/

China Uses a “Backdoor” to Re-Enter the US Market

As U.S.-Mexico Trade Increases, China Uses a “Backdoor” to Re-Enter the US Market with Lower Tariffs Assessed

What’s at Play with the Trump Tariffs on Mexico? Look to China’s Utilizing a Trojan Horse

By Antonio J. Soave December 9, 2024

There has been a marked increase in cross-border trade between the United States and Mexico, especially with the imposition of extensive tariffs on Chinese products in 2018. As of this past year, Mexico has now overtaken China vis-à-vis the exportation of goods to the United States. The U.S. now imports over $475 billion in goods from Mexico, effectively outpacing imports from China and other exporters of goods to the U.S. This represents an increase of $20 billion from the previous year. China exports approximately $427 billion to the U.S. (a decline of $110 billion from the previous year). However, some Chinese companies are using Mexico to avoid U.S. tariffs.

To avoid the tariffs imposed by President Donald Trump on China in his first term in office, Chinese companies have been relocating raw goods and manufacturing processes to Mexico at an alarming pace. In some cases, the Chinese approach is to “transform” the production of goods that are of Chinese origin and make them appear as Mexican, at least to a degree. This approach— the trick of the trade, if you will—is for Chinese companies to engage in the effective ”transformation of goods” and/or “value added manufacturing” so that they (the Chinese companies) avoid broader tariffs and so that Chinese products can qualify as Mexican-made goods. In modern and common vernacular, it is an “end-around” strategy. To review a little history (in brief), we can look to the following to understand the broader development of this scenario:

NAFTA, the North American Free Trade Agreement, was implemented in 1994; it eliminated most tariffs between the U.S., Canada, and Mexico.
The USMCA, implemented 4 years ago, replaced NAFTA and is up for official review in 2026.
Trade—most certainly—will be a major issue.

Suffice it to say, though, that the U.S. relies heavily on Mexico as a source of goods manufactured at a cheaper rate. This, undoubtedly, inures to the benefit of the U.S. consumer, especially as Chinese imports are shunned even more by official U.S. trade policy. The “nearshoring” that has occurred in Mexico is a great benefit for the U.S. overall. It is still an economic and financial reality that the U.S. simply cannot produce certain goods at a cost-effective rate, even with the advent of robotics and AI. So, if the U.S. consumer wants to continue to buy more cheaply at some key outlets such as Walmart, Sam’s Club, and Costco, Mexico becomes the primary partner in allowing that spending trend to continue. As a reminder, the U.S. relies heavily on spending to advance its economy. After all, the
U.S. is a spending economy. Also, and as the BBC has stated:

Certainly, nearshoring is considered to be providing an important shot in the arm to the Mexican economy – by June of last year, Mexico’s total exports had risen 5.8% from a year earlier to $52.9bn (£42.4bn). Source: BBC News online.

At this juncture, the U.S. threat of greater tariffs on Mexico via Donald Trump is certainly real, however it is not just about Mexico. For certain, the U.S. has a definite interest in reducing illegal border crossings. Equally important—if not more significant—is to have greater vigilance when it comes to severely curtailing the flow of drugs into the U.S. At the same time, the other large “elephant in the room” is the transformation of Chinese goods in Mexico to avoid the tariffs that were initially placed on China. As one cross-border expert has said under the condition of anonymity:

Mexico’s new president, Claudia Sheinbaum Pardo, is serious about helping to curtail the caravans that have been crossing into the U.S. She is taking it seriously, for sure. Having said that, she also acknowledges that the U.S. must help Mexico to eradicate drugs from the equation. That is because someone on this side of the border is making it easier to allow drugs into the U.S. It needs to be a cooperative effort to continue to improve trade between the U.S. and Mexico. It is not one-sided.

Source: Anonymous Executive in Cross-Border Trade

At the end of the day, the U.S. relies on Mexico for cost-effective goods to be imported into the United States. The two countries—even more than the U.S. and Canada— have a truly symbiotic relationship that is interdependent in nature. The U.S. and Mexico cannot afford for a degradation in trade, especially when considering that the trade war between the U.S. and China will most likely intensify over time, at least over the course of the next few years.

About the Author: Antonio J. Soave is the CEO of two boutique Merger & Acquisition firms, CGA and Gulf Global Synergies (GGS). He is also a cross-border advisor between the U.S. and Mexico, and he is a board advisor for an international trade and logistics platform based on AI technology. Antonio is a longtime Advisory Board Member of the United States Institute of Peace in Washington, D.C. He is the former Editor-in-Chief of the Journal of International Law & Practice, an international scholarly law review now housed at the Michigan State University School of Law. Antonio has a BA in International Studies from the American University in Washington, D.C., a Juris Doctor from Michigan State University, and a LLM in International Law from the University of San Diego. He was an intern under President Ronald Reagan at The White House in 1987 (Office of Public Liaison’s Department of Foreign Policy and Defense), and he served as the Secretary of Commerce for the state of Kansas from 2015 to 2017. Antonio is married to Ann, and they have seven children.