China vs. Mexico: Where does the future of US production facilities lie?
China and Mexico – both countries are important production sites for the US industry. However, for a long time Mexico has hardly been a serious competitor in the race against China. Over the past two years, this tide seems to have turned: More and more US companies are outsourcing production facilities from China to Mexico. These particularly include companies from the electronics, aerospace, and automotive industries such as that of Motorcar Parts of America based in Los Angeles. In the last two years the organization has invested more than 30 million dollars in a production facility in Tijuana. Alternators, starters and brake boosters, which were previously manufactured in China; are now to be produced in Mexico.
Why is China losing attractiveness?
The war on trade
The USA and China have been in a trade war for over two years. Since September 2019, almost all imported goods from China are subject to punitive tariffs of up to 25%. On the one hand, the sanctions are part of the political power struggle between the two countries. At the same time, they are intended to protect domestic production from cheaper products from China. It is clear that tariffs are showing a sort of protective effect. Meanwhile, before the onset of this war on trade, nearly 23% of all imports into the USA came from China and by the end of 2019 it was only 18%.
However, the punitive tariffs have been harsh on US companies too as they run production in China for the American market. These companies have also been affected by the shot up in import costs, making it even more difficult to sell their products in the USA. In summary, the punitive tariffs against China cut both ways for not only China is being affected but the US too.
Aggravated manufacturing conditions due to the pandemic
In addition to the trade war with the USA, the outbreak of the coronavirus pandemic has weakened Chinese supply chains. Almost all production in China has temporarily been paralyzed. As a result, in just the first three months of the year, China’s exports dropped by 11.4% compared to the same period in the previous year.
Persistent punitive tariffs and difficult production conditions due to the pandemic: For many companies producing in China and exporting to the USA, these are reasons enough to start looking for an alternative to China. And more and more often, it is Mexico that catches their eye.
Alternative to China – What advantages does Mexico offer US manufacturers?
General conditions
A key factor to turn into the Mexican market for manufacturers exporting to the US is the geographical proximity to the country of destination. While import goods from China have to travel long distances overseas to reach the USA, Mexico offers short transport routes that can also be handled overland. Due to the cost and time savings implied, Mexico is much more attractive than China in terms of logistics alone.
Especially for US-American companies, there are also linguistic and cultural advantages. Due to the geographical proximity, the cultures of the two countries are closely intertwined and the language barrier is low. These factors favor efficient cross-border cooperation while reducing communicative and mentality-based misunderstandings.
The time factor contributes to smooth and efficient cooperation as well. While the time difference between Beijing and Washington is 13 hours, it is only one hour between Washington and Mexico City.
General economic policy conditions as well as the country’s broad integration into global trade also make Mexico attractive as a production site. Mexico is an active member of the World Trade Organization, the G-20 and the OECD. Furthermore, the country is a record holder in terms of free trade agreements. Companies operating in Mexico benefit from a total of 12 free trade agreements with 46 countries.
Protection of intellectual property
In China, imitation of US products and product designs is a common problem. As far as the protection of intellectual property is concerned, Mexico has much more stringent laws. This makes it less likely for illegal imitation to occur. However, if a violation of intellectual property laws does happen, there are legal means available to take action against it.
Qualification of the workforce
In terms of qualified labor, Mexico is not only able to beat China, but is also competitive at an international level. In recent decades, the country has especially promoted training programs in the fields of engineering, manufacturing and construction technology. Successfully, since 2009, the number of architects, engineers and other professionals with university degrees has doubled up.
The Deal-Breakers with China: Penalty tariffs and the Corona-outbreak – What is the situation in Mexico?
In order to put pressure on migration policy, the US has also threatened Mexico with punitive tariffs. However, since an agreement was reached with regard to the border conflict, sanctions did not materialize.
Instead, the US-Mexico-Canada Agreement (USMCA) finally came into force in early July this year. As a result, the three countries continue to maintain decisive duty-free tariffs.
Even as far as the pandemic is concerned there is good news: Mexican supply chains with the USA have proven to be stable and reliable even in times of crisis.
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