Why U.S. Imports From Mexico Surpassed Those From China

What’s behind this shift in trade? Is it motivated by “friendshoring”?

There are two drivers of this shift:

First, North American auto production has finally recovered from the COVID-19 pandemic and the resulting chip shortage. Mexico is a major auto producer these days, and as a result, U.S. imports of vehicles from Mexico have increased substantially. China was never an important supplier of vehicles to the United States, so this isn’t really driven by a shift away from China. Mexico’s auto output has grown steadily since it joined the North American Free Trade Agreement (NAFTA) with the United States and Canada in 1994.

Second, tariffs that President Donald Trump introduced on trade with China have led to an undercount in the official measure of imports from China. Average tariffs are now around 18 percent, creating a significant incentive for firms to find ways around this tax. They have done so mostly by shifting final assembly to Southeast Asia (Vietnam, Malaysia, Thailand), though Chinese firms such as Shein and Temu also make extensive use of the so-called de minimis exception, which allows packages worth less than $800 to enter the United States tariff free. Since the de minimis shipments aren’t counted in the U.S. trade data, the formal count of imports is clearly too low. China’s own data shows that it is selling more to the United States than the U.S. reports importing.

What does this mean for the future of the U.S.-China trade relationship?

The frictions that now complicate direct bilateral trade between the United States and China are likely here to stay. The Joe Biden administration is still reviewing the Trump tariffs, but any changes it makes will likely be increases in the tariffs on strategic goods (press reports have pointed to an increase in tariffs on electric vehicles) rather than decreases. 

Trump, now the leading Republican presidential candidate, is calling for a 60 percent tariff on imports from China. Naturally, firms are thus looking for ways around the tariffs—largely by setting up alternative points for final assembly. True “de-risking,” the stated goal of the Biden administration, demands more than just tariffs and reduced bilateral trade. Solar panels made in Vietnam with Chinese wafers avoid the tariffs, but their key component still comes from China. IPhones produced in India using Chinese-made displays and circuit boards still have a lot of Chinese content. The same goes for critical medicines made with active pharmaceutical ingredients from China.

As the Biden administration recognized in its supply chain reviews, true de-risking means building up alternative sources of production for key components of strategically significant goods.

Is China also losing ground with its other trade partners amid its domestic economic challenges, or does this change merely represent a reshuffling of trading patterns?

China is actually gaining ground globally, not losing it. Its exports did slump a bit in 2023 because of a global retrenchment in consumer spending, but Chinese exports of electric vehicles and “green” goods are absolutely skyrocketing. An analysis of the evolution of China’s trade since the introduction of the Trump tariffs reveals that China’s exports have increased by about $1 trillion globally, with exports now accounting for a higher share of China’s gross domestic product (GDP) than before the tariffs.

There has been a reshuffling of trading patterns to avoid the tariffs, but the world’s dependence on China as a source of supply is up—and China, with a weak domestic economy, is also more reliant on exports than it was five years ago.

What are the pros and cons of this shift for North American economies?

This recent rise in Mexico’s exports isn’t primarily a function of Mexico gaining at the expense of China. Rather, it is evidence of the ongoing evolution of the North American auto industry and of Mexico’s evolution from being an oil and energy exporter to becoming a major auto exporter as well.

Most of the trade diversion that resulted from the Trump tariffs has gone to Southeast Asia and, to a lesser extent, Korea and Taiwan. It hasn’t mainly gone to Mexico. There are some high-profile examples of Chinese firms, including important Tesla suppliers and other auto parts manufacturers, setting up shop in Mexico to serve the North American market. There are also some high-profile investments, including from Chinese electric vehicle (EV) firm BYD, being considered, but the scale of this shift is still modest.

That said, the fact that Mexico is part of the integrated North American market and a “free trade agreement” partner with the United States does create opportunities for Mexico-based production to qualify for EV subsidies, under the United States Inflation Reduction Act. Mexican-made EV batteries and other green goods could also qualify. Moreover, ongoing difficulties with global shipping point to the advantages of producing in Mexico and shortening supply chains, even if tariffs for many goods are already zero globally.

So there is clearly a rather positive regional dynamic supporting the growth of bilateral trade between the United States and Mexico; Mexico increasingly imports U.S. energy while it has become a real center for North American auto and aircraft part production.

Such regional integration would get an additional impulse from the withdrawal of “most-favored-nation” status for China, which Trump has proposed alongside new tariffs. But avoiding bilateral tariffs is pretty straightforward: it is just as easy to assemble Chinese components in Vietnam as it is to ship the components to Mexico for final assembly. The empirical data suggests that Southeast Asia and India are more likely than Mexico to benefit from higher U.S. tariffs on consumer goods and electronics. 

However, the continuation of this regional dynamic is not assured. The Trump administration renegotiated NAFTA, which should give Mexico a bit of a pass on new trade frictions. But the United States now runs a growing trade deficit with Mexico, and it is not clear whether Mexico and Canada would be exempt from the universal 10 percent tariff that the Trump campaign has floated in the press. Trade policy by tweet would likely make a comeback in the event of a second Trump administration, and it is unlikely Mexico would be spared.