexico, and then ship them to the U.S. This process adds value by operating in Mexico and leveraging the USMCA [United States-Mexico-Canada Agreement] to label their products as made in Mexico.”
This nearshoring strategy allows companies to alter the origin of goods, also known as the “economic nationality” of a product. When components or raw materials are imported into a country and used to complete a product, they undergo what trade officials call a “substantial transformation.” The manufacturing location then determines the duties and other charges applicable to the product. Companies importing Chinese components and raw materials into Mexico and manufacturing their products there would have a “Made in Mexico” label, not “Made in China.”
“The key sectors have always been automobiles and textiles in terms of determining origin,” explained Mary Lovely, Anthony Solomon senior fellow at the Peterson Institute for International Economics. “To label a product as Mexican instead of Chinese, it must undergo substantial transformation, meaning it becomes a different product. For example, if wooden boards are manufactured into a desk, the product must change customs categories.”
This manufacturing shift has also influenced European companies across various products. “We have European-based companies that previously manufactured solely in China now producing their goods here,” said Simon Cohen, founder and CEO of Henco Logistics. The strong demand for nearshoring, with items being manufactured, packaged, and shipped to the U.S. from Mexico, is driven by the “China Plus One” strategy and the USMCA, he noted.
Data from freight analytics firm Xeneta shows a 26.2% increase in China-to-Mexico container trade from January to July 2024, following a 33% growth in 2023. May recorded the highest number of containers from China into Mexico, with June close behind.
VesselBot, which also tracks container flows, reported that April, May, and June saw the highest volumes of Mexican exports to the U.S. this year.
The growing demand for container shipping imports from China into Mexico in the first half of 2024 has fueled suspicions that it has become a “back door into the U.S.,” according to Peter Sand, chief analyst for ocean freight rate benchmarking and intelligence platform Xeneta. “This route has gained popularity over the past year and a half,” he said.
Mexico’s extensive network of free trade agreements and economic alliances makes it an attractive destination for manufacturing operations. The country boasts 13 free trade agreements covering 50 countries, including the USMCA, and agreements with the European Union, the European Free Trade Area, Japan, Israel, 10 Latin American countries, and the 11-country Trans-Pacific Partnership. Additionally, Mexico is a member of the Pacific Alliance, a trade bloc that includes Mexico, Chile, Colombia, and Peru.
The increase in trade and manufacturing between China, a major geopolitical and economic rival to the U.S., and Mexico, comes amid ongoing political challenges. New tariffs on China and potential restrictions on Mexican manufacturing are key campaign issues for former President Donald Trump.
“President Trump accelerated the shift in USA-China trade relations,” said John Piatek, vice president of consulting at GEP Worldwide, a procurement and supply chain consulting firm. “He continues to portray China as the bogeyman and has indicated he will adopt a more aggressive stance.”
However, President Biden has maintained most of Trump’s trade protections and has also been proactive in supporting U.S. industries, such as semiconductors, while introducing new trade barriers in areas like EV technology and medical supplies, Piatek noted.
Piatek highlighted that imports from Mexico to the U.S. have increased by over 20% annually from 2020 to mid-2024, contrasting with the decline in China-to-U.S. trade. Imports directly from China to the U.S. fell from 17.7% to 13.5% during the same period.
On the campaign trail, “Both candidates are discussing the introduction of more trade barriers, not fewer,” Piatek said.
Mary Lovely, Anthony Solomon senior fellow at the Peterson Institute for International Economics, warned that additional tariffs could have negative consequences. “The more tariffs we impose, and the more chaos we create, the greater the incentive for black markets and corruption in developing countries,” she said.
The U.S. government is targeting potential trade policy violations. If a product undergoes minimal changes and is shipped to the U.S., it could be subject to U.S. countervailing and anti-dumping duties, Lovely explained, citing recent cases involving solar panels.
The surge in imports aligns with an increase in cross-border trucking from Mexico to the U.S., particularly through Laredo, Texas. Data from Motive, which tracks trucking visits to North American distribution facilities for the top five retailers, shows record levels of truck border crossings and ground import volumes, solidifying Mexico as the No. 1 U.S. importer amid declining Chinese imports. The top three U.S. destinations for Mexican exports are El Paso, Houston, and San Diego.
A recent Moody’s report on nearshoring highlighted several announcements by auto companies, including foreign OEMs, regarding plans to invest in Mexico. “The automotive sector is a key player in the interest to expand in Mexico by companies such as Tesla, BMW, Ford, and GM, along with Asian manufacturers like BYD and Kia,” Moody’s noted.
Mexico’s government reported $36 billion in foreign direct investment in 2023, a 27% increase over the previous year. By mid-2024, that figure had reached $31 billion, setting a new record, according to the government.
Trump has threatened to impose a 100% tariff on vehicles made in Mexico. During a recent presidential debate, he reiterated claims about Mexican manufacturing linked to China. “They’re building big auto plants in Mexico, often owned by China. They’re constructing these massive plants, and they think they’re going to sell their cars into the United States because of the current administration,” Trump said.
Tesla CEO Elon Musk has announced a pause on the company’s gigafactory in Monterrey, Mexico. In the financial update for the first half of the year, Musk cited tariff uncertainties as a major factor making heavy investment in the plant impractical. Instead, Tesla plans to ramp up production at its existing facilities in Fremont, California, and Austin, Texas.
In a September statement, the Americas affiliate of Chinese electric car giant BYD denied reports of pausing plans for a Mexican plant, emphasizing the market’s relevance.
Volvo, majority-owned by Chinese parent company Geely, recently announced plans for a $700 million truck manufacturing plant in Monterrey.
Mexico’s Role in Safeguarding Supply Chains
Avoiding tariffs is not the sole reason for Mexico’s rise as a trade conduit for China. Logistics professionals are increasingly using the Mexican route to safeguard their supply chains, according to Sand.
“Mexico is a key focus for American importers looking to mitigate risks from higher tariffs and potential labor disputes on the U.S. East and Gulf coasts,” he said.
Bills of lading, the digital receipts of ocean freight containers, show that top companies exporting from Mexico to the U.S. include Tesla, tire companies Pirelli and Michelin North America, Hyundai and Kia affiliate Mobis Parts America, and industrial firm SKF USA.
Charles Van der Steene, president of Maersk North America, noted significant growth in Mexico-to-U.S. trade this year.
“We’re seeing double-digit growth,” said Van der Steene. “The growth in Mexico is real. While some impact might be linked to tariffs, the overall robust development of the Mexican economy is evident.”
In March, Maersk announced a new facility in Tijuana, Mexico, to optimize the growing volume of cross-border trade, targeting sectors like technology, automotive, retail, and lifestyle. In September, the company opened a 402,000-square-foot facility in El Paso, Texas, to support the increasing demand for logistics services at the border.
According to Moody’s, the value of Mexican exports has increased more than tenfold over the past three decades. “Mexico’s trade balance with the U.S. has improved significantly, from a $2.4 billion deficit in 1993 to a $234.7 billion surplus in 2023,” the report stated.
Moody’s also highlighted that U.S. direct investment and reinvestments in Mexico have surged from $3.5 billion in 1993 to $20 billion in 2023.
Data from the Bureau of Transportation Statistics’ TransBorder Freight program, which details North American freight by transportation mode, commodity type, and geographic detail for U.S. exports to and imports from Canada and Mexico, underscores the strength of Mexico-U.S. transborder trade.
The top ten commodities exported from Mexico to the U.S. include vehicles, computer-related machinery, equipment, and parts.
Cost-Effective Trade Routes
Companies using the China-Mexico-U.S. trade route can achieve lower freight costs by avoiding tariffs, according to a CNBC analysis of August freight rates from various logistics providers. Despite higher pricing due to the route’s popularity, it remains cost-effective.
Once ocean containers are on land, U.S. shippers can move them by truck or rail into the U.S. tariff-free.
The overall cost of moving a single container is estimated between $10,100-$12,300 for ocean freight/truck and $8,700-$8,800 for ocean freight/rail. This is slightly cheaper than sending a completed product directly from China to the U.S., which incurs tariffs.
According to Redwood Mexico, the cost for roundtrip trucking from the Pacific Coast Port of Lazaro, Mexico, to Laredo, Texas, for a single container ranges between $3,900 and $6,100. The approximate cost to rail a single container from the Port of Lazaro to Laredo is $2,700, while transporting a container by rail from the Port of Lazaro to Monterrey, California, would be around $2,600.
Freightos reports that the price of ocean freight from China to the U.S. West Coast is $6,459.20, to the U.S. East Coast is $9,480.20, and to the Gulf Coast is $9,475.
ITS Logistics informs CNBC that the approximate all-in freight cost for an East Coast container is between $11,530.20 and $14,745.20 by truck, and $11,030.20 by rail. For a container imported into the West Coast, the cost ranges between $10,959.20 and $13,659.20 by truck, and $10,160.20 by rail.
If Chinese imports were subjected to the 301 tariffs, 232 tariffs, 373 (patent infringement), anti-dumping, and countervailing duties, these additional tariffs would increase the cost of importing the product.
For example, a 20-foot container of household washing machines, holding roughly 50-60 units and subject to a 7.5% tariff if imported from China, illustrates the economic impact of these tariffs on logistics costs.
“At an average import price of $400 per unit, a U.S. importer would owe between $1,500 and $1,800 in trade war taxes on a 20-foot container of washing machines,” said Erica York, senior economist at the Tax Foundation. “Bilateral tariffs are expected to lead to trade diversion, which is exactly what happened after the trade war. The tariffs not only increased costs for Americans but also disrupted and reallocated trade flows and business relationships,” York added.
“The shift toward nearshoring has highlighted the cost benefits of ocean freight from Asia to Mexico, with average rates around $4,200 per container and trucking from Mexico City to the U.S. averaging $4,000,” said Tim Robertson, CEO of DHL Global Forwarding America. However, he emphasized that logistics decisions should not be based solely on cost, with transit time, reliability, security, and service levels being equally important.
Election Threats and New USMCA Trade Deal Scrutiny
Ian Arroyo, chief strategy officer of Freightos, noted that the increase in Chinese goods flowing into Mexico is driven by a combination of geopolitical factors, supply chain reconfigurations, economic strategies, and market opportunities that began during the pandemic.
“It’s clear that due to these supply chain disruptions, both foreign and American companies are using Mexico to reduce costs,” said Arroyo. “The question is whether the next administration will scrutinize the USMCA exemption for moving Asian goods through Mexico.”
When the Trump administration renegotiated NAFTA into the USMCA in 2020, a key provision required the countries to begin reviewing the trade deal after six years, starting in July 2026. If one or more of the three parties decides not to renew the agreement, it will not immediately end the deal but will trigger years of uncertainty for the markets regarding the trade route’s future.
“I am concerned that Mexico is being unfairly criticized because 301 duties can be avoided by manufacturing in any country worldwide. It seems that China is finding Mexico to be a favorable platform for their products (materials and parts). I believe this will be a topic of discussion during the 6-year review,” said Evelyn Suarez, founder of the Suarez Firm, which advises corporations on customs and international trade law and policy.
If the nations agree to continue the deal, “We do not expect this flow to slow down,” said Ian Arroyo. “As global trade continues to evolve in an increasingly complex geopolitical environment, Mexico’s role as a key node in North American supply chains is likely to grow, further increasing the flow of goods from China into the country.”
Logistics managers told CNBC that clients are already planning to front-load products through Mexico and U.S. ports in the late fall to mitigate the risk of a Trump presidential win leading to additional Chinese tariffs as high as 60%-100%.
“Just like in his first term, President Trump will continue to use the leverage of the United States to negotiate better trade deals and prioritize American workers, farmers, and families,” said Karoline Leavitt, national press secretary for the Trump campaign. “The Harris-Biden Administration has allowed China to take advantage of us with policies like their radical electric vehicle mandate, and it will only get worse if Kamala Harris is president and Tim Walz, who honeymooned in China, is in the White House alongside her.”
The Harris campaign did not respond to requests for comment.
Supply Chain Companies Seizing the Opportunity
Logistics companies such as DHL, Maersk, Uber Freight, and ITS Logistics have been expanding their operations to capture the additional freight opportunities moving in and out of Mexico. North American freight rail company CPKC is completing the construction of its new international rail bridge from Laredo, Texas, to Nuevo Laredo, Tamaulipas, expected to be operational in Q4 of this year.
Paul Brashier, vice president of global supply chain at ITS Logistics, said that since 2018, the company has seen a steady increase in demand for capacity from Mexico to Texas markets, including Laredo, San Antonio, Austin, and Dallas/Ft. Worth.
“Over the last two years, demand has grown exponentially,” Brashier said. “We are heavily investing in Texas with cross-border services in Laredo, a one-million-square-foot distribution center in Haslet, and our logistics offices in downtown Ft. Worth.”
Mollie LeBlanc, vice president of international operations for Uber Freight, said the logistics company is experiencing huge demand for its services in Mexico. “Our sales team in Mexico is receiving more and more inquiries about importing directly from China into Mexico, and it’s growing,” said LeBlanc. “There’s strong demand for truckloads coming out of Mexico, so our team is providing customers with consultation and transportation management services to enhance their cross-border logistics operations.”
LeBlanc described Uber as an early investor in Texas cross-border logistics, with locations on both sides of Laredo, and said the spaces are now in full use. “We also have about 1.5 million square feet of warehouse space across 10 locations in Mexico, including Monterrey and Mexico City. We’re not an asset-based provider, but as we continue to see heightened demand, we’re exploring ways to provide our customers with the tools they need to expand,” LeBlanc said.
Recent increases in tariffs on Chinese exports by the Biden Administration are further fueling trade flows, but experts say this phenomenon will not be short-term driven. According to Hamish Woodrow, head of strategic analytics for Motive, Mexico could remain the top importer to the U.S. until at least 2030, with demand for AI technology – closely linked to national security concerns and a key area of rivalry with China – likely fueling this trend further.
Woodrow believes there will be a need for more factories to produce computer-related machinery and parts, leading to the development of more manufacturing and assembly plants in Mexico. With its strategic position and close proximity to the U.S., Woodrow predicts continued growth in this sector and Mexico’s imports overall as it expands its role in making and sending these products to the U.S.
For U.S. exporters, Mexico’s trade liberalization efforts mean that the Mexican market is one of the most open and competitive in the world. Christine McDaniel, senior research fellow at the Mercatus Center at George Mason University, notes that consumers will naturally look for the lowest prices, and trade will divert based on comparative advantage.
Lovely tells CNBC that it’s entirely predictable when tariffs up to 25% or more are levied on a country, manufacturers will find strategies to avoid those tariffs. “This is what we’re seeing,” Lovely said. “So, is it a back door? In a sense, it is. Is it violating any agreements? Almost surely not.” According to Lovely, going back to the original impetus for NAFTA, Mexico came to the Americans because they wanted foreign direct investment into Mexico.
Source: CNBC News
