China-Mexico-US trade relations remain evermore interdependent

Trade exchanges between China, Mexico and the US are a topic of constant debate in academic and public spheres due to their significance and impact at the local and international levels. These exchanges have intensified and transformed amid shifting global trade dynamics, adding further complexity to the discussion.

Today's relocation of value and supply chains, further reinforced by nearshoring and friendshoring, can strengthen Mexican exports to the US. However, the close commercial links forged between China and Mexico in the last two decades have also become increasingly complex, rendering the prospects of bilateral relations hard to predict.

Amid strong global competition and the influx of Asian products into the Mexican and US markets - the latter being a common export destination of both the Mexican and Chinese economies - Mexican business communities view China as a formidable competitor that has displaced it from its traditional market, especially after China's accession to WTO.

Before this, Mexican entrepreneurs had relied on Asia's efficient supply chains, primarily concentrated in China, to improve the competitiveness of their products in international markets, especially in the US.

Some observers and authors have labelled China as an "uninvited guest" of the North American Free Trade agreement (NAFTA, later the US-Mexico-Canada Agreement (USMCA) ) which promotes regional integration and economic growth in North America.

In this context, the trade flows in question are not only the bilateral ones between China and Mexico, and Mexico and the US, but also the trilateral China-Mexico-US trade flows linking the three countries in which Mexico has become a "springboard and assembly place" with increasing product ́presence in the North American market.

Due to the integration of the three economies, both Chinese and Mexican exports have gained greater participation in the US market, and the two economies have become essential parts of the great global factory.

Not only that, according to recent studies, the trilateral relationship of the trade flows among the three nations shows a high correlation coefficient between Mexico's purchases from China and its exports to the US market.

Specifically, by applying a Vector Autoregressive (VAR) model, it was concluded that between June 2001 and August 2008, for each percentage point of the increase in exports destined to its northern neighbour, Mexico required an additional import from China by almost two percentage points. Between September 2008 and December 2020, the interdependence of the two variables decreased but was still high at 0.9.

This largely demonstrates the dependent relationship between sales destined for the US market and purchases from China that Mexico has realised from 2001 to 2020.

Faced with the global relocation of value and supply chains and attempts since 2020 by the developed countries (led by the US) to decouple from the Chinese economy, Mexico has been deemed one of the most attractive destinations to host productive chains leaving Asian economies, above all, from China.

In 2017, a year before the start of trade frictions between China and the US, Mexican products represented 13.5% of the US market. In 2023, it was 15.4%, 1.9 percentage points more. Consequently, Mexico became the top trading partner, as well as the top supplier of commercialised goods, of its northern neighbour.

The fact that Mexican exports registered a significant increase to the US and the rest of the world from 2017 to 2023, implies that Mexico has expanded its share of exported goods to both the US and the global market. The growing concentration of Aztec exports to the US also reflects its dynamic export capacity to the US when compared to other destinations.

Since 1993, when the central bank of Mexico (Banco de México) started implementing the electronic system for publishing foreign trade statistics, to date, imports from China have shown almost the same pattern in relation to Mexico's economic growth.

In 2009, 2016, 2019 and 2020 respectively, when China experienced a negative growth rate in its exports to Mexico, it coincided with Mexico's poor economic performance. However, it seems that the opposite is true in 2023: Mexican imports from its Asian partner fell by 3.8% compared to the year before, but the economy did well, growing by 3.2% in the same period.

The shrunk imports from the Asian economy in 2023 is unusual, not only with respect to economic performance, but it also does not correspond with the interrelationships between Mexico's purchases from China and exports to the US from 2001 to 2020.

The reasons for the decrease could be multifaceted, such as the persistent trade frictions with the US, the weak performance of the flow of global goods, etc., but the primary reason is likely a natural adjustment following two years of robust growth in 2021 and 2022, which followed the trough caused by the Covid-19 pandemic in 2020.

Thus, it would be erroneous to conclude that trading relationships between China and Mexico could develop differently based on the figure of a particular year.

In fact, until today, most Mexican manufacturing firms still rely on imported raw materials, intermediate goods and capital products from China to consolidate and improve their exporting capacities. These imports cannot be readily substituted by local value and supply chains, at least in the short and medium terms.

Finally, it should be noted that Chinese manufacturing companies that settled in Mexico in the context of nearshoring have struggled to find local suppliers.

According to the survey conducted by Deloitte Spanish Latin America in October 2023, of over 116 Chinese companies with manufacturing operations in Mexico, 73.3% of all materials needed to be imported, and in some cases the figure could be up to 100%, and most of them from China particularly.

In other words, the value and supply chains that were uprooted from China and established in México could strengthen even more the interdependent relationships between the two economies.

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