Earlier this year, a historic event took place. For the first time in close to two decades, China was dethroned as the largest exporter to the US. In the early 2000s, China's main rival for the title was Canada, which had historically led trade relations with the world’s largest economy and its southern neighbor. But this time, a new challenger has taken the throne. As China’s economy faces internal turmoil and resistance from developed nations, Mexico—which had often trailed behind Canada when it came to exports—has taken the lead.

The story of how Mexico got to this feat, however, is more complex than headlines suggest. 

(Data from the U.S. Census Bureau)

Let’s start with the facts. The data is quite clear about this recent shift in trade. As early as February of last year, Mexico had overtaken China in terms of monthly exports to the US—in fact, Mexico led in exports every month excluding January and November. When aggregated for the entirety of 2023, Mexico exported a total of $475.6 bn to the US, while China’s exports equalled some $427.2 bn—a difference of $48.4 bn.

How Nearshoring Is Reshaping Mexico

Perhaps the main explanation for Mexico’s rise is a newfound interest from the US and developed economies to invest in the country. The strategy—commonly known as nearshoring—has led a number of companies to announce multi-billion dollar investments in the country, as they attempt to circumvent China’s current influence over global supply chains while cutting the potential for trade disruptions. In such a context, Mexico is a great alternative. The country has much to offer in proximity to the US—arguably one of the biggest consumer markets—, low labor costs, and a plethora of trade agreements connecting it with the rest of the world. As such, organizations such as the Inter American Development Bank (IDB) has gone as far as estimating overall restructuring of supply chains to Mexico could result in increased revenues of up to $35 bn from trade alone.

Intuitively, there are some early signs that nearshoring is more than just a buzzword and is actually pushing Mexico’s economy. Over the last four years, US Foreign Direct Investment (FDI) to Mexico has increased steadily reaching a 20-year high in 2022 of $19.6 bn and total valuation of investments of over $130 bn (full data for 2023 is still forthcoming). One of Mexico’s leading banks went as far as accounting a total of $1.8 bn in announced investments to the country related to nearshoring just in January of 2024.

(Data from Mexico's Secretary of Economics)

Nearshoring, furthermore, isn’t just a one way stream. Mexico has taken note of this recent spotlight and its economy has slowly begun to adapt towards more technologically advanced products demanded by the US market—more so with the rise of AI and the importance of EVs. The number of STEM graduates in the country, for instance, has risen steadily from some 171 thousand a year in 2015 to over 220 thousand in 2020 alone. Technology is also becoming a key player in the Mexican economy, a crucial signal to international markets that the country is aware of rising demand for electronics and data processing equipment. While vehicles (from cars to tractors) remain the biggest segment of exports to the US, electronics and data processing machines are growing steadily and both represent over $75 bn in exports. 

(Data from Mexico's Secretary of Economics)

If we further break down trade categories between the countries, we will notice that Mexico is already betting on data processing as a key component of its economy. Ever since 2020, data processing machines became the number one subcategory of exports to the US, growing in value to nearly $40bn—little shy of 10% of total exports to the US. Put plainly, the country is successfully shifting its economy to meet the needs of the US market.

(Data from Mexico's Secretary of Economics)

China’s Own Contraction

It would be unfair to explain the shift in US exports solely on Mexico’s triumph or logistical efficiency. In reality, it has as much to do with China’s own internal economy as with Mexico’s bet for nearshoring. The same trade figures we discussed earlier serve as an initial indicator. While Mexican exports to the US grew from $454.7 bn in 2022 to $475 bn in 2023 (an increase of $20.9 bn), Chinese exports plummeted from $536.8 bn to $427 bn in the same period. That is, Mexico could only account for little below a fourth of China’s $109.6 bn fall—and that is assuming all of Mexico’s growth is a direct result from replacing China which, statistically speaking, is highly unlikely.

In great part, we must understand that China’s trade and economic capabilities isn’t being replaced but simply contracting. The country faces the inevitable prospect of lower economic growth. Instead of the accustomed double digit growth of the late 90s and early 2000s, China is now facing a still meaningful, albeit reduced, prospect of 4.2% GDP growth in 2024. All of this while the real estate sector, which represents between 25-30% of the country’s economy, has recently fallen as much as 34%, and overall investment in the stock market has plummeted with investors selling over $6.3 trillion worth of stocks since 2021.

China Newly Built House Prices YoY Change

(Figure from Trading Economics)

But, by far, the most meaningful shift for China—and the key explanation to Mexico’s rise in global trade—has been the ongoing sanctions imposed by the U.S. government. These began with the Trump administration, targeting over $380 bn worth of trade goods, and were maintained, for the most part, by the Biden administration. By imposing large tariffs of up to 25%, the US has effectively pushed many companies to rethink their supply chains. Recent research suggests that this is the main driver of China’s contraction in the world of global trade. As a matter of fact, if we separate Chinese exports by their tariff status, we will notice that exports for non-tariffed goods grew at similar, albeit smaller rates to the rest of the world. It is tariffed goods which, in turn, led to China’s contraction, decreasing in size between 2017 and 2022.

(Figure from the Center for Economic Policy Research)

Tariffs, then, are to blame for China’s trade contraction together with the country’s decreased economic performance. In 2023, global Chinese exports fell from $3.54 trillion to $3.38 trillion—a fall of some $164 bn. If we recall that Chinese exports to the US fell by $109.6 bn in the same period, the US—and, by extension, its trade tariffs—accounted for roughly 66.82% of China’s contraction. Of course this is  a generalization, but it serves to understand what was behind the prominent shift in trade patterns.

So let us return to our initial inquiry. It is true that Mexico surpassed China as the top trade partner for the US. In great part this is because the country has shifted its economy to be more closely aligned with US goals. But it is also true that this was a result of overall US economic policies and China’s own financial struggles. Mexico has managed to excel in some key areas currently subject to tariffs, most prominently for electronics and specialized IT hardware, as found by recent research from the Peterson Institute. Many of the country’s gains can be attributed to such shifts in trade.

This should serve as a lesson for Mexico’s decision makers. The country has managed to capture a meaningful share of the pie left behind by China, but there’s still much to be captured—precisely, some $109.6 bn in reduced trade or $88.7 bn accounting for Mexico’s $20.6 bn rise this year. To grow further, the country should focus on the areas affected by US trade tariffs—more so considering non-tariffed goods continue to grow at competitive rates. In great part, this is already the case from existing data, but much more can be done to incentivize the electronics industry in the country from federal subsidies for development to further investment in education.

So it is true, Mexico is the largest trade partner of the US. Now is time to look at the causes of this triumph and further exploit them.