by In the depths of the pandemic, as global supply chains collapsed and the cost of shipping a container to China increased nearly twenty-fold, Marco Villarreal saw an opportunity.
In 2021, Villarreal resigned as CEO of Caterpillar in Mexico and began fostering ties with companies seeking to move manufacturing from China to Mexico. He found a client in Hisun, a Chinese producer of all-terrain vehicles, which hired Villarreal to establish a $152 million manufacturing site in Saltillo, an industrial center in northern Mexico.
Villarreal said foreign companies, particularly those looking to sell within North America, saw 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 rising tensions between Washington and Beijing are disrupting trade flows.
The U.S. trade deficit with China narrowed significantly last year, with the country’s goods imports falling 20 percent to $427.2 billion, data show. 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 approximately the same as last year, $475.6 billion.
The total U.S. goods and services trade deficit, which consists of exports minus imports, fell 18.7 percent. Overall, U.S. exports to the world rose slightly in 2023 from a year earlier, despite a strong dollar and a weak global economy.
US imports fell annually as Americans bought less crude oil and chemicals and fewer consumer goods, including cell phones, clothing, camping equipment, toys and furniture.
The recent weakness in imports and the decline in trade with China have been partly a reflection of the pandemic. American consumers stuck at home during the pandemic bought Chinese-made laptops, toys, Covid tests, sports sports, furniture and home exercise equipment.
Even as coronavirus concerns eased in 2022, the United States continued to import many Chinese goods as bottlenecks at congested U.S. ports finally dissipated and companies replenished their warehouses.
“The world couldn’t access enough Chinese goods in 2021 and gorged on Chinese goods in 2022,” said Brad Setser, an economist and senior fellow at the Council on Foreign Relations. “Since then everything has been normalizing.”
But beyond the unusual changes in annual patterns in recent years, trade data is beginning to provide compelling evidence that years of heightened tensions have significantly eroded the United States’ trade relationship with China.
In 2023, quarterly US imports from China were at about the same level as 10 years ago, despite a decade of growth in the US economy and increasing US imports from other parts of the world.
“We are decoupling and that is weighing heavily on trade flows,” Mark Zandi, chief economist at Moody’s Analytics, said of the United States and China.
Economists say the relative decline in trade with China is clearly related to tariffs imposed by the Trump administration and then maintained by the Biden administration.
Research by Caroline Freund, dean of the School of Global Policy and Strategy at the University of California, San Diego, showed that trade with China decreased for products that have high tariffs, such as screwdrivers and smoke detectors, while trade of products that do not have tariffs, such as hair dryers and microwave ovens, continued to grow.
Ralph Ossa, chief economist at the World Trade Organization, said trade between the United States and China had not collapsed, but had been growing about 30 percent slower than trade between those countries and the rest of the world. .
There were two episodes in recent history in which U.S. trade with China slowed noticeably, he said. The first was when trade tensions between the countries increased in 2018. The second was when Russia invaded Ukraine, prompting the United States and its allies to impose strict sanctions and further reshuffle global trade relations.
“There was a period when geopolitics didn’t really matter much for trade, but as uncertainty increases in the world, we see trade becoming more sensitive to these positions,” said Stela Rubinova, research economist at the Organization. World Trade.
Some economists warn that the decline in U.S. trade with China may not be as pronounced as bilateral data shows. This is because, like Hisun, the Chinese vehicle producer, some multinationals have moved parts of their manufacturing out of China to other countries, but continued to source some raw materials and parts from China.
In other cases, companies may simply be shipping products that are actually made in China through other countries to avoid U.S. tariffs.
US trade statistics do not record that these products come from China, although a significant part of their value would have been created there.
Mrs. Freund, who wrote a recent article In this regard, he said that the trade relationship between both countries “is definitely weakening, but not as much as official statistics suggest.”
Still, 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 of 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 factors that pushed companies toward Mexico.
When China appeared to align itself with Russia in the conflict, “all kinds of alarm bells went off,” Carmona said. “People realized that we cannot have that dependence on China, which we have been accumulating over the last 40 years while making China the factory of the world.”
Schneider, which already had a substantial presence in Mexico with nine factories and almost 12,000 employees, decided in 2021 that it needed to grow more in the country. Now, after opening new manufacturing sites and expanding existing plants, the company has about 16,000 employees in Mexico, and plans for that number to soon reach about 20,000.
Schneider ships about 75 to 80 percent of its production in Mexico to the United States, including a variety of products such as circuit breakers and panels used to distribute and regulate electrical power.
Although foreign direct investment in developing countries fell 9 percent in 2023, the flow of such investment to Mexico increased 21 percent last yearaccording to the United Nations Conference on Trade and Development.
Another economy caught in the shifting tides 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, U.S. imports from South Korea were the highest ever recorded.
South Korean companies have also particularly benefited from President Biden’s new climate legislation. The US government offers tax credits to consumers who buy electric vehicles, but has placed certain limits on the purchase of parts for those cars in China.
As leading manufacturers of batteries and components for electric vehicles, South Korean companies have seized the opportunity to participate in newly expanding US 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 more restrictive for Korean companies. Meanwhile, U.S. limitations on China benefiting from EV tax credits had given Korean companies “more room to play.”
“For a business to survive, you always find the market that has the greatest potential,” Mr. Sung said.
As major Korean companies such as SK, LG, Samsung and Hyundai build new facilities to manufacture products in the United States, that also appears to be increasing American trade with South Korea, as companies are importing some materials, machinery and parts from their countries of origin to supply the new facilities.
In December, Korean exports to the United States exceeded Korean exports to China for the first time in 20 yearsdriven by shipments of vehicles, electric batteries and other parts.
Sung agreed that growing American skepticism toward China was bringing the United States and South Korea closer together.
“It has never been stronger than in recent years between two allies,” he said.
