‘Friendshoring’ – evolving US and Mexico trade relations

November 2024  |  FEATURE | GLOBAL TRADE

Financier Worldwide Magazine

November 2024 Issue

Hyperglobalisation – a transformative era which spanned the early 1990s through to the global financial crisis of the late 2000s – saw trade grow markedly faster than global gross domestic product. However, strained trade relations appear to have consigned this level of world trade growth to the history books.

Key contributing factors are US-China trade tensions and ongoing military conflict in Ukraine and the Middle East. Others include the coronavirus (COVID-19) pandemic, which put pressure on supply chain links, and climate change fuelling the struggle between countries for green industrial supremacy.

Amid this geopolitical uncertainty and instability, many companies are looking closer to home to strengthen their supply chains and trade partner ties. As a result, nearshoring and onshoring have become common trends.

Turning to friends

In recent years, it has become increasingly difficult to separate economic issues from broader national interests. Rising in popularity is ‘friendshoring’ – the tendency to move production and trade away from countries considered to be political rivals or national security risks, and toward allies instead.

One high-profile example of friendshoring is the US embracing Mexico and Canada as its principal trading partners by total trade. According to recent data from the US Census Bureau, Mexico has surpassed China as the main trading partner of the US. In 2023, the US imported more than $427bn worth of auto parts, medical equipment, electronics and other goods from the country.

The process began during the Trump administration as part of its trade strategy, which aimed to reduce US dependence on Chinese goods. An escalating trade standoff led the US to raise tariffs on imports from China.

In an attempt to bolster US competitiveness against China and expand the US tech industry, the Biden administration also placed restrictions on trade with China. Import tariffs remain high, making the costs of importing goods from China to the US more expensive.

Over the last five years, the Biden administration has continued to champion friendshoring, encouraging companies to shift production from China to Mexico as they weigh up geopolitical risks against production costs.

“Let’s build on and deepen economic integration and the efficiencies it brings – on terms that work better for American workers,” said Janet L. Yellen, US secretary of the treasury. “And let’s do it with the countries we know we can count on. Favouring the ‘friendshoring’ of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy, as well as to our trusted trade partners.”

The US has signed up to new trade agreements such as the United States-Mexico-Canada Agreement (USMCA), which is more about geopolitics and friendshoring than lowering tariff barriers – as was the case with its predecessor, the North America Free Trade Agreement (NAFTA).

Trade savvy

Mexico has been the primary beneficiary of US-China rivalry. As of December 2023, companies in the MSCI Mexico Investable Market Index (IMI) derived nearly 11 percent of their revenues from the US, placing Mexico among the top five emerging market countries in terms of US economic exposure. This exposure exceeded Mexico’s Latin American peers, reflecting its progressive efforts in recent trade initiatives.

Mexico is increasingly recognised as a strategic location for the industrial operations of foreign companies, as well as for the emerging strength of its domestic businesses.

Organisations domiciled in nations other than the US have also opted to leverage Mexico’s North American location by increasing their presence and investments in the country. In response to continued nearshoring and ongoing trade tensions with the US, Chinese companies are  looking to Mexico as a strategic trade and investment alternative.

Bloc party

According to the Organisation for Economic Co-operation and Development (OECD), half of all trade currently takes place between members of trade blocs. Recent trade data for the US and Mexico suggests that trade blocs may become more important over time as production shifts. In conjunction with trade and economic policy, friendshoring can boost domestic manufacturing and jobs for both nations, while derisking supply chains.

As trade and security blocs continue to form around the world, friendshoring will play a role in shaping global economic competition and collaboration for years to come. Moves to deepen economic integration and increase efficiency favour supply chain friendshoring.

Though the outcome of the US presidential election will have implications for US trade policy, it is likely that friendshoring to Mexico will remain an economic and trade strategy for the foreseeable future, regardless of the November result.

© Financier Worldwide

BY

Richard Summerfield