Talk about unintended consequences: The trade war that was supposed to punish China for unfair business practices is fueling an economic boom south of the US border in Mexico.
When tariffs on Chinese steel and aluminum were announced in 2018, the idea was to protect an American steel industry that had suffered from years of economic dumping and unfair trade policies.
For US consumers and manufacturers, prices went up on everything from cars to solar panels to washing machines.
Tariffs were popular among key voters in several electoral swing states, but the nonpartisan Tax Foundation found the measures have cost Americans $74.7 billion and killed 173,000 jobs.
They also have spawned a significant tariff-avoidance business in Mexico.
Confronted by the 25 percent US tariff on steel, and the 10 percent tariff on aluminum, Chinese businesses are sidestepping the US government sanctions by building significant new industrial operations in Mexico.
That Chinese “reshoring” investment in Mexico is going on with the blessing, and sometimes with the support, of the Chinese government, which knows it’s cheaper to produce in Mexico than the US.
With enough planning, the Chinese work in Mexico also is free of US tariffs.
Powered by Chinese investment, the Hofusan Industrial Park near Monterrey, Mexico – a 120-mile trip by rail or truck to Texas – is booming. One study found that half of all new investors seeking industrial space in Mexico are from China. The United Nations estimated that the US-China trade war is boosting Mexico’s total exports by 6 percent, or $27 billion.
Because Mexico has 13 free trade agreements with 50 countries, Chinese companies can use Mexico as a hub to ship products without tariffs across the world.
As a major maquiladora company trumpets on its website, “US-China Trade War Benefits Mexico.”
How should US companies react?
For starters, I think it’s unlikely there will be big tariff rollbacks before the midterm November elections. The trade war remains popular with certain key voters in swing states like Michigan, Ohio, Pennsylvania, and Wisconsin, and US elected leaders do not want to be portrayed as soft on China in any domestic political arena.
For US business, that means tariffs will be part of the cost base for the foreseeable future.
Though some industries can pass along that 25 percent tariff price increase to consumers, many others cannot because of international competition. So the focus should be on adapting to the tariff price hike.
Some businesses may be able to increase production in the US, which is certainly one of the goals of the tariff supporters. One challenge in this tight labor market is finding the right number of employees at an internationally competitive price. Another is securing needed capital as interest rates rise.
Other businesses may want to consider nearshoring efforts of their own. The trade war with China illustrates the risks of relying too much on one country for key business components and products. Diversification of your supply chain to several nations can make sense. Shipping times from Mexico and other Western Hemisphere countries can be faster to US markets than from Asian suppliers such as China or Vietnam.
US companies also should embrace flexibility. Though many manufacturers have traditionally owned all their factories, the current trade war may offer the right time to consider nearshoring joint ventures and rights of acquisition and 10-year deals.
A nearshore investment doesn’t have to be permanent – it can be an open-ended arrangement to get a business through the current political climate.
In fact, much of the recent Chinese investment in Mexico doesn’t have the feel of permanence. It’s the manufacturing equivalent of a Chinese mobile home in Mexico – setting up an operation to test the business climate and to be nimble if and when the tariffs change again.
In recent weeks, President Biden has indicated a willingness to undo some tariffs against China as an inflation-fighting measure for US voters. But even his own trade negotiator has expressed reluctance, saying tariffs remain an important source of leverage against the Chinese.
The key for businesses to remember is that trade wars start with political choices. They only end that way, too.