The United States has a new top trading partner — and it’s much closer to home.
Mexico officially replaced China in the first four months of 2023, the two North American countries having achieved total bilateral trade of around $260 billion, Census Bureau data shows. Over that period, Mexican imports to the U.S. were around $154 billion and U.S. exports to Mexico around $106 billion.
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This marks a shift in the global economy away from a focus on low prices and greater efficiency (through fragile supply chains) to a more complex dynamic, according to Luis Torres, senior business economist at the Federal Reserve Bank of Dallas.
“Today’s global economic relationships encompass a myriad of concerns, among them national security, climate policy and supply-chain resiliency,” Torres wrote in a recent explainer.
Here’s why Mexico pushed past China — and what that change means for U.S. consumers and businesses.
A deteriorating relationship with China
U.S. relations with China have been wobbly at best in recent years.
After joining the World Trade Organization (WTO) in 2001, China quickly became a top trading partner of the U.S. — pushing Canada from the top spot in 2014 — but it wasn’t long before critics started questioning Chinese trade practices and the country’s huge trade surplus with the U.S.
“Within a decade of its admission [to the WTO], critics increasingly accused China of flooding the world with cheap exports while limiting foreign access to its market,” Torres explained.
The situation finally came to a head in 2018 when the Trump administration imposed restrictive tariffs on Chinese imports, justifying the move in part by pointing to longstanding allegations that China had been stealing intellectual property and coercing American companies into sharing their technology.
China clapped back with retaliatory tariffs, and trading between the two superpowers began to slow.
The strained trading relationship took another blow a few years later when pandemic-driven border closures and stay-at-home orders put a plug in global trade and ground supply chains to a halt.
This made countries, including the U.S., reconsider ideas like “nearshoring,” whereby companies transfer part of their production to countries that are close by, preferably within the same time zone(s), in order to minimize the effects of supply-chain disruptions.
Chinese imports to the U.S. — both as a percentage of total imports and as a percentage of GDP — are now at the lowest they’ve been in 20 years, according to Axios.
Over a four-month period from February to May 2023, total trade of manufactured goods between China and the U.S. reached nearly $180 billion, Census Bureau data shows, with Chinese imports to the U.S. totaling $130 billion, down 25% from $175 billion a year earlier.
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Mexico solidifies rank as top trade partner
Mexico has long enjoyed a strong trading partnership with the U.S. thanks to the 1994 North American Free Trade Agreement (NAFTA) and, subsequently, the United States-Mexico-Canada Agreement, which replaced NAFTA in 2020.
But the rise of “nearshoring” during and after the pandemic and declining U.S. relations with China, have helped make Mexico the top U.S. trade partner.
At the heart of the countries’ trade relationship is manufacturing. Bilateral manufacturing-based trade between Mexico and the U.S. represented 16.5% of all U.S. manufacturing trade in the first four months of this year, according to Torres, followed by Canada-U.S. at 13.5% and China-U.S. at 12.5%. Torres also points out that transportation-related manufacturing, which includes the automotive sector, has accounted for almost a quarter (24.5%) of total bilateral manufacturing trade between Mexico and the U.S. in the past two decades.
Over the same period, computer and electronic equipment have accounted for 22.4% of bilateral trade, followed by electrical equipment, appliances and components at 8.5% and machinery (excluding electrical) at 7.7%.
In a typical manufacturing supply-chain arrangement between the two countries, intermediate goods are produced in a U.S. plant and then exported to Mexico where it becomes part of the assembly process before a final good is shipped back to the U.S.
The impact on U.S. consumers
“While Mexico benefits from increased trade with the U.S., the impact on U.S. producers and consumers has been mixed,” Torres wrote. “To the extent that frictions with China account for Mexico’s ascension in the trade rankings, the higher profile comes at a cost to U.S. firms and consumers through higher input and purchase prices.”
There also seems to be cultural factors. During a webinar hosted by international lawyer Dan Harris and supply chain expert Andrew Hupert earlier this year, the duo discussed Mexico’s business culture, which is described as being more risk-averse and less open to newcomers. This means that U.S. companies may find it harder to source suppliers and negotiate agreements compared to doing so in China.
Simply put, when companies “reshore” or “nearshore” their supply chains, costs typically increase for U.S. consumers.
That’s why U.S. Treasury Secretary Janet Yellen tried (unsuccessfully) to get the Biden administration to roll back some of the Trump-era tariffs in May.
“It seems as though they impose more harm on consumers and businesses and aren’t very strategic in the sense of addressing real issues we have with China, whether it concerns supply chain vulnerabilities, national security issues or other unfair trade practices,” she told reporters in Bonn, Germany.
“Some relief could come from cutting some of them.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.