China circumvents US tariffs by shipping more goods via Mexico

China is shipping more goods to the US via Mexico, circumventing steep tariffs imposed by the Trump administration and retained by Joe Biden’s White House, according to a Financial Times analysis of trade data.

Figures from Container Trades Statistics, analysed by Xeneta, show the number of 20ft containers shipped from China to Mexico hit 881,000 in the first three quarters of 2023, the most recent period for which data is available, up from 689,000 in the same period of 2022.

The rise came as Mexico overtook China as the biggest exporter of goods to the US last year, and as truck shipments across the border into the US have continued to increase quickly.

The numbers also point to the difficulty facing the Biden administration, as it moves aggressively to curb US dependency on global supply chains dominated by geopolitical rivals such as China, whose manufacturing capacity has given it a pre-eminent role in supplies of everything from white goods to electric vehicles.

“The US is the world’s biggest consumer of stuff; China is the world’s biggest producer of goods,” said Robin Brooks, former chief economist at the Institute of International Finance. “One way or another, these two forces have to meet.”

US moves to reorient supply chains away from China and reshore manufacturing capacity began in earnest in 2018, when then President Donald Trump slapped hefty tariffs on trade with China. His successor Biden has kept them in place amid persistent trade and geopolitical competition between the two powers.

As a result of the tariffs, shipments arriving directly from China now account for less than 15 per cent of US imports, down from more than a fifth in 2017.

However, some Chinese goods that would have been shipped directly to the US are still making their way to the country via Mexico — without facing the same levies.

“Reducing reliance on China is an easy soundbite for politicians, but the reality is very different,” said Erik Devetak, chief product and data officer at Xeneta.

A genuine realignment of global manufacturing would be “a vast undertaking which will take many years and a colossal amount of investment and state intervention to achieve”, Devetak added.

Mexico is not the only beneficiary of China’s move to export goods that could end up later in the US to a third country first.

Beijing is also running trade surpluses with countries like Vietnam, Singapore and the Philippines, which in turn are running widening surpluses with the US — suggesting that China’s manufacturers are continuing to benefit from US consumers’ demand for their goods, Brooks said.

Chinese carmakers appear to be particular beneficiaries. Figures from INA, Mexico’s trade body for auto parts suppliers, show that 33 Chinese-owned companies with Mexican operations sent $1.1bn worth of parts to the US in 2023, up from $711mn in 2021. Mexico imported almost $9bn in vehicle parts from China last year, INA said.

Cars imported to the US from Mexico are subject to a 2.5 per cent US levy, while parts put together in Mexico incur a tariff of 0 per cent to 6 per cent.

By contrast, cars and auto parts imported directly from China pay an additional 25 per cent levy under the regime introduced by Trump and maintained under Biden.

Gary Hufbauer, of the Peterson Institute think-tank, suggested rules written years ago for the US-Mexico-Canada trade deal had been overtaken by China’s rise as an auto-manufacturing powerhouse — giving Chinese companies a way to avert the tariffs. The US was likely to “press for new and tighter rules of origin”, he said.

Current US rules prevent direct transshipments, so goods simply shipped through Mexico without any assembly or Mexican input pay the full tariffs.

But Biden has faced pressure from unions and Congress for an even tighter regime, amid signs that Chinese components are reaching the US via Mexico. Plans by Chinese companies such as EV manufacturer BYD to open factories in Mexico have also raised concerns in the US.

Katherine Tai, the US trade representative, acknowledged in a January letter to Congress that existing US rules left unintended openings for Chinese companies as she pledged to work with lawmakers to address the “challenges”.

Mexico is aware of the issue and last year announced tariffs ranging from 5 per cent to 25 per cent on goods from countries such as China — although it is unclear how well the new regime will be enforced or affect the imports.

It also signed a memorandum of intent with the US in December on screening foreign investments — including planned new Chinese EV plants in Mexico — for national security risks.

However, trade analysts are sceptical that tariffs and trade rules will be sufficient to discourage goods from the world’s biggest manufacturer reaching its biggest consumer.

“The Mexico story highlights the real paradox,” said Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies. “The US wants to create alternative supply chains in partner countries . . . but what happens when it’s Chinese companies that are building those supply chains?”

Source:ff.com