More than Cheap Labor

It’s been no secret that Chinese companies have been building factories in Mexico to protect their access to the United States market in the face of high U.S. tariffs on many Chinese exports. The Financial Times has now put numbers on this: using figures from Xeneta, a data analytics company, and Container Trades Statistics, a data supplier, the FT estimates that the number of containers from China imported into Mexico rose 28 percent in the first three quarters of 2023, compared with the same period of 2022.

This needs to be kept in perspective: Mexico’s containerized imports from China over those nine months, the equivalent of 881,000 twenty-foot containers, are about what the United States imports directly from China in a single month. Nonetheless, it’s obvious that many Chinese companies see Mexico as a ticket to the United States. Many Mexican exports enter the United States duty-free under the U.S.-Mexico-Canada Agreement. The remainder typically face very low tariffs. While the punitive duties the United States has imposed on many Chinese products since 2018 generally apply to Chinese-made goods shipped to the United States through Mexico, they may not apply to goods that are in some way transformed in Mexico, such as Chinese-made components used to make other products in Mexican factories. Several Chinese vehicle manufacturers are reportedly scouting sites for Mexican assembly plants from which they could export to the United States with low or zero tariffs, causing considerable distress in Washington.

Predictably, a blowback is underway, with talk about rewriting the rules of origin that determine what is a Mexican product for purposes of U.S. Customs. If done right, this could actually benefit Mexico.

At present, there is little Mexican value added other than factory labor in most of the manufactured goods that come across the border into the United States. Nearly half the value in Mexican exports originates in other countries. If Chinese-owned factories in Mexico must incorporate more North American value added in order to receive U.S. trade preferences, they will likely need to undertake more sophisticated activities in Mexico, such as making more of their own inputs there and engaging more Mexican engineers, designers, and programmers. That could help the Mexican economy become more than a cheap labor play, which the 30-year-old free-trade arrangement among Mexico, Canada, and the United States has distinctly failed to do.

Tags: Manufacturing, Mexico