Made in Mexico and the U.S.-China Trade War

The US-China trade war has helped vault Mexico far past China as a U.S. trading partner. As global companies seek to diversify their supply chains, Mexico offers proximity to U.S. markets, modern infrastructure, access to ports for global distribution and a highly skilled, well-educated workforce.

Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors, and the United States Mexico Canada Agreement (USMCA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provide tariff-free access to the United States, Canada and 10 countries throughout the Asia-Pacific region.

With the U.S. “Trump tariffs” likely to continue in place indefinitely, manufacturing in Mexico is attractive not only for U.S. (and other) companies that manufacture goods in China, but also for Chinese companies, many of which have set up or are setting up production facilities outside China, in Southeast Asia and right across the U.S. border, in Mexico.

Mexico’s top-notch industrial parks used to host only North American, European, Japanese and a few Korean companies, but several months ago, Lyman Daniels, president of CBRE Mexico, noted that from 2018 to 2019, Chinese investment in Class A and Class B industrial real estate in Mexico grew sixfold. Daniels added, “Foreign buyers are showing considerable interest particularly in [Northern Mexico], due to the growth in industrial demand expected from USMCA and the configuration of a new supply chain based on and for North America.”

What does this mean for international businesses, and especially manufacturers?

In the medium and long term, foreign investment will unquestionably contribute to the further development of Mexico as one of the world’s important manufacturing nations. China did not become the factory of the world overnight: its rise was the result not only of inexpensive labor, but also of planned policies and reforms.

While certainly Mexico can continue to become more business-friendly, many building blocks (e.g. the rule of law) are already in place, and if Mexico follows the path of almost every other mid-market developing nation, industrial investment will be accompanied by public and private investments in supporting infrastructure (e.g. transportation, energy) that will benefit all Mexicans and fuel domestic growth.

Mexico is fast-increasing in importance as a manufacturing hub, especially for businesses targeting the U.S. market. Chinese businesses are not adopting a “wait and see” attitude; they are moving aggressively to establish production and logistics facilities, and they are using smart strategies to access the market despite government rhetoric that has been to say the least ambivalent toward foreign business.

Looking down the road two or three years, U.S. tariffs (at current levels) on Chinese-manufactured goods will likely still be in place and Chinese companies are not sitting at home hoping those tariffs will be lifted. They’re actively reconfiguring their supply chains. They’re snapping up Class A industrial real estate in locations that will position them to not only realize significant savings on U.S.-bound exports, but also position themselves to access Mexico’s USD1.3 trillion economy – the second-largest in Latin America – with domestically produced products.

What’s your plan?