When Mexico recently outpaced China in annual trade with the U.S., one expert said it was about time.
In a February 22 Insights post for IE University, “The United States Buys More from Mexico than from China…at Last,” Gayle Allard, Professor of Economic Environment and Country Analysis, cited February data from the U.S. Department of Commerce demonstrating Mexico’s 2023 lead over China as America’s leading trade partner.
But while it was undoubtedly good news for many, Allard said it should have happened much sooner than this.
Mexico leads — at last
Allard framed her perspective in the context of Mexico’s unrealized hopes within 1994’s North American Free Trade Agreement (NAFTA).
“What was surprising about the news was not that it did happen, but that it took 30 years to occur after the signing of the 1994 NAFTA (North American Free Trade Agreement), replaced by the USMCA in 2020,” Allard wrote. “Mexico enjoyed the advantages of immediate geographic proximity, low costs, close diplomatic ties, and near-zero tariffs on its exports to the other NAFTA members, the United States and Canada, and it seemed a natural and complementary trade partner.”
But she said Mexico’s peso crisis that followed shortly after NAFTA’s signing put a kink in that vision, as well as other economic crises that followed. Still, Allard said Mexico’s “dynamic” economy had plenty of time to “recover and soar to first place.”
However, the economics of global trade underwent a dramatic shift when China joined the World Trade Organization (WTO) in 2001.
“A combination of very low Chinese wages and prices, the manipulation of China’s currency to make its exports very attractive, and technological advances that reduced ocean shipping costs meant that China was able to shoulder its way past Mexico in 2004-2006 and become the biggest trade partner of the United States,” Allard said.
Contributing factors to Mexico’s lead
But now things have changed. Allard said there were three primary forces driving the shift to Mexico’s top spot last year, breaking the “trend of ever-rising Chinese exports.” She also said factors such as these may “keep Mexico in first place for the foreseeable future.”
- Geopolitics — which include the trade war started in 2018 by former President Trump, which had a “special focus on China.” Allard said the tariffs on Chinese exports to U.S. markets that were initiated then have not been reduced by President Biden, and regardless of how the 2024 presidential election turns out, this dicey dynamic will likely remain. Plus, China’s friendly posture toward Russia in the midst of its unprovoked invasion of Ukraine has only fueled animosity toward the country.
- COVID-19 pandemic — which Allard says “marked a before and after in US-China trade relations” after its 2020 start. “The severing of supply chains and the skyrocketing price of shipping…disrupted prevailing trade patterns and exposed the vulnerabilities of building business around far-flung global supply chains,” she wrote, underscoring the destructive trade effects of China’s “zero-Covid” policy, which disrupted supply chains and caused Western companies to look elsewhere for trade partners.
- Chinese wage growth — which Allard cited as the “main economic change” and which has reduced the competitiveness of exports. “Recent figures from one source show that the average monthly wage in manufacturing in China has risen to $840, compared to only $480 in Mexico; another says the average hourly figures are $6.50 and $4.82, respectively (compared to some $25/hour in the United States),” Allard said.
Overall, Allard said that if Mexico can maintain its new ranking, it will be good news for many.
“…If after its slow climb upward, Mexico retains its position as the main US trading partner, this bodes well for the future of all parties, and for the American continents,” she wrote. “A more integrated North and South America, with their natural affinities, has itself been a long time coming, and if it becomes reality, it will present many future opportunities for both continents.”
The shift to India
Although Mexico has been in the spotlight due to the recent trade data, India is becoming increasingly attractive for U.S. companies looking to reduce their reliance on China.
According to a recent OnePoll survey of 500 executive-level U.S. managers, 61% said they would “pick India over China if both could manufacture the same materials.”
Conducted on behalf of India Index and their communications agency, Hypemachine, the online opinion poll showed that 59% of the respondents “found it ‘somewhat risky’ or ‘very risky’ to source materials from China,” compared with 39% for India.
“Companies are seeing India as a long-term investment strategy as opposed to a short-term pivot to avoid tariffs,” said Samir Kapadia, CEO of India Index and managing principal at Vogel Group, in an exclusive interview with CNBC.
One company that’s clear on its intentions along those lines is Walmart.
Walmart’s deepening ties
In a February 16 press release, the retail giant said it had just concluded its inaugural India Growth Summit, describing it as “an event where export-ready suppliers, innovators and entrepreneurs representing 24 states and union territories participated in pitch meetings featuring products made, grown or assembled in India.”
Walmart said that of the suppliers that participated, more than 80% received an invitation to move on to the next round, and provided further details about the process:
- “Invitations to advance include the opportunity to participate in a bid process and line review, an invitation to join Walmart Marketplace or both. Walmart Marketplace is one of the world’s largest online marketplaces reaching customers in the U.S., Canada, Mexico and Chile.”
- “Innovation entrepreneurs advancing to the next round will move on to explore pilot projects with Walmart.”
- “To be invited to pitch, suppliers underwent a rigorous screening process to determine product export capabilities. As the list narrowed, invitations were sent out for the three-day Walmart Growth Summit where sellers and innovators met in New Delhi with more than 100 Walmart and Sam’s Club associates to determine the potential for a future partnership.”
“At Walmart, we see tremendous opportunity in India and that was seen in the quality products, sellers and innovators we met with this week. We are excited to continue serving as partners in India’s economic growth,” said Andrea Albright, executive vice president, Sourcing, Walmart. “Investing in high growth markets like India helps us strengthen our relationships with established suppliers while also developing new relationships to build long-term surety and diversity of global supply. We also see huge potential in collaborating with some of India’s brightest minds around value chain solutions.”
However, Walmart also noted that its commitment to the India market is nothing new, since the company has “cumulatively sourced more than $30 billion in products across a range of categories.”
In association with Flipkart, Walmart also announced reaching its goal through the Walmart Vriddhi training and mentorship program to empower 50,000 MSMEs (micro-, small and medium-sized enterprises) to participate in domestic and global supply chains.
“At Flipkart, we have a continued commitment to support the growth, development and prosperity of MSMEs, who, backed by their entrepreneurial zeal and innovation, are the driving force of India’s economy,” said Rajneesh Kumar, chief corporate affairs officer, Flipkart Group in the statement. “Enabling MSMEs and unlocking inclusive growth while creating new jobs and empowering communities, is key to achieving India’s vision of a $5 trillion economy in the next few years. Alongside Walmart and the Walmart Vriddhi program, we are proud to support the digital transformation of MSMEs to enhance their growth journey, along with the knowledge they need to scale, uncover new business opportunities and imbibe international best practices.”
And Walmart is continuing its investment south of the U.S. border — noting in an April 26 press release that over 350 companies had participated in the second edition of the “Walmart Growth Summit Mexico 2024” event the day before.
“The Walmart Growth Summit Mexico is the largest purchasing event that Walmart holds for products manufactured, grown, and assembled in Mexico,” the release said. “Its goal is to boost the growth of local economies and promote direct purchasing from suppliers in the country.”
Noting that the Walmart Growth Summit originated ten years ago in the United States under a different name, the company said that 2023 was the first time Walmart Mexico celebrated this initiative — which is being replicated by Walmart India (as noted previously) and Walmart Chile, which will be held in May.
