China-Mexico Freight Surge in Tariff Era: A "Back Door" for U.S. Trade?
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The trade war between the U.S. and China, initiated by the Trump administration and for the most part continued under President Biden, has sent cargo crossings between China and Mexico soaring. Companies are apparently finding legitimate ways to skirt U.S. tariffs by moving production to Mexico, a "back door" into the U.S. market, according to new data on trade.
An analysis done by CNBC found a remarkable growth in the volumes of assembled products, materials, and components passing between China and Mexico. This rise is also partly attributed to a bid by companies to circumvent tariffs imposed on Chinese imports under the Trump and Biden administrations. Jordan Dethwart, president of the logistics firm Redwood Mexico, said Chinese companies are increasingly moving production facilities to Mexico. By using Chinese parts at Mexican assembly plants, the companies are able to legally label their products "Made in Mexico" and apply for the benefit of the United States-Mexico-Canada Agreement.
This allows companies to shift the "economic nationality" of their products. According to the trade laws, raw materials or components that are imported into Mexico and transformed into fully assembled products can enter the U.S. carrying a "Made in Mexico" label without falling under the tariffs levied on Chinese-made goods.
Nearshoring and Supply Chain Shifts
Besides avoiding tariffs, companies are leveraging Mexico as part of a general trend of nearshoring to protect their supply chains. Its proximity to the U.S., trade agreements, and global manufacturing hub status have all combined to make Mexico an attractive alternative to China. This shift has been further driven by disruptions such as possible U.S. East Coast port strikes and global supply chain challenges.
According to freight analytics firm Xeneta, container trade from China to Mexico rose 26.2% between January and July 2024, after growing 33% last year. The increased volume of goods demonstrates the route's increasing favor among businesses looking for alternatives amid declining direct trade between China and the U.S. since 2020.
Political Ramifications and Industry Impact
The politics run deep with this cargo boom, as trade relations between the U.S., China, and Mexico increasingly become campaign issues. former President Donald Trump, who initiated the tariffs during his administration, continues to push for tougher trade barriers. Meanwhile, President Biden has retained many of the protections while putting into place new barriers in industries such as semiconductors and EV technology.
That's a risk experts say may become a reality as tariffs continue to rise. According to Mary Lovely, senior fellow at the Peterson Institute for International Economics, more tariffs will create an incentive for black market activity and corruption in developing countries. Meanwhile, the U.S. government is vigilant when it comes to searching for violations of trade policies; indeed, the latest investigations have covered industries such as solar panels.
The Future of U.S.-Mexico Trade
As Mexico exports to the U.S. increase, especially in sectors like automobiles, computer-related machinery, and industrial parts, it has made itself a close trading partner of the United States. Mexico, with its free trade agreements along with its strategic geographic location, has become one main critical link in global supply chains.
But with the 2024 presidential election looming, both Trump and Biden have signaled that rougher trade waters lie ahead. If new tariffs are imposed, companies shipping goods across borders between China, Mexico and the U.S. may find themselves under increased scrutiny - and financial pressure.
For now, the freight boom in China-Mexico is proof that companies find their ways to navigate the increasingly tricky global trade landscape through legal loopholes and tactical choices on logistics in an attempt to stay competitive through trade wars and supply chains in flux.