The volume of freight traffic between China and Mexico has increased during the Trump and Biden tariff eras, as companies have discovered methods to circumvent the U.S. trade conflict.

• Recent trade data indicates a rise in the exchange of assembled products and materials and components used in Chinese manufacturing between China and Mexico.
• According to experts, the "back door" into the U.S. to avoid tariffs imposed by the Trump and Biden administrations is entirely legal under existing trade laws.
• Other factors, including the possibility of East Coast port labor strikes and long-term changes in logistics strategy such as nearshoring, are contributing to Mexico's rapid growth in the global supply chain.

During the presidential campaign, there was a rise in trade between China and Mexico, as evidenced by customs data showing a substantial increase in raw materials and components from China entering Mexico for manufacturing into fully assembled products that were then shipped to the U.S. via rail or truck.

"According to Jordan Dethwart, president of Redwood Mexico, more Chinese companies are shifting their production facilities from China to Mexico. These companies use Chinese third-party logistics providers, which offer services such as warehousing, inventory management, and shipping. By operating in Mexico, they can bring in their parts and raw materials from China, produce the product in Mexico at their Chinese facilities, and then ship those goods into the U.S. This strategy adds value by taking advantage of the USMCA to have their product made in Mexico."

By nearshoring manufacturing, companies can alter the country of origin of their products, also known as their "economic nationality." When components or raw materials are imported into a country and used to create a product, they undergo a "substantial transformation," and the manufacturing location determines the duties and other charges that can be imposed on that product. Companies that import Chinese components and raw materials into Mexico and manufacture their products in Mexico will have a "Made in Mexico" label, not "Made in China."

"Mary Lovely, Anthony Solomon senior fellow at the Peterson Institute for International Economics, stated that the key sectors for determining origin have always been automobiles and textiles. To label a product as Mexican as opposed to Chinese in origin, it must be substantially transformed, meaning it must become a different product. For example, if a set of wooden boards is manufactured into a desk, the product must change customs categories."

European companies are now manufacturing their products in different locations due to the shift in the manufacturing shift. Simon Cohen, founder and CEO of Henco Logistics, stated that European-based companies that once solely manufactured in China are now manufacturing their products here. The strong pace of nearshoring demand is being driven by the "China Plus One" strategy and the USMCA, he said.

According to data from freight analytics firm Xeneta, the container trade between China and Mexico increased by 26.2% from January to July 2024, following a 33% growth in 2023. May saw the highest volume of containers shipped from China to Mexico, with June falling just short by a few hundred containers.

This year, the highest volumes of Mexico's exports to the U.S were recorded during the three-month period of April, May, and June, according to VesselBot, which also tracks container flows.

The surge in demand for containers shipping imports from China to Mexico in the first half of 2024 has intensified concerns that it is being used as a "back door into the U.S.," according to Peter Sand, the chief analyst for ocean freight rate benchmarking and intelligence platform Xeneta. He noted that this route has gained popularity over the past year-and-a-half.

Mexico's numerous free trade agreements and economic alliances make it an appealing destination for manufacturing operations. With 13 free trade agreements covering 50 countries, including the USMCA and agreements with the European Union, Japan, Israel, and 10 Latin American countries, Mexico is an attractive location for businesses looking to expand their operations globally. Additionally, Mexico is a member of the Pacific Alliance, a trade bloc comprised of Mexico, Chile, Colombia, and Peru, providing even more opportunities for businesses to expand their reach.

The increase in trade and production between the U.S.'s top geopolitical and economic competitor and its southern neighbor occurs amid ongoing political challenges, including new tariffs on China and a possible clampdown on Mexican manufacturing, which were significant campaign promises of former President Donald Trump.

"John Piatek, vice president of consulting at GEP Worldwide, stated that President Trump has accelerated the shift in USA-China trade relations and continues to make China the bogeyman, indicating that he will become more aggressive."

President Biden has mostly maintained Trump's trade protections and has been proactive in supporting American industries, such as semiconductors, while also imposing new trade barriers, particularly in the areas of electric vehicle technology and medical supplies, according to Piatek.

Between 2020 and mid-2024, imports from Mexico to the U.S. increased 20 percent-plus annually, while imports directly from China to the U.S. decreased from 17.7% to 13.5%.

Piatek stated that on the campaign trail, both candidates are discussing increasing trade barriers rather than decreasing them.

"The more tariffs we impose, the more chaos we cause, the more likely a black market will emerge, and the more corrupt officials will become in developing countries," Lovely stated.

The U.S. government is investigating possible violations of trade policy for products that are only slightly altered and imported into the country. According to Lovely, such products may be subject to U.S. countervailing duties and anti-dumping duties, as seen in recent cases involving solar panels.

The surge in imports from Mexico to the U.S. is accompanied by an increase in cross-border trucking through Laredo, Texas. According to Motive, the top five retailers' trucking visits to North American distribution facilities have reached a record level, with Mexico as the leading U.S. importer. Despite declining Chinese imports, the top three U.S. destinations for Mexico exports are El Paso, Houston, and San Diego.

Moody's has reported that several auto companies, including foreign OEMs, have announced plans to invest in Mexico. Among these companies are BMW, , and , as well as Asian manufacturers such as BYD and Kia.

In 2023, Mexico's government reported $36 billion of foreign direct investment, a 27% increase over the previous year. By mid-year of 2024, the figure had reached a new record of $31 billion.

Trump has threatened to impose a 100% tariff on vehicles made in Mexico, renewing claims he has made in the past about Mexican manufacturing linked to China. During the recent presidential debate, he stated, "They're building big auto plants in Mexico, in many cases owned by China. ... They're building these massive plants, and they think they're going to sell their cars into the United States because of these people [Biden administration]."

Elon Musk, CEO of Tesla, declared a halt in the construction of Tesla's gigafactory in Monterrey, Mexico, due to uncertainties surrounding tariffs, which made it unwise to invest heavily in the plant. Instead, Tesla will increase production at its existing facilities in Fremont, California, and Austin, Texas.

The Americas affiliate of Chinese electric car giant BYD stated in a September statement that reports of pausing plans for a Mexican plant were untrue, emphasizing the market's significance.

Last month, Volvo, a majority-owned subsidiary of Chinese parent company Gheely, unveiled plans for a $700 million truck manufacturing facility in Monterrey.

Mexico has become critical to 'safeguarding' supply chains

The Mexican route is increasingly being used by logistics professionals to safeguard their supply chain, not just to avoid tariffs, as Sand stated.

American importers are focusing on Mexico as a potential solution to the risks they face from higher tariffs and the U.S. East and Gulf coast labor dispute that threatens strikes in October.

Among the top companies exporting from Mexico into the U.S., according to the bills of lading, are tire companies Pirelli and Michelin North America, Hyundai and Kia affiliate Mobis Parts America, and industrials firm SFK USA.

This year, there has been remarkable expansion in trade between Mexico and the U.S., as stated by Charles Van der Steene, president of Maersk North America.

"Van der Steene stated that the growth in Mexico is real and is expected to be in double digits. He also mentioned that some impact might be linked to tariffs, but overall, the Mexican economy is developing robustly."

In September, Maersk opened a 402,000-square-foot facility in El Paso, Texas, to support the growing logistics services demand at the border. Meanwhile, in March, the company announced its new Tijuana, Mexico, facility that would optimize the growing volume of cross-border trade, targeting the transport of items in the technology, automotive, retail, and lifestyle sectors.

"Mexico's trade balance with the U.S. has improved significantly, from a deficit of $2.4 billion in 1993 to a stratospheric surplus of $234.7 billion in 2023," according to Moody's.

The amount of U.S. direct investment and reinvestments in Mexico has increased from $3.5 billion in 1993 to $20 billion in 2023, as noted by Moody's.

The Bureau of Transportation Statistics' TransBorder Freight program reveals the robustness of Mexico/U.S. transborder trade through its breakdown of North American freight by mode of transportation, commodity type, and geographic detail for U.S. exports to and imports from Canada and Mexico.

The top ten exports from Mexico to the United States are vehicles, computer-related machinery, and equipment parts.

Mexico freight trade route can be cheaper

Despite the recent popularity of the China-Mexico-U.S trade route, companies can still achieve lower freight costs when the avoided tariffs are factored into the equation, according to a CNBC breakdown of the costs utilizing August freight rates from various logistics providers.

U.S. shippers can choose to transport ocean containers into the country via truck or rail after they are offloaded from ships, without incurring tariffs.

The estimated cost of moving a single container through ocean freight/truck is between $10,100-$12,300, while the cost through ocean freight/rail is between $8,700-$8,800. This is less expensive than sending a completed product from China to the U.S. directly, which is subjected to tariffs.

The cost of roundtrip trucking from the Pacific Coast Port of Lazaro, Mexico, to Laredo, Texas, for a single container is between $3,900-$6,100. The approximate cost of railing a single container from the Port of Lazaro to Laredo is $2,700. Transporting a container by rail from the Port of Lazaro to Monterrey, California, would be approximately $2,600.

The cost of shipping from China to the U.S. West Coast is $6,459.20, while the price for shipping to the U.S. East Coast is $9,480.20, and the cost of shipping to the Gulf Coast is $9,475, according to Freightos.

The cost of transporting an East Coast container by truck is estimated to be between $11,530.20 and $14,745.20, while the rail option costs approximately $11,030.20. On the West Coast, the cost of a container imported by truck is between $10,959.20 and $13,659.20, with the rail option costing $10,160.20.

If the 301, 232, 373 (patent infringement), anti-dumping, and countervailing duties were applied to Chinese imports, the cost of importing the product would increase due to the additional tariffs.

The import of a 20-foot container of household washing machines from China, which contains approximately 50-60 washing machines and is subject to a 7.5% tariff, increases the logistics bill's economic impact.

According to Erica York, senior economist at the Tax Foundation, a U.S. importer would owe between $1,500 and $1,800 in trade war taxes on a 20-foot container of washing machines at an average import price of $400 a unit. York explained that bilateral tariffs can result in trade diversion, which occurred after the trade war. The tariffs not only increased costs for Americans but also caused disruptions and reallocations of trade flows and business relationships.

While the shift towards nearshoring has emphasized the cost benefits of ocean freight from Asia to Mexico, with average rates around $4,200 per container and trucking from Mexico City to the U.S. averaging $4,000, Tim Robertson, CEO of DHL Global Forwarding America, advised that logistics decisions should not solely be based on cost, but also on transit time, reliability, security, and service levels.

Election threats, new USMCA trade deal scrutiny

The surge in Chinese goods entering Mexico is mainly due to a mix of geopolitical factors, supply chain adjustments, economic plans, and market prospects that emerged during the pandemic, according to Ian Arroyo, Freightos' chief strategy officer.

"Arroyo stated that it is clear that due to supply chain disruptions, both foreign and American companies are using Mexico to reduce costs by building in a net reduction. The question now is whether the next administration will review the USMCA exemption to allow Asian goods to be moved through Mexico."

The USMCA, which was renegotiated by the Trump administration in 2020, includes a provision that requires the countries to review the trade deal after six years, starting in July 2026. If any of the three parties decides not to renew the agreement, it will trigger years of uncertainty for the markets about the ultimate fate of the trade route, with no immediate end to the deal.

Evelyn Suarez, founder of the Suarez Firm, stated that she is concerned about the negative perception of Mexico due to the avoidance of 301 duties in manufacturing in any country globally. Despite this, China seems to be utilizing Mexico as a platform for their products, including materials and parts. Suarez believes that this will be a topic of discussion during the 6-year review.

If the nations agree to continue the deal, Arroyo stated that the flow of goods from China to Mexico is not expected to slow down. As global trade becomes more complex due to geopolitical factors, Mexico's role as a key node in North American supply chains is likely to increase, further increasing the flow of goods from China into the country.

CNBC clients are already strategizing to front-load products through Mexico and U.S. ports in the late fall to mitigate the risk of a Trump presidential win leading to additional Chinese tariffs as high as 60%-100%, according to logistics managers.

"President Trump will continue to prioritize American workers, farmers, and families in trade negotiations, just as he did in his first term, using the leverage of the United States, said Karoline Leavitt, national press secretary for the Trump campaign. On the other hand, the Harris-Biden Administration has allowed China to take advantage of the US with policies such as their radical electric vehicle mandate, and this trend will only worsen if Kamala Harris becomes president and Tim Walz, who has a history of honeymooning in China, is in the White House alongside her."

The Harris campaign did not respond to requests for comment.

Supply chain companies chasing the opportunity

Logistics companies such as DHL, Maersk, Freight, and ITS Logistics are expanding their operations to take advantage of new freight opportunities in and out of Mexico. Additionally, a North American freight rail company is completing the construction of a new international rail bridge from Laredo, Texas to Nuevo Laredo, Tamaulipas, which is expected to be operational in Q4 of this year.

Since 2018, ITS Logistics has experienced a consistent rise in demand for capacity from Mexico to Texas markets, including Laredo, San Antonio, Austin, and Dallas/Ft. Worth.

"Over the past two years, demand has increased rapidly," Brashier stated. "We have significantly invested in Texas with cross-border services in Laredo, a one-million square foot distribution center in Haslet, and our logistics offices in downtown Ft. Worth."

Uber Freight's vice president of international operations, Mollie LeBlanc, stated that the logistics company is experiencing a surge in demand for its services in Mexico. "Our sales team in Mexico is receiving an increasing number of inquiries about importing directly from China into Mexico, and this trend is growing," said LeBlanc. "There is a strong demand for truckloads coming out of Mexico, so our team is offering consultation and transportation management services to help customers integrate or upgrade their cross-border logistics operations."

Uber is an early investor in Texas cross-border logistics located on both sides of Laredo, and the spaces are now in full use. Additionally, Uber has about 1.5 million square feet of warehouse space spanning 10 locations in Mexico, including Monterrey and Mexico City. Uber is not an asset-based provider, but as demand continues to heighten, the company is exploring ways to provide its customers with the tools they need to expand.

The Biden Administration's recent increase in tariffs on Chinese exports is contributing to the trade flows, but experts predict that the phenomenon will not be short-term.

Motive's head of strategic analytics, Hamish Woodrow, predicts that Mexico will be the top importer to the U.S. until at least 2030, and the demand for AI, which is closely linked to national security concerns and a key technology rivalry with China, will further fuel this trend.

"Woodrow stated that there will be a need for more factories to produce computer-related machinery and parts, and we could see the development of more manufacturing and assembly plants in Mexico. With Mexico's strategic position and close proximity to the U.S., continued growth in this sector and Mexico imports overall are likely. This could keep Mexico as the No. 1 importer to the U.S. until the end of the decade."

Mexico's trade liberalization efforts have made its market one of the most open and competitive globally for U.S. exporters.

"Christine McDaniel, senior research fellow at the Mercatus Center at George Mason University, stated that the trend of de minimis parcels is also being observed in relation to the recent scrutiny of Asian-based online retailers Temu and Shein by the Biden administration, who have accused them of alleged "abuse." Consumers will naturally seek the lowest prices, and trade is like water, flowing wherever there is comparative advantage. Tariffs like the 301 and other restrictions are likely driving China to find alternative ways to enter the U.S. market. U.S. consumer demand is there, and they will find a way to meet it, such as using Mexico as a platform."

CNBC reports that Lovely predicts that manufacturers will find ways to avoid tariffs of up to 25% or more when they are imposed on a country.

"Lovely stated, "This is what we're seeing. So is it a back door? In a sense it is. Is it violating any agreements? Almost surely not. In fact, going way back to the original impetus for NAFTA, which came from Mexico — Mexico came to the Americans because they wanted foreign direct investment into Mexico.""