For the first time in twenty years, the US buys more from Mexico than from China

At the height of the pandemic, when global supply chains broke down and the cost of shipping a container to China increased nearly twentyfold, Marco Villarreal saw an opportunity.

In 2021, Mr. Villarreal resigned as director general of Caterpillar in Mexico and began cultivating ties with companies looking to move production from China to Mexico. He found a customer in Hisun, a Chinese all-terrain vehicle manufacturer, which hired Mr. Villarreal to set up a $152 million manufacturing site in Saltillo, an industrial hub in northern Mexico.

Mr. Villarreal said foreign companies, especially those looking to sell within North America, see Mexico as a viable alternative to China for several reasons, including simmering trade tensions between the United States and China.

“The stars are aligned for Mexico,” he said.

New data released Wednesday showed Mexico surpassed China to become America's top source of official imports for the first time in two decades — a major shift that highlights how increased tensions between Washington and Beijing are changing trade flows.

The United States' trade deficit with China narrowed significantly last year, with goods imports from the country falling 20 percent to $427.2 billion, the data showed. American consumers and businesses turned to Mexico, Europe, South Korea, India, Canada and Vietnam for auto parts, shoes, toys and raw materials.

Mexican exports to the United States were about the same as last year, at $475.6 billion.

The total U.S. trade deficit in goods and services, which consists of exports minus imports, decreased by 18.7 percent. Total U.S. exports to the world increased slightly in 2023 from the previous year, despite a strong dollar and a weak global economy.

US imports fell annually as Americans bought less crude oil and chemicals and fewer consumer goods, including cell phones, clothing, camping gear, toys and furniture.

The recent weakness in imports and the decline in trade with China are partly a reflection of the pandemic. US consumers stuck at home during the pandemic bought Chinese-made laptops, toys, Covid tests, leisure activities, furniture and home fitness equipment.

Even as coronavirus concerns subsided in 2022, the United States continued to import many Chinese products as bottlenecks at congested U.S. ports have finally been cleared and companies have replenished their warehouses.

“The world couldn't get access to enough Chinese goods in '21, and in '22 it was stuffed with Chinese goods,” says Brad Setser, economist and senior fellow at the Council on Foreign Relations. “Everything has normalized since then.”

But beyond the unusual swings in annual patterns in recent years, trade data is beginning to provide compelling evidence that years of heightened tensions have significantly dented the U.S. trade relationship with China.

In 2023, quarterly U.S. imports from China were at about the same level as a decade ago, despite a decade of growth in the U.S. economy and rising U.S. imports from elsewhere in the world.

“We are decoupling, and that is weighing heavily on trade flows,” Mark Zandi, chief economist at Moody's Analytics, said of the United States and China.

Economists say the relative decline in trade with China is clearly linked to the tariffs imposed by the Trump administration and then enforced by the Biden administration.

Research by Caroline Freund, dean of the University of California at San Diego's School of Global Policy and Strategy, showed that trade with China declined for products subject to high tariffs, such as screwdrivers and smoke detectors, while trade in products subject to no tariffs rates, such as hairdryers and microwaves, continued to grow.

Ralph Ossa, the World Trade Organization's chief economist, said trade between the United States and China had not collapsed but had grown about 30 percent slower than trade between those countries and the rest of the world.

There were two episodes in recent history when U.S. trade with China slowed significantly, he said. The first was when trade tensions between the countries escalated in 2018. The second was when Russia invaded Ukraine, prompting the United States and its allies to impose tough sanctions and further reshuffle global trade relations.

“There was a period when geopolitics didn't really matter much for trade, but as global uncertainty increases, we're seeing trade become more sensitive to these views,” said Stela Rubinova, research economist at the World Trade Organization.

Some economists warn that the U.S. decline in trade with China may not be as sharp as bilateral data suggests. That's because, like Hisun, the Chinese carmaker, some multinationals have shifted some of their production from China to other countries, but have continued to source certain raw materials and components from China.

In other cases, companies can simply route goods actually made in China through other countries to avoid U.S. tariffs.

US trade statistics do not indicate that such products originate in China, even though a significant portion of their value is created there.

Mrs. Freund, who wrote a recent article On the subject, he said the two countries' trade relationship was “certainly weakened, but not as much as official statistics suggest.”

Still, geopolitical risks are clearly forcing companies to look to other markets, especially those with low costs and stable trade relationships with the United States, such as Mexico.

Jesús Carmona, the president for Mexico and Central America at Schneider Electric, the French electrical equipment giant, said the Biden administration's 2022 climate law and geopolitical tensions from the war in Ukraine were both factors that drove companies to Mexico.

When China appeared to join the conflict with Russia, “it raised all kinds of red flags,” Carmona said. “People realized that we can't be so dependent on China, which we built over the last 40 years as we made China the factory of the world.”

Schneider, which already had a substantial presence in Mexico with nine factories and almost 12,000 employees, decided in 2021 that it needed to grow further in the country. Now, after opening new production sites and expanding existing factories, the company has approximately 16,000 employees in Mexico, with plans to increase that number to approximately 20,000 soon.

Schneider sends about 75 to 80 percent of its production in Mexico to the United States, including a range of products such as circuit breakers and panels used to distribute and regulate electrical energy.

While foreign direct investment in developing countries fell by 9 percent in 2023, the flow of such investments to Mexico fell increased by 21 percent last yearThis is evident from the United Nations Conference on Trade and Development.

Another economy caught in the changing tides between the United States and China is South Korea. Like Mexico, South Korea is subject to lower tariffs because it has a free trade agreement with the United States. In December, US imports from South Korea were the highest ever.

South Korean companies have also benefited greatly from President Biden's new climate legislation. The US government offers tax breaks to consumers who buy electric vehicles, but has placed certain restrictions on purchasing parts for those cars from China.

As major manufacturers of batteries and parts for electric vehicles, South Korean companies have seized the opportunity to participate in the expanding U.S. vehicle supply chains. A Korean battery manufacturer, SK On, has invested $2.6 billion in a factory in Georgia and is building new facilities in Georgia, Tennessee and Kentucky in partnership with Hyundai and Ford.

Min Sung, SK On's chief commercial officer, said China is becoming more restrictive on Korean companies. Meanwhile, U.S. restrictions on China taking advantage of tax breaks for electric vehicles had “given Korean companies more leeway.”

“For business to survive, you always have to find a market that has more potential,” Mr Sung said.

As major Korean companies like SK, LG, Samsung and Hyundai build new facilities to make products in the United States, that also appears to be increasing U.S. trade with South Korea, as companies import certain materials, machinery and parts from their home countries to to deliver the new facilities.

In December, Korean exports to the United States exceeded growth Korean exports to China for the first time in 20 yearspowered by shipments of vehicles, electric batteries and other parts.

Mr. Sung agreed that rising American skepticism toward China was bringing the United States and South Korea closer together.

“It has never been as strong as in recent years between two allies,” he said.