Mexico: Has It Displaced China As The New Star Of Offshoring?

Mexico has overtaken China as the top exporter to the U.S. In 2023, according to U.S. Commerce Department, U.S. imports from Mexico hit $475 bln in value, while imports from China were $427 bln. Imports from Mexico rose 5% YoY, and imports from China fell 20%. The U.S. goods and services trade deficit with Mexico was $131.1 bln in 2022, according to USTR.

In the face of U.S. regulatory hostility and unreliable Chinese policies, exporters are spreading their bets.

A lot of Mexican exports are by Chinese companies. Facing a suspicious U.S. bureaucracy, many Chinese companies have increasingly been investing in and exporting components to Mexico in an effort to rebrand themselves.

Globalization is not ending, but investors are spreading risk. The last few years of unpredictable Chinese behavior have acted as a wake-up call to foreign investors. They are not going home, but they are trying hard to diversify manufacturing bases, the better to reduce the risks associated with concentration in the supplier network.

The international system of trade and investment is re-aligning, as companies grow wary of risks associated with China, and funds looking at China see the IPO window as impossibly narrow. News that Mexico in 2023 exported more to the U.S. market than China did was a harbinger: while China will remain an important base for manufacturing, companies are cautious about excess exposure to China and are accelerating investment in other regions. Beneficiaries include Mexico and Vietnam.

Political caution has prompted diversification not only by international companies in China but by Chinese companies, which have ramped up manufacturing in Southeast Asia and in Mexico. Many Chinese companies are doing all they can to appear American, whether to attract U.S. investors, avoid sanctions, or evade rules of origin in trade that make it hard for Chinese companies to export into the United States.

There are two different paths for Chinese companies escaping the Mainland: 1) subterfuge to rebrand Chinese products and manufacturers by transiting third countries to avoid sanctions and taxes, and 2) genuine relocations of manufacturing capacity. Of course, there is every variation in between.

Outsized state control of investment capital and strong, top-down directives on technology, focal industries, and R&D priorities generally drive targeted sectors of the Chinese economy. This has led to rapid capacity development in focus sectors such as lower-end semiconductors, solar panels, EVs, bulk vitamins, steel, and so on. The result inevitably is substantial overcapacity, shake-outs, and local losses, all of which lead to global market value destruction.