Did Mexico eat China’s lunch? – Economist weighs in

Mexico has overtaken China to become the number one exporter of goods to the United States (US).

China’s squabble with the US, or vice-versa, has seemingly opened a gap for other international trade players like Mexico to take up a larger slice of the pie.

As of July, Mexico boasted roughly 15% share of exports to the US, while China’s portion of the market had declined to 14.6% from 22% in March 2018.

There’s no doubt that political tensions between China and the US have affected global supply chains, further worsened by the effects of the Covid-19 pandemic.

ALSO READ: China at 74: Opening up markets to ‘improve themselves’

Overtaking China

Senior Emerging Markets Economist at Schroders, David Rees, said the combined effects of the two factors meant that a market shift had been long coming.

Furthermore, deglobalisation coupled with nearshoring – as countries like the US brought supply chains closer to home, catapulted Mexico’s trade success.

“The resilience in US demand for Mexican goods has seen Mexico overtake China for the first time since the early 2000s, to become the number one exporter of goods to the US,” Rees said.

“While not as dynamic as [Asian markets], Mexican manufacturing and markets ought to benefit from any reshoring of production back towards the US,” he added.

ALSO READ: China ready to help SA reduce load shedding

Things could still change

Rees said while it might be tempting to conclude that a regime shift in global supply chains is already underway, he explained that a number of factors suggested that China could still benefit from any upturn in the goods cycle in the upcoming months.

“While China has underperformed, it’s worth noting that US nominal imports from Asia have been weak across the board over the past year. This in large part reflects price effects as the large swings in energy prices since Russia’s invasion of Ukraine wash out of the incoming data,” he explained.

He further said that based on energy price effects, it’s worth noting that Asian exports have been growing in volume terms.

“By contrast, government-mandated price controls through state-owned energy companies meant that swings in energy were less violent in Mexico and they are now having less of a dampening effect on nominal trade,” Rees noted.

Another notable factor to tip the scales is changes in the composition of US consumption which have made it less import-intensive.

ALSO READ: China’s great leap forward leaves South Africans feeling hopeless

Although there was a concentrated demand for goods in the initial phase of the pandemic amid subsequent lockdowns, the reopening of the US economy released pent-up demand for services that rely far less on imported goods.

“While Mexican exporters also faced the same issues, they have benefited from strong motor vehicle exports as dealers scramble to clear backlogs of orders from the post-pandemic era,” he explained, adding that a small percentage of these products are bound for the US market.

Further contributing to changes in supply chain is the move by Chinese firms to reroute exports via third parties to circumvent tariffs and sanctions imposed by the US government in recent years.

“It’s always difficult to identify a single smoking gun when it comes to proving re-routing of trade,” said Rees, adding that a couple of factors “point that direction.”

Firstly, he noted that while China’s bilateral trade with the US had fallen, its global export market had not.

“Indeed, China’s share of global exports shot up during the pandemic and has remained elevated ever since,” he explained.

Secondly, there’s been a diversification in Chinese trade – with the country taking up a larger share of trade with Russia its invasion of Ukraine.

“But the sheer difference in the size of consumption spending means that more exports to Russia cannot feasibly explain the fact that China has retained global market share even as exports to the US have sagged,” Rees explained.

ALSO READ: Reunification could help build a stronger China nation

‘Not safe from from reshoring’

Rees said China is not safe from the effects of reshoring.

He further explained that the uptake in gross fixed capital investment in Mexico over recent months, mirroring similarly strong investment in US manufacturing facilities, suggests that firms were starting to relocate.

However, Rees warned that while Mexico stood to benefit from the new regime in global trade, reshoring would happen gradually – taking years rather than months.

“In the meantime, if we are right in expecting an upturn in the global goods cycle, that ought to be a positive catalyst for China’s economy and some of its markets…,” he explained.

ALSO READ: Africans must see China’s intentions