Trade War Between China and the US
A trade war between China and the US has the potential to be greatly beneficial for Mexico in some important ways. To begin with, Mexico can position itself to recover the part of the US market that it lost beginning in 2001 when China joined the World Trade Organization (WTO). In 2001, 12.5% of the American import market was serviced by Mexicans. This number has since decreased to 10% with China’s ascension to the WTO.
A trade war between China and the US enables Mexican manufactured goods to be more competitively priced in both the Chinese and US markets. For instance, a trade war between China and the US will make some Mexican products such as electronics, telecommunications equipment textiles, and auto parts more cost competitive vis a vis similar Chinese product offerings that are in the US market.
Companies that are manufacturing in Mexico will send their products duty-free to the United States, while a portion of the competing Chinese goods will be at an up to 25% price disadvantage. For this reason, in many instances, manufacturing in Mexico today is a better option than locating production facilities in China. In addition to manufactured items, a trade war between China and the United States can be a boon to Mexico’s agricultural sector. Some farm products such as meat and fish will most likely gain United States’ market share going forward.
US Companies Reviewing Moving Manufacturing from China to Mexico
A trade war between China and the US will spur greater interest among manufacturers in China to cross the ocean to establish a production facility in Mexico. According to Sergio Luna, Director of Economic Studies at Citibanamex, tariffs on Chinese manufactured products has prompted many companies that have a production presence in the Far Eastern country to look at Mexico as the site from which they will serve the important US market.
Labor Costs in Mexico are Now Lower Than in China
In addition to the effects of the trade war between Mexico and China, there are other concerns such as the cost of labor in both countries that companies take into account when deciding where to locate a new manufacturing facility. According to the Mexico economist at Bank of America Merrill Lynch, Carlos Capistran, hourly wages in Mexico are on average 40% lower than those paid to Chinese workers. This is a drastic change from 2006, when the cost of Mexican labor was 183% more.
In addition to the benefits of duty-free entry into the US market and lower labor costs that are enjoyed by companies that have manufacturing facilities in Mexico, there are a number of other reasons that companies should consider Mexico to be the logical alternative to production facilities in China. Mexico is, of course, the United States’ neighbor. Locating in one of Mexico’s thirty-one states enables manufacturers to cut shipping costs and times. A location closer to the US customer base makes servicing emergency shipments a much more manageable proposition. Furthermore, US companies with production facilities in Mexico work in the same or similar time zones, which facilitates communication and enhances efficiency and product quality.